Insights

Essential Services Q3 Check-In

08/20/2014

Midway through the third quarter, we continue to view the low interest rate environment as supportive for global stock markets. Looking at the essential services space on a sector-by-sector basis, we see both areas of opportunity and areas to exercise caution.

EXERCISE CAUTION

POTENTIAL OPPORTUNITY

Communications

  • We are maintaining an overall cautious view on the communications sector, particularly integrated telecom companies.
  • Although European stocks continue to be buoyed by M&A talk and the possibility of improved regulation, fundamental trends remain difficult.
  • In the U.S., concerns over increased wireless competition are weighing on stocks, but so far fundamentals show relative stability with good cash flow generation supporting solid dividends.
  • Sector bright spot: Tower and satellite companies, with their revenue growth profiles and high margins, offer attractive long-term opportunities.

Energy

  • Energy remains an attractive sector, based on our expectations for the continued build-out of oil and gas infrastructure in North America.
  • Fundamentals of the energy pipeline business remain strong, with robust growth in earnings and dividends expected over the next few years.

Utilities

  • Reduced exposure to the utilities sector may be prudent, particularly U.S. and European companies with significant power price exposure.
  • Early 2014 uptick in power prices was likely mainly weather related, and we expect prices may weaken through year-end.
  • We remain cautious concerning European political and regulatory developments.

Transportation

  • Solid underlying fundamentals remain supportive in transportation, which we see as the biggest sector opportunity.
  • Traffic demand is recovering in the hardest hit southern European countries, and trends remain strong in the Australasia companies.

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.