Uncertain outlook to keep US markets volatile

US Stocks

The direction of the US economy still remains an uncertain event and continues to impact US equity investments with high volatility.

Remain positive on International Business Machines (IBM US, $105.70, CSFB rating: Hold, CSPB MG V Buy Recommendation). The company reported mixed Jun-2Q01 results with revenue that fell below expectations (0% year-on-year growth) to $21.6 billion, while EPS of $1.15 matched analyst forecasts. Hardware (40% of total sales) and software (14% of total sales) revenue fell below expectations at -5% YoY contractions, while Global Services revenue (41% of total sales) surged +7% YoY. With Europe (including Middle East and Africa) contributing 27% of total sales and Asia contributing 20%, the impact from a stronger US-dollar (foreign currency translation effects) reduced total sales by 5% (Bloomberg). Nevertheless, with a wide technology product offering and sustained brand leadership, we believe the company is well positioned to withstand the present IT slowdown. As such, we maintain IBM as a core holding candidate and would look to accumulate more of the stock below $100. Short-term price at $112.00 and 12-month price target at $122.00.

Positive on RJ Reynolds Tobacco Holdings (RJR US, $50.65, CSFB rating: Buy, CSPB MG V Buy Recommendation). RJR reported June-2Q01 results with revenue growing 10% YoY to $2.3 billion and EPS of $1.26 (above expectations of $1.25). We continue to like RJR as an attractive valuation play (12.7x price-to-earnings, and 0.6x price-to-sales and price-to-book). With the company's cash position remaining strong at $2.6 billion, and with an additional $300 million allocated for share repurchases (over the next 12 months), we believe RJR's stock price should attempt to stabilise at around the $45.00 - $50.00 range. We maintain our Buy recommendation on the stock and view any price weakness below $50.00 as an opportunity to accumulate for a 12-month investment performance (maintain price target at $72.00).



US Technology

Remain cautious on technology stocks. On a week-on-week basis, the NASDAQ Composite Index fell 2.6% (closed at 2029) on continued weak sentiment due to frustrations that an earnings recovery for technology companies will have to be 'pushed-out' to 2002. Nevertheless, positive news comments from Nokia Corp (NOK US, $19.20, CSFB rating: Strong Buy) and Broadcom Corp (BRCM US, $41.00, CSFB rating: Hold) of a potential rebound in sales growth in 4Q01 helped smooth out negative sentiment during the week.

Over the last 13 weeks, the NASDAQ Composite Index has been trapped in a tight trading range between 2325 and 1943. Investors remain uncommitted to technology investments and trading activities continue to be direction-less. Looking ahead, we believe the index still has three potential downside risk levels: (a) 1976 or -2.6%, (b) 1945 or -4.1%, and (c) 1756 or -13.5% from current levels. Taking this price-risk scenario into consideration, and the fact that companies continue to have limited visibility ahead, we remain cautious on technology issues in the short-term.

For long-term investors who own the Nasdaq-100 Index Tracking Stock (QQQ US, $41.65), we recommend the following accumulation strategy to capitalise on potential near-term market weaknesses and be positioned for any subsequent rebound in price (and sentiment) as we approach 4Q01.

Positive on Micromuse Inc (MUSE US, $15.52, CSFB rating: Buy, CSPB MG V Buy Recommendation List) in the long-term (1-3 years) but cautious in the short-term (1-3 month). MUSE reported Jun-3Q01 results with sales that jumped 92.3% year-on-year (YoY) to $63 million. EPS of $0.13 was slightly above expectations of $0.12 a share. MUSE stock was sold down during the week on negative guidance from the company's management (4Q01 sales expected to decline by 27% sequentially due to continued slowdown in customer spending). Though MUSE is presently being hurt by the global slowdown in IT spending, we continue to like the company as a long-term Buy candidate. We believe that the company has the potential to grow once the current global macroeconomic uncertainty lifts. CSFB anticipates MUSE's growth prospects to improve over the next 12-18 months due to (1) a return to more normalised higher ASPs, (2) resumption of repeat businesses (3) new product momentum (4) higher attached rates for add-on products, and (5) increase in revenue from channel partners. Looking ahead, we expect MUSE's stock price to improve from current range-bound levels as we move closer to the December-January period. For those who bought the stock for a long-term investment (and at higher entry prices), we recommend to HOLD in the near-term to allow price volatility to settle at around the $15.00 level before accumulating again for a 6 to 12 month performance gain. Anticipate a near-term price target at $17.50 and a 6-month price target at $34.00.



