$XLU Utilities have already paid for the rate shock: ~14% relative underperformance since April and a de-rating from 13% P/E premium to parity
Utilities have taken the valuation hit first.
@morganstanley says European utilities underperformed the market by “~14% since April highs” and de-rated “from 13% premium to market P/E to parity.” Historically, utilities underperformed the market in “68% of periods of large upward moves in yields,” with a “median -3%,” and renewable and regulated names saw “median -7%.”
The fundamental point is different from the price action. @morganstanley argues the debt stock is largely fixed rate, refinancing is staggered, and allowed returns and PPA prices showed pass-through in 2021-23.
So higher yields are mostly a multiple headwind, not an immediate EPS shock. If yields peak, long-duration utilities are the rebound expression. If yields keep rising and equities weaken, the defensive earnings profile matters more.
Utilities have taken the valuation hit first.
@morganstanley says European utilities underperformed the market by “~14% since April highs” and de-rated “from 13% premium to market P/E to parity.” Historically, utilities underperformed the market in “68% of periods of large upward moves in yields,” with a “median -3%,” and renewable and regulated names saw “median -7%.”
The fundamental point is different from the price action. @morganstanley argues the debt stock is largely fixed rate, refinancing is staggered, and allowed returns and PPA prices showed pass-through in 2021-23.
So higher yields are mostly a multiple headwind, not an immediate EPS shock. If yields peak, long-duration utilities are the rebound expression. If yields keep rising and equities weaken, the defensive earnings profile matters more.