Living in a world of environmental uncertainty changing environmental regulation is introducing new risks and opportunities
how do investors treat these risks?
should companies make green or black investments?
Problems with traditional valuation models - using a base case cashflow scenario and arriving at a DCF using a WACC may tend to under or overvalue some investments an alternative valuation framework
- categorizing real assets according to whether they behave like equities, bonds or options
- implications for valuation (does DCF fairly value, overvalue or undervalue these assets?)
- implications for financing and portfolio optimization
Eoin Treacy's view The
raft of environmental and carbon related legislation that has been passed by
various European governments over the last few years can't but have a knock-on
effect for related companies. Therefore it makes sense to assess how they will
be affected by such regulation when calculating their value.
Broadly speaking, UK listed Utilities have outperformed their European counterparts by a substantial margin over the last few years. (Also see Comment of the Day on May 11 th). This ratio of the Euro Stoxx Utility Index / FTSE-350 Utilities Index has been trending lower since 2008 and depicts the Eurozone's Utility sector's underperformance over that timeframe. However, the ratio is now oversold by any measure and found support this week in the region of 0.34. This suggests that Eurozone utilities are more likely to outperform over the short-term as the ratio reverts towards the mean.
UK utilities such as Scottish & Southern Energy, National Grid, Centrica, United Utilities, Pennon Group and Severn Trent among others pulled back rather sharply this week in sharp contrast to the wider market. This suggests the sector has at least entered a period of consolidation. Drax Group was an exception this week.
Eurozone utilities such as Enel Green Power, Acciona, Gas Natural, EDP Renovaveis, Verbund, Fortum, RWE, E.ON and GDF Suez share almost identical patterns of short-term oversold conditions that appear to be unwinding. While medium-term downtrends remain in place there is significant scope for additional rallies as the short-term oversold condition relative to the 200-day MA is closed.