Engie, RWE, Veolia, and Centrica Are our Preferred Inflation-Shielding Plays

Amid the war in Ukraine and the energy crisis, inflation in the eurozone reached 7.5% in April 2022. Unlike U.S. peers, European utilities have been outperforming in times of high inflation since 2000. This prevails as the sector is flat year to date, outperforming the market by 7%. We think this is fundamentally justified though the impact of inflation varies across the value chain. Power production boasts the best exposure given skyrocketing power prices. Inflation could hit the returns of some renewables projects but does not affect significant long-term growth potential. Energy networks' revenue is mostly indexed to inflation. Energy supply is the weakest spot against high inflation due to political risk and weak competitive advantages.