Dumping of utility stocks and switching to high-yielding bonds has gone too far, according to Deutsche Bank, which also sees too much negativity surrounding renewables currently.
“European utilities have underperformed by 6% year to date, reflecting concerns over rising bond yields and the outlook for renewables,” says the bank.
“We see scope for at least part of this underperformance to reverse.”
Investors often overestimate the importance of bond yields, it adds, “when really it's the relative earnings outlook that is key for performance”.
On that note, Deutsche Bank expects the bumper energy-driven earnings of recent years to normalise but offer defensive appeal as they will hold up if the economic backdrop weakens.
For pure renewable companies, Deutsche Bank adds that investors should separate the normalisation of multiples for these pure plays, and offshore challenges in the US, from the broader outlook which remains strong.
On that basis, the outlook looks good for integrated utilities, in spite of sharp pure play drops, says the bank.
SSE PLC (LSE:SSE), down 16% since May’s year high, is a 'buy' on that basis among UK-listed companies with European groups RWE (ETR:RWE), Enel, Engie and E.ON also favoured.
Shares in SSE rose 0.9% to 1,568p.