Speaker: Edmund Shing
Hello and welcome to a new podcast from BNP Paribas Wealth Management. I am Edmund Shing, Chief Investment Officer. In this podcast, we are going to talk about the global utilities sector.
Why utilities, you may ask ? It's a boring defensive sector, isn't it ? Well, let me tell you something interesting about utilities sector. Both in the US and in Europe, the utilities sectors have outperformed the respective S&P 500 and Stoxx Europe indices over the last 25 years, despite being boring and defensive. Long-term outperformance. So that's the first point. Always remember that this has been a strong sector historically in the context of the broader market.
Secondly, the utilities sectors both in the US and Europe are in focus today because they're benefiting from a surge in electricity demand. That is coming notably, of course, from artificial intelligence and the data centres that are being installed everywhere around the world to serve the need for artificial intelligence and the growth of large language models. As you know, AI data centres are very energy hungry, so the electricity needs to come from somewhere. But not only do they require electricity, but they require sources of electricity that are constant and reliable. And this is very important. They run 24/7 and so require electricity, a lot of electricity all the time, both for powering the servers, the computers, but also, of course, for the cooling systems that are required to cool these servers, which of course get extremely hot over time.
Therefore, a lot of electricity is required, which is requiring, of course, a substantial growth and substantial investment in both electricity generation capacity. And this can be, of course, from fossil fuels such as natural gas. It can be from renewable energies, such as solar panels, or indeed from nuclear power, but also investment in the transmission networks. The transmission networks, the grids need to be upgraded to be able to carry all of this extra electricity from the power generation sources to the final consumers, whether they be, of course, the data centres, whether they be industrial companies or, of course, households.
So what we see here is that the utilities sector in the US and Europe are indirect beneficiaries of the AI boom, because they are the ones that will be supplying the necessary power to drive these computers. Now, of course, when we think about the types of sources of energy that we're looking for, we are in particular looking for cleaner sources of energy. And of course, they are helped, in particular, in the case of solar panels, by the falling cost of the raw materials, the solar panels themselves. They become cheaper and more efficient over time. And so even on a non-subsidised basis they are becoming increasingly economical to install for electricity generation.
Now, the issue with renewable energy sources when it comes to AI data centres is that they are intermittent sources of energy. They do not provide energy 24/7. So to overcome that, you really need to pair solar power or wind power with industrial battery storage so that electricity can be provided even when the sun isn't shining and the wind isn't blowing, for instance, in the night-time, so that the AI data centres can continue to run. But that is exactly the sort of investment that we're seeing today.
Now, if we look at performance so far this year, European utilities in particular, have performed well, driven of course by a number of factors. We see the government stimulus plans both for defence, but also in, in the case of Germany, for upgrading infrastructure. This is clearly a benefit for the utilities sector. And on top of that, remember that the utilities sector is a largely domestic sector and therefore not subject to higher US import tariffs. Much of Europe is subject to that. Automakers, for instance, are one example, because of course they're export-driven sectors. The utilities sector is domestic and is therefore not affected. And the performance of the sector has been strong, with a 20% net return over the year-to-date since the beginning of the year, which is substantially ahead of the broader Stoxx Europe 600 index.
Now, how would you invest in this? Well, clearly, we like investing in the utilities sector. You can buy sector ETFs and funds. We would also look to thematic ETFs that focus on investment in electrical infrastructure or European infrastructure more precisely. And there are again funds and ETFs that do target these themes. Or indeed, you can invest in companies that will be required to supply the components and equipment to upgrade power generation and power transmission, such as companies related to the electronic and electrical equipment sector.
Thank you very much for listening to this podcast from BNP Paribas Wealth Management. Please like, share and subscribe to our series of podcasts. And for more information about our research and investment themes, please search on the web for “BNP Paribas Wealth Market Insights”.
Thank you and goodbye.