Among the sectors which have started to gain the attention of value investors are the technology and

This is a clear disappointment for European equity markets, as lower interest rates would have a positive impact on equities and the euro in our view

US Markets

Stock markets proved to be very volatile last week. After the sharp decline in the first half, the technical rebound did not come as a surprise. This was especially due to the fact that the markets looked to be oversold. The rebound came on the back of better than expected, after initial jobless claims figures, which came in on Thursday. However, we did not see the volumes we would have liked to see in order to talk about a return of investor confidence. The S&P 500 Index came close to an important technical support at 770 points, when it closed at 776.76 on the 9th of October. We continue to believe that block trades heavily influenced market movements, where hedge funds move big blocks of shares in order to place some form of influence the market. Most investors continue to stay on the sidelines wanting to see a real improvement in the economy, before they start buying stocks. Companies' profit outlook remains very bleak and mid quarter updates have given a first view into what we can expect for the earnings season ahead. We remain cautious and are not convinced that the market will move up on positive earnings guidance given by the companies reporting their third quarter numbers.

Sector wise we believe that the oil companies are likely to continue to do well. We would especially focus on the upstream part of the business, which is the main beneficiary of the high oil price environment. The possibility of military intervention in Iraq is continuing to drive crude oil prices. We do not expect the situation to ameliorate any time soon, which gives us reason to believe that oil companies will continue profit from high prices. We also expect analysts would revise their average oil price forecasts on which they base their assumptions for the sector's profitability. We currently recommend Noble Corp (NE, CSFB: Neutral) which is a pure play offshore drilling company and as such a bet on the upstream business.

Placer Dome (PDG, CSFB: not rated) share price has seen some weakness, as the gold mining stock declined as a group. We believe that this weakness is unwarranted, given the fact that the gold bullion price remains firm at $318 levels per ounce. We believe that this weakness offers a buying opportunity for investors who would like to diversify their portfolio with an investment in gold as an asset class. The recent decline does not take into account that the mining companies have reduced their hedge books and will likely profit from high gold prices. Gold continues to be a safe heaven given the uncertain economic outlook and should see continued strength. However, we perceive a risk to the price of gold in the very short term, should the rally in the equity market continue for some time. We would then expect some weakness in gold, which should also be reflected in the share price performance of the gold mining stocks. However, we do not expect a prolonged rally in the US equity markets, as there has been no solid proof of a return in investor confidence. There has been too much disappointment and the uncertainty amongst most investors is at such high levels, that we would expect rapid profit taking to take place, should we see a series of trading sessions closing on the upside.


European Equities

• The DJ Euro Stoxx 50 finished the week 5.7% higher after a rally late on Thursday which extended into Friday, broke the downward movement earlier in the week.

• CSFB upgraded the telecom equipment sector from underweight to neutral. CSFB's analysis of restructuring benefits and cash flow let the analysts conclude that the current share prices already discount a brutal long-term outlook for equipment stocks. However, this upgrade should not be misunderstood as an outright bullish call on telecom stocks. The networking sector will continue to remain weak next year.

European markets continued their downward trend and only rallied on Thursday in the last 90 minutes after better than expected earnings reports from US companies such as Yahoo, Lexmark and Aetna as well as better than expected US initial jobless claims. On Friday, stocks continued their impressive move upwards after companies such as Sainsbury (SBRY LN; GBP 282), Porsche (POR3 GR, EUR 447.17) and Lufthansa (LHA GR; EUR 10.25) indicated earnings expectations for this year might be too low.

The rally was led by the most battered sectors over the past weeks and months: the insurance sector, technology and banks gained 13%, 12% and 6% respectively for the week. Despite strong gains we believe it is still too early to call this a sustainable rally. Markets need to see a follow-through of the recent gains to say more about the quality of the rally.

