Morgan Stanley upbeat for utilities in 2024

Morgan Stanley has reiterated its ‘overweight’ recommendations for SSE and Severn Trent, on expectations European utilities will outperform in 2024.

In a note published on Monday, the Wall Street bank said it had an "attractive view" of the sector for next year, given its "attractive valuation, continued operational-driven earnings per share upgrades, defensive attributes, policy support and sensitivity to rate moves".

It continued: "After 30 basis point on total return in 2023 in the year to date, despite underperforming for most of the year, we see a stronger set up for the year ahead.

"We consider the sector attractively values at 1x market P/E, after a 10% relative derating through 2023, and with a likelihood of continued EPS updates through the year as operational performance continues."

Morgan Stanley also argued that policy tailwinds in renewables frameworks and electricity and water infrastructure "should dovetail with solid regulatory returns for these growth capex programmes".

The key risks in 2024 were elections in key markets and a market focus on how to fund the growth outlook, it noted.

But it added: "Funding the extent of growth capex plans is a concern for markets, but we point out idiosyncratic differences between stocks with a range of solutions.

"We conclude concerns here are overdone."

The bank reiterated its ‘overweight’ ratings on SSE and Severn Trent in the UK, and on France’s ENGIE. Its main ‘underweight’ ratings are on Spain’s Endesa and Austria’s Verbund.