Morning Note: Market News and an Update from National Grid.

Market News

The US and Israel continue with strikes on Iran, while Iran has stepped up its attacks on the US and its allies in the region. President Trump maintains a 4–5 week war scenario but warns of potential for a longer engagement.

Brent crude rose more than 3% to above $80 per barrel, as traders tracked mounting risks of a full shutdown of the Strait of Hormuz. Secretary of State Rubio is to act against higher oil prices, but US is not planning to tap strategic reserve yet. UK natural gas futures jumped a further 30% this morning (on top of a 40% jump yesterday) to 140p per therm, after QatarEnergy suspended LNG production at the Ras Laffan and Mesaieed industrial cities. LNG tanker rates in the Atlantic Basin tripled within a day. LNG disruption puts Asia most at risk: 80% of Qatar LNG goes to the region.

Gold is little changed at $5,330 an ounce after a four-session rally, held back by a stronger US dollar and rising Treasury yields – the 10-year currently yields 4.09%. Meanwhile, data on Monday showed US manufacturing activity expanded for the second consecutive month in February. The ISM survey reported that factory input prices rose to the highest level in nearly three and a half years, further intensifying inflation worries, prompting traders to reduce bets on further interest rate cuts.

US equities recovered last night to end the session in positive territory – S&P 500 (+0.04%); Nasdaq (+0.36%) – with cyclicals and energy outperforming. However, the risk-off sentiment resumed overnight, with markets in Asia moving lower this morning – Nikkei 225 (-3.1%); Hang Seng (-1.1%); Shanghai Composite (-1.4%) – and the S&P futures currently pointing to a 1.2% decline at the open this afternoon.

The FTSE 100 is currently 1.4% lower at 10,631, while Sterling trades at $1.3315 and €1.1445. UK BRC shop price inflation eased to 1.1% in February, underpinning disinflation but complicated by energy developments. Investors have begun trimming their expectations for UK interest rate cuts amid renewed inflation concerns.

Company News

Yesterday National Grid extended and upgraded its 5-year financial framework and accepted the latest regulatory framework for its UK Electricity Transmission Business. As a result, EPS growth is now expected to be 8%-10% p.a., with dividend growth still in line with UK CPIH inflation. We are positive on the long-term outlook for the business given the company’s critical role in the energy transition, AI infrastructure, and security of supply. As an income stock, the performance of the shares is driven, in part, by bond yields, with the recent volatility providing some uncertainty. In response to this announcement, the stock was marked up by 2% against a weak overall market backdrop.

National Grid operates a regulated infrastructure 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.

The global power grid is critical infrastructure that requires substantial and sustained investment to integrate an ever-growing pipeline of renewables and support the rising demands of an electrified world. Put simply, the grid needs to be larger, smarter, and more resilient to enable the energy transition to continue at pace.

Over the last few years, National Grid has pivoted 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. Increased demand will also come from new connection to AI data centres – there is currently a massive queue of data centres waiting for grid connections.

In response, the company is undertaking a significant hike in investment in order to deliver a step-change in critical energy infrastructure in the UK and US in support of energy transition, security of supply, and economic growth objectives.

In yesterday’s announcement, the company set out an extended and upgraded 5-year Financial Framework to March 2031 which replaced its existing framework to March 2029. The cumulative capital investment is expected to be at least £70bn, versus the previous target of £60bn over the five years to March 2029.

The plan represents a 70% increase compared to the prior five years, reflecting a doubling of investment into UK electricity networks and an almost 50% increase in investment into US gas and electricity networks. The expected split across the group is: UK Electricity Transmission (£31bn); UK Electricity Distribution (£9bn); New York Regulated (£17bn); New England Regulated (£12bn); and National Grid Ventures (£1bn).

The target is to generate asset growth CAGR of around 10%, with group assets heading towards £115bn by March 2031. With most of the investment going into the group’s electricity networks, the mix will continue to move away from gas.

In yesterday’s update, the company also confirmed that it has accepted all of the RIIO-T3 price control arrangements proposed by the regulator Ofgem in its Final Determination, which covers the UK Electricity Transmission business for the period April 2026 to March 2031. The company is confident that this price control enables delivery of an overall return on equity above 9% (6.12% real) across the price control.

In addition, the company has also achieved constructive recent US regulatory outcomes, and combined with progress in securing the supply chain, creates improved visibility and momentum across the group over the next five years.

As a result, underlying EPS CAGR is now expected to be 8%-10% from an FY26 baseline, more aligned with the group’s asset growth. This upgrade isn’t a complete surprise – the market was already forecasting EPS growth above the top-end of the previous range of 6%-8%. For the financial year to March 2026, the group’s performance remains in line with management expectations. For FY2027, the company now expects underlying EPS growth of 13%-15%, reflecting higher allowed revenue as its steps up delivery from RIIO-T2 to RIIO-T3 regulatory regimes.

The company also continues to streamline its portfolio to focus on pure-play networks across regulated and competitive onshore and offshore networks. It has sold its ESO (electricity system operator), National Gas Transmission, its National Grid Renewables onshore business in the US, and its Grain LNG business.

As a reminder, 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 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 in May 2024. The company expects net debt to increase by £1.5bn in the financial year to March 2026, due in part to a slightly higher scrip dividend uptake.

The stock remains popular with investors seeking an attractive income that is growing in real terms – the dividend policy to deliver annual growth in line with the increase in average UK CPIH inflation has been reiterated. The payout for the current financial year is expected to be around 48p, equivalent to a yield of 3.5%. Following the recent strong performance of the shares, we note the yield has dropped below both the UK base rate and 10-year gilt yield, implying the shares are now being viewed more as a growth utility than a bond proxy.

Although regulation provides a framework for the company to operate within, it can be a double-edged sword – at a time when many consumers are struggling to pay their energy bills, the regulator may be under pressure to hold back utility companies’ returns. However, we believe the risk is lower for the grid operators given the essential nature of their business and the fact that the grid only accounts for a small percentage of an energy bill.

Other than regulatory risk, the stock may also be negatively impacted by a rise in gilt yields, the threat of a cyberattack, supply chain and labour inflation risk, and weakness of the US dollar.