Summary
European regulated utilities are a relatively small and unexciting corner of the global listed infrastructure universe. But the strongest earnings profile and cheapest relative valuations in many years have led the Lazard Global Listed Infrastructure team to one of its largest weightings in this area in nearly two decades.
Sector Poised for Strong Growth
- The European regulated utilities sector—infrastructure monopolies providing electricity, gas, and water services—is typically associated with predictable earnings, solid yields, and pedestrian earnings growth. But policy-driven demand for infrastructure spending means the growth outlook for these companies is now stronger than it has been for many years.
- In the UK and Italy, governments need utility networks to build infrastructure to bring remote wind and solar energy into population centers. Legislation is also helping. The UK has passed a law mandating domestic water companies to repair and expand their infrastructure to cope with increased flooding and droughts. This legislative backing, combined with the monopolistic and essential service nature of utilities, makes the sector’s growth profile particularly compelling.
- Furthermore, with interest rates now at a more normalized level, the risk of a downgrade to allowed returns has reduced. Consensus forecasts now project earnings from the European regulated utilities sector will grow by almost 10% a year to 2029, more than double the growth rate of the last 10 years (Exhibit 1).
EXHIBIT 1
A Step Change in Earnings Forecasts
Source: Lazard, FactSet consensus estimates.
Data as of 28 February 2025.
'European Regulated Utilities' represents an equal-weighted basket of Italian and UK utilities companies held in the Lazard Global Listed Infrastructure portfolio.
Relative Valuations are the Lowest in Two Decades
After a difficult decade characterized by falling allowed returns, political controversy, and high-profile infrastructure failures in the UK water sector, European regulated utilities are unappreciated and overlooked. They now trade on some of the most attractive valuations in two decades: the sector’s price-to-earnings ratio relative to the MSCI World index is currently 37% down on its historical average (Exhibit 2).
EXHIBIT 2
Relative Valuations are at a Two-Decade Low
Source: Lazard, FactSet.
Data as of 28 February 2025.
But the Risks are Unchanged, and the Earnings Outlook is Strong
Importantly, we do not believe the sector’s risk profile has changed relative to its history. In fact, we consider UK and Italian utilities to be some of the highest quality assets in our investment universe—they take no volume risk, can pass on 100% of inflation every year, and are robustly regulated. The discount to the global equities market is particularly striking, given consensus earnings forecasts for these utilities are actually higher than for the broader market, as represented by the MSCI World index (Exhibit 3).
EXHIBIT 3
Lower Valuations but with a Better Earnings Outlook than Broad Global Equities
Source: Lazard, FactSet.
Data as of 28 February 2025.
'European Regulated Utilities' represents an equal-weighted basket of Italian and UK utilities companies held in the Lazard Global Listed Infrastructure portfolio.
A Rare Opportunity
In summary, we see a rare opportunity for long-term investors in what is arguably the lowest-risk sector in our investment universe. The Lazard Global Listed Infrastructure strategy is currently significantly overweight the European regulated utilities sector, holding over 36% of the portfolio in these stocks (Exhibit 4).
EXHIBIT 4
Our Significant Portfolio Overweight in European Regulated Utilities
Source: FactSet, Lazard.
Data as of 28 February 2025.
This is one of the highest weightings in the nearly 20-year history of the strategy, and substantially higher than typical index sector weightings. We believe it may be time to plug into the investment opportunity currently provided by Europe’s boring but booming regulated utilities companies.
Related Insights
Important Information
Published 25 March 2025
Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the published date and are subject to change.
Allocations and security selection are subject to change.
The performance quoted represents past performance. Past performance is not a reliable indicator of future results.
Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy.
Securities and instruments of infrastructure companies are more susceptible to adverse economic or regulatory occurrences affecting their industries. Infrastructure companies may be subject to a variety of factors that may adversely affect their business or operations, including additional costs, competition, regulatory implications, and certain other factors.
The MSCI World Index is a free-float-adjusted market capitalization index that is designed to measure global developed market equity performance comprised of developed market country indices. The index is unmanaged and has no fees. One cannot invest directly in an index.
Certain information included herein is derived by Lazard in part from an MSCI index or indices (the “Index Data”). However, MSCI has not reviewed this product or report, and does not endorse or express any opinion regarding this product or report or any analysis or other information contained herein or the author or source of any such information or analysis. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any Index Data or data derived therefrom.
Certain information contained herein constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “intent,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events may differ materially from those reflected or contemplated in such forward-looking statements.
This document reflects the views of Lazard Asset Management LLC, Lazard Frères Gestion or its affiliates ("Lazard") based upon information believed to be reliable as of the publication date. There is no guarantee that any forecast or opinion will be realized. This document is provided by Lazard for informational purposes only. Nothing herein constitutes investment advice or a recommendation relating to any security, commodity, derivative, investment management service, or investment product. Investments in securities, derivatives, and commodities involve risk, will fluctuate in price, and may result in losses. Certain assets held in Lazard’s investment portfolios, in particular alternative investment portfolios, can involve high degrees of risk and volatility when compared to other assets. Similarly, certain assets held in Lazard’s investment portfolios may trade in less liquid or efficient markets, which can affect investment performance. Past performance does not guarantee future results. The views expressed herein are subject to change, and may differ from the views of other Lazard investment professionals.
This document is intended only for persons residing in jurisdictions where its distribution or availability is consistent with local laws and Lazard’s local regulatory authorizations. Please visit www.lazardassetmanagement.com/global-disclosure for the specific Lazard entities that have issued this document and the scope of their authorized activities.