Green deal sprinkles stardust on European power stocks

By Danilo Masoni and Thyagaraju Adinarayan
FILE PHOTO: General view of the Walney Extension offshore wind farm operated by Orsted off the coast of Blackpool, Britain

By Danilo Masoni and Thyagaraju Adinarayan

MILAN/LONDON (Reuters) - Who said utilities shares were dull?

In the past year European power company stocks have triggered a buying frenzy more akin to headline-grabbing U.S. tech giants following the continent's "green deal".

An EU target to cut carbon emissions to zero by 2050 and expectations of an associated spending boom have fired up shares in electricity firms, providing by far the biggest boost to stock market gains in Europe this year.

The pan-European utilities index has gained over 20%since the European Union launched its ambitious green deal in December, dwarfing the 6% rise in the broader equity benchmark.

And the sector that is often dismissed as boring because of its predictable revenues and tight regulation, is set for its best 10-week run ever, with returns on many of its components outdoing the likes of Facebook, Amazon and Google.

Utilities versus STOXX 600

The zero carbon plan could unleash 7 trillion euros ($7.6 trillion) of cumulative investments, Goldman Sachs estimates, with utilities accounting for nearly half of that.

Goldman anticipates an era of "unprecedented" growth and regulatory stability for utilities and sees a sustained re-rating for firms it has dubbed as "Climate Champions" - Orsted, RWE, EDP Enel, EDPR, and Iberdrola.

The growing influence of environmental, social and corporate governance (ESG) on portfolio decisions is also helping. Barclays data late last month showed that 31% of global funds are overweight on European utilities, the highest level in five years.

"ESG is intensifying the pace at which active and passive funds move into 'winner' sectors, including utilities," said Antonio Amendola, fund manager at AcomeA in Milan. AcomeA's funds have exposure to utility stocks, although it has not disclosed which ones.

Some of the sugar rush is also down to investors' search for safe-haven equity assets at a time when the coronavirus outbreak threatens to inflict significant damage on the global economy. These businesses which are less tied to the economic cycle tend to benefit too from the continued drop in borrowing costs.

Power stocks may lack the glamour of the FAANG quintet - Facebook, Amazon, Apple, Netflix and Google-owner Alphabet - but look back over a one-year period and this group of "boring" electricity generators has easily outperformed their tech counterparts.

EU Utilities versus FAANGs

($1 = 0.9245 euros)

(Reporting by Danilo Masoni in Milan, writing and graphics by Thyagaraju Adinarayan in London; editing by Susan Fenton)