Investing.com -- Morgan Stanley said recent weakness in UK utility stocks offers a buying opportunity, naming National Grid, SSE and Pennon as preferred picks after the sector fell roughly 14% from April 2026 highs on policy and macro uncertainty.
The analysts said in a note dated Monday said that the sell-off has been overdone, with stocks trading at undemanding valuations despite what it called intact structural growth stories underpinned by electricity network expansion, water infrastructure investment and clean power capacity build-out.
"Recent stock weakness on policy and macro uncertainty offers an attractive buying opportunity for UK Utility stocks," the broker said.
National Grid, rated “overweight” with a price target of £14.75, trades at 12.4x calendar year 2027 price-to-earnings and carries a 22% upside to Morgan Stanley’s target from a June 12 price of £12.08.
The broker forecast 10% earnings per share compound annual growth from 2026 to 2030 and a 4% average dividend yield.
SSE, also “overweight” with a £29 price target and 21% upside from £23.96, is forecast to deliver 13% EPS CAGR over the same period and trades at 12x 2027 P/E adjusted for UK renewables investment tax shield.
Pennon, rated “overweight” at a £6.80 price target implying 43% upside from 476 pence, trades at or below 1x its regulated asset base and at 11x 2027 P/E, with a 6% dividend yield and more than 10% EPS CAGR from 2026 to 2029.
Morgan Stanley said it does not expect dramatic changes to industry structure, market design or ownership, describing policy concerns as "largely overdone" and separating "politics from policy in headlines."
It noted the UK electricity and water regulated asset base stands at roughly £200 billion, approximately £120 billion in water, £44 billion in electricity distribution and £37 billion in electricity transmission, with an implied market value of around £250 billion, making large-scale ownership change impractical.
The broker forecast roughly £260 billion in electricity system and water infrastructure investment from 2026 to 2030, calling private sector delivery the most likely outcome given government fiscal constraints.
On macro risk, Morgan Stanley said bond yield sensitivity poses a greater near-term threat than policy change for long-duration utility stocks, but noted its strategists forecast UK 10-year gilt yields falling to 4.5% by end-2026 and 4.3% by end-2027.
The broker flagged risks including prolonged policy uncertainty extending into 2027, persistently elevated bond yields and competition from European utility peers with more than 17 stocks offering above 5% EPS CAGR through the end of the decade.
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