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Utilities drag on FTSE as energy profits debated

February 11, 2014

FRESH political pressure on British utilities hit the sector's stocks yesterday, limiting broader gains in the UK's top equity index although it rose for the fourth straight session.

The blue-chip FTSE 100 index closed up by 0.3 per cent, or 19.87 points, at 6,591.55 points.

Gains at British bank Barclays and drugmaker AstraZeneca together added the most points to the FTSE, enabling the index to shrug off the effects of a pullback in the utility sector.

Barclays rose 1.2 per cent as analysts welcomed its plans to step up its costcutting programme after the bank published a snapshot of its headline 2013 results, while AstraZeneca rose 1.4 per cent after Morgan Stanley increased its price target on the stock.

However, a decline in major utility stocks prevented the FTSE 100 from making even bigger gains.

The utility sector was hit after British Energy Secretary Ed Davey wrote to regulators to say the profit margins of major energy companies' gas supply units were too high.

Davey also said British Gas may have to be broken up and his comments knocked shares in the sector, with British Gas owner Centrica falling 1.7 per cent while rival SSE declined by 0.4 per cent.

Utility stocks are often favoured by investors for their solid dividend yields, but Cavendish Asset Management fund manager Paul Mumford said political pressures on the sector were turning him away from holding those stocks.

"I don't bother to hold them because you're up against all these political headwinds," he said. "There are other areas of the market where you don't have the same amount of regulatory interference," added Mumford, who said his preferred UK equity sectors include oil and gas, and property.

The FTSE 100 rose 14.4 per cent in 2013 to post its best annual gain since 2009, but the index has declined 2.3 per cent since the start of 2014 as global equity markets have fallen due to concerns over a slump in emerging markets economies.

Despite this weak start many investors with a long-term view expect the FTSE to rise slowly over the course of 2014, partly helped by a gradual recovery in the British economy.

Mike Franklin, chief investment strategist at Beaufort Securities, said the index could rise by around 5 per cent over the next two weeks to reach the 6,900 point level.

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Source: City A.M. (UK)

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