ECB cut by the expected 50bps - market reaction was moderate (page 3 of 3)

Retail sales in the Eurozone's biggest economy fell 0.7% in October from September, missing forecasts for a flat figure.

After we ended our trading call and reduced equity weightings in Europe from 15% to 12% in our global Asset Allocation, we decided to take our remaining stocks Axa (CS FP; EUR 14.39), Nokia (NOK1V FH; EUR 18.46)) and the exchange traded fund XMTCH (Lux) on MSCI EURO (XMMSE SW, EUR 72.80) off our trading list as we believe these stocks might have run its course during the last two months. After investors were focused on beta and high-risk stocks since beginning of October, we believe that attention will shift back to earnings forecast for the coming year.

Nokia (NOK1V FH; EUR 18.46) has started its Year End Strategy meeting in Dallas last Monday where it toned down its recent statement that handset sales could grow between 10%-15% next year depending on economic developments. Nokia's CEO said that next year's sales growth would be in the region of 10% or slightly more and reiterated its 2002 target of 400 million units. Next year's growth will be driven by a strong replacement cycle, which will account for more than 50% of total sales. Nokia expects its market share to be closer to 40% by the end of the year versus 37% last year and reiterated that a share buyback remained an alternative to reduce the high cash pile of currently about EUR 8bln. There are no major acquisitions planned. Nokia's forecasts on the networking sector remained very cautious. The company expects the networking market to decline 20% this year and 10% next, which compares to a more or less flat market forecast in 2003 of Ericsson (ERICB SS; SEK 8.4).

Although this week's mid-quarter update by Nokia could surprise on the upside, we see the short-term upside in Nokia in a range of EUR 20-22 and would reduce positions whenever the stock trades close to these ranges.

CSFB downgraded the European mobile sector to market weight after most of the stocks have outperformed by 50% since early October and seemed to have reached fair value. Using the same arguments, CSFB also downgraded Vodafone (VOD LN; GPB 1.17) from outperform to neutral. Vodafone failed in an attempt to gain control over Cegetel and announced that it will put plans for a possible share buy-back on hold as it would like to maintain financial flexibility for a possible bid for the rest of Cegetel. Despite Vodafone increasing its stakes in Cegetel from 32% to 44% by acquiring SBC's equity interest, it does not seem to be an optimal solution for the long-term. We retain our "hold"rating on the stock.


We added DaimlerChrysler (DCX GY; EUR 33.75) to our recommendation list. DaimlerChrysler is mainly a value play where we see upside potential once the benefits from the restructuring plan and the product regeneration for Mercedes and Chrysler come through next year. At current valuations the stock trades at 12-year lows on most multiples, which reflects a solid buffer for potential disappointment of car sales figures in the months ahead. At current levels the market attaches absolutely no value to the Chrysler brand. Given the potential improvements after the tough restructuring measures this year we believe this is too pessimistic. Even if Chrysler was valued at half the average of the OEMs we would receive a value of about EUR 10 not taking into account any other improvements in the group. We have basically added the EUR 10 to the current price and arrive at a target price of EUR 46, which is about 35% above the current level.

We consider last week's news that US auto sales fell 13% in November as a buying opportunity as our call is mainly based on valuation and restructuring benefits. Obviously weaker car sales in the months ahead would cause volatility in the stock but CSFB's valuation model has already taken into account a 6% year-on-year drop in US car sales for next year. DCX's November sales fell 12% yoy but gained 10% compared to October 02.