Where to Find Opportunities in Utilities

Global utilities have underperformed in 2012, but opportunities exist for investors in well regulated and politically stable regions, Per Lekander, analyst at UBS, told CNBC.

Electricity pylon pass the Ffos-Y-Fran opencast coal mine in Merthyr Tydfil, Wales.
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Electricity pylon pass the Ffos-Y-Fran opencast coal mine in Merthyr Tydfil, Wales.

“Utilities are clearly very poor performing not only this year but for three or four years, but really you have to break that down into those utilities that are really regulated not exposed to commodity prices and those that are,” Lekander explained.

He singled out UK utilities stocks, particularly Centrica and National Grid as sound investments in a volatile market and said while U.S. utilities performed well last year, stocks seem expensive at the moment.

“We are quite skeptical of (U.S. utilities stocks) in general. They are quite expensive, like 20 to 30 percent more expensive than European ones,” he said.

“We are still positive on the UK because you know I think if you invest in utilities now you invest in something which is still a low risk sector and the UK is well regulated, they are much cheaper than the U.S.,” he added.

Cautious on Europe

Lekander contrasted the UK utilities sector, which currently has an overweight rating from UBS, to the rest of Europe which is currently rated neutral.

He mentioned E.On , RWE , and GDF but said that "you shouldn’t rush in" and urged particular caution on southern European utilities firms which he said were failing to address their debt issues.

“Southern Europe in a way you can say that the utilities is a picture of a mini scale of the whole sovereign problem. And it's going to continue. That’s where I would say we would really stay out of the stocks because there will be a lot of deleveraging,” he stressed.

Russia and Brazil

Lekander said UBS maintains a bullish stance on Russian and Brazilian utilities and singled out stocks that were largely foreign owned in Brazil.

“In Brazil, and I will say this is a great attractive market, the problem is governance. So therefore, invest in those that have a significant foreign ownership,” he said.

“You have Tractebel which is majority owned by International Power, you have EDP which is owned by the majority owned by EDP in Portugal, so that’s what I would do in Brazil,” he said.

On Russia, Lekander said he favored the generating segment of the utilities sector and singled out hydro generating company RusHydro and E.On Russia, formerly OGK-4 as key stock picks.


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Disclosure information was not available for Per Lekander or his company.