Among the sectors which have started to gain the attention of value investors are the technology and insurance sectors. In addition, insurance stocks (together with food and pharmaceuticals) have historically outperformed the market in 4Q over the past 27 years. Even though we also believe that these stocks have further downside potential in excess of 10%, we feel it is time to start looking more closely at some of these shares if a longer-term approach is chosen. Among the insurance sector we believe that ING (INGA NA; EUR 15.69) and AXA (CS FP; EUR 12.05) offer good value and high leverage if stock markets were to see a rally. Ways to play such a scenario would be to buy an ELN on weak days or to sell puts with strike levels between 10%-20% out of the money. An 80% strike ELN on ING yields almost 45% annually whereas an 85% strike AXA ELN yields 56%. Alternatively you sell puts on these stocks. However, both scenarios should only be chosen on weak days to gain higher premiums or to achieve a lower strike.

Based on dividends for FY 2001 (paid out in 2002) ING currently offers a dividend yield of 7.3% whereas a 10-year ING bond offers a yield of about 4.8%. This is an impressive example of how cheap insurance stocks are compared to bonds. With a dividend cover of 2.2x ING would be able to maintain its dividend next year. However, even if ING decides to lower dividends, the stock would still remain attractive compared to its bonds. Even though we believe that the environment will remain difficult for insurance companies (especially if equity markets fall further) over the next few months it is hard to argue that investors should sell them at current levels.

Banking stocks continued their slide and only started to recover after an encouraging statement by the German banking regulatory body which said that the German banking industry was not in a critical situation and suggested that the recent drop in the share prices was exaggerated. During the week, Commerzbank (CBK GY; EUR 7.21) was in the limelight announcing that another few hundred jobs would be cut on top of the 4300 that will have to go by the end of the next year. S&P lowered the bank's rating to A- from A with negative outlook after the rating agency Fitch changed its rating outlook to negative the week before. Concerns about write down of the bank's equity investments followed by earnings shortfalls will dominate the banking sector and we remain cautious on the sector.

CSFB upgraded the telecom equipment sector from underweight to neutral. CSFB's analysis of restructuring benefits and cash flow let the analysts conclude that the current share prices already discount a brutal long-term outlook for equipment stocks. The analyst team mentioned Nokia (NOK1V FH; EUR 14.65) followed by Alcatel (CGE FP; EUR 3.05) as the most attractively valued while the cautious stance on Ericsson (ERICB SS; SEK 4.45) was reiterated due to potential cash constraints in 2004. However, this upgrade should not be misunderstood as an outright bullish call on these stocks. The networking sector will continue to remain weak next year. Forecasts for the mobile infrastructure industry were adjusted to a decline of 25% this year (previously 18%) and to 11% in 2003 (from 4%).

Nokia closed the week 8.6% higher in line with a good sector performance and after Nomura Securities upgraded the stock as they expect the company to confirm its 02 guidance this week when they report 3Q 02 results on Thursday. Consensus EPS are expected to come in towards the upper end of the range of EUR 0.15-0.17 per share.

Roche (ROG VX; CHF 98) reported nine months sales yesterday, which were at the bottom end of expectations. Sales came in at CHF 21.7bln, which was virtually unchanged, compared to the same period a year ago. Roche also announced an unexpected charge of CHF 1.2bln to cover liabilities form the Vitamins price fixing case. The US monotherapy approval for one of Roche's most promising drugs, Pegasys, is expected shortly. The company reiterated its full year guidance of mid-to-high single digit sales growth for 2002 with improvements in operating profit and EBITDA margins. In 2002 pharma division sales growth is still expected to be in the mid single digit range (ex Chugai), whilst Diagnostics is expected to grow in double digits. In 2003 both pharmaceuticals and diagnostics are expected to deliver double-digit sales growth in local currencies (incl. Chugai). This is the scenario we are waiting for and reiterated our long-term positive call on Roche.

Arcelor (LOR FP; EUR 10.05) gained almost 8% after the company announced that it would raise steel prices by EUR 20/ton, or about 10%, from the beginning of next year. This is good news as the stock was battered early in the week on the back of concerns that the price increase would be delayed due the weak economic conditions. We reiterate our positive stance on the stock, as Arcelor will benefit from signs of an improvement in the global economies.

This week, among the companies reporting 3Q results are Philips (PHIA NA; EUR 15.92), Nokia (NOK1V FH; EUR 14.65), Ericsson (ERICB SS, SEK 4.45), SAP (SAP GY; EUR 56.70) and Novartis (NOVN VX; CHF 59.50).