Apple! Trump! Yen! Utilities Offer Sanctuary — for a Price
(Bloomberg Opinion) -- With Apple Inc. sounding the alarm on China, currency markets freaking out and the U.S. president still on Twitter, thoughts naturally turn to the traditionally safe harbor of utilities. Yet, as any insurance salesperson will tell you, the premiums tend to get higher when the tornado is already on your doorstep.
Utilities were the second-best performing sector in the S&P 500 last year, and one of only two to end 2018 in positive territory. The sector outperformed the index by almost 7 percentage points. All of that came in the fourth quarter, though, as the world collectively lost its nerve. Utilities ultimately weren’t immune to frenzied selling in December, but they still held up better than most:
Despite joining in the late selling, utilities still look relatively pricey on several measures, though. Here’s the sector’s premium to the S&P 500 on rolling forward price-to-earnings multiples:
A similar story emerges when looking at relative yields. Greg Gordon, Evercore ISI’s veteran utilities analyst, wrote in mid-December the sector was looking more than 23 percent overvalued in terms of how dividend yields compared with corporate bond yields (the Moody’s Corporate BAA index). Again, the spread has narrowed during the recent sell-off but still looks wide relative to history.
It’s entirely possible that utilities’ current premium is deserved — that 2019 is going to be a roller-coaster ride of thrills and spills but generally heading away from the sky and toward that harder stuff below. Signs of softening economic growth continue to mount, even if Apple’s striking China call may also be somewhat self-serving (as my colleague Shira Ovide laid out on Wednesday evening). And the president doesn’t look likely to delete his account anytime soon. At this point, though, the sector remains priced for our general suffering; anything sunnier could set it adrift.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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