With the economy at last picking up, driven by City growth expectations for next year of circa 2.5 per cent, stock market investors will need to reconsider their sector ratings. Should they move more funds into sectors that have been depressed in the past five years – the housing sector springs to mind?
In fact, after a disastrous few years, shares in the major housebuilders have rallied strongly, especially those of Barratt Developments and Taylor Wimpey, both of whom entered the recession with excessive debt.
Conventionally, electricity investments have been viewed as defensive, albeit with the acceptance that a generation-related business carried more risks than those beholden to price regulation. Recent experiences have decisively disproved this view, most notably within the EU. The share prices of Germany’s top two utilities, Eon and RWE, have plummeted, along with those of other major EU players EDF, Enel and Iberdrola.
The UK response has been more muted, with National Grid – bereft of any material generation exposure – performing very solidly. In July 2008 its shares were 568p, compared with the current price of 776p. Indeed, its shares reached a peak of 847p last May, shortly after it reassured the market that no dividend cut was necessary following acceptance of the unprecedented eight-year pricing formula for its UK regulated businesses. National Grid is very appealing to long-term infrastructure funds.
Centrica’s share price performance since 2008 has been similar, supported by its strong domestic gas business. In mid-2008, Centrica’s share price was 268p, compared with a current price of just below 350p. While fluctuating gas prices inevitably impinge on its market rating, it has also been adversely affected by Ed Miliband’s 20-month price freeze pledge; this would sharply reduce its operating margins and its earnings capacity.
By contrast, SSE’s share price performance has been lacklustre, despite the payment of robust dividends. Of course, it is far more exposed to generation – clearly reflected in the fact that its share price has barely moved since the 1,377p quotation in July 2008. Weak generation returns have been a key factor, allied to concern about high debt levels and the ability to sustain dividend growth.
So other market sectors are more obviously positioned to benefit from an improving economy, such as the retail sector and transport businesses. But it is unlikely that there will be a flood of money away from either the UK electricity sector or from UK utilities generally – it’s just that their investment appeal is less compelling.