JP Morgan backs SSE and Centrica as Middle East shock lifts European power outlook

JP Morgan reiterated 'overweight' ratings on SSE PLC and Centrica PLC, saying Middle East conflict should continue to support European power prices. The bank also named SSE a top pick in European utilities alongside RWE, citing double-digit EPS growth that is above the sector average. The note is supportive for utility stocks but is primarily analyst commentary rather than a company-specific catalyst.

Analysis

The market is likely underestimating how persistent geopolitics-driven power-price support can be for regulated and quasi-regulated utilities: the winners are not just the obvious generators, but any utility with a meaningful merchant exposure or embedded hedging optionality that can reprice output above prior assumptions. If forward power curves stay elevated for several months, the real second-order effect is a widening earnings dispersion inside the sector, with balance-sheet strength and hedging duration becoming more important than headline yield. That creates a cleaner relative-value setup than a pure beta bet on the utility complex.

For CNA, the key question is not whether higher power prices help, but whether the uplift is already partially normalized through hedges and customer mix. The nearer-term catalyst is the next set of forward guidance revisions and wholesale pricing resets over the coming quarters; the risk is that if conflict headlines fade or LNG flows normalize, the support can unwind quickly even if the spot market remains noisy. In that scenario, the market will likely punish the most rate-sensitive utilities first, because they have the least margin for disappointment when investors are paying up for defensive earnings growth.

The contrarian angle is that bullish utility positioning may become crowded precisely because it feels like a clean geopolitical hedge. If that happens, the trade stops being about fundamentals and starts being about duration sensitivity: utilities with rich multiples can de-rate if bond yields rise or if the conflict premium compresses faster than earnings estimates. The best expression is therefore relative value, not outright long-only exposure, with an emphasis on names where revised power assumptions are least contested and balance-sheet optionality can convert elevated prices into actual EPS upside.

Key Decisions for Investors

• Go long CNA on a 4-8 week horizon, but size it as a tactical trade rather than a core hold; target a 8-12% upside on estimate revisions, with a stop if forward power curves retrace materially or conflict risk premium fades.
• Prefer a pair trade: long SSE / short a higher-duration European utility with less merchant exposure for the next 1-2 quarters; the goal is to capture earnings revision dispersion while limiting sector beta.
• If already long utilities, add protection with short-dated puts on a broad European utilities ETF over the next 1-3 months; this caps downside if the geopolitical premium unwinds faster than consensus expects.
• Avoid chasing the whole defensive basket after a multi-day spike; wait for a pullback or for analyst revisions to confirm that higher power prices are feeding through to 2025-2026 earnings rather than just spot sentiment.