Volatile weeks to accompany the July reporting period

We recommend to maintain a conservative and selective approach to accumulating technology stocks as we believe sentiment will remain volatile into the July reporting period.

Technology

We have added Openwave Systems (OPWV US, $32.45, CSFB rating: Strong Buy) to our US Technology Buy Recommendations list. OPWV is a leading supplier of communications software infrastructure products and services. Since its (Phone.com) merger with Software.com in 2000, Openwave Systems (renamed) has successfully delivered 2 consecutive quarters (Dec-2Q01 and Mar-3Q01) of healthy earnings. OPWV has a leading global market share in the Internet gateway market and we believe the company is well positioned to benefit from any increase in adoption rates of wireless Internet usage. Looking ahead, we believe the key drivers to the stock's out-performance includes 2.5G network upgrades and Unified Messaging potentially being the killer-application for wireless Internet. OPWV's valuations are relatively undemanding at 17.4x price-to-sales and 3.2x price-to-book. Our initial price target at $37.00 provides a investors with a short-term return of 14% and our 12-month price target of $43.50 provides a long-term capital gain of 34%. OPWV is scheduled to report Jun-4Q01 results on 23 July 2001. We recommend to accumulate OPWV with the following 3-tiered structured buying strategy.

Wireless Communications Software: Price Levels
Openwave Systems * T1 = $32.00 40%

--CSFB rating: Strong Buy T2 = $24.00 40%
T3 = Hold 20%

Average (straight) Purchasing Price $28.00


Valuations: (if at $24.00) (at $32.00) (if at $37.00)
Price-to-Sales: 12.90x 17.42x 19.89x
Price-to-Book: 2.41x 3.26x 3.72x
(source: Bloomberg)

3-tiered structured Buy strategy:
T1 = 1st tier buy level
T2 = 2nd tier accumulation level
T3 = 3rd tier accumulation level

Neutral on Applied Micro Circuits Corps (AMCC US, $16.33, CSFB rating: Buy). AMCC warned earlier in the week that they expect the coming June 1Q01 to experience a sequential revenue decline of 67% (magnitude of decline was unexpected) and guided down revenue and EPS estimates. The company attributed the shortfall to persistent excess inventory, continuing cancellations and push-outs. Though the company warned of weaker than expected numbers, and given the prevailing weak sentiment in the early part of the week when AMCC announced, it was interesting to see the company's stock price holding steady above $14.00 (the day after) and even trekking higher later in the week. The reasonable conclusion from AMCC's price action during the week is that investors were psychologically prepared for the bad news and that at low levels of $14.00, AMCC's valuations (9.6x price-to-sales and 0.8x price-to-book) appeared relatively undemanding given the company's potential when business recovers sometime in 2002/03. However, given the anticipated volatility in sentiment during the coming earning period, we suggest investors who bought the stock for a short-term trading scenario to look to sell a portion of their trading exposure on the stock to lock-in profits as price approaches $20.00. AMCC is expected to report earnings on 18-Jul-02. We do not recommend investors to chase the stock at current levels but to accumulate on weakness (for high risk-taking technology investors with at least a 12-month investment time horizon).


Europe


International equity markets had to cope with a couple of events, such as the FED rate cut, a drop in oil prices, more profit warnings and window dressing at the end of a disappointing first half of 2001. That markets behaved fairly well could be due to technical factors rather than anything else. We expect the next few weeks to remain volatile since the earnings season will kick-off soon and hard facts will follow the series of profit warnings. Probably the number of major earnings shortfalls will remain limited. However, companies have struggled to make forecasts for Q3 and Q4 and we believe that this will cause room for disappointments. We remain cautious over the next couple of weeks.

Our hopes of a quick economic recovery that we had six months ago turned out to be wrong as well as our assumption that European markets would be less affected by the US downturn. The US weakness has caused a global economic slowdown with cyclicals and technology-related sectors being affected the most. The past few years of over-investment and the economic slowdown have led the latter in a depression-like state where earnings visibility remains very low and the timing of a sustainable recovery is postponed until some time next year (probably rather later than earlier). The series of FED rate cuts helped to keep the broad market stable for 2Q01. The most important shift was the return to the 2000 sector pattern with defensives such as Healthcare (+11.60%) and Food & Beverage (+10.42%) being the best performers. Despite the sharp drops in 1Q01 the telecom and technology sectors continued their fall, losing another 11.6% and 5.1% respectively, bringing the year-to-date decline to 18.5% and 33% respectively. We believe that there will be minor changes to this sector preference in the weeks and months ahead. However, the performance (absolute and relative) of these defensive sectors has left these stocks rather expensive. Even though we expect these sectors to hold up well it will be the scarcity value that drives these stocks rather than valuation and earnings momentum.

The oil price came under pressure after US inventory data showed an increase in gasoline inventories. The sharp drop of the oil stocks reflects the high correlation to the oil price despite various efficiency programs these companies currently undergo. Given the weak economic environment a decline in the oil price could contribute to a faster recovery and lower inflation threat. However, we remain confident that OPEC will not increase production levels this week. We expect oil stocks to perform well as long as the oil price remains above USD 25. Our favourite oil stock remains TotalFina (FP FP; EUR 165.40).

The series of profit warnings continued last week. The most prominent victims were Cap Gemini (CAP FP: EUR 86) and Bayer (BAY GY; EUR 46.35). Both companies blamed the sharp slowdown in the US for the shortfall. Despite the fact that both profit warnings were widely expected and stocks declined accordingly the reaction on the announcement was very different. Cap Gemini lost 25% for the week while Bayer gained more than 6%. Cap Gemini remains the best play among European IT services companies but for the time being we do not recommend to come back to the stock until the macro-picture improves. Bayer, on the other side, looks attractive in the range of EUR 43-45.

Vodafone (VOD LN; GBP 1.5750) finally started to find some ground after Banco Santander said that it would not sell its Vodafone shares it got from the Airtel deal. Additionally KPN said that it had terminated its share sale. This is good news in the short term, as supply of additional shares seems to be stopped for now. However, the negative point is that the topic of share overhang is only postponed and not solved. Even though we consider the current level as attractive for the long-term we do not expect a sustainable recovery.

Today Infineon (IFX GY; EUR 27.70) announced the details of its secondary offering. The company plans to sell 60 million new shares, worth approx. EUR 1.7bln. The stocks are priced on July 12 and first traded on July 13. Siemens will not take part in the capital increase, which means that its stake will fall to about 51%. The proceeds will be used to refinance debts and fund investments. The only reason, we see, why the company goes ahead with the placing in these troubled times is the almost desperate need for cash. We expect the stock to remain under pressure in the short-term. However, most of the bad news should be out now. We remain convinced that Infineon will emerge stronger from the current downturn and retain our hold recommendation on the stock.

ING's (INGA NA: EUR 77.20) shares will be split 2:1 as of today.