Thursday, 11 December 2008

Are Electricity Generation Companies Defensive Stocks in Brazil? Uhhmm ...

According to Brazilian newspaper Valor Economico, prices in the electricity spot market have tumbled 15 percent in recent months. Large industrial power consumers are selling part of their electricity contracts for 2009, on expectations that growth will decelerate -- leading to less consumption. If future electricity consumption can be regarded as a powerful leading indicator, then the lower power prices present us with the painful and inevitable prospect of a slowdown in the Brazilian economy.

If small investors were betting on defensive stocks such as utility shares to help them navigate through a very uncertain 2009, then they may be wrong. Eletrobras, the state-controlled energy company, as well as Cemig, Copel and Cesp will probably be the most affected as a consequence of declining spot prices, because they might be entitled to smaller-than-expected tariff revisions. Also the fact that the government is so obsessed with the idea of expanding the industry at any cost may lead to oversupply -- and the likelihood of losses for a prolonged period.

Before this scoop by Valor, I was almost sure that these companies (electricity generators) would be good picks for 2009, partly because of their status as defensive stocks. I was expecting them to win decent tariff increases along next year and 2010, due to the effect of the real`s decline (some of their costs are linked to the dollar.)  Analysts at Morgan Stanley warned they might revise down their earnings estimates for some of these companies, citing the economic slowdown and the prospect of smaller tariff revisions.   

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