The utilities sector is trading at heightened valuations after investors plunged into the defensive play in search of yield and safety in an environment of historically low yields, slow growth and geopolitical uncertainty.
“We think investors should watch two other metrics to better understand how interest-rate moves in 2017 could affect utilities stocks. The first metric is relative performance. Recent history–including the post-election period–shows utilities underperform nearly every other sector and diversified index when rates are rising. During the past 20 years, utilities underperformed the S&P 500 by an average of 10%, including dividends, when interest rates rose more than 30% in two years. Utilities still posted positive absolute returns in every period,” adds Morningstar.
FactSet projects the utilities sector is expected to experience earnings growth of 4.4% in 2016. Consequently, analysts warned that the lofty prices may not be supported by robust earnings growth.
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