Optimism is appropriate under a long term view

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. Firstly, Sony has the consumer electronics know-how and better marketing capability than Ericcson. Secondly, should there be further losses (although not expected by the JV partners) from this unit it would allow Ericsson to share the burden. The Sony Ericsson JV creates the number three handset maker with a market share of about 10%. Should the macroeconomic picture not deteriorate we expect Ericsson's newsflow to improve from here. However, given the dismal financial situation we do not see a significant rally until evidence of improvement is visible.

Infineon's (IFX GY; EUR 46.64) operating profit fell to EUR 10 million in 1Q01 compared to a profit of EUR 253 million in the year-ago period. This was above expectations. A resilient performance in Wireline, Industrial and Smart card compensated for higher than expected losses in the DRAM and Wireless division. Infineon expects the DRAM business to improve in 2H01 and does not see a recovery in the telecom chips market until the end of the year. With a performance of 17% Infineon belongs to the best performing European Blue chips year-to-date. This makes the stock vulnerable for negative news, especially given high uncertainity in the industry. However, we believe that Infineon will be a main beneficiary of a DRAM recovery that could materialise later in the year. We reiterate our 'Hold' rating.

Rhodia (RHA FP; EUR 13.84) reported disappointing earnings figures like many other chemicals. Net income of EUR 26 million fell short of expectations (EUR 50 million). The company blamed higher taxes and acquisition related interest costs for the shortfall. Rhodia sees margin improvement in 2H01 but expects the 1H01 to be weak. Even though we believe that the stock is significantly undervalued against its peer group we see no immediate trigger for a re-valuation. The consistently high resource prices pose a threat to the benefit of the ongoing restructuring program. We hope to see some structural changes later in the year, such as a progress on the sale of Rhodia Ster.

GlaxoSmithkline (GSK LN; GBP 18.48) published a healthy set of figures. Earnings per share increased to 16.2 pence from 13.3 pence and pharmaceutical sales rose 11%. GSK said that the US market and the new products enjoyed healthy gains. The company confirmed to be on track to meet its EPS growth target of 13% and merger savings of GBP 400 million for the year. GSK reflects a sound investment in the pharmaceutical industry. The company has a strong management and R&D team and an attractive product portfolio that is not exposed to patent expiration. GSK was also rumoured to be interested in American Home Products.

Siemens and Alcatel reported earnings that were a reflection of the difficult industry environment. Siemens announced the lay-off of 3500 staff and both companies said that they have lost money in their handphone division. Siemens did not give a forecast for the remaining two quarters of its FY2001 while Alcatel cut its sales forecast to 5%-15% from 20% for 2001. Even though we believe that a great deal of bad news has been priced in these stocks we consider it too early to come back to the industry.

On Monday, April 30, Henkel (HEN3 GY; EUR 72.08) will release 1Q01 earnings. We are particularly looking for an update on the progress of the sale of its chemical unit Cognis. A disposal of Cognis would enable Henkel to be valued as a consumer good company rather than a chemical firm