Brexit sell-off creates opportunities in UK utilities firms

The continued sell-off in UK equities since the Brexit vote has created buying opportunities in the shell shocked utilities sector, Legg Mason affiliate RARE Infrastructure has said.

 

While the broad UK market has made significant gains since the vote, utilities have seen their share prices struggle to keep pace. Core names such as National Grid, United Utilities and SSE have seen share prices fall sharply since the referendum three years ago.[1]

 

Nick Langley, manager of the £450m Legg Mason IF RARE Global Infrastructure Income fund[2], said the stocks had been shunned by investors en masse even as the broader market rose.

 

‘UK utilities stocks have been caught up in a sell-off since the referendum result, despite many of these firms generating revenue from outside of the country, for example’, he said.

 

The UK’s decision to exit the European Union has been complicated further by the possibility of a pro-nationalisation Labour government led by Jeremy Corbyn, and Langley said this combination of factors had created a wealth of buying opportunities in the sector.

 

‘Firms such as National Grid have been part of an indiscriminate sell-off.  Investors seem not to realise that two thirds of the firm’s revenue is generated from regulated utility businesses in the US,’ he said.

 

‘By using our long-term fundamental valuation approach we have been able to take advantage of the current market dynamics in utilities firms which we believe are undervalued, as they continue to have strong, predictable and regulated cash-flows, at a discount,” he said.

 

‘With loose monetary policy and Chinese stimulus starting to find traction, we believe an economic recession is not yet on the cards. However, as we approach the later stages of this current economic cycle, infrastructure assets such as these utilities work well as a defensive allocation within a portfolio.”

 

The Legg Mason IF RARE Global Infrastructure Income fund, which has returned 36.3pc[3] since inception three years ago, holds a number of UK utilities stocks, including National Grid, SSE plc and United Utilities.

[1] Numbers correct as of 11/07/2019

[2] Source: Legg Mason, AUM as of 19/7/2019

[3] Source: Legg Mason, Date: 11.7.2019, Past performance is not a reliable indicator of future results. Source for performance figures – Legg Mason. Performance is calculated on a NAV to NAV basis, with gross income reinvested without initial charges but reflecting annual management fees.