Once overall environment improves earning potential is good (page 1 of 3)

US Equities
The markets began the last week quietly, awaiting President George W. Bush's State of the Union speech.

More important for the markets was what President Bush said beside the war rhetoric. Of course any statement on a possible attack would have a short-term impact on stock markets, but the comments on the strategy of the US Administration would be much more meaningful for long-term perspectives.

In fact the healthcare sector got some support, as President Bush announced new plans to improve health care coverage for elderly people. Medicare will be strengthened and improved and prescription drug coverage expanded. Healthcare is a topic of priority in Bush's administration and this should alleviate some of the fears regarding the discussion currently being held on Medicare reforms.

Stocks in the sector reacted positively and rose the next day. The sector as such has been under pressure during the last month and Bush's speech come as a relief. Our recommended drug distribution company AmerisourceBergen (ABC, CSFB: Outperform) share price rose 2.5% as a result.

We expect further momentum in our other recommendations Pfizer (PFE, CSFB: Outperform) and Tenet Healthcare (THC, CSFB: Neutral) as well, as investor sentiment should be improving towards the healthcare industry, after the difficult year the industry experienced in 2002, with patent expiries and lawsuits. The market should start recognising the long-term value the sector offers after the long decline of last year. Pfizer, Tenet Healthcare and AmerisourceBergen in our view are the most attractive picks in three different areas of the industry in terms of valuations and prospects.

Currently we remain cautious on the automobile sector. The threat of a war on Iraq, and the weak U.S. economy would continue to pressure this industry. Consumer pullback and the potential for roughly flat to falling vehicle sales/production in 2003 is likely to make earnings growth for automotive manufacturers and suppliers more dependent upon individual company performance. The "Big Three", namely General Motors Corp. (GM, $37.28, CSFB: Neutral), Ford Motor Co. (F, $9.39, CSFB: Neutral), and DaimlerChrysler AG (DCX, $29.77, CSFB: Outperform) ended December with 63 days' supply, down from 93 days' last month, and 66 days' supply last year. The norm for this time of year is 67-77 days' (source: Morgan Stanley). Modest production increases suggest that manufacturers may be pessimistic in Q1 sales. GM expects moderate economic growth in 2003 in the United States, resulting in total U.S. industry vehicle sales of approximately 16.5 million units. In Europe, total industry vehicle sales are expected to be about 19 million units. GM's 2003 first-quarter production forecast for North America is now estimated at 1.43 million units vs. 1.425 million in 4Q'02, and up nearly 6 percent from the first quarter of 2002. GM estimates that earnings in the first quarter of 2003 will be approximately $1.50 per share, above consensus expectations of $1.408 per share.

Furthermore, according to President Bush's speech on the State of the Union, we believe this sector will continue to be under pressure for the coming months. Firstly, with regards to the war on Iraq, we believe if it occurs, the automobile sector would react negatively. Apart from uncertainties related to war, car sales would decline due to higher oil price. Furthermore, if the war goes on for a longer period than expected, car manufacturers would face cash flow problems due to decreasing sales.