Focus in Europe on a combination of economic sensitivity (cyclicals) and reliable growth (pharma).

US Stocks

International Business Machines Corp. (IBM, $102.89, CSFB rating: hold) - the stock has lost approximately 15% this year (from $121.50 to $102.89) partly because 4Q results were lower than forecasted. Nevertheless we remain positive on the stock with a 12-months target price at $122.00. We see IBM's stocks being attractive below $100 as a core holding. With an expected US economy recovery for the second half 2002, original equipment manufacturer's business should perform better. In addition, the company should begin to reduce excess capacity or to find a more efficient way to use it. Besides services and microelectronics, IBM is well positioned to gain market shares in other areas like middleware platforms, in unix servers and in storage.

Boeing Co. (BA, $44.90, CSFB rating: strong buy) remains one of our favourite buy (accumulate below $40.00). In spite of lower aircraft delivery projections and doubts in development in space and communications business in the near future, the stock is recovering nicely back to its level before September 11th 2001. President George W. Bush has called for higher defence spending, which could be positive for the company. Besides the company keeps a strong operational and financial control. 12-months target price $50.00.

Microsoft Corp. (MSFT, $60.23, CSFB rating: strong buy): the company continues to execute effectively in a tough economic and tech-spending environment. In addition, Microsoft Corp. continues to benefit from new licensing initiatives and effective price increases to outpace the PC industry. In the downside, Microsoft's management has lowered its forecasts and reiterated its uncertainty about the economy. Nevertheless we consider Microsoft Corp.'s stock attractive below $60.00 with a 12-month target at $88.00.

American Financial Group Inc. (AFG, $26.62, CSFB rating: strong buy) is a profitable underwriter positioned to benefit from higher property-casualty insurance pricing. Besides the company is well positioned to benefit from the seller's market that has emerged in California worker's compensation. We think that below $25.00, the stock is at an attractive level. 12-months target $35.00.

Consumer price index for January will be announced on February 20th. 0.2% change is expected after a previous change of -0.2% for December 01. On Feb. 21st US trade balance for December 01 is expected to come out with a deficit of $28.40B vs. -27.9B for November 01. On the same day, the budget statement for January will be made public. We expect $40B vs. $76.4B for December 01.


US Technology

After rising steadily during the week the NASDAQ Composite lost all the gains on Friday, after new fears of accounting concerns surfaced again. Nvidia Corp (NVDA, $57.35, CSFB rating: Buy) came under SEC investigations for reserves and product costs accounting issues while IBM (IBM, $102.89, CSFB rating: Hold) was accused of not having fully disclosed the sale of its connector business. IBM disclosed the spin-off transaction as revenue from intellectual property (which is acceptable within accounting standards) instead of an extraordinary item. This case will probably rise more questions about current accounting standards as investors seek more transparency so as to accurately determine (as best as possible) a company's financial health.

Sentiment within the technology sector remains nervous as bad news continues to flow in (shading the hopes of a recovery in the near-term). While some of the recently highlighted cases of creative accounting might provide attractive buying opportunities (in terms of relative price levels) for the long-term, investors are presently fearful of stepping into potential minefields.

We believe there exists a high probability of this (volatile) roller coaster ride on NASDAQ to go on for some time as there could be further accounting surprises or even corporate bankruptcies. As such, we recommend investors to also focus on a company's cash flows from operations, as well as any outstanding debt levels as investment pre-qualifiers.


Europe

Confusion about US accounting deficits make it difficult for investors to grab reliable information about where the market could be heading to. Although the potential impact of Enron could be substantial we believe that the market has become too obsessed with its focus on finding the next victim. The safest way, in our view, to play the current period of confusion would be by a combination of economic sensitivity (cyclicals) and reliable growth (pharma). In general, cyclical stocks (ex technology) should be less exposed to 'Enron' concerns as these companies have made much less and smaller acquisitions.

In order to spice the whole story up we would add a few semiconductor stocks, such as Infineon (IFX GY; EUR 25.45) and ASM Lithography (ASML NA; EUR 22.85). Fundamentals on the DRAM supply side are moving in the right direction, as consolidation is about to start. In terms of valuation Infineon still has to catch up with its peers and if demand picks up as expected in the second half of the year selective investments in equipment will set in, which will benefit ASML.

Among the cyclicals we continue to focus on the basic materials and construction materials. Stora Enso (STERV FH; EUR 15.48), Usinor (USI FP; EUR 15.26), Pechiney (PEC FP; EUR 61.50) and Lafarge (LG FP; EUR 103.70) have all resisted the latest volatility by outperforming the market so far this year. They posted gains between 1.57% and 9% last week.

With effect from today Arcelor (LOR FP) will start trading in Paris, Luxembourg and Madrid. Arcelor is the new company emerging from the merger of Usinor, Aceralia and Arbed. Usinor has been trading on very low volume over the past weeks due to the transition of the shares. Consequently we will replace Usinor with Arcelor on our recommendation list. Our main investment point in Usinor has always been the Arcelor story due to the attractive valuation of the world's number one steel producer relative to its peers (about 20% discount on P/E and EV/EBITDA), the synergies that should result from the merger (at least EUR 700 million by 2006) and the possibility to be added to major indices such as the CAC 40. Additionally, signs of steel prices recovering from a 20-year low should improve Arcelor's earnings outlook for the second half of the year. We consider our price target of EUR 16.50 as conservative.

Aventis (AVE FP; EUR 83.55) managed not only to beat its already twice-increased forecasts for 2001 but also delivered one of the best performances in the Pharmaceutical industry over the year. EPS for 4Q01 rose by 32% to EUR 0.61 and by 38% for 2001 to EUR 2.07. These figures were above expectations due to strong sales in Aventis' leading drugs such as Allegra (allergy), Taxoterre (blood thinner) and Lovenox (cancer), which all posted sales growth of more than 40%. The stock's performance was held back over the past months by concerns about its earnings quality and generic competition for Allegra. We do not share these concerns. Aventis gave a very optimistic outlook for its businesses, which underlines that earnings are not of low quality in our view. The company has extended their earnings guidance of 25%-30% growth for another year to 2002-2004 and has given guidance of 11%-13% revenue growth over the same period. Even though Aventis does expect the U.S. patent protection of Allegra to hold it gave guidance in case generic competition set in. In such a case Aventis expects earnings growth of 20%-25% p.a. for the same period. We continue to view the shares as very attractive with a price target of EUR 90.

After a period of high volatility Serono (SEO VX; CHF 1310) surprised the market with strong earnings and an optimistic outlook for Rebif (multiple sclerosis). Serono said that it expects Rebif to receive USA approval in March 2002. This is very good news as the recent volatility was related to concerns about a late FDA approval (2003) for Rebif. Rebif remains the driving force behind Serono's strong 17% sales growth in 4Q01. Rebif exceeded the market's growth expectations with 4Q01 sales up 46% being the market leading multiple sclerosis treatment outside the USA with a market share of 38%. Serono posted a strong operating income of USD 88 million. This was partly offset by lower than expected financial income and led to a net profit of USD 76.7 million, broadly in line with market's expectations. Serono expects profits to rise at least 15% this year and sales should rise 35% regardless of the FDA decision. We remain confident that the news flow over the next few months regarding Rebif will be positive.