Asset owners beat the French in 2011. What’s next?

We have been working on our 2011 stock performance review for this month’s magazine. It does not make a pretty picture. 2011 was a bad year for all stocks, but certain water companies were hammered more heavily than the market in general. Specifically, the two biggest water companies in the world, Suez Environnement and Veolia Environnement, fell by 42% and 61% respectively over the course of the year.

What is interesting is the staggering difference between the performance of the French private water model (which is based on long-term contracts) and the asset-owning model prevalent in the UK and the US. American Water, which is the leading asset-owning water company in the world, saw its shares rise by 26% over the year.

The strong performance of the asset owners has a number of interesting implications. It suggests that demand for financial instruments which deliver steady yields throughout the economic cycle is as high as it has ever been, but supply remains limited to a handful of investor-owned utilities. It highlights the hidden value of water utilities on the public balance sheet at a time when many public balance sheets are weaker than they have ever been. Somebody is going to notice there is a trade to be done.

I don’t buy the idea that the French model is dead, or somehow less well equipped for a downturn in the economy. There is a lot of underlying strength in both Suez and Veolia which I don’t think that the market fully realises. Both companies have a core of long-term water, wastewater and solid waste operating contracts which are not going to be impacted by an economic slowdown, and won’t require large capital injections to keep them going. They both have very strong water technology portfolios which ensure that they are well placed to benefit from the growing pressures on global water resources. Both companies may have a lot on the periphery which may not be so solid, but this is more than accounted for in the share prices.

My stock tip for 2012 would be to sell investor-owned utilities now and buy French.