Global Utilities Outlook

Valuation support, but remaining headwinds

Worst performer in 2010, due to oversupply and tax issues

2010 has been another poor year for global utilities. The underperformance is

mainly attributable to integrated utilities in mature markets (Europe, US, Japan).

Regulated utilities, growth markets (Asia, LatAm, Russia), and markets with better

regulatory stability (UK, Australia) have had relatively good performance.

Valuation support, but no change to fundamentals in 2011 - cautious stance

Utilities trade at a discount and we see value in particular among the integrated

utilities. However, with gas and power market oversupply in the US and Europe

(two-thirds of the index), and thus poor earnings growth, we see a risk for a third

year of underperformance. Emerging markets show generally better fundamentals.

Regional preferences: Favour growth markets until mature have troughed

We overweight emerging markets - LatAm and Russia - and Australia, given better

near-term fundamentals. We are neutral in Asia ex J+A. We underweight Europe,

the US, and Japan, due to poor/negative growth and significant regulatory

uncertainties. We will consider increasing our mature market weighting once we

see signs of recovery, but we do not think this will occur in the first half of 2011.

Positioning: No sub-sector preference; pick less fuel-exposed change stories

Integrated stocks trade at lower multiples, but show poor growth. Regulated stocks

show better near-term growth, but trade at a historic premium. Thus, we see

differences in fundamentals largely in the share price and favour stock-picking,

focusing on change stories. In the US and Europe, we would avoid stocks exposed

to low gas prices, and in Asia, those squeezed by higher coal prices.