Outlook remains uncertain with little reassurances from companies

US Stocks

The 2Q reporting season is pretty much done. We can look back on it and say:

1. It was pretty bad
2. Very few companies offered much in terms of reassurance for 3Q and beyond

On the other hand, investors put US$10.6 billion into equity funds in June, down from US$18.1 billion in May. Yet the market rallied since July 24, 2001, with the NASDAQ being the best performer, up close to 5.5% thanks to positive comments from Craig Barrett, CEO of Intel Corp., and Merrill Lynch & Salomon's upgrades on semiconductor stocks and the call on the bottom of the chip industry.

The inventories to sales ratio declined in May, the data are consistent with the view that the worst of deceleration in the manufacturing sector is probably behind us. But a look at the comparison of the national NAPM (National Association of Purchasing Management) manufacturing and non-manufacturing surveys yielded some interesting results:

• The manufacturing sector continued to decline in July

• The rate of decline accelerated during the month as new orders softened somewhat from June and inventory liquidation accelerated

• Manufacturers continued to reduce payrolls and capital expenditures in cost cutting efforts.

• Though the Prices Index appears positive as most manufacturers are enjoying lower raw material costs, but it is also indicative of deteriorating pricing power for their finished goods

• Comments from purchasing and supply managers in July reflected a sense of relief with regard to energy prices

• The two most used words were "slow" and "flat." There were a few respondents expressing a sense of optimism and they were from construction-related industries

• Decreased activity in the non-manufacturing economy compared to June

• New orders decreased and order backlogs shrank more rapidly in July than in June

• Exports increased while imports decreased for the sixth month in July

• Employment was reduced and inventories continued to decline

• Prices decreased in July for the first time since February 1999, and the Non-Manufacturing Inventory Sentiment Index indicated that purchasing and supply executives felt somewhat less discomfort with the level of inventories in July than they did in June

• Increased business activity in July was reported by 21 percent of purchasers, compared to 30 percent in June

Stay with the sectors with relatively better earnings visibility as stated in the last weekly.


US Technology

Cautious on technology stocks. On a week-on-week basis, the NASDAQ Composite Index inched up 1.8% (closing at 2066) and maintained its direction-less trading behaviour.

Looking into the week, we expect investors to stay cautious ahead of Cisco Systems' (CSCO US, $20.05, CSFB rating: Buy) profit reporting on Tuesday (7-Aug-01). While we expect CSCO to post results inline with expectations, we believe investors will be focusing more on CSCO's revenue guidance for the quarters ahead, as well as any commentaries by management as to the state of the overall technology environment over the next six to twelve months. For those who own CSCO's stock and have been looking for an exit opportunity, we suggest trimming a portion of holdings on price strength at $24.00.

Neutral on Intel (INTC US $31.68. CSFB rating: HOLD). Positive news from INTC's CEO, along with encouraging words from semiconductor analyst about the chip sector facilitated turn-around investor sentiment towards the semiconductor segment. This helped fuel a rally in the semiconductor and PC segments, with INTC's stock closing 8.4% higher (week-on-week). According to Intel's CEO, the computer industry has bottomed out. Intel's positive expectation for the near term is based on a seasonal boost in sales deriving from a new school year and the holiday season. For the 4Q sales, the company forecasted a slight increase of $6.2-6.8 billion (similar to 2Q's guidance).

Nevertheless, given the persistent economic slumps in the US, Europe and Japan, end-user demands for PCs will be difficult to predict (CSFB's global PC forecast for the year is at 0% year-on-year growth). We believe INTC's optimistic outlook for the near term is based more on seasonal demand rather than any recovery in end-user demand.

INTC's prospects for the rest of the year relies heavily on Microsoft's (MSFT US, $66.89, CSFB rating: Strong Buy) new release of Windows XP where INTC intends to put a heavy push to move the Pentium 4 chip onto the mainstream of PC sales. Looking ahead, we remain neutral on INTC and suggest investors to look to take-profits on the stock on further price strengths (ie $37.00). Though INTC has made good efforts to diversify its revenue stream (by moving into the networking and communications segments), we believe the existing price war between INTC and Advanced Micro Devices (AMD US, $19.25, CSFB rating: Buy) will continue to hurt microprocessor chip (80% of INTC's total revenue) margin potentials.

On the other hand, for investors seeking to capitalise on the launch of Windows XP, we suggest exploring the benefits of increased memory chip requirements (Windows XP requires a minimum 128 MB of RAM) instead of solely focusing on high performance chip processors. With this in mind, investors may want to consider diversifying their Windows XP event driven investments into memory stocks like Micron Technology (MU US, $43.45, CSFB rating: Buy).

Europe

The Europe share index closed 1.6% higher on the back of strong gains in the TMT-sector. But the rally may not last as signs of an upturn in the economic outlook remain uncertain. We would like to point out, that we stay on the sideline and wait until the technology sector shows clear indications of improvement.The ongoing earning season and the low volume might keep the volatility high.

