May 18, 2018 / 11:50 AM / a year ago

UPDATE 1-Italian utilities under pressure on government policy risk

(Updates with details, changed dateline, slug)

By Danilo Masoni and Stephen Jewkes

MILAN, May 18 (Reuters) - Italian utilities shares fell on Friday after the anti-establishment 5-Star Movement and far-right League published their joint government programme, promising a ramp up in spending and greater focus on green energy.

State-controlled Enel was the major drag, as investors fretted the focus on renewables could dent power prices, while finding funds for broader policy needs could result in higher corporate tax or the sale of state holdings.

“Utilities are under pressure and it’s clear that the creation of the new government is having a big impact,” said Enrico Vaccari, fund manager at Italy’s Consultinvest.

The joint programme published on Friday spoke of the need to cut the use of carbon and fossil fuels and foster energy efficiency and greater electrification. It made no reference to specific policies on energy.

Italy’s utilities index fell on Friday as much as 2 percent to its lowest level since end March. European utilities were little changed.

The sector in Europe has been supported recently by a fall in government bond yields fuelled by expectations it would take longer for the European Central Bank to tighten monetary policy.

Italian bond yields have been creeping upwards on growing concern Italy’s new government could relax fiscal discipline.

Utilities are sensitive to the direction of bond yields due to their high debt and tendency to pay higher dividends compared to other sectors.

On Friday, Goldman Sachs removed Enel from its “conviction list” of favourite stocks, citing the risk power bills could fall by around 15 percent due to higher green energy use.

Shares in Enel, one of Europe’s most indebted utilities, fell by as much as 2.6 percent.

Angelo Meda, head of equities at Banor SIM in Milan, said higher yields could help regulated companies like Terna and Snam. Their tariffs are partly based on bond yields.

Renewable energy companies rose in early deals on Friday but later succumbed to the negative trend. Falck Renew, Alerion fell 3 and 1.2 percent respectively, while ERG edged up 0.2 percent. Enel also has big global renewable business.

Consultinvest’s Vaccari said the decline could open up a buying opportunity.

“Volatility is tied to uncertainty over future polices but I believe that it will settle down once the government sets in and policies become clearer,” he said.

Additional reporting by Helen Reid in London

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