Investments via equity funds (page 1 of 3)

We strongly advocate balanced investments with a focus on quality rather than a bet on the most battered stocks or sectors. Investments via equity funds are the appropriate way as stock selection in the early phase of a recovery will be very difficult.

US Stocks

A year and 3,328 points on the NASDAQ ago, in March 2000, when the equity markets were on a one-way ride. Stocks that were incapable of going down, that was the New Economy. Now, everyday brings more earnings warnings and another historical stock price low. The technology "blue chips" suddenly find that their double or triple digit revenue growth have dried up and that the tyranny of the business cycle is still with us. In the end, it is a question of saturated demand, excess inventories, and a downturn.

As mentioned in the last weekly, the capacity growth was mainly concentrated in the technology area. The traditional durable and non-durable manufacturing have seen both their capacity growth and utilization rate decline in 2000. Therefore, the excess capacity and inventory workout in the Old Economy may not be as bad as the New one. To make things worse, the Old Economy might decide to hold off from purchasing equipment like networking and computers until their own downturn is over, so the tech industry would likely take longer to recover than the traditional industries.

The service sectors like outsourcing, food & drug stores and healthcare management should experience moderation in growth as non-tech manufacturing and construction activities slow, but should offer defensive quality in the current market condition.

Nonetheless, a recession will prevent business to pick up anytime soon, particularly when technology is responsible for two-fifths of the GDP growth. If that is the case, and the economy turns for the worst, diehard investors will finally loose faith, and then we will find ourselves in for a longer than expected bear market.

US Technology Stocks

On a week-on-week basis, the NASDAQ Composite index continued to trade south-bound and ended the week -6.5% lower at 1720. For the week ahead, we expect prices to trade side-ways (at best) due to the lack of positive news in the near-term. Sentiment will be mixed ahead as investors await leading companies like Lam Research Corp (LRCX US, $22.0625, CSFB rating: Buy), Yahoo Inc (YHOO US, $14.8125, CSFB rating: Hold), and Juniper Networks Inc (JNPR US, $33.80, CSFB rating: Buy) to report earnings during the week. Attention will then be focused on their forward-looking expectations and earnings guidance.

Maintain Hold on the eBusiness Software Applications segment. Last week, six software companies warned that they will miss earnings estimates for the quarter. As client companies temporarily suspend software spending, due to the continued uncertain economic environment in the US, software application vendors have become the latest victims of the earnings slowdown scenario. In terms of falling short of expectations, i2 Technologies (ITWO US, $16.9375, CSFB rating: Buy) will miss estimates by 1.4%, Commerce One Inc (CMRC US, $6.2000, CSFB rating: Buy) by 18%, E.piphany Inc (EPNY US, $7.9688, CSFB rating: Buy) by 24%, Documentum Inc (DCTM US, $9.1250, CSFB rating: Hold) by 26%, Broadvision Inc (BVSN US, $2.8438, CSFB rating: Hold) by 29%, and Ariba Inc (ARBA US, $4.8438, CSFB rating: Buy) by 51%.

Though the shortfall was expected by the market, the magnitude of the group miss was bigger than anticipated.