* Years of falling wages pressure politicians to act
* UK utilities seen most at risk from politics
* European telecoms to benefit from EU regulation
By Toni Vorobyova
LONDON, Dec 2 Political intervention and
regulation are becoming increasingly important in shaping the
views of European equity investors, prompting some to ditch
banks and utilities and creating opportunities in transport and
Four years of falling or flat real wages in Europe,
stretched state finances and a desire by authorities to step up
regulation to avoid a repeat of the financial crisis have led
governments to exert more influence in corporate affairs.
Banks are being urged to boost capital, reducing their
ability to reward shareholders through dividends.
Utilities, particularly in Britain, are under pressure from
politicians to cut costs for consumers, which will leave the
companies with lower profits and less cash for investment.
Investors are thus paying more attention to what authorities
are doing, prompting both Citi and HSBC to pick regulation as a
key European equity investment theme for 2014.
British utilities are seen as among the most exposed, facing
widespread public discontent over rising fuel bills against the
background of an often uneasy coalition government and a
parliamentary election in 2015.
In the two months since the opposition Labour Party proposed
freezing energy prices until 2017 if it wins power, the Thomson
Reuters UK Utilities Index has dropped 7.4 percent
, strongly underperforming a broadly steady FTSE
Over the weekend, Prime Minister David Cameron responded
with his own plan to clamp down on energy costs, prompting
analysts to forecast lower earnings for the likes of SSE
"There is always a political element at the best of times,
but it's become more acute now that we've had some years of
negative real wages in the UK and the recent energy bill
increases have thrown this into to focus," said Michael Clark,
portfolio manager at Fidelity, who said he might reduce holdings
in energy companies.
"From an investment point of view, I don't know which way
things are going to go in terms of who wins the election in
2015, but we should be a little bit careful of expecting too
much from these companies because of the political pressure."
In the past 90 days, top analysts have cut dividend
forecasts for FTSE 100 utilities - including SSE, Centrica and
Severn Trent - by 0.4 percent for next year and 1.5
percent the year after, according to StarMine SmartEstimates.
Foreign players may also be affected, with Germany's RWE
, last week scrapping plans to build the world's
largest offshore wind farm in British waters amid uncertainty
over government renewable energy subsidies.
Indeed, RWE and peer E.ON show the possible
impact of policy on the sector, with a state-ordered exit from
nuclear power and competition from green energy sources leaving
them less cash for investments and dividends.
Spanish utilities also face problems after the finance
ministry withdrew 3.6 billion euros ($4.9 billion) in financing
for the electricity sector over the weekend, choosing to focus
on reducing the government deficit but in so doing raising costs
for indebted companies.
Iberdrola and Endesa shares fell 2.2
percent on Monday, while Gas Natural lost 1 percent.
Colin Morton, portfolio manager at Franklin Templeton,
meanwhile, has already reduced his holdings, taking about 2
percent of his money out of UK utilities.
"I still like the companies but unfortunately their fortunes
have been hijacked ... The problem is that we are going to now
be watching things like opinion polls like a hawk for the next
12 to 18 months," he said.
"It would make me nervous of UK banks because a lot of
people own shares like Lloyds because they think they
are going to start returning a lot of money to shareholders, and
under a Labour government I think that's not very likely."
Lloyds is expected to start paying cash to shareholders next
year, when StarMine SmartEstimates forecasts a dividend of 2.9
percent, rising to 5.0 percent the following year to overtake
the FTSE 100's forecast average yield of 4.2 percent.
The pressure on dividends could spread across Europe, where
the European Central Bank's Asset Quality Review, stress tests
and the prospect of more regulation will put the spotlight on
balance sheets and capital ratios.
"If regulators tighten rules on aggressive distribution of
profits, we would highlight SEB and Handelsbanken
as being vulnerable," HSBC said in a note.
SEB and Handelsbanken both offer a dividend yield of 3.5
percent, above the 2.5 percent average for STOXX Europe 600
banks, according to StarMine.
Politics, though, can create winners as well as losers, with
telecoms expected to benefit from the European Union's drive to
overhaul the sector, including by encouraging investment in
broadband network infrastructure.
Here, winners could include Vodafone and Deutsche
Telekom, according to HSBC.
Back in Britain, some transport companies such as bus and
rail operator Go-Ahead could benefit from a new approach
to rail franchising. The new policy, which seeks to restore
confidence in the privatised network after costly errors in the
bidding process, includes staggering the award of franchises and
is expected to improve profits and reduce risks.
"Go-Ahead Group is the stock most exposed to rail franchise
wins, in our view. These could drive upgrades to consensus
earnings of 20-30 percent," HSBC analysts wrote.
"Importantly, they (the franchises) look set to be awarded
on better terms than they previously were, meaning that the
impact on share prices could be amplified further still."