Volatile markets, trending down

USA

The US markets faced several intraday wild swings, sparked by negative earnings news about major blue chips and the big swings in oil prices. However, major indices ended with only slim losses.

Liquidity, as indicated by recent well-anticipated IPOs and low interest rates, and respectable economic data supported the market on the downside. As we continue expecting a trading range, sector selection appears to be increasingly important in driving investment performance.

Cyclical factors favor investing in financials, basic industries, consumer staples, industrials, semiconductors, energy and utility stocks but structural factors are expected to hinder performance among networking and telecommunication stocks.

Based on the newly released data, aluminum fundamentals continue to improve. March orders jumped 11%, compared to a month ago. Despite talks of smelter restarts, supply in the U.S. has not increased as expected and U.S. producer inventories continue to stay at multi-decade low. In fact, the drop in inventories in February marked the biggest monthly decrease in 5 years.

The utility sector has outperformed the S&P 500 by over 10% since the beginning of March. Firstly, despite edging higher in recent months, electricity reserves stay near 30-year low. Despite efforts from the U.S. government to de-regulate and increase capacity in power production, driven by the California crisis, the collapse of Enron has delayed some of the planned capacity additions.

Because of the decreased planned capacity additions, as concerned by Department Of Energy officials, there could be a potential shortage of electricity supply should temperature in the upcoming summer were above normal. Secondly, dividend yields of the sector (currently at 3.5%) appear attractive to domestic investors.

Although interest rates are expected to go higher in the medium term, the sector's dividend yields historically follow movements in Treasury yields, offering comparative yield advantage over other sectors. Finally, the sector's P/E has stayed at the lower end of the 5-year range, overshadowed by Enron's bankruptcy.


Europe

Major European markets fell last week, led by weakness in mobile phone operators and profit taking in oil stocks after oil prices retreated down to around $24/bbl.

Recent economic data offers little doubt that a recovery is underway. A first drop in German jobless data since December 2000 offers encouragement and suggests the expected consumer recovery is coming closer.


Japan

The Nikkei underperformed major global indices last week. Earnings warning by local wireless giant NTT Docomo prompted negative sentiments amidst volatile overseas markets. Investors have bought bank shares on perceptions of mangers upgrading their currently underweight positions, given that much of the bad news appears to have been discounted and the shares are cyclical plays.

March's equity funds flow indicated that individual investors, who mostly missed the strong rally in February, bought a net 370 billion yen of equity in the last 3 weeks of March. However, on the contrary, foreign investors were net sellers of 240 billion Yen during the same period.