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During periods of economic upheaval, utility companies are usually viewed by stock market investors as something of a safe haven, supplying increased profitability and regular dividends.
But, according to blue-blooded stockbroker Cazenove, during the year to date, water companies have underperformed the FTSE All Share by 27% due to concerns about the price review published by the water regulator.
It points out that since publication of Ofwat's draft determination on 23 July, the sector has underperformed the market by a whopping 22.6%, with Severn Trent, up 6p at 977p, and United Utilities (UU), 3p better at 450p, particularly poor performers.
Severn Trent is down from the 1180p level since June, while UU has dropped from a peak of 557p since the spring. This is because the City has become increasingly jittery about both companies' ability to keep on growing dividends in the face of weakening balance sheets. Cazenove says these concerns are perfectly valid based on what Ofwat has said so far.
But the shares of Severn Trent and UU now fully reflect these fears and are starting to look oversold. As a result, it has upgraded both companies from underperform to in-line in the belief that the relative and absolute valuations of their shares are attractive compared to their peers.
The macro environment is also improving for the water companies. Northumbrian Water, down 5¼p at 235¼p, continues to be rated in-line along with Pennon, 9¼p off at 462p.By contrast, Credit Suisse has cut Severn Trent's target from 1210p to 1045p, and dropped Northumbrian Water from outperform to underperform.
Shares traded within a narrow range for much of the session, drifting off from yesterday's 12-month highs. The FTSE 100 index rose 6.88 at 5217.05.
One bright spot was Whitbread, which was up 21p at 1312p after first-half pre-tax profits came in ahead of market expectations. Evolution Securities has raised its target on the shares from 1300p to 1360p.
But banks were a drag on the market as they awaited results from their American peers.
There is also growing concern that UK banks may soon be looking to tap shareholders for extra funds.
Barclays was the biggest casualty, falling 9p to 363½p, but Lloyds Banking Group lost 1.9p at 89.8p. Brokers say institutions have continued to dribble out stock as they wait to see whether the bank will proceed with the £15 billion cash call designed to reduce its reliance on the taxpayer.
Miners reversed early losses to top the FTSE risers. Lonmin added 54p to 1663p while Kazakhyms gained 40p to 1212¼p.
Speculative buying continued to drive rudderless ITV higher with a rise of 3.9p at 51.3p. The move came after the television broadcaster announced plans to raise £120 million by way of a convertible bond. It needs the money to relieve the burden of looming debt repayments and the worst advertising downturn for years.
The speculators argue ITV remains ripe for takeover following its inability to find a new chairman and chief executive. Rival BSkyB continues to hold 19% of the shares but has been ordered to reduce that stake to below 7%. Numis has responded to news of ITV's fund raising by tweaking its target price from 51p to 55p.
The outlook must be looking better for the UK's two biggest drug companies. Credit Suisse has raised its target on GlaxoSmithKline, up 3p at 1263½p, from 1325p to 1445p. It has also raised AstraZeneca, 6½p off at 2700p, from 2630p to 2820p.
It has been a difficult time for the drug producers during the past few years, with a combination of regulatory worries and cheap generic competition eroding their profits.
