Once overall environment improves earning potential is good

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. On a positive note, as suggested by President Bush, research & development expenses in fuel cell technology should be increased by $1.2 billion in research funding. Each of the 'Big Three' has its fuel cell program. However, this technology is currently limited to concept cars. Hence, we do not believe this would have a significant impact on the models coming into the market in the short-term.

Europe

• The DJ EUR Stoxx 50 closed the week with a 0.6% increase at 2248.17

A nine-day loosing streak triggered by fears that a war with Iraq might get closer was broken on Tuesday after buyers stepped in to pick up some oversold positions. The insurance sector led the overall market on both ways. On the way down triggered by fears that the recent fall in equity markets put into danger solvency ratios and on the way up as relief replaced fears. This is a good example of the new behaviour insurance stocks developed since mid 2002. Generali (G IM, EUR 19.626) for example used to be a low beta and anti-correlated to market movements but since mid 2002 it trades with a beta of 2x, Aegon's (AGN NA, EUR 11.65) volatility increased to 3x market movements and only once in the last 6 months (up to end Nov 02) did it not trade in the same direction as the market.

The release of the German business confidence (IFO survey) figures for January had little lasting impact on the markets. The business climate index was more or less in line with expectations at 87.4 in January from a revised 87.3 in December. The expectations index increased also 0.1 to 98.1 from a revised 98 in December. Although expectations are off the lows registered in November, the outlook for this component of the index remains highly uncertain given war risks, equity market weakness and the continuing rise of the Euro.

In a strategy meeting ENI (ENI IM, EUR 14.064) confirmed its production target of an average yearly production growth rate for 2002 - 2006 of 6% and stated an increase in the cost reduction to EUR 3.4bn in 2006 (+13% increase over the previous target of EUR 3bn in 2005). ENI also stated that the Italgas deal marks a further step in the reorganization of the domestic gas business and increases its flexibility to reduce its presence in regulated assets. It is expected that it will sell the pipelines to its sister company SNAM Rete Gas (SRG IM, EUR 3.179) which runs Italy's high-pressure network. Capex budget for 2003-2005 is EUR 23bn and will mainly be used to optimise its exploration and production sector. ENI confirmed sustainability of dividends in 2002 to 2006 at EUR 0.75 per share assuming an oil price of USD 23 per barrel in 2003 and USD 21 per barrel afterwards. If oil prices were lower, the management would first lower capex and share buyback. The current dividend yield is 5.4%. It also confirmed the ongoing share buyback program (so far 53% of authorized amount spent (EUR 2.84bn)).

Although the oil price remained at a high level, the oil sector has under-performed the overall market since the beginning of the year. However, we believe that the attractive valuation and dividend yield of stocks such as ENI as well as the defensive character of oil stocks provide a good hedge in an investor's portfolio.

Vodafone (VOD LN, GBP 1.09) announced better than expected KPI (key performance indicators) for the quarter ending end December. The customer base increased to 112.5m (4.6% QoQ) including over 4m net additions (CSFB expected 2.7m) whereby Germany was very strong with 922,000 (CSFB expected 400,000). The 12 months rolling ARPU (average revenue per user) rose in all major European markets and data as a percentage of service revenues increased in December to 16% from 12.7% (CSFB expected 14.5%) driven by premium SMS. It looks like Vodafone is benefiting from its recently launched Vodafone Live! and is gaining market share.

On top of the good KPI's, Verizon reported 02 figures with Verizon Wireless having a strong 4Q (ARPU rose 6% yoy, net adds rose 18.4% yoy). Vodafone has a 44% stake in Verizon Wireless and it accounts for 16% of Vodafone's proportionate mobile EBITDA. This suggests that there is potential for raising forecasts and also strengthens the investment story relative to the sector. Besides showing positive earning momentum, the telecom sector is also less exposed than many others to a weaker dollar. Whereas for the European market as a whole close to 30% of revenues come from the US only 8% of sales of the telecom sector come from that region. We consider an entry level of around GBP 1.10 as attractive.

SAP (SAP GY, EUR 86.60) reported 4Q and full year sales figures above analysts' expectations. As headline results have already been given in the pre-announcement of 9th January it did not surprise the market to a big extent. SAP rose 2.75% over the week.

4Q license revenue came in at EUR 958m (CSFB expected EUR 950m), which represents a fall of 7% from a year ago. Please recall that US rival PeopleSoft and Siebel reported a 20 and 38% decline of 4Q license revenue, which shows that SAP continues to gain market share based on license revenue. In fact, in 2002 the company reached a market share of 50% based on license revenue. Net income for the full year came in at EUR 509m or EPS of EUR 1.63 per share, excluding extraordinary items, EPS would have reached EUR 3.29 per share (CSFB expected 2.93).

The American business, which does not yet show material improvement, continues to disappoint. Although SAP produced better than expected 4Q license results we do not believe that this is indicative of any improvement in the underlying demand environment but think the result reflects the company's better control of its cost base. In fact, guidance for 2003 implies conservative revenue growth. Operating margin guidance for 2003 is for an increase of 1% and EPS excluding extraordinary items in a range of EUR 3.45 - 3.60.

We believe the results show the earnings potential of SAP. With the conservative revenue guidance we would expect that any improvement in corporate free cash flow would result in upgrades to revenues and more than proportional upgrades to earnings. It is worth noting that SAP in the past has traded very closely in line with consensus up and downgrades in EPS.

We would also like to point out that CSFB upgraded the software sector as their preferred play for an expected corporate spending turning point further to 20% overweight after raising to 10% overweight in late November from underweight.

Stora Enso (STERV FH, EUR 8.78) 4Q result came in below expectations with a pre tax profit of EUR 143m (CSFB expected EUR 178m). Weak newsprint and packaging board explains part of the shortfall. On the positive side are signs of strength in the US and the confirmation of the unchanged dividend of EUR 0.45 which gives a dividend yield of almost 5%.

It has to be noted that the 4Q was expected to be a weak quarter. Recently the sector showed some positive signs such as strong order inflow to coated fine paper mills and a price hike announced by newsprint producers. As such we expect the sector to benefit from improved seasonal newsflow on fundamentals in the near-term.