Cautiously positive on certain US Technology sub sectors

US Stocks

The Gap Inc. (GPS, $13.91, CSFB recommendation: hold) - We think that sales weakness should be turning around as the slowdown stabilises. The biggest risk is that GAP continues to miss the fashion trend. The high short-term debt from the aggressive floor space expansion can be a drag on earnings if the economy fails to recover. On the other hand, it will gain market share if the economy does come back. At $13.50 we think it is an opportunity for a turn around play, 12-months target prices $16.00.

Boeing Co (BA, $49.40, CSFB recommendation: buy) - The company won the role of Lead System Integrator for the Future Combat System program. Boeing & Co is positioned to capture over $4 billion in revenues as the army undertakes its transformation to a more integrated battle force. The initial contract is about $150 million, with $4 billion possible over the next 5 years. We recommend reducing the position, for a 40% gain. Stock remains a core holding, accumulate in the low $40s

Waste Management Inc. (WMI, $27.46, CSFB recommendation: buy) - The company will reduce overall headcount by about 2,000 (3.5% of workforce), expecting to save $100 million in annual expense when completed. The implementation of this plan will probably continue into 2003. During the first quarter, Waste Management Inc. plans to take a charge of $50 million ($0.05 per share) to implement its plan. An additional $25 million in expense will also be recorded throughout the year, putting the plan's total implementation cost at $75 million. The company did not make any changes to its full year earnings expectations. Consensus expects $1.419 a share.12-months target price $34.00

Applied Biosystems Group (ABI, $23.46, CSFB recommendation: hold) - ABI, like many other life science supply companies, has experienced difficult times over the past 12 months due to increased global uncertainty and lower biotech spending. ABI has missed to meet earnings and/or revenues for four quarters running, and the company still does not have good visibility on future sales trend. Nevertheless, we remain positive on Applied Biosystems Group and we continue to think that it is a premium life science supply company. It develops, manufactures, sells, and services instruments and associated consumable reagents for life sciences research. ABI has an installed base of more than 50,000 instruments systems in approximately 100 countries.

In 2001, more than 50% of its revenues came from instruments (DNA sequencers, PCR machines, nucleic acid synthesisers, and mass spectrometers). The other part was derived from reagents, services and software. Furthermore, the company has strong internal R&D capabilities, an extended intellectual property portfolio, and broad access should enable Applied Biosystems Group to maintain its industry-leading position in the near future. Good buy opportunity below $22.00, 12-months target price $28.00.

US Technology

During the last week the NASDAQ Composite made a nice bounce out of its downtrend since the beginning of the year. The rise in the Purchasing Managers' Index to 53.1% in February was probably one of the triggers, short covering an additional cause.

Positive mid-quarter updates coming from major US technology companies provided some relief in investor confidence last week. Intel Corp (INTC, $34.17; CSFB rating: Buy) and Sun Microsystems Inc. (SUNW, $10.00; CSFB rating: Buy), announced that they where both were feeling quite comfortable with their sales forecasts. Qualcomm Inc (QCOM, $43.80; CSFB rating: Buy) commented that they are seeing some incentives from the China's push towards adopting the latest generation of mobile telecommunications network which is based on Qualcomm's technology. The order of CDMA cell phones by the Chinese government, totalling 700,000 devices, comes just in time, as phone makers see their latest models having only a modest success. According to Gartner Dataquest, mobile phones sales fell 3% in 2001 (their first decline ever).

The sales decline is just a result of saturation of the market. Handset sales are increasingly dependent on the replacement rate. In the past this rate has been quite short as the handset was a fashionable product with the latest models being smaller and more attractive in design. But, with the economy entering a phase of low growth, consumers became more reluctant to buy something they already had. What consumers are waiting for now is a new "killer" application that will invigorate the desire for something new and subsequently "must-have".

The push-out (indefinite date) of the implementation of the UMTS/WCDMA standard, which allows high rate data transfer, left phone makers without a potential market for the related handsets. On the other hand, the intermediate standard prevailing, called GPRS, could still the reason to buy a new phone, but we have yet to see any indications of it occurring. Several handset makers have presented quite promising new models during the last week, which should come to market in the next few month, with a lot of new features like PDA functions or imaging capabilities, hoping to attract new customers.

A greater acceptance of the GPRS standard would also be suitable for mobile communication operators as they seek to increase customer ARPU (Average Revenue Per Unit) through the introduction of new applications and high data throughput rates. These premium services would help to improve the operator's earnings and so help further improve their balance sheets.

Although we might see some profit taking in the coming trading sessions, we expect further strength in the overall technology sector over the near term, as optimism about a near-term economic recovery improves.

