Will the turmoil on Wall Street spur a massive flight to utilities?
It may seem obvious today that utilities are viewed as the defensive, counter-cyclical investments most favored by investors when the economy takes a downturn. For the great majority of the U.S. utility industry’s history, that is, in fact, how they were regarded.
But during the last economic downturn in the early 2000s, not as many utilities played the cherished role of “widows-and-orphans” investments.
The merchant meltdown left the debt of several utilities downgraded to junk, and their equity valuations at all time lows. Furthermore, even utilities with no merchant exposure suffered as fearful investors, thinking some utilities were on the verge of Enron-like implosion, sold off the sector.
The reason investors lost millions was their failure to understand the different risks involved in the merchant and unregulated sectors. Much like the sub-prime meltdown occurring this summer, many—fairly or unfairly—blamed the equity and bond analysts for not conveying the risks.
Yet the utilities have recovered fully since those dark days, showing double-digit increases in stock prices, while the industry’s credit ratings largely have returned to investment grade.
Yet, there remains a concern that during the next economic downturn investors will pass on utilities again. The reason is that the industry’s risks are still opaque to investors.