JP Morgan has told clients that political uncertainty surrounding the future of the Labour leadership is creating an attractive entry point for UK utility stocks, with concerns over nationalisation risk overdone.
The investment bank noted that recent weeks have seen calls for Prime Minister Keir Starmer to resign, with former health secretary Wes Streeting and Manchester mayor Andy Burnham positioning themselves as potential successors.
Policy signals from the rival camps have varied significantly, ranging from Burnham's push for stronger public control of utilities to a caucus of Labour MPs in the Growth Group arguing for the return of zonal electricity pricing.
JP Morgan said its conversations with investors had focused primarily on nationalisation risk, particularly for the water companies, but the broker views these concerns as exaggerated.
Within the sector, JP Morgan said Centrica PLC (LSE:CNA) and Drax Group (LSE:DRX) should fare better than peers given their exposure to higher and more volatile power prices, combined with underleveraged balance sheets that provide insulation against rising bond yields.
Both stocks carry 'overweight' ratings.
For investors seeking exposure to UK electricity network growth, the bank prefers SSE over National Grid, though both are rated overweight.
JP Morgan acknowledged that National Grid's more defensive business mix and its exposure to the US market may appeal to some investors.
On the water sector, where JP Morgan holds neutral ratings across the board, the bank said investors are underappreciating the impact of inflation in driving higher-than-expected returns on equity, which underpins value creation alongside more growth in the regulated asset base (RAB) than the broker had anticipated when it downgraded the subsector six months ago.
Within water, JP Morgan prefers Pennon Group and United Utilities to Severn Trent, noting that the first two trade at discounts to their forecast 2030 RAB valuations.
The note reflects a broader theme in the UK market where political risk is being repriced across regulated and semi-regulated sectors, with JP Morgan's message to clients that the selloff has gone too far and that the fundamentals remain supportive for well-capitalised operators.