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How the weather affects your investments
March 18, 2015

The disastrous weather we’ve witnessed in recent years has many people wondering what the weather will do next. The seemingly end-to-end floods, bushfires, cyclones and other devastating weather events prove to us that nobody can be 100% sure of how things will turn out over the coming years, let alone the coming weeks.

The climate change debate is heightened by these events with the question in many minds being “what impact will this have on businesses and individuals?”

As the results of ‘climate change’ become more obvious, we must be ready to change our ways. Many industries will be forced to make expensive modifications to business practices, and scores of individual businesses will perish if they cannot adjust. At the same time, changes in consumer demands and sources of economic value will provide new opportunities.

For both professional and individual investors it is crucial to recognise the various impacts of climate change on the companies or funds that they are invested in or will potentially invest in. For example:

Energy sources and the price of coal

Coal has been a cheap way to generate electricity, but many will argue that this won’t be the case once the ‘real’ cost is taken into account (ie. the environmental impact of burning coal). Opportunities for companies specialising in wind, solar and geothermal energy are improving. And as consumers see their electricity bills rising, they will be further inclined to seek energy-efficient methods.

Impact of drought on the agricultural sector

Drought is a way of life for many Australians on the land so we should never get complacent about water supply. Water scarcity can lead to lower crop yields and/or higher prices for food products. Farmers are responding through demand for technologies that enhance their yields or enable better water usage and recycling.

Rising sea levels

Increasing global temperatures and the consequent rise in sea levels will most obviously impact on the lifestyles of coastal communities. As a result we could see new demands for infrastructure that is suitable for the ‘new environment’. The effects of climate change on fisheries and various ecosystems may lead to increased opportunities in farming and, again, technologies that enable these ecosystems to adapt.

Extreme weather and the effect on insurers

Insurance companies aim to be adequately compensated (via premiums paid by policyholders) for the risks they are taking. In response to the 2011 floods, the federal government demanded that insurers change policies and highlight what weather events are covered and what aspects are excluded. The increasing claims over recent years has affected premiums, which may create opportunities for improved building standards and materials as consumers seek to better weather-proof their properties.

One thing that won’t change is the fundamentals of good investment decisions. The changing climate will result in many winners and many losers, and the prudent investor will be seeking to choose the right place to invest.

So the next time you’re chatting to your adviser about the weather, ask them how it could affect your portfolio.

How the weather affects your investments

18/03/2015

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