A more positive outlook for global equities (page 3 of 3)

Looking at valuations, both stocks are trading in line with the European sector average on a price/book and PER measure.

The power outages in North America "shed light" into the run-down state of the US transmission grid most of which was built in the 1930s and 1950s. The Electric Power Research Institute estimates the cost of renovating the transmission grid at around USD 50bn, which is around 25% more investment volume over the coming 10 years.

The earliest renovation contracts are expected to be awarded is in 2004 depending also on the enacting of the pending US energy bill. The company with the biggest exposure is ABB (ABBN VX; CHF 7.86). ABB has over 40% market share in the US Transmission & Distribution Business and derives around 10% of its group revenue from that segment.

Please note ABB remains a high risk recovery story and investors need to take into account the uncertain timing of further disposal proceeds, the restrictive bank covenants and - although diminished - the risk of asbestos liabilities.
Siemens - another possible beneficiary of the upgrade of the US T&D grid - has a market share of more than 10% in the USA but the T&D segment accounts for only around 0.5% of total consolidated revenue.

Among the many companies reporting in Switzerland this week was our defensive pick Nestle. Nestle (NESN VX; CHF 307.50) reported results, which were above expectations and good when compared with the sector and therefore eliminating fears of disappointment in the wake of Unilever's (UNA NA; EUR 52.10) results. 1H 03 results with net income coming in above expectations at CHF 2.78bn which represents however a 51% drop compared to last year, bearing in mind that last year's figure was boosted by a one-time gain.

Sales fell 6.3% to CHF 41.4bn in CHF due to a 12.6% adverse exchange rate impact and organic sales growth which is the new metric chosen by the company to measure sales growth accelerated to 5.5% in the period, which is above analysts' expectations and also higher than the 4.6% reported in the 1Q.

RIG (real internal growth) came in lower than expected at 2.1%. Good news was the improved operating efficiency reflected in the EBITA margin up 30bps to 12.2% (up 70bps to 12.6% in constant currency terms) compared to last year 11.9%.

Guidance of 5-6% organic sales growth was maintained and the management sees 'more favourable trading environment in the 2H'.
Trading on a forward PE of 14x the stock trades around 10% below the sector average, which we believe is not justified especially after these results. Nestle remains our favourite defensive play. Nestle closed the week 6.5% higher.