Why Bernstein says there is still room to run in this defensive growth sector

Bernstein maintained a bullish view on European utilities even as the sector trades at a 5% premium to its historical average, arguing the valuation is justified by accelerating decarbonization and rising network investment. The brokerage highlighted projected EPS growth of 7.1% CAGR from FY26-FY29, dividend yield rising from 3.9% to 4.5%, and sector capex increasing from €58 billion in 2020 to €117 billion by 2030. Utilities have outperformed year-to-date by 14.6% TSR, with renewables up 27% YTD, though some sub-sectors like UK-regulated networks have lagged since the Iran conflict began.

Analysis

The cleanest read-through is that this is less a pure “utilities rerating” story than a capital-allocation story where regulated asset bases become a quasi-bond proxy with embedded growth. If network capex is the dominant incremental driver, the winners are the names with the most visible transmission/distribution backlog and the lowest political friction on allowed returns; the losers are the higher-beta generation-heavy utilities where the market can’t underwrite returns on new spend as cleanly. That also argues for an internal rotation from merchant-exposed power utilities into regulated networks and water, because the latter monetize decarbonization without taking much fuel-price or spark-spread risk.

The second-order effect is that conflict-driven energy security urgency should compress permitting timelines and improve regulator willingness to front-load allowed returns, but that benefit is likely to show up over quarters, not days. In the near term, the market may be underpricing the duration mismatch: capex-heavy utilities can look attractive on EPS growth while still being vulnerable if rates stay elevated, because the implied equity value depends on WACC staying contained. That makes balance-sheet quality and inflation linkage more important than headline dividend yield; the highest-quality compounders should keep winning while leveraged “yield” stories can lag if bond yields reprice.

For NGG specifically, the opportunity is not a short-term geopolitical pop but a 6-18 month multiple grind higher if investors conclude UK network regulation will remain constructive and capex earn-backs are defendable. The contrarian risk is that the current premium is already discounting a lot of policy support; if political rhetoric on affordability intensifies or real rates rise another 50-75 bps, the sector can de-rate even with decent earnings growth. In that scenario, the market will likely punish the most interest-rate-sensitive names first, so the trade should be built around quality and optionality rather than blanket beta.

Key Decisions for Investors

• Long NGG vs short a higher-duration European utility basket for 3-6 months: own the regulated network cash-flow visibility while fading names with more merchant/levered exposure; target 8-12% relative outperformance if rates stay stable or fall.
• Add to SSE or NGG on any 3-5% pullback over the next 2-4 weeks: use weakness as entry because the policy/capex thesis is medium-term, with downside capped by defensive yield support and upside driven by allowed-return re-rating.
• Pair long European regulated utilities / networks vs short European industrials sensitive to power prices for 6 months: if security-driven capex accelerates, utilities capture the investment cycle while industrial margin pressure and capex headwinds remain latent.
• Avoid initiating fresh longs in levered, high-dividend utility names until after the next rate move: if real yields back up, these are the first to give back 5-10% despite stable earnings, making the risk/reward unattractive near current premiums.
• For optionality, consider a small call spread on NGG or similar regulated names into the next policy/regulatory milestone: payoff improves if investors re-anchor on multi-year RAB growth, but premium risk is limited if the thesis takes longer to mature.