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NZ Funds likes utilities in 2010

Tuesday 5th January 2010

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Limited competition, recession-proof demand and upsides from greater regulation make utilities a favoured pick for local funds management group, NZ Funds Management.

"Utility shares such as water, electricity and energy stocks have relatively stable earnings predictability as well as built-in inflation protection because of their ability to raise prices quickly in periods of high inflation," says the company's chief investment officer Michael Lang in a New Year commentary.

"They have a relatively low level of risk as they sell essential services in markets with limited competition and frequently have regulated prices."

New Zealand electricity companies had proven their resilience in 2009.  "In the middle of one of the most several global economic crises in decades, New Zealand households did not hesitate to turn on their electric heaters," Lang says.  "Power companies have reported double digit growth in the demand for power from residential customers."

Utility network operators were particularly well-insulated because their assets were often either monopolies or difficult and expensive to replicate.

This made them susceptible to regulatory interventions, but while price caps arguably remove earnings potential, "in its place is certainty', says Lang.  "Once the regulatory framework is set up, the future pricing is relatively easy to predict, especially when compared with an average company."

Regulation also tended to defer investment, leading to government incentives as new infrastructure became necessary, often in the form of allowing higher returns.

However, the relative lack of utility investment opportunities for private investors means New Zealanders will need to look offshore to create a balanced utilities portfolio, Lang says.

Listed utilities opportunities in New Zealand include the network company Vector, electricity companies Contact Energy and TrustPower, the New Zealand Refining Company, Auckland International Airport, and Telecom.

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