War and upcoming quaterly results to add to market volatility (page 1 of 3)

US Equities

• Recommendations update

Uncertainties coming from the war in Iraq after US troops entered into Baghdad would still have a major impact on the market in the coming week. However, companies would soon report their quarterly figures, which would add market volatility. Hence we would like to highlight some recommendations, which offer good portfolio diversification.

Firstly, Johnson Controls Inc. (JCI, $75.67, CSFB: Not rated), our recommended automobiles components company, should continue to outperform this industry. We believe, with its wide range of customers, like Ford Motor, General Motors, DaimlerChrysler, Honda, Interstate Battery Systems of America, John Deere, Mazda, Mitsubishi, Nissan, Peugeot, etc, the company should be relatively sheltered from a decline in auto sales in the U.S. Furthermore, JCI's two-year correlation with the S&P500 is at -0.114 while its beta is at 0.93 (source: Bloomberg). Hence we maintain our Buy on JCI.

Secondly, Countrywide Financial Corp. (CFC, $59.37, CSFB: Not rated) stock price also indicates a negative correlation with the S&P 500 (-0.756), and a low beta (0.75, source: Bloomberg). Last week, in order to protect our profits since our recommendation of the stock at $50.55, we increased our stop-loss level to $55, which secures an 8.8% gain on the stock. We believe CFC would continue to report strong mortgage loans origination for the first quarter 2003. Hence we reiterate our Buy recommendation on Countrywide Financial. The risk for CFC is a possible downturn in the cycle. However, servicing portfolio fees, and non-mortgage operations, which represented 27% of CFC's pre-tax earnings in 2002, should protect earnings from high volatility.

Finally, Northrop Grumman Corp. (NOC, $83.26, CSFB: Outperform) should continue to benefit from US defence spending. We believe this trend would continue this coming couple of years, as President Bush has asked for a $74.7 billion supplemental spending bill from US Congress. The latest defence budget left over from the Clinton administration stands at $291 billion. Two years on, if this supplemental spending is included, the FY03 budget will be about $430 billion. Although this supplemental request will be mainly absorbed by the personnel, operations and maintenance accounts, we believe defence companies would also benefit from a potential increase in new weapons programs. We have a Buy rating on NOC.

The pharmaceutical sector recently has come back into favour. We believe one reason is the defensive characteristics of this industry, but also the weak sector performance over the previous three months. This has led to bargain hunting in the sector. Our favourite stock, which we recommend to buy, is Pfizer (PFE, $32.80, CSFB: Outperform). We like the company for its solid growth outlook and the benefits of the acquisition of its competitor Pharmacia Corp (PHA, $44.80, CSFB: Outperform), which is expected to be finalized by the end of this month.

Major oil companies, including our recommendation Exxon Mobil (XOM, $35.52, CSFB: Neutral) are likely to be involved into rebuilding the Iraqi oil industry, according to the early talks that are held between US officials and Iraqi exiles, which could be placed into power after a defeat of the current Iraqi regime. It is estimated that approximately USD 5 billion would be needed to restore the production capacity of 3.5 million barrels a day that Iraq had before the sanctions were enforced after the first war. This would give these companies access to the important Iraqi oil reserves and would for these companies mean a new opportunity for long-term growth.