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This edition of the Geostrategic Analysis examines how a strengthening El Niño could disrupt food production, logistics networks, energy systems and economic resilience through 2027. As climate-related pressures intensify across vulnerable regions, businesses will need to prepare for greater operational volatility, supply chain disruptions and resource constraints.
We also spotlight the private equity sector, where investors are increasingly rotating capital toward resilient industries amid AI disruption and geopolitical uncertainty. Energy systems, digital infrastructure, advanced manufacturing and defense-related assets are attracting growing attention as governments prioritize security, competitiveness and strategic supply chains.
Other issues covered include elections in Israel, the US and South Africa, highlighting how political transitions, regulatory shifts and governance capacity can influence business risk, investment and operations. This month's indicator tracks rising global defense spending and highlights the implications for supply chains, industrial policy, investment priorities and national-security-driven procurement.
In the monthly Geostrategic Analysis, the EY-Parthenon Geostrategic Business Group (GBG) provides its insights on key geopolitical developments. Each issue includes our take on recent or upcoming political risks and events and what they mean for global business. Subscribe now.
Topic 1
An intensifying El Niño puts food, electricity and infrastructure at risk into 2027.
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Read moreThe climate phenomenon El Niño will intensify in the coming months, increasing risks to agricultural production, critical infrastructure, water availability and economic resilience across exposed regions. Forecasts indicate that El Niño will peak in late 2026 but continue to shape weather patterns and economic conditions well into 2027. National Oceanic and Atmospheric Administration (NOAA) cites a greater than 90% chance of a very strong event in the Northern Hemisphere fall and winter 2026-271.
Historically, severe El Niño events have strained government resources, contributed to food and energy inflation, disrupted business operations in certain sectors and slowed economic growth in vulnerable markets. These pressures can amplify social unrest, complicate policymaking and create operational challenges for businesses through supply chain disruptions, resource constraints and market volatility2.
El Niño is expected to increase climate volatility through 2027, intensifying weather-related disruptions. Some regions are at higher risk. Drought conditions are likely in Central America and the Caribbean, Southern Africa, South Asia, Australia and Southeast Asia. Extreme heat associated with El Niño would also impact labor productivity and energy systems. Conversely, other regions should expect higher rainfall, such as East Africa, southern South America and parts of China and the US.
Food production is likely to be affected. Rice harvests have dropped 1.0%-1.5% in past El Niño events. Food price increases or shortages may pressure policymakers to expand subsidies and seek emergency imports, testing government capacity in climate-exposed economies where fiscal resources and social safety nets are strained. This would heighten the risk of social unrest, political instability and policy uncertainty.
Logistics routes may face challenges due to reduced water availability impacting inland waterways and creating trade bottlenecks. The Panama Canal is already operating at a lower volume due to water shortages, for instance. Increased supply chain volatility would continue to raise operating costs and incentivize supplier diversification and strategic inventories3.
Food and agriculture companies will likely face heightened production volatility as El Niño-driven weather disrupts crop yields and livestock production across key growing regions. These pressures will impact food prices, tighten global commodity supplies and likely prompt governments to intervene in food markets, creating additional uncertainty across agricultural value chains4.
Infrastructure and logistics firms will face heightened physical asset risks as El Niño increases the frequency and severity of flooding, droughts and other extreme weather events. These disruptions threaten transportation networks, energy systems and critical facilities, increasing maintenance costs. Companies may respond by diversifying logistics networks, increasing inventory buffers and investing in resiliency measures.
El Niño-related impacts could increase claims, prompting insurers and reinsurers to reprice and tighten exposure or reduce capacity in higher-risk locations. Companies facing a higher chance of disruption should include plans for increasing costs of resilience.
Power and utility providers will likely face rising demand as higher temperatures increase cooling needs. At the same time, drought conditions constrain hydropower generation. This combination would tighten electricity supply, heighten grid reliability risks and increase power costs. Utilities and large energy consumers may accelerate investments in generation capacity, grid resilience and demand-management measures.
