(Bloomberg) — After a bumper year for Europe\u2019s renewable-energy stocks, underappreciated utilities shares are now gaining support from the market as 2021\u2019s hot sector to play the clean power transition.<\/p>\n
Helped by government policies such as the European Union\u2019s Green Deal and investors\u2019 environmental, social and governance concerns, renewable assets have strongly outperformed traditional utilities peers this year in the Stoxx Europe 600 Index. Turbine maker Vestas Wind Systems A\/S has almost doubled in value, while U.K. electric company SSE Plc is up less than 3%.<\/p>\n
Some strategists warn that opportunities in wind and solar stocks may be more uneven in 2021 as valuations appear stretched. Utilities may be a lower-risk way to buy into green energy growth than renewables equities, said Ursula Tonkin, head of listed strategies at infrastructure investor Whitehelm Capital Pty Ltd.<\/p>\n
\u201cOver the long run, the tortoise will likely outperform the hare,\u201d she said. \u201cFor every new solar, wind or battery installation, the grid has to expand to accommodate it.\u201d<\/p>\n
While coronavirus-pandemic winners such as tech shares are losing favor in the latest vaccine-fueled stock rally, sustainable companies have stayed in favor, also helped by November\u2019s U.S. presidential election victory for Joe Biden, who pledged a clean-energy agenda. Still, utilities as a whole have gained only modestly so far this year.<\/p>\n
Many utilities have positioned themselves to capitalize on opportunities in green energy after \u201ccleaning up\u201d their portfolios in the past few years, said Sam Arie, an analyst for the industry at UBS AG.<\/p>\n
\u201cWe\u2019ve gone from a world five years ago which didn\u2019t really have climate goals in view to one where now those are the most important goals across all the sectors,\u201d he said.<\/p>\n
Investors will have to be more selective, with next year unlikely to be as \u201cexceptional\u201d as 2020 for the renewables segment, said Louise Dudley, a global equities portfolio manager at Federated Hermes Inc. Stocks such as Orsted A\/S trade at about 53 times estimated earnings, versus 19 times for the Stoxx 600 Utilities Index. The Danish offshore wind-farm developer was recently downgraded at Bank of America Corp. and Royal Bank of Canada.<\/p>\n
Investors are giving \u201cinsufficient credit\u201d to utilities like SSE, Germany\u2019s RWE AG, and Portugal\u2019s EDP SA that balance spending on renewables with defensive earnings flow from electricity networks, RBC Capital analysts said in a 2021 outlook note for the utilities sector. Analysts tracked by Bloomberg see 16% upside for RWE and 6% for EDP, while average price targets are for at least 11% declines for Vestas and peer Siemens Gamesa Renewable Energy SA.<\/p>\n
Another plus is attractive payouts. Investors would struggle to find another industry that delivers utilities\u2019 highly predictable, strong earnings growth alongside comparatively high dividend yields, UBS\u2019s Arie said.<\/p>\n
Still, while 2021 may involve a \u201cbumpier ride\u201d for renewables, valuations for Vestas, Orsted and peers aren\u2019t likely to slide as their business growth forecasts are so positive, Whitehelm Capital\u2019s Tonkin said.<\/p>\n
Green Competition<\/p>\n
An additional concern for the pure renewables industry in 2021 is increasing competition, both from utilities ramping up spending and oil companies aggressively investing in green energy. This could pose a \u201creal threat\u201d to the economics of wind and solar, said Ulrik Fugmann, co-head of the Environmental Strategies Group at BNP Paribas Asset Management.<\/p>\n
Others, however, are sanguine. James Smith, fund manager at the Premier Miton Global Renewables Trust, said oil companies that \u201cseek projects simply for the sake of it\u201d would put returns at risk at a time when the sector must strike a balance between operating core crude-oil assets, executing the shift to renewables and paying dividends.<\/p>\n
The energy market \u201cneeds to grow very aggressively in the next two decades\u201d to reach regulators\u2019 emission-cutting goals, said Harry Boyle, a portfolio specialist at sustainability-focused fund manager Impax Asset Management. \u201cThere should be ample room for all actors.\u201d<\/p>\n
\u00a92020 Bloomberg L.P.<\/p>\n","protected":false},"excerpt":{"rendered":"
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