The utilities sector has exhibited widely divergent performance in the various major markets over th...
The utilities sector has exhibited widely divergent performance in the various major markets over the calendar year.
In the S&P 500, electric companies are up 26.51% in dollar terms for the 12 months to the end of July. In the UK they are up 6.76% in sterling terms while in Europe it is up 2.85% in euro terms over the same time period.
While performance in the sector has been mixed over the calendar year, Stephen Docherty, fund manager at Aberdeen Asset Management, believes that investors will continue to hold utilities as the markets continue to remain difficult to call.
He says: 'Generally, while global markets are in no man's land, people will be sticking with utilities for the higher yield.' Docherty says that the sector also offers a number of merger and acquisition opportunities globally, as deregulation continues around the world.
Alison Sinclair, US analyst at Britannic Asset Management, is less positive about the sector and says the house has held an underweight position in the sector over the calendar year, following profit-taking in the aftermath of the sector's strong performance in 2000.
While the sector started the year poorly as investors looked to invest in higher growth areas of the market after the rate cuts, performance improved as the highly publicised power shortages in California pushed electric companies into the growth arena, Sinclair says.
However, the new-found growth status of a number of independent power companies looking to cash in on the premium being paid for their wares soon petered out, she adds.
She says: 'A lot of momentum money was pumped into the sector and it crashed down in May when the weather changed and electricity usage was lower than expected because less people were using their air conditioning systems.'
Demand was also weaker than expected because the economic slowdown has led to the closure of a number of factories and the denizens of such power-starved states as California have actually started to successfully curb their excess and power usage.
Sophie Richmond, European water and electricity analyst at Royal & SunAlliance Investments, is bullish about the specific stocks within the sectors.
Richmond says that a number of domestic electricity companies are well positioned to benefit from Neta, the new electricity trading arrangement.
The arrangement, which came into force this year, aims to curb market pricing power in any quarter, the year on year effect of which will be to push prices up, she adds.
Richmond says: 'Electricity markets indicate that winter electricity prices are going to go up.
Prices for consumers will probably stay where they are but distributors margins may be lower than they were last year.'
Any shrinkage of profits will not have a major impact on distributors, she adds, noting that those such as Scottish & Southern Energy generally have a diversified business.
In Europe, Richmond also anticipates acquisition activity, as those companies like RWE and Endesa, that have divested many non-core activities, look to spend cash on their balance sheets.
• High yields available in sector.
• Defensive qualities of sector.
• Potential for corporate activity.
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