The FTSE 100 falls whilst other European markets retest their autumn lows (page 1 of 3)

(DJ EUR Stoxx 50 3.8% away, Dax Index 4.4% away, CAC 40 Index 8.4% and SMI only 0.95%)

United States
With the earnings period continuing this week, volatility in the U.S. stock market should continue as earnings expectations are revised. Hence, we remain cautious whilst we await more clarity in companies' outlooks for 2003.

Last week, diversified financials sector led the market down as JP Morgan Chase & Co. (JPM, $23.81, CSFB: Outperform) reported a 4Q02 loss of $0.200 per share (consensus expected a loss of $0.094 per share), due to write-offs related to the Enron bankruptcy and reserves to cover the cost of lawsuits. Although we believe JPM stock price would remain weak in the short-term, we reiterate our long-term buy rating due to current low valuations (current P/E ratio at 14.26x, and P/B ratio at 1.15x), and an attractive gross dividend yield of 5.71%. JP Morgan Chase has significant exposure to investment banking. In 2002, the investment banking business accounted for 28% of total operating profit ($1,365 million), decreasing from $2,918 in 2001, and from $3,586 in 2000 (source: JP Morgan). Due to this exposure, JPM is our turnaround play in this industry.

Citigroup Inc. (C, $35.79, CSFB: Outperform) also reported its quarterly figures last week. Due to its well-diversified operations, Citigroup reached a 4Q EPS of $0.470, slightly better than expected ($0.459). This profit was driven by its consumer business, which accounted for 60% of C's income in 2002, while private client services represented 5%, global corporate & investment banking 22%, and global investment management 13% (source: Citigroup). We have a BUY rating on Citigroup, as we believe the company is one of the safest plays in the diversified financial sector. However, this should not wipe out the risk that consumer spending could weaken over the coming months, affecting Citigroup's earnings.

Lastly within the diversified financials sector, Countrywide Financial Corp. (CFC, $54.28, CSFB: Not Rated) reported an EPS of $1.94 in 4Q02 vs. consensus expectations of $1.922, driven by high loan production volume. A potential increase in rates or a drop in the overall volume of U.S. mortgage origination would put pressure on CFC's earnings. However, we believe CFC's diversified business should protect earnings from volatility. In 4Q02, diversified operations represented 28% of CFC's pre-tax earnings. Currently we have a BUY rating on Countrywide Financial.

The earnings releases coming out of the healthcare sector last week were rather mixed. On the positive side were AmerisourceBergen (ABC, $55.35, CSFB: Outperform) and Pfizer (PFE, $30.25, CSFB: Outperform), which we both recommend as a BUY.

AmerisourceBergen reported slightly better than expected earnings, with an EPS of $0.82, one cent higher than forecasted. In the same quarter a year earlier the company had reported an EPS of $0.67. The company benefited from a 14.5% increase in revenues and improved operating margins due to merger related synergies and economies of scale. We expect the company to be able to improve its profitability, thanks to its newly implemented technology platform, which should allow the company to improve inventory management and reduce its costs. AmerisourceBergen should be able to continue to grow its revenue steadily. The drug distribution market is expected to grow at a 11-14% rate per annum, which matches the company's expectations forecast.