Defensive + AI faith double blessing, Asian utilities stocks achieve the best performance in 20 years

Utility stocks in Asia have unexpectedly become a popular choice for investors, with the market betting that their outstanding performance this year will continue.

The artificial intelligence boom has led to a sharp increase in electricity demand in many regions around the world. At the same time, concerns about global economic slowdown and escalating geopolitical tensions have grown, leading investors to favor utility companies for their high dividends and defensive nature.

Since the beginning of this year, the MSCI Asia Pacific Utilities Index has risen by nearly 14%, on track to achieve its strongest annual gain since 2006. Among the 11 sub-indices under MSCI's broader Asia benchmark, the utility index ranks second, just behind the technology sector.

Multiple Factors Driving the Prosperity of Asian Utilities

Multiple factors are driving the long-term growth of the Asian utility industry. David Smith, Senior Investment Director for Asian Equities at Abrdn, stated:

"In recent years, people have realized that the growth in electricity demand and the need for energy transition require significant and profound investments in energy grids, power generation equipment, and software to control the grid."

In contrast, the utility sector has underperformed in the United States and Europe. Britney Lam, Head of Stock Positions at Magellan Investment Holdings Limited, commented:

"Asian countries have better fiscal balance and political willingness to spend on utilities, while the United States is in an election year, so power and infrastructure spending are not a priority for the U.S."

Among the heavyweight stocks in the MSCI Asia Utilities sub-index, India's NTPC Limited and Power Grid Corporation of India have seen gains of nearly 30% this year. Torrent Power Ltd. in India has surged by over 50%.

Due to a shortage in supply, electricity prices in India have risen, coupled with the benefits of a growing population and expansive fiscal policies, India's power generation companies are thriving. David Smith mentioned:

"India has a big target to increase renewable energy capacity to 500 gigawatts by 2030, making India exciting in terms of utility and grid capital expenditure."

The global AI boom has increased investor interest in utility stocks in South Korea and Malaysia. HD Hyundai Energy Solutions in Korea has seen a 9% increase in its stock price this year, while YTL Group in Malaysia has soared by 85%. In comparison, the broader Asian stock market benchmark has only risen by 7.8%.

Risks Still Exist

Since the end of July, major AI stocks in the United States have been heavily sold off, raising doubts about whether utilities, like AI, are in a bubble.

Bloomberg Intelligence analyst Kelvin Ng warned that apart from Indian companies, the profit growth of Asian utility companies over the next three to five years may be "very limited," stating:

"It's difficult to measure the demand for AI in electricity because we need to know how much equipment these companies will use."

However, for many market observers, the uncertainty of global growth prospects, tensions in the Middle East, and the U.S. presidential election are all reasons why defensive utility sectors are expected to perform well in times of increased market volatility