Europe

This week's earnings reports have further strengthened our view that the next few quarters are going to be as tough as the past year. Companies are focusing their attention on factors they can control (cost cutting) rather than on factors that are beyond their influence such as capital expenditure. While this will eventually result in much leaner and more efficient companies once the economy starts growing again it will be a painful process for those involved. We believe that investors should take these troubled times to assess their portfolios under the perspective of risk rather than rewards.

The last 12 months have shown how essential it is to be invested in a diversified manner. The Euro STOXX Index declined 24.60% over the last twelve months with the Health sector performing the best (11.58%) and the Technology sector the worst (-60.07%). Our preferred equity Fund, the Fidelity European Growth Fund, showed an excellent performance and declined only 2.19%, while the Absolute Europe Fund even managed to generate a profit of 3.11%. The latter's worst month showed a loss of a meagre 0.6%. Apparently, past performances are no indication of future success but given the uncertain outlook of global equity markets over the next few quarters we recommend increasing or building up positions in these broadly diversified and well managed products. Apart from offering some downside protection through complex strategies (Absolute Europe) investors benefit from an eventual upside at a much lower risk. Alternative products that focus on absolute returns are the recently launched Best International Manager Certificate and the upcoming Protected Investment Note (PIN) Euro.

Philips, Nokia, ASM Lithography, SAP, Ericsson and DaimlerChrysler reported earnings last week. All technology companies had the same message. There is no recovery in sight for the rest of the year and some even don't see it happen before 2H02.

Philips (PHIA NA; EUR 29.16) reported a loss of EU 770 million, which was in line with earlier guidance by the company. However, excluding the one-offs Philips generated an operating loss of EUR 228 million, much worse than expected. The shortfall was due to a rapid decline in the consumer electronics and components units. Philips will have to take another extraordinary charge of approx. EUR 300 million in 2H01. We remain cautious on the management's outlook of a recovery in Q4. We see no reason to turn positive on the stock as long as there is no improvement in the semiconductor and PC industry. Despite the patience required, we believe that Philips offers good potential for further restructuring and share price appreciation in the medium-term.

Nokia (NOK1V FH; EUR 21.94) ended the day of the earnings release with a 15% jump in the share price. In fact, the report contained something for the bulls and bears. The company reported EPS of EUR 0.17, at the top end of the range, given by the management. Nokia managed to keep operating margins at a high level of 15.5%, which is good news. It shows that Nokia was able to defend its market share without making too many concessions on price, which is just another proof for the high quality of this company. However, the outlook was somewhat mixed. 3Q01 is expected to be a flat quarter followed by a somewhat stronger end of 2001. We consider the company's outlook of a return to sales growth in the range of 25%-35% next year as too optimistic. We continue to believe that Nokia remains the strongest player in an industry that experiences one of the sharpest downturns ever.

Ericsson's (LMEB SS; SEK 51) report caused some relief to the market in the sense that there were no further bad news. Operating margin of 1% was in line with expectations and cash flow managed to come back to positive territory. We believe that Ericsson's management is taking the right steps to address the company's problems. However, the industry's weakness will continue to prevent the stock from any sustainable recovery. We remain cautious for the time being although we become slightly more optimistic that Ericsson will eventually make the turn-around.

SAP (SAP GY; EUR 156) reported a 78% yoy increase in 2Q01 earnings, which was well ahead of estimates. The company remains very optimistic for the coming quarters. We consider SAP as the most attractive technology stock in Europe for the time being. The company proves that its products are very competitive. We are convinced that, once the global economies improve, SAP will be among the first to recover. We recommend buying the stock in any weakness with an investment horizon of 12-18 months.

Vodafone (VOD LN; GBP 1.4125) caused another setback for the telecom industry by saying that it will cut investments in 3G networks as there were not enough handsets available. This is bad news for operators and equipment makers alike and underlines the negative sentiment towards the 3G roll-out. Despite the high amount of intangible assets (GBP 13.3bln) in Vodafone's balance sheet we would argue that the current valuation already reflects this. However, with the current negative sentiment towards the industry we do not believe that the stock has seen its lows.

This week the following companies are about to report

July 23, 2001 Vivendi Universal
July 23, 2001 Fiat
July 23, 2001 Sonera
July 24, 2001 GlaxoSmithkline
July 25, 2001 Danone
July 25, 2001 Akzo Nobel
July 25, 2001 Siemens
July 26, 2001 Stora Enso
July 26, 2001 Rhodia