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Monday, June 1st, 2015

Political risk plus reversal of flight to safety effects sees utility betas rise posted by Dr Andrew Lilico & Dr Stefano Ficco

 Figure 1: Rolling Asset Betas (2-years of daily data)

EE calculations based on Bloomberg data.

 

The “beta” of an asset tells us how the riskiness of that asset changes relative to the sum of all assets in the economy.  The beta of all assets is by definition equal to 1.  Periods of crisis don’t usually affect all sectors equally.  For example, in the Great Recession financial and construction (“Materials”) stocks came to be seen as more risky than before.  If their relative riskiness and hence betas go up, the relative riskiness of other stocks such as utilities must (mathematically) go down.  This is part of what is sometimes called a “flight to safety”.

By contrast, over the past eighteen months, as the UK economic recovery has become more secure, the riskiness of financials and materials stocks has fallen back again.  So that part of the flight to safety effect has reversed, with utilities betas rising.

Another factor, however, may have been political risk in the run-up to the 2015 General Election, with the main political parties competing to propose various means (e.g. price freezes) to be “tougher” on utilities.  It remains to be seen whether, with the unexpectedly decisive General Election result, this shift is reversed or exacerbated.

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