Companies in all sectors should stress-test their 2027 operational plans against El Niño scenarios, including water and power availability, logistics and workforce disruption. Firms with higher exposure to hydro-dependent markets (for energy and/or transport) should assess alternate sourcing and routing, backup energy preparation and business continuity plans.
For more information, contact Charlie Smith.
Topic 2
AI disruptions and geopolitical demands are rotating PE capital toward resilient sectors.
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Read morePE deployment has remained selective in 2026 as sponsors reassess sectors exposed to AI disruption. The value of technology-focused PE acquisitions globally fell 50% in the first half of 2026. In contrast, non-technology deal value increased by 9%, according to Dealogic, suggesting capital is rotating rather than retreating from the market.
The recent EY PE Pulse survey reveals sponsors are increasingly directing capital toward sectors with durable demand, visibility and stronger resilience characteristics, including healthcare services, digital infrastructure, power systems, and aerospace and defense. The trend reflects a broader shift toward resilience-oriented investment themes amid geopolitical uncertainty and rapid technological change.
Capital rotation is happening amid expansion, with 72% of general partners expecting deployment to increase over the next 12 months and 56% expecting exits to accelerate, per the PE Pulse survey. PE firms are expected to increasingly align this deployment with government priorities around national security, industrial competitiveness and strategic supply chains. Advanced manufacturing, robotics and industrial materials linked to supply chain reshoring may receive greater investor attention as governments seek to improve strategic autonomy and reduce dependence on external suppliers.
AI will continue to be a focus for both governments and PE funds. Capital is likely to continue flowing toward semiconductors, power generation and AI infrastructure. Additionally, AI infrastructure investment5 is likely to broaden beyond data centers into the wider ecosystem supporting compute demand as technology investment and critical infrastructure converge. Power transmission infrastructure, cooling systems and energy storage are attractive opportunities associated with AI adoption.
Geopolitical instability is likely to influence PE deployment as well, strengthening investment interest in defense technology, munitions, autonomous systems and related supply chains.
Companies operating in defense, energy, digital infrastructure and industrial manufacturing should consider whether to position themselves to attract greater sponsor interest as investors seek exposure to sectors benefiting from long-term policy support, resilient demand and favorable market positioning.
Management teams should expect PE investors to place greater emphasis on geopolitical resilience, supply chain security, energy availability, AI readiness and national-security considerations during transaction diligence and capital allocation decisions. Companies in these sectors should prepare diligence materials on these issues ahead of sponsor approaches.
For more information, contact Pete Witte.
Topic 3
Elections in Israel, the US and South Africa highlight political transitions, governance capacity and policy execution can shape business risk, investment and operations.
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Read moreIsrael’s upcoming national elections6 — the first since the 7 October 2023 attacks and ensuing regional conflict — could reset the country’s political direction and its global relations. Responses to the security environment and the strategic direction of the country are defining features of the campaign. Other top issues for voters include cost-of-living challenges and military conscription rules. With an estimated 38 parties contending for seats in the national legislature, preliminary polls do not point to any one coalition with a clear advantage.
Election results may create more variable domestic policy than foreign policy. Domestically, uncertainty around judicial reform and fiscal policy will depend on whether there is a decisive win for one coalition, versus a more mixed outcome that leads to prolonged coalition negotiations. The speed of coalition formation would be a signal of greater certainty around policymaking. Finance teams should model various electoral outcomes and economic implications. Externally, the country’s national security objectives are expected to remain consistent, although the policy tools and methods could shift. Sectors such as defense, cybersecurity and frontier technologies will remain strategic national priorities, regardless of outcome.
For more information, contact Courtney Rickert McCaffrey
The US midterm elections on 3 November will have implications at both the federal and the state and local levels. At the federal level, 35 of 100 Senate seats and all 435 seats in the House of Representatives are being contested, while state-level elections include 36 of 50 governorships. Key issues influencing the decisions of undecided voters center on cost-of-living challenges, data center expansion and the broader role of AI in society. These issues are prevalent at the state and local level: voters will face at least 38 local data center measures this cycle7.
