Morning Note: Market news and an update from National Grid.

Market News

US equities surged last night – S&P 500 (+2.5%); Nasdaq (+3.0%) – enjoying their best post-election day in history. The 10-year Treasury yield moved above 4.4%, to its highest level since early July. Gold ($2,666 an ounce) fell over 3% to hit a three-week low, pressured by a stronger dollar. Trump’s presidency has also led traders to unwind safe-haven gold positions, as markets anticipate higher interest rates from the Federal Reserve, diminishing gold’s appeal. This came as the newly elected US president previously campaigned policies focused on immigration, raising tariffs, lowering taxes, and deregulation that fuelled expectations of larger deficits and inflation. Although the Fed is forecast to trim its benchmark rate by a quarter point on today, expectations for 2025 are now pricing in just 57 basis points of cuts.

In Asia this morning, equities followed the US higher – Hang Seng (+2.0%); Shanghai Composite (+2.6%) – helped by expectations Beijing will roll out more stimulus measures. China’s exports surged 12.7% year on year in October, the fastest growth since July 2022, while regulators told banks to lower the rates they paid for demand deposits from other financial institutions. Japan was an outlier, with the Nikkei 225 down 0.3%.

The FTSE 100 is currently trading 0.2% higher at 8,180. The Bank of England is expected to cut rates by 25 basis points to 4.75% today, against a backdrop of elevated gilts yields – the 10-year currently yields 4.56%. The Halifax house price index rose by 0.2% month on month in October, in line with expectations. Sterling trades at $1.2935 and €1.2024.

In Germany, Olaf Scholz called for a confidence vote on 15 January and a snap election at the end of March after his coalition finally collapsed over how to revive the lacklustre economy.

Source: Bloomberg

Company News

National Grid has today released results for the financial half-year to 30 September 2024 and reiterated its short and long-term targets. As an income stock, the recent increase in bond yields on both sides of the Atlantic has been unhelpful and the shares have drifted lower over recent weeks. However, in response to today’s robust update, they have been marked up by 1% in early trading.

National Grid operates a regulated business in the UK and US, with electricity and gas transmission and distribution assets. The group has no direct exposure to volatile commodity prices and relatively little exposure to usage levels.

Over the last couple of years, the group has undertaken several transactions to pivot its portfolio towards electricity. This has enhanced the group’s role in the decarbonisation of the energy system, with investment in infrastructure that enables higher penetration of renewable energy and low carbon technology.

Back in May, the group announced a refreshed strategy to be a pre-eminent pure-play networks business. This will involve a significant step up in investment, around £60bn over the five years to March 2029, nearly double the prior five years. This will deliver a significant step-change in critical energy infrastructure in the UK and US in support of the energy transition and economic growth objectives. This is expected to drive 10% group asset growth CAGR, with group assets heading towards £100bn by 2029, and underlying EPS CAGR of 6%-8%. Credit metrics will be consistent with current group rating.

Of the £60bn investment, around £51bn will be aligned to the EU Taxonomy to decarbonise energy networks. Nearly 80% will go into the group’s electricity networks, moving the mix towards 80%/20% electricity/gas by 2029. The company will further streamline its portfolio to focus on pure-play networks across regulated and competitive, onshore and offshore networks, with the intention to sell Grain LNG and National Grid Renewables. The company has also sold its UK gas transmission business.

On to the results. In the six months to 30 September, underlying operating profit grew by 15% on a constant currency basis to £2,046m. This was principally driven by: increased rates in the New York businesses; higher revenue in UK Electricity Transmission; a lower charge to the environmental provision in New York; and a higher contribution from the UK Electricity System Operator (now sold); partially offset by lower profits in National Grid Ventures (NGV).

The company has a cost efficiency programme targetting at least £400m p.a. In addition, the group has now delivered £58m of cumulative synergy benefits as a result of the UK Electricity Distribution acquisition and is on track to reach its £100m target by the end of 2025/26. Underlying EPS grew by 8% to 28.1p.

For the full year, the group continues to expect strong operational performance reflecting year-on-year operating profit growth of around 10%, as well as reduced financing costs due to lower average net debt. The additional share count from May’s rights issue (see below) is expected to largely offset this improved performance.

Regulatory progress continued. In the UK, the group sold the Electricity System Operator to the government, and Ofgem’s publication of the sector specific methodology decision marked the next step in the RIIO-T3 regulatory process. In the US, the group has new rates for its downstate New York gas business and its Massachusetts Electric business, providing greater visibility on investment plans.

Capital investment rose by 17% to a record £4.6bn during the half-year, with work on the group’s 17 major UK onshore and offshore transmission projects moving forward and progress on the $4bn Upstate Upgrade in New York.

National Grid has a robust balance sheet and a strong investment grade credit rating, underpinned by regulatory revenue, which allows the group to secure the required long-term funding needed to invest in its business. The group’s believes it has the financial flexibility to deliver its strategy over the 5-year financial framework, helped in part by the £6.8bn rights issue announced in May.

During the six months to 30 September, net debt fell by 12% to £38.5bn. Regulatory gearing is still expected to fall to the low-60% range by March 2025 and then trend towards the high-60% range by the end of the RIIO-T3 regulatory period.

The stock remains popular for investors seeking an attractive income that is growing in real terms – the dividend policy is to deliver annual growth in line with the increase in average UK CPIH inflation. This morning, the group has declared an interim dividend of 15.84p, up 6%, representing 35% of the total rebased dividend per share in respect of FY2024. For the full-year, the stock is expected to yield around of 4.7% at the current share price.

Source: Bloomberg