We expect European markets to fall below the levels of July 24, 2002 (page 3 of 3)

For the time being we remain cautious and would not advise to commit new funds.

Philips (PHIA NA; EUR 17.27) hit the market with a major disappointment as it reduced 3Q02 sales guidance for its semiconductor unit. Philips expects sales to fall between 13% and 15% in euro terms compared to the second quarter. This comes after an earlier guidance of a decline between 2% and 5%. The company blames the revision on the stronger euro and a further decline in demand. Philips intends to reduce supply further by shutting down production sites and by introducing additional restructuring measures, which will require an extraordinary charge of EUR 200-225 million in the next six months. Philips expects a slight recovery in Q4 with a sequential increase between 7% and 12%. The wide range of the guidance reflects the lack of visibility in the industry and increases the risk of disappointments. Though trading at the lower end of the valuation range we do not think that the stock is cheap enough to buy.

Some good news came from LVMH (MC FP; EUR 41.78). The company reported a 19% increase in operating profits based on strong performances in champagne and wines, where operating profits increased by 44% over the past six months. Losses in selective retailing were reduced by more than half and LVMH reiterated its plans to break even with DFS by the end of the year. These numbers were slightly ahead of expectations. The company reiterated its earlier guidance of a 'significant rebound' in operating profits for the full year. We believe that the long-term potential of LVMH is not reflected in the current share price. However, with the war on Iraq looming, consumer confidence and consumption could be affected negatively.

Nokia (NOK1V FH; EUR 14.22) surprised the market by lowering its sales guidance for the third quarter from a range of EUR 7.2-7.6bln to EUR 7.1-7.4bln due to increased weakness in the networking sector where sales are expected to fall by approx. 5% compared to last year. Nokia confirmed its EPS guidance of EUR 0.15-0.17 and estimates that the final result will be closer to the upper end of the range. The handphone unit continues to do very well based on a strong demand pick-up from Europe. Despite the launch of a series of new phones the company expects handphone margins to be at 20% or above. We remain concerned about the ongoing strategy of the company to cut sales forecasts. Based on the guidance given for 3Q Nokia would have to post a year-on-year sales increase of more than 25% in Q4 if full-year guidance were to be reached. Despite a series of new models coming up (the first 3G-phone is scheduled to be launched on September 26, 2002) we believe this is way too optimistic and hence expect 4Q02 sales guidance to be cut sometime in November.

Nestle (NESN VX; CHF 316) has been range trading since the bidding process for Hershey Foods has started. A US court has blocked the deal a few days ago on concerns that the sale would cause 'irreparable harm' to the company's home community. The seller of the stake, Hershey Trust, has appealed the ruling and a final decision is still outstanding. According to newspaper reports Nestle plans a joint-bid with Cadbury Schweppes (CBRY LN; GBP 4.6250) in which the latter is thought to commit about GBP 3bln or 46% of the deal. Such a combination is widely seen as the best solution and makes Nestle the frontrunner in the bid. However, as long as the details are not confirmed we expect the stock to remain volatile. We would use a level between CHF 300-310 to buy the stock.

After an almost 50% year-to-date decline in the European insurance sector it appears difficult to come up with further disappointments. Allianz (ALV GY; EUR 100.20) managed to do exactly this when it announced that it had to inject USD 750 million into its US Fireman's Fund Insurance Co. to cover asbestos related risks. This is the third time the company has to increase its provisions for potential asbestos claims. With no trigger for improving equity markets in sight, insurance stocks remain in a vicious circle despite our belief that the current levels reflect attractive long-term valuations.