It's not too late to invest in funds

US Stocks

Last Saturday, congress gave final approval to a sweeping $1.35 trillion tax cut package. The compromise package would give households a refund of up to $600 this year and reduce most income tax rates across the board by 3 percentage points starting July 1, 2001. The cuts will range from 8% to 11% of the current tax rates, with the full benefits coming in 2006.

The victory did not come without a hefty cost; the president lost control of the Senate when Republican James Jeffords declared his independence and effectively handed control of the Senate to the Democrats. With the Senate controlling the traffic of the legislation, the administration will encounter more formidable obstacles down the road.

After the last cut by the Fed on May 15, 2001, which was well anticipated by the investors, the surprise is that the strength in the tech stocks, particularly, the Internet stocks, as of May-15-01:

S&P500 +2.28%
DJIA +1.22%
Nasdaq + 7.9%

Although we are quite convinced that we have seen the bottom, we did not anticipate a move into equities until the end of the year when earnings start to recover. Investors might have become comfortable in buying for a recovery at this level, but the very strength in the more speculative counters like Internet stocks makes this rally susceptible.
This unfounded optimism is based on companies CEO's claims that their businesses are about to turn around, but remember, these are the very same CEOs that watched helplessly when their companies' earnings fell off the cliff earlier this year. As the economy continues to slow, we expect to get an opportunity to buy again at lower levels, i.e. 1150 - 1200 range for the S&P500.

Meanwhile, in the capital goods, GE (GE $50) is getting to a buy area of $47.00, and JP Morgan (JPM $49) is a buy at current levels in the financial sector. RJ Reynolds (RJR $58.10) will once again prove its merit of negative correlation (low beta) in an uncertain market.

US Technology Stocks

On a week-on-week basis, the NASDAQ Composite Index traded stronger (+2.4%) to close up at 2251. In terms of price and sentiment, the focus for the week ahead will be on whether the positive price movement will be sustainable or if prices retreat back to their April lows.

Investor confidence has no doubt improved over the week (as represented by the recent price appreciation) as expectations gradually turned positive for technology companies to potentially turn-around earnings performance in 2H01. However, with the lack of fundamental confirmation, we believe investors are simply betting that the latter half of the year will provide a better business environment (especially after 5 interest rate cuts) and enhanced earnings profitability for technology companies. On the other hand, we believe that unless business leaders follow suit in confidence and open up corporate purse strings again to continue spending on the technology infrastructure build-out, technology companies' earnings growth will remain muted and rising stock prices will then collapse once more. As such, we remain cautious on technology issues and would subscribe to an accumulation strategy on price weakness and only on selected stocks within preferred technology segments. In terms of technology product investment allocations, we prefer the software (60%) over hardware (40%) issues in the near-term. And, within the software regime, we would focus on eBusiness Applications/Enablers, eBusiness Infrastructure and Wireless Communications themes. In terms of hardware, we still like the Telecommunications Wireline (Broadband) Equipment segment and Broadband- related Semiconductors. We still maintain an underweight preference to the PC and PC-related segment.

Europe

The euro zone's two largest economies -- Germany and France -- grew less than expected in 1Q2001. Germany's GDP grew 0.4% in the first quarter, below expectations of 0.5%, and French GDP rose 0.5%, which was below the 0.7% consensus. At the same time Germany reported an increase in May CPI figures of 3.5% yoy, well ahead of consensus. The combination of declining growth and increasing inflation made the ECB leave interest rates unchanged while the Euro reached levels last seen in late November 2000. If we take several, mainly TMT, company related statements of last week in consideration it becomes increasingly likely that assumptions of a recovery as early as 4Q2001 are premature. This applies not only for Europe but most likely also for the US, where Mr. Greenspan's remarks pointed to an economy that is weaker than previously expected.

However, after the recent rally valuations of many stocks (especially TMT) have reached a level that is only justified if a recovery takes place any time soon. We do therefore recommend that short-term oriented investors take profit at these levels with the intention to buy them back at lower levels.

At the CSFB European Technology Conference in Barcelona Infineon (IFX; EUR 43.15) and STMicroelectronics (STM FP; EUR 47.13) pointed out that the weakness in wireline- and wireless related products would witness further deterioration in the current quarter. The weakness in the semiconductor industry was further confirmed by a decline of the book-to-bill ratio to 0.42, the lowest reading since 10 years and a profit warning of ASM Lithography. Infineon said that the number of handphones sold in 2001 could be as low as 370-380 million. This would still give some more downside potential to earnings forecasts of equipment makers such as Nokia and Ericsson. Although Nokia reiterated its earlier guidelines for the quarter we believe that the stock has somewhat run ahead of the facts and expect it to head in a consolidation like most other TMT stock. However, the time to overweight TMT stocks has not come yet and it will most likely take longer. The current environment is the right field for traders and hence we recommend buying these quality stocks in weakness with the intention to take profits rather soon.

ING (INTNC NA; EUR 76.10) reported another good set of numbers in a tricky environment. The company reported an increase in net income of 11% to EUR 1.13 bln. Insurance profits grew by 30% to EUR 681 million while banking earnings decline by 10% to EUR 450 million. Asset management results fell 42%. Management has reiterated its forecast of 12% underlying EPS growth, plus accretion to come from newly acquired business to augment growth. Management had pointed to EUR 0.24 accretion, which would have given 18% growth. We believe this is an excellent result and reiterate our buy recommendation. We continue to believe that the stock is undervalued. ING gained 3.37% for the week.

Cyclical stocks faced a bit of a setback last week. This was due to the weaker than expected macroeconomic data, mentioned above. We continue to believe that the outlook for cyclicals remains bright and valuations reasonable. Our top picks remain TotalFina (FP FP; EUR 174.20), Pechiney (PEC FP; EUR 63.15), Lafarge (LG FP; EUR 108.8) and Syngenta (SYNN SW; CHF 88.70).

The main story for the markets however, was the rumour about the merger of Alcatel and Lucent. So far both companies have declined to comment on details. Such a combination would create a behemoth in the industry with a near monopoly in certain business areas. Even though a merger makes geographical and strategic sense the market has so far taken this idea as a negative due to the high integration risk, overlap of businesses, antitrust concerns, the sensitivity of Bell Labs and the high level of Lucent's debts. Additionally, should Alcatel dominate the company, i.e. be a European company, many US fund managers who currently own Lucent would be forced to sell the stock, because they are not allowed to own foreign shares. According to newspaper reports an announcement will be made soon.

Funds

We recommend purchasing ACM Global Growth Trends and ACM Bernstein Global Value as core holdings.

We continue to recommend buying into MSDW Sicav Japanes Equities and CS Japan Megatrend fund as core holding for Japanese market.

On the technology side, we recommend a neutral (20% of equities) weighting for new investors in Aberdeen Technology fund. For TMT basket investors, we continue to urge rolling positions out and into Aberdeen Technology