US Automobile industry, the momentum has not been reached as yet

US Markets
U.S. carmakers, namely General Motors Corp. (GM, $34.42, CSFB: Restricted), and Ford Motor Co. (F, $8.74, CSFB: Neutral), are still under pressure from a weak U.S. economy. Despite the rate cut by the Federal Reserve, which would allow the companies to carry on with their 0%-loans, we believe this would not be enough to mitigate the downside risks. Each company still expects that sales would reach 17 million units (including heavy trucks) for the year. In October, sales were down 32% and 34% for GM and Ford respectively. Not surprisingly, market shares declined from last year's levels. GM's market share declined to 29.8% (including Saab) from 31.9%, while F's market share decreased to 22% (including Jaguar, Land Rover, and Volvo) from 24.2%. Moreover, we believe fears of war in Iraq would deter new buying. However, we expect that if the Iraq-issue is resolved on a diplomatic level, car manufacturers are likely to rebound significantly. Nevertheless, even if the upside prospects appear more promising than those of the downside, we believe the momentum has not been reached as yet. Hence, we would not recommend investing in this industry, given the near-term uncertainty, which could push stock prices down further. On a fundamental basis, GM and Ford appear more fragile than one would expect.

We do not believe there is a risk of bankruptcy. However, further downgrades could occur in the following months. Finally, in such markets we think fundamentals, and valuation should be the primary investment criteria. For GM at least, even If valuations seem attractive, fundamentals remain weak.

Microsoft last week began selling its Windows XP based Tablet PC, which will be produced by several PC makers. This new kind of portable computer, which should increase mobility, has enhanced functionality compared to the laptop, and allows users to write on the screen through handwriting recognition technology similar to the one used for Palm. The key advantage of this new Tablet PC is that it combines the functionality of the laptop with new functions, such as pen based input and easy access to wireless networks. In the near term we do not expect sales to be too impressive, given the weak-spending environment for PC's. But the creation of new application software could be a strong driver for the adoption of this new breed of PC. A software company has already developed a program to enable doctors to view patient records (downloaded via wireless LAN) and which would allow the prescription to be transmitted directly to the pharmacy from the Tablet PC. We believe that this new product has a strong chance of finding a market and growing its share, as it evolves and generates a return on Microsoft's $400 million investment. This product launch for which Microsoft will spend $70 million comes right in time to cover the setback Microsoft suffered in entering the mobile phone software market, as Sendo, a closely held UK company, drops Microsoft's platform in favour of Nokia's.

The Tablet PC is much closer to Microsoft's core expertise in the PC field, than the mobile phone is. As such, the importance of succeeding with the Tablet PC is more crucial to the company. However we believe that in the initial stages it will remain a niche product, but has the potential to grab substantial market share from the laptop in the next couple of years, as the independent research firm IDC expects a 42% of the portable PC's to be Tablet PC's in 2006. This is quite a positive outlook for Microsoft, as it should add $215 million in revenue by 2006, from the operating systems alone.


European Equities

• The Euro STOXX50 closed the week 1.5% lower

• We still like oil stocks as a portfolio hedge in the current environment where geopolitical risks remain

• Among banks we favour retail oriented banks such as BNP Paribas

The focus of last week was all on the action of the central banks. The decisions - apart from the larger than expected cut by the Fed - did not take us by surprise. Reasons why the ECB preferred to keep rates on hold, might have included a desire to get some more confirmation of the downtrend in inflation. Inflation remained at 2.2% in October, which is above the central bank's target of 2%. The release of much weaker than expected German factory orders for September (down 2.5% in September - much worse than consensus expectation of -0.5%) could not convince the ECB to cut rates. While the BOE has probably more reasons to keep rates on hold given the continued strength in domestic demand and a supporting housing market, we believe that the chance of a rate cut by the ECB at their next meeting on 5th December has increased. This week's report by the European Commission, which is expected to show the German budget deficit greater than the benchmark of 3% of GDP, might act as another trigger for action.

On the back of the ECB's resistance to move rates and the fact that earnings forecast still do not reflect economic reality, we anticipate some further profit taking and recommend to use any opportunity to sell into strength. According to a study done by the financial information company JCF Group analysts' earnings growth forecast of the DJ Stoxx 600 is 24% for 2003 compared to 19% six months ago, whereas they predict a 1.7% earnings growth for this year compared with a 17.5% six months ago. The 24% earnings growth for next year seems even less realistic given the deteriorating rather than improving macro-economic picture.

In its Global Strategy report, CSFB reduced the oil sector to underweight in favour of banks. With the UN Security Council voting in favour of the US resolution on Iraq and raising hopes of disarming Iraq peacefully, the war premium may be declining temporarily. However, we believe that oil stocks still offer a good hedge in investors' portfolio in the current unstable political environment. Our favourite oil stocks are TotalFinaElf (FP FP; EUR 134.2) and ENI (ENI IM; EUR 13.769). Whereas TotalFinaElf offers higher long-term growth output, ENI pays an attractive dividend (current dividend yield: 5.44%) and is an interesting valuation play (trades on a PER03 of 11x compared to the sector of 14x).

Given the stock market sensitivity to the value of investment portfolios of investment banks, we prefer the more retail oriented banks such as BNP. Total retail now accounts for 59% of revenue and 65% of operating profit. Besides trading on a discount to the European banking sector (PER 03 of 9.7x vs peers 15.5x), BNP Paribas' (BNP FP; EUR 39.5) 3Q results were solid given the poor market environment and relative to recently downgraded expectations. 3Q profit fell 23% to EUR 537m - slightly less than expected. Cost cutting measures and steps to bolster the consumer banking business were dragged down by falling stock markets, which prompted the bank set aside provisions of EUR 244m for the equity investment portfolio. This greater than expected impairment on the equity portfolio was the result of a more conservative valuation approach which should provide some comfort at present. Instead of averaging the last 24 months the equity portfolio was marked to market as of end September. Capital markets improved compared to a weak 2Q and retail was strong especially in the domestic French market.

This week should provide some further insight into the financial state of the bigger European banks as Commerzbank (CBK GR; EUR 7.06) and UBS (UBSN VX; CHF 68.15) report on Tuesday. On Thursday Allianz (ALV GR; EUR 107.56) and Credit Suisse (CSGN VX; CHF 27.9) are scheduled to release their figures.

Further earnings releases due this week are the following:
12 November 2002
Bayer(BAY GR; EUR 19.43)
Axa(CS FP; EUR 13.39)
Vodafone(VOD LN; GBP 0.9925)
Beiersdorf(BEI GR; EUR 109.88)

14 November 2002
BASF(BAS GR; EUR 36.52)
Altadis(ALT SM; EUR 21.16)