Is the market being too pessimistic about beaten down Australian utilities AGL Energy (ASX:AGL) and Origin Energy (ASX:ORG)? AGL’s share price peaked in 2017 and that of Origin in 2018. Since then both have halved, suggesting a tough outlook. But Morningstar analyst Adrian Atkins argues there is value to be had, with both names trading at discounts of almost 30 per cent.

Patience is, however, required as there is a bit of grit in the machine. Atkins expects earnings for both companies to halve from peak fiscal 2019 levels primarily because of low wholesale electricity prices, rising fuel costs, and regulatory reform.

Key to the outlook is cautious optimism about a recovery in Australian wholesale electricity prices. Prices have plunged in recent years, from well over $100 per MWh in early 2019 to about $50 per MWh in most states now. But there’s reason to believe it can rally back towards $80.

“The futures market expects low prices to continue for the medium term, but we have a more positive outlook and expect electricity prices to return to $80 per MWh over the next decade,” Atkins says.

“Our more positive view is based on two factors. First, we think new renewable generation supply will be largely offset by closure of ageing power stations, keeping demand and supply in balance. Second, and more importantly, we expect rising gas prices to raise the floor price that gas-fired power stations are willing to operate at.”

And higher gas prices will likely help electricity prices, Atkins argues. The domestic gas market is likely to start tightening from 2024 as Victorian gas fields deplete and Asian demand absorbs excess global LNG supply.

“We believe the market is extrapolating recent strong growth in renewables and assuming this will keep wholesale electricity prices low into perpetuity. But that new supply was encouraged by very high wholesale electricity prices, a situation which no longer exists. We expect slower additions in the current environment.”

AGL Energy (AGL), Origin Energy  (ORG) – 3YR

a chart showing the 3YR performance of AGL and Origin Energy

Source: Morningstar Premium

In Firstlinks this week, Graham Hand reflects on the year and pinpoints some of the stark contradictions that have emerged in markets, consumer confidence and in particular local property prices.

“Far from the predicted collapse in residential property prices, new mortgage commitments rose 23 per cent in the year to October 2020 driven by owner-occupied loans and rising prices,” Hand writes. “A friend told me this week he has borrowed at 1.79 per cent fixed for four years ... champagne pricing.”

Hand also features two fascinating pieces on what to expect next year. One from Neuberger Berman's Joseph Amato and his team on 10 key themes; and another from Vanguard economists Qian Wang and Beatrice Yeo, which includes what a balanced portfolio might look like under three scenarios.

Elsewhere, IML founder Anton Tagliaferro shares his views on the value versus growth debate and offers a few yield ideas for your portfolio.

Morningstar strategist Dave Sekera looks at how spending habits are expected  to change in 2021 and singles out which sectors are poised for a comeback when consumer behaviour normalises.

Valerio Basselli talks to Janus Henderson's Matt Peron on how the relationship between the US and China will evolve under president-elect Biden; while in company news, Susan Dziubinski weighs the stunning debut of food delivery company DoorDash.

Morningstar analyst Tancrede Fulop examines whether car companies be ESG investments. For ESG-conscious investors, some of the largest carmakers score highly in some measures such as safety and human capital, Fulop says.

Investors are increasingly considering how sustainable investing may play a part in their portfolios. Sara Silano has drawn up a checklist for those looking for help.

And finally, in Your Money Weekly, Peter Warnes lays out his Forecast for 2021. What will it look like? Markets could begin next year by extending the current upswing, Warnes writes, but as it unfolds several questions will undoubtedly be asked about the progress of the economic recovery and the relationship to risk asset valuations.

“While the availability of a vaccine will assist the process and provide more certainty, the behaviour of the corporate sector in terms of job creation and investment will be critical.”


Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.

See also Morningstar Guide to International Investing.