Green Utilities Are Starting to Outperform

(Bloomberg) -- Concern about an economic slowdown has struck equities hard in the past three days. Amid the bloodbath, utilities -- perceived as safer -- have fared better than others. While the sector is up 17% for the year, it masks strong winners and losers within it. Renewables in particular have outperformed, given that many European governments are looking to boost spending on tackling climate change.

Government policies globally are increasingly supporting net-zero carbon targets, underpinning the growth ambitions of utilities including Orsted, RWE, Enel, SSE and EDPR, which are poised to benefit from structurally growing capex pipelines, Bank of America Merrill Lynch says. The analysts estimate renewable players will enter a “golden age” with investments doubling from current levels to 60 billion euros per year.

Goldman Sachs analysts are on the same page and said back in August that “climate champions” will benefit from an unprecedented growth to 2030, a call they reiterated last week after the announcement of the German climate package. They forecast a 9% to 12% compounded annual growth rate (CAGR) for those stocks. In a highly fragmented renewable market Goldman has a clear preference for six utility plays: RWE, Orsted, EDP, EDPR, Enel, SSE and Iberdrola. They see the “pioneering” German plan to act as a “blueprint” for the rest of the world.

Valuation could put off investors, though. Orsted and EDPR are the two largest pure-play stocks of the sector but they’re also the most expensive. Overall, analysts on average are struggling to find some upside for renewables after the recent rally. UBS analysts turned cautious on Orsted and Iberdrola last month, saying fundamentals are no longer supportive. They prefer other players including Enel and RWE.

Some caution might also be needed on German utilities as the government allocated less money in its budget for closing coal-fired power plants than the companies that own them expected.

Climate change remains the number one ESG issue for investors, according to BofA. They estimate $70 billion of assets are tied to ESG strategies in the U.S. alone, while $3 trillion of assets currently use climate change and carbon footprint as one of the ESG criteria in their investment process.

Among European countries gearing up spending on tackling climate change, Germany already announced it will spend more than 100 billion euros to reduce carbon emissions between 2020 and 2030, with half of the amount in the first three years.

With 77 countries now committed to net-zero emissions by 2050, and 87 large companies with a similar pledge, BofA analysts estimate there may be a need to triple the current capacity of renewable projects, as over 75GW of green power purchase agreements (PPA) should be generated.

Renewables might be one of the few beneficiaries from the German package, because the country may not commit to much more fiscal spending beyond this new "green" deal, according to Deutsche Bank economists.

In the meantime, Euro Stoxx 50 futures are up 0.5% ahead of the European open, while S&P 500 contracts are up 0.1%.

SECTORS IN FOCUS TODAY:

• Watch miners as nickel continues to gain on supply concerns and gold strengthens ahead of highly-anticipated U.S. jobs data. Watch nickel-exposed Eramet, Norilsk Nickel, Aperam, as well as gold miners Polymetal, Centamin, and Fresnillo among others.
• Watch Apple suppliers following a report that the U.S. tech giant has asked suppliers to increase production of the iPhone 11 range by around 10%. Watch AMS, Infineon, STMicro, Dialog Semi and IQE.
• Watch the pound and U.K. stocks after U.K. Prime Minister Boris Johnson was given a week by the European Union to revise his Brexit deal or risk a postponement of the divorce. Johnson has a Plan B and might be flexible, a good thing since Brexit might become a problem for the world economy.

COMMENT:

• “It’s illogical that U.K. industrials are outperforming staples amid a gloomy macroeconomic outlook, but we don’t think this is a typical cyclical-defensive play,” Bloomberg Intelligence strategists Tim Craighead and Laurent Douillet write in a note. “Industrials aren’t that economically sensitive and staples are hampered by tobacco. Staples (excluding tobacco) are more clearly exposed to Brexit, U.S.-China trade and global growth than discretionary.”

NOTES FROM THE SELL SIDE:

• Casino PT lowered to EU35 from EU36 at Deutsche Bank, which cites a likely 3Q slowdown for the French retailer and the “limited” likelihood, at this stage, of a bid by domestic rival Carrefour.
• Huhtamaki’s resilient business model gets support from strong customer relationships, diversified geographical exposure and high exposure to fast-moving consumer goods, Berenberg says, initiating with a buy rating on the stock.

COMPANY NEWS AND M&A:

• BP CEO Dudley to Retire; Bernard Looney Succeeds
• Allianz to Buy EU1.1b Japan Residential Assets From Blackstone
• ABN Amro to Look for External CEO Successor, Telegraaf Writes
• Aryzta to Sell Majority of Picard Stake for EU156m
• Some LSE Investors Tell HKEX to Raise Bid, Offer More Cash: Rtrs
• Vivendi Files Claims Against Mediaset, Fininvest Over EGM
• Italy in Talks With EU Over Monte Dei Paschi Loan Spin Off: Rtrs
• Nokia, NEC Win U.S. Trade Case Over Xtera Subsea Cables
• RCF Price Range Set at EU1.15-1.45, Trading Start Set on Oct. 22
• Norwegian Air September Total Passengers Y/y -4%

TECHNICAL OUTLOOK for Stoxx 600 index:

• Resistance at 381.1 (50-DMA); 395.1 (July high); 397.9 (June 2018 high)
• Support at 375.9 (200-DMA); 365.5 (50% Fibo)
• RSI: 37.6

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

• Resistance at 3,439 (50-DMA); 3,573 (July high); 3,596 (May 2018 high)
• Support at 3,403 (61.8% Fibo); 3,356 (200-DMA)
• RSI: 39.6

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

• Arjo upgraded to buy at SEB Equities; PT 40 Kronor
• H&M upgraded to buy at HSBC; PT 225 Kronor

DOWNGRADES:

• Atlas Copco downgraded to sell at DNB Markets; PT 275 Kronor
• Hexagon downgraded to sell at Goldman; PT 415 Kronor
• Marks & Spencer downgraded to reduce at HSBC; PT 1.50 Pounds
• Siemens Gamesa downgraded to add at AlphaValue
• Verbund downgraded to reduce at Oddo BHF; PT 45 Euros

INITIATIONS:

• Altia rated new hold at SEB Equities; PT 8.20 Euros
• Huhtamaki Oyj rated new buy at Berenberg; PT 45 Euros
• JD Sports rated new outperform at Exane; PT 8.30 Pounds

MARKETS:

• MSCI Asia Pacific down 0.5%, Nikkei 225 up 0.2%
• S&P 500 up 0.8%, Dow up 0.5%, Nasdaq up 1.1%
• Euro up 0.05% at $1.097
• Dollar Index up 0.05% at 98.91
• Yen up 0.08% at 106.83
• Brent up 0.5% at $58/bbl, WTI up 0.6% to $52.8/bbl
• LME 3m Copper down 0.7% at $5620.5/MT
• Gold spot up 0.1% at $1506.9/oz
• US 10Yr yield up 1bps at 1.54%

ECONOMIC DATA (All times CET):

• 9:30am: (GE) Sept. Markit Germany Construction PMI, prior 46.3
• 10am: (IT) 2Q Deficit to GDP YTD, prior 4.1%
• 10am: (UK) Sept. New Car Registrations YoY, prior -1.6%
• 11am: (IT) Istat Releases Revised Quarterly National Account Series

To contact the reporter on this story: Michael Msika in London at mmsika4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Namitha Jagadeesh

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