A divided federal government is a distinct possibility, with Democrats seen as increasingly likely to take control of the House and possibly the Senate. Regardless of the outcome, though, the executive branch will continue to actively lead on regulation and foreign policy via rulemaking and executive actions. If Democrats take control of the House, oversight of executive agencies is expected to intensify. Bipartisan interest in scrutinizing AI and data centers suggests there could be congressional activity on these issues, as well. Yet state elections may prove more impactful in terms of policy changes, as state governments seek to expand housing construction and power generation, while adding oversight to data center development. Utilities could face pressure to expand capacity and protect residential ratepayers, while technology companies may see fragmenting regulations with divergent state-level approaches to infrastructure permitting, energy sourcing and incentives.
For more information, contact John Hallmark (EY US) and Adam Barbina.
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Read moreSouth Africa’s local government elections on 4 November will take place amid mounting financial, infrastructure and service delivery pressures among municipalities and at a time of heightened unemployment nationally. Johannesburg has become emblematic of this trend, with public complaints of poor infrastructure and basic services. In FY 2025-26, the city spent only 49% of its capital budget8 against a 70% target, leading to concerns about governing capacity. The national audit office’s FY 2024-25 analysis9 confirmed that metro areas, which account for roughly 54% of local government expenditure, have regressed on financial health and service delivery. Johannesburg’s coalition instability and related administrative turnover have driven service delivery shortfalls. Stable governing arrangements will be critical to stabilizing finances and infrastructure.
Coalitions, the prevalent governance model in South African municipalities, are a near-certain outcome of the elections. The durability of each coalition is the variable to watch; fewer coalition partners point to greater stability. Effective coalitions would likely restore maintenance spending, impacting utility reliability and operating expenses for energy-intensive industries, such as manufacturing and mining. Better infrastructure planning and maintenance benefits logistics operators that depend on efficient urban transport networks. Companies with energy- or transport-dependent operations in South African metros should plan for multiple scenarios, with municipal government execution capacity as a key planning variable.
For more information, contact Angelika Goliger.
Topic 4
Global defense spending is accelerating, creating growth opportunities while raising fiscal pressures and elevating supply chain security as a strategic priority.
The Stockholm International Peace Research Institute’s military expenditure database10 indicates that defense spending is growing worldwide. While North America remains the largest single defense spending market, its growth since 2016 is only 13%, lagging far behind Europe (102% growth) and Asia (50% growth). Recent IMF analysis11 finds that large defense spending buildups are more frequent, with defense outlays typically increasing by almost 2.7% points of GDP. Roughly two-thirds of this spending is financed through fiscal deficits.
While government spending on defense can stimulate short-term economic activity, it also contributes to rising public debt, inflationary pressures and weaker external balances over time. These outlays also redirect funds from other policy demands, risking shortfalls and lower growth for non-defense sectors. Rising defense spending creates opportunities not only for aerospace and defense companies, but also for organizations in sectors such as advanced manufacturing, technology and cybersecurity. Governments are placing greater emphasis on where companies source, produce and invest to promote domestic economies and secure supply chains from disruptions and foreign adversary inputs. Executives should prioritize supply chain transparency and their sourcing footprint to align with national-security-driven procurement preferences.
Additional EY contributors include Kyle Madura, Saurabh Yadav, Ben-Ari Boukai and Lakshita Chadha.
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Middle power influence grows, data center investment faces power constraints, Brazil elections near, Middle East disruption persists and more.
EU competitiveness measures evolve, World Cup highlights investment opportunities, Strait of Hormuz uncertainty persists, Ukraine conflict continues and more.
USMCA uncertainty raises North American trade risks, EU tech sovereignty accelerates, G7 divergences, energy coordination evolves and more.
The EY-Parthenon Geostrategic Business Group (GBG) provides its take on key geopolitical developments and the impact of these political risks on international business. Each monthly EY-Parthenon Geostrategic Analysis issue includes assessments of recent or upcoming geopolitical risk events and what they mean for companies across sectors and geographies.
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