Europe

European steel stocks headed lower after the US government imposed tariffs on imported steel between 8% and 30%. While the extent of the tariffs was much higher than expected it was widely known in the market that the US government would take measures to protect the troubled domestic steel industry. However, the US decision stands in stark contrast with President Bush's strong statement in favour of free trade only one month ago. We expect the EU and other governments to post strong complaints with the WTO and possibly introduce retaliatory actions. Apart from being very sceptical whether these actions will resolve the problems of the US steel makers we do believe that the current incidents are of rather political than economic nature. Europe exports only about 5% of its production to the USA. Arcelor (LOR FP; EUR 15.30), our preferred steel stock, exports about 3% to the USA. We are not overly concerned that Arcelor's business will be seriously affected and regard the current weakness as a buying opportunity. We believe that the restructuring benefits and the gradual improvement in demand and pricing power for steel keeps our investment case intact. Additionally, Arcelor was negatively affected by two big share sale programmes initiated by Suez, who sold its 1% stake in the company, and a private investor. The stock lost XXX for the week.

Technology stocks continue to perform very strongly on the back of the improving macro data. Based on our strategy that growth and cyclicals will perform best in a recovery scenario we have added SAP (SAP GY; EUR 168.00) to our recommendation list. The stock has slightly underperformed in the recent technology rally, which is partly related to Oracle's pre-announcement. We do not believe that the Oracle warning has an impact on SAP as Oracle blamed their Asian business for the shortfall. Asia accounts only for 13% of SAP's license revenues. In addition to that SAP confirmed that Asia remains one of the fastest growing areas for the company where they continue to gain market share. SAP is a play on an improvement in capital spending in the second half of the year. Even though we do not expect a strong recovery we expect companies to start investing selectively. SAP is extremely well positioned to benefit from this trend as the company has built an unrivalled product offering with a significant installed base. However, investors need to bear in mind that the stock is not cheap, trading on 47x and 37x 2002E and 2003E earnings. SAP, like the global software industry, has never been cheap and hence we believe that the investment risk can be justified. We recommend buying the stock with a price target of EUR 190 and set a stop-loss at EUR 144.

Our two recommended technology stocks Infineon (IFX GY; EUR 27.94) and ASML (ASML NA; EUR 28.00) continued their strong performance. The two stocks are up by 13.12% and 45.07% year-to-date and are the best performing technology stocks among the big caps. We have been pushing the improvement in the semiconductor industry since the beginning of the year as prices started to firm. Infineon's CEO said that they were now able to sell DRAM chips above USD 4, which is the average break-even level for Infineon. He said that demand has been incredibly strong. Additionally, the company filed a registration with the SEC that allows it to sell stocks or bonds worth USD 1.5bln. Infineon said that it has no plans to sell securities any time soon. We think that this is true unless the company should plan any transaction. We remain positive for both stocks. However, for investors who intend to buy the stocks we would recommend not chasing them and wait for some weakness.

Last Friday Serono (SEO VX; CHF 1486.00) received the long-awaited FDA approval for its multiple sclerosis drug Rebif. The uncertainty has acted as a drag on Serono's share price for quite some time. Now that this obstacle is removed we look forward on the benefits that Serono should receive from the introduction of this drug. Serono made provisions for a quick introduction in 4Q01 and as such we believe that Serono is ready to launch Rebif immediately. The stock gained 12.92% for the week. We reiterate our Buy recommendation with a target of CHF 1600.

MAN (MAN GY; EUR 29.05) reported earnings that were ahead of expectations. The company reported a 64% fall in net income of EUR 151 million versus expectations of EUR 132. We were mainly impressed by two statements. Firstly, the 74% increase in operational cash flow, which, together with disposals, helped to reduce net debt to equity from 75% to 45% in Q4 and secondly, the positive outlook statement. The group confirmed that the US business is bottoming out and expects Germany to improve in 2H02. The progress in the restructuring programme is impressive but we believe that there is still tremendous operational upside potential for MAN that could be unlocked in the next two years. Besides this, MAN carries the lowest valuation among the European truck makers and Allianz's 36% stake in MAN could trigger industry consolidation in the medium term. Hence we reiterate our buy recommendation, as we believe that the market starts shifting away from the early cyclicals such as materials to later-stage cyclicals such as engineering stocks.

Next Tuesday will be a very important day for Nokia (NOK1V FH; EUR 27.70). Within two hours the company will hold a mid-quarter trading update and the CEBIT Press conference. These two events are important because of two reasons. Firstly, it will be crucial for the company to confirm earlier guidance of a 1Q02 EPS in the range of EUR 0.15-0.17 and revenues of -6%. The most important point in this mid-quarter update will be the guidance on the infrastructure development after all the negative news over the past months. Here we see some potential for disappointment. Secondly, there has been a lot of positive news flow on the product launch of SonyEricsson in the recent past, which has put some pressure on Nokia to follow up quickly. Nokia's massive product launch for 2002 is skewed towards 2H02. It will be the management's task to remove these growing uncertainties about being late in the product roll-out. Nokia had a very good rally over the past two weeks. We expect the stock to remain volatile in connection with these two events. In the short-term we see the stock reaching the upper end of the trading range and we do not expect the stock to break this resistance until the market comes to the conclusion that the product transition is gathering pace and the earnings momentum is picking up.