With less than 50 days to go until we go to the polls, I’ll be taking a look at some of the companies who could benefit and some that could suffer, dependant on which party takes power on 7 May.
Anyone Up For A Game of Football?
If it’s not the banks being bad or an insurance company not giving you a fair deal, there is always a certain company or sector that is in the press for all of the wrong reasons. This has been particularly true for Centrica (LSE: CNA) and sector peer SSE (LSE: SSE). If there aren’t allegations that wholesale prices are being fixed, or people having to choose whether to either eat or heat their homes, there doesn’t seem to be anywhere to turn for the London-listed two of the ‘big six’ energy companies. So the last thing that they needed was Ed Miliband proposing a 20-month energy price freeze if the Labour party came to power at its 2013 party conference. A quick look at their charts show that they have lagged the FTSE 100 over the last 12 months, albeit marginally so for SSE.
It is fair to assume that the material underperformance of Centrica can in part be attributed to the collapse in the price of oil together with the unexpected cut in its dividend when the preliminary results were announced. I wouldn’t be surprised if our energy companies will be one of a number of political footballs being kicked about as the race for the golden ticket to Number 10 intensifies over the next few weeks. Combine that with the wave of challenger energy companies, such as Ovo Energy and Flowgroup, and there is plenty of potential for the shares to head south, even from these lows.
Defensive Qualities
Whilst I do think that there will be weakness in the utilities sector as we head towards election day, and possibly even more so should Labour and Ed Miliband swing to power or lead a coalition government for the next five years, I also believe that investors should note the defensive qualities of the sector – after all, householders and businesses need to keep the lights on and the country’s ageing infrastructure needs to be updated. This brings me nicely to, in my opinion, one of the most defensive companies in the sector: National Grid (LSE: NG). While energy suppliers need to remain competitive to avoid excessive customer churn, National Grid knows that it will be getting paid by whoever supplies the gas or electricity that runs through its wires or pipes. A quick look at its chart shows that it has marginally outperformed the FTSE 100 over the last 12 months, although it seems to have fallen in sympathy with the sector recently.
Taking A Contrarian View
It is fair to say that there will be plenty of factors that may cause volatility in the sector, some of which are noted above, but with these defensive companies trading on price to earnings ratios between 13-15, I am becoming more and more interested. I recently wrote about Neil Woodford topping up on both of his holdings in Centrica and SSE due to his belief that the market reaction to Centrica’s results were overdone. Whilst he may have been early to the party, he has been proved right more times than not — he is most certainly worth keeping your investing eye on.
