A theme we have been tracking throughout the summer has been the very low projected returns over the next 6 months for the utility sector globally, as investors have crowded into defensives.

We highlight this below with two charts showing the VP Equity Leading Indicator, which is a mean-reversion based indicator that projects future equity returns using metrics such as EV/EBIT, price-to-FCF and deviation from moving averages. The indicator (red lines) has a 6 month lead on turning points in equity returns and shows that the utility sector has very low projected returns over the next 6 months.  We believe that playing for downside in utilities offers good risk-reward.

VP leadingVP utilitis

Source: Bloomberg, Macrobond and Variant Perception