In the UK we are expecting the FTSE-100 to ease back as the recent stream of results slowed and investors looked to lock in some profits after this week's surge. BoE's surprised rate cute by a quarter to 5% could not help to stimulate the market.

Some sectors might benefit from a strengthening EURO. We expect some companies that are highly dollar dependent and which have suffered as a result, to profit from the dollar weakening, despite improved hedging facilities.

Deutsche Bank (DBK GR, EUR 78.21) experienced selling pressure as the Bank reported earnings. 2Q net profit down 49% yoy despite the sale of their stake in Munich Re for EUR 1bln and other disposals for 600mln. Nevertheless the result, supported by the strength of the fixed income division, was above analysts' expectation. The cost side is beginning to come under control. As we believe the situation for the banking sector will remain tough for the next months, we retain our HOLD rating.

Royal Dutch/Shell Group (RD NA, EUR 62.45) reported net income of USD 3,354mln for 2Q in line with consensus. The result is 12% higher yoy but 8% below the 2001 Q1 result. A surprise was the lower than expected production growth. EPS for the period is EUR 1.14, an increase of 21% on the year previous. Both crude oil and natural gas prices are expected to remain soft for the rest of the year. Given this implied weakness, coupled with potentially declining volume growth, we feel that it will become increasingly difficult for the company to maintain such strong operational performances. Currently, we prefer Total Fina.

Aventis (AVE FP, EUR 85.6) released strong 2Q figures and raised its full-year earnings targets. The earnings increased 31%, helped by demand for the blood-thinner Lovenox for thrombosis, cancer drug Taxotere and antihistamine Allegra as well as the merger-related cost savings. We are comfortable with the figures released but the company needs new medicines to boost earnings as the scope for more cost cuts begins to lessen. For now, we prefer Glaxo and Roche.

Funds

In line with our increased asset allocation for US equities (30%) we recommend the following funds for a diversified exposure to the US market.

One of our core holdings which we highlighted in the 26th March issue is the Putnam Growth and Income (US Value) Fund. The fund invests in large established US companies following a value approach.

As 'Growth and Value' moves in different (unpredictable) cycles, we stress the importance to balance the portfolio with both 'growth and value' focusing funds. The Russell 1000 Growth Index shows an average return of 14.59% from June 1979 to June 2001 whereas the Russell 1000 Value Index has returned 15.39% in the same period.

For a 'growth' exposure to the US market, we recommend ACM Global American Growth Portfolio. Please note that this fund is only appropriate for aggressive investors as it follows a stockpicking approach which can involve high volatility. The portfolio invests in high quality, well-established companies and are selected for their dominant industry positions, superior management capabilities and attractive growth rates. The fund moved recently away from technology stocks (17%) towards financial (19%), healthcare (19%) which comprises pharmaceutical & biotechnology & some energy stocks (7%). This decision was made at an individual stock level based on an evaluation of risk-to-return (purely stock selection basis), trimming into strength for stocks that have gone up significantly into stocks that perhaps have been weaker or underperformed of late and not due to sector allocation.

ACM's large cap growth team manages over USD 68 billion in assets with an average account size of over USD 109 million.
The fund is rated by S&P AA and by Micropal 4 stars.

Another fund which we would like to highlight is the Credit Suisse Equity Fund (Lux) USA B. Historically, the fund is less volatile as it is more in line with the S&P Index. The managers aim to achieve its investment objective by concentrating on leading companies which are most able to effectively capitalize on global unit growth for their products or services, as well as companies that can improve their return on assets by restructuring.
The fund is rated 5 star by Micropal and won the Lipper US equities award in 2000.

Small caps continued to outperform large caps (the Russell 2000 is up 5.75% YTD compared to S&P -5% and Dow Jones -1.5%) and we would like to reiterate our recommendation made on 21th May: Schroders US Small Cap.

A fund which brings together a value approach and investing in smaller companies, is the Nordea 1 North America Value Fund. The fund's value strategy is based on the earnings power and the financial strength of the companies. Their investment philosophy will generally lead towards companies with good businesses enjoying healthy prospects, i.e. companies that are undervalued with respect to their real earning power. This is opposed to merely cheap companies, which have low valuations but also suffer low profitability.

Nordea is the newly formed financial group springing from the merger of four of the Nordic region's leading banks (Denmark's Unibank, Finland's Merita Bank, Norway's Christiania Bank og Kreditkasse and Sweden's Nordbanken). They have total assets of around EUR 230 and are actively pursuing a strategy of expansion in asset management. In this area, the group manages capital of over EUR 100 bn, one third of which is placed in investment funds. Nordea has succeeded in becoming the leading Nordic asset manager. Investment opportunities are identified through independent research of individual companies. The fund is rated 5 star by Micropal.