As with other defensive sectors, utilities outperformed in the US during 2000, while the start of th...
As with other defensive sectors, utilities outperformed in the US during 2000, while the start of this year has seen funds flowing away from them and towards growth areas of the market.
The S&P 500 fell by 9.1% over the 12 months to the end of December, while the S&P Natural Gas index rose 75.49% and the S&P Electric companies index rose 46.22%, in dollar terms. Over the past month, however, the natural gas index fell by 2% and electricals fell by 9.32% compared with a rise of 5.65% in the S&P 500.
Rupert Howard, North America fund manager at Aberdeen, says: "Last year, utilities performed exceptionally well because they are in many ways a bond proxy. They have a very high yield, and visible and low earnings growth. They did well because they were perceived as a safe defensive haven. So far this year they have not performed well as there has been a rotation of funds, with more money flowing to growth areas such as technology, media and telecoms."
Simon Melluish, head of US equities at Gartmore, notes that Calpine reached a peak of $52.25 on 29 September 2000 and dropped to a low of $29.50 on 11 January 2001.
"There was a lot of window dressing at the end of last year as people who did not own Calpine wanted it in their portfolios," he says. "Then there was a big rotation on the first days of January and it now looks as if it has bottomed out."
Another factor influencing investors moving away from utilities have been recent events in California, where a state of emergency was declared. People were urged to conserve power and electricity companies PG&E and Edison saw their share prices go down between 50% and 60%, notes Howard.
"California was one of the first states to deregulate," Howard says. "The past year saw a quintupling of the price of gas, to levels never seen before. The problem is that gas is a very tricky commodity, the market is very localised and it can not be imported or exported easily. Gas producers in North America had a poor track record in the last five years in increasing productive capacity. So gas supply was flat or down, while demand was going up, and eventually crunch time was reached."
With the rise in the price of gas there was also an increase in the demand for and the price of electricity, and the two electricity companies were unable to produce enough electricity for the state. The companies had to buy electricity from other producers at market prices but sell to customers at fixed prices. The result is they have run up debts of $11.5bn and there are concerns that they may face bankruptcy.
However, despite the problems the sector faces, Gartmore still favours utilities. The company is overweight in the sector but it has slightly reduced its exposure since last year.
Melluish says: "Earnings estimates are still rising and some good news is still not priced into the stocks. Estimates have been revised all the way through the year, partly because the industry has changed with deregulation, but also because stocks have been under pressure with the California crisis. We believe California is the exception rather than the rule."
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