Optimism is appropriate under a long term view (page 1 of 2)

US Technology Stocks

A relatively quiet week for technology stocks that resulted in a directionless trading week on the NASDAQ Composite Index. Conservative investors took to profit-taking, especially after the previous week's strong up-move on technology issues.

We continue to believe the potential exists for further profit-taking activity to edge prices lower. As we do not expect prices to rally in any significant manner in the near-term, we remain cautious for the week ahead.

We continue to recommend staying away from PC and PC-related stocks as we expect the segment to be under-performers over the next few weeks. Compaq Computers' (CPQ US, $17.00, CSFB rating: Hold) stock price took a beating during the week as investors gave up on the stock in reaction to the company's downward revisions for (June) 2Q01 estimates. Demand visibility ahead remains poor but the company expects a 2H01 recovery. Looking ahead, CPQ is expected to adopt an aggressive pricing policy to clear channel inventory as well as recover lost market share, which we anticipate will further hurt margins. We recommend to stay away from the segment as we believe that the demand-supply equilibrium has yet to stabilise.

Maintain Hold on JDS Uniphase (JDSU US, $18.21, CSFB rating: Buy). JDSU reported 3Q01 results which were in-line with expectations. However, the company's stock traded lower as nervous investors shied away from the issue due to the company's downward revisions to its (June) 4Q01 results. We believe the company's initiatives in cutting costs will be beneficial over the long-term. JDSU plans to eliminate about 20% of its workforce, shut down selected operations in the US and expand (lower costs) manufacturing capabilities in China. We remain hopeful that the company will emerge from its realignment process as a more leaner and cost-effective fiber optic telecommunications equipment producer. For the time being, we maintain our Hold recommendation on the stock and look forward to an improved performance from 4Q01 onwards.


Europe

Earnings reports from European companies do not offer any incentive to come back to the market aggressively, even though some more optimism is appropriate under a long-term view. Very often the right time to buy is when newsflow appears to be worst. To avoid being caught on the wrong foot we recommend avoiding too much stock picking risk and seeking diversification in our preferred European equity fund Henderson HF European Fund.

As expected, the ECB did not lower interest rates. Inflation signs from various German countries outweighed the weak business confidence indicator IFO earlier in the week. The seemingly growth-unfriendly communication of the ECB makes it hard to find the necessary confidence that the monetary policy will be efficient enough to turn around the undoubtedly weakening European economy.

The Energy sector was the best performing sector for the week. Despite some volatility in the oil price during the week we do not expect the oil price to fall below USD 25 on a sustainable basis. The oil sector is the only sector that enjoys earnings upgrades as many analysts still base their figures on an oil price below USD 25. Assuming that the OPEC sticks to its production discipline we recommend buying TotalFina at current levels.

Finally Ericsson (LMEB SS; SEK 61.50) confirmed that it would merge its handphone unit with Sony's in a 50:50 Joint Venture. Even though some might have hoped for a complete exit we consider it a good step in the right direction.