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May 2001

May 2001

A Financial Reassesment

Sell in May and go away

An old saying in the stock market is sell in May and go away, this indicated that the summer months historically did not deliver high returns on the stocks. The period from September/October until May were historically the best months to get a nice return on your investments. Is it still valid, should we consider to sell our portfolio and return after the summer break. The last couple of years did not support the old saying, on the contrary the summer delivered a nice return. The bull market and the holiday investors did give a boost to the market.

The year 2001 has not been a good year for the stock markets. The slow down of the economy and some lesser than expected numbers, profits, revenue and growth, of a number of companies made the market fall. Especially the Nasdaq and other technology heavy indexes experienced a near free fall in value. Companies have lost over 50 % in value compared to the unnatural prices of 2000 and before. The commuication and technology and especially the dot com companies, in short the ICT sector, had become very expensive in a very short time span. The ratios of those companies were staggering 80 to 120 times to even zero as profits were not yet realised but everybody wanted to be in. The demand was enormous and the price moved up accordingly. A bubble was created and what seemed necessary the bubble bursted as expectations could not be met and the economy started to grow slower.

The first quarter of 2001 saw a big sell off in ICT stocks and even other big and small cap stocks were hit by the sell off.

What will the year deliver to the stock market, as with stocks there is no certainty, and everything might be possible. But we could eventually make a forecast over investing in the stock market.

The economy

The value of the stock market is essentially a reflection of the expected development of the economy in general and the businesses operating in it specifically. The value of the companies is based on the future expectations of a company of what they are most likely to return on the investments, in short the sales, revenues and profits generated by the companies.

After several years of growth, the US economy and several other western economies have achieved growth rates of 3 % to 5 % annually for a couple of years in a row. Even the Asian economies could recover somewhat after the Asian financial and economic crisis of 1997. This growth translated into very positive balance sheets of the majority of the companies in the world, especially in the US and Europe. The ICT boom did its part to the growth.

The economic slow down in the US did lead to a negative trend throughout the world. Economic growth figures had to be adjusted downwards and instead of the nice 3% to 5 % growth, growth will be limited to a meager 2% to 3 % growth annually. The companies in turn could deliver growth rates of 15 % to 20+ % annually, and now they will only be able to deliver a growth of 5% to 10% annually. The spoiled investors have become somewhat dissatisfied with those limited growth figures. The earnings warnings of a number of bigcap and especially the ICT sector created a feeling of dissatisfaction in the stock trading community.

The insecurity in the stock trading community did become more pervasive by the big interest rate cut of the US Federal Reserve this led to speculations that the US economy was in a much worser state then anticipated. But the cut led to a rally on the stock markets of the world as it did give a positive signal.

The quarter results of the big caps were on the other hand better then expected or in line with expectations only a minority did not meet the expectations.

The US and the European economies are not growing that fast as in the previous period, there is a slow down. But it is still uncertain of the level of slower growth. This uncertainty of the economic growth is suppressing the growth of the stock market.

The slow down will most likely be smaller and shorter than anticipated, we expect a turnaround in the stock market in about 6 months. The economies of especially Europe will also show a good improvement in about 9 to 12 months. The US economy will return to a stable growth of 3-3,5% within 12 to 18 months. There is still a lot of potential in the western world which will be used on the medium term. The US economy may show some better figures than expected as the consumer demand might pick up. The durable goods orders and the homesales proved to be much better than expected.

Europe might have a slight advantage over the US as they have been lesser touched by the fall of the ICT stocks and have not experienced the boom which happened in the US in the nineties. There is still a large demand in Europe which will need to be satisfied. Thus an opportunity for growth in Europe, especially if the US slow down is lesser and shorter as first has been anticipated.

Asia and the emerging markets are of no big help for the stock markets or the US or European economies. They have still problems of their own and are highly dependqent on the growth of their economies on the well being of the western world.

The stock markets

In this assessment we will limit ourselve to the US and European stock markets as they are the most important and essentially the most secure to invest and have the best chance to deliver the best returns.

The stock markets are because of the slower growth of the economy very volatile and without any clear direction. The US slowdown even as it was expected hitted the market harder then was anticipated. The market expected a gradual slow down but when the first signs were worser than they anticipated they sold off large parts of their investments. Even if the signs were largely incorrect with the exception of some ICT stocks. These bad stocks took the whole market with them in their fall.

The market is thereby a victim of the wide difference in the expectations of the majority of the analysts on many companies. This does not give the market any direction, or the companies are performing good to very good or they are listed as bad performers and a candidate for the sell list. The largest disadvantage is that the companies are not belonging to one or two sectors but all kind of sectors and all kind of scales are involved. Small ICT start ups are in the same group as multinational multi-billion corporations. The ICT companies take the lead but as all sectors are present are in the group there is no direction, what so kind, in which sector to invest or to avoid.

The US interest cut of the Federal Reserve, Fed, should have been a support to the market, as it did in the beginning. But the analysts started to doubt the decision as they now suspected that the US economy was in a much worser shape than was anticipated by them.

The availability of cheaper money should support the market as it will probably do but on the short term it increased the insecurity in the market. The suspicious minds of the analysts might suppress the market with their doubts.

These three conditions made the market go up and down without any clear direction. This will continue for some time as the market will have to find itself and the strength to come back from the negative information. The market needs to bottom and need to find the strength to bounce back and show growth for some consecutive days or even weeks before the trust in the market will return.

The strenght of the markets is further undermined by the increased poitical tensions in the world. The relations between China and the US have deteriorated by the spy plane incident and the planned weapon deliveries to Taiwan. The Middle East has also become less reliable for the US and the world in general. The tensions between Israel en its neighbors and especially the Palestinian people have increased. Peace, stability and economic progress seem farther away than before in the Middle East.

These tensions and several other smaller and bigger and close by and remote conflicts have a bad influence on the strength of the stock markets in the world.

A volatile stock market will be around for some time. It will take at least a quarter to a half year before the market will find some direction. And up to six to nine months before the market can gain a positive direction upwards. The exception, as always, are the unexpected good consumer numbers which could create a summer rally. And amking the transition towards a positive direction faster and smoother.

In the mean time the stock markets will show a relatively sharp upward and downward movements with in the end possibly remaining flat. But the market will not have a big decline in value. The markets will have a more side way direction because of the lack of direction, indecisiveness, and the suspicious minds..

This year is therefore partly an example of sell in May and go away. The market will most likely not show any big growth this summer, with the exception of the above mentioned summer rally, but on the other hand it will present some opportunities to buy stocks at a very cheap price. This summer will most likely see the bottom of the prices of stock. An opportunity of one’s in lifetime.

Investment strategy

The best course for the future will be to hold on to the majority of the existing portfolio and prepare to enter the market on the low. This period will deliver an unique opportunity to buy some stocks at very competitive prices. There are still a large number of technology, ICT, stocks which hold much for the future. And there are a numer of other companies which were simply pulled down with the ICT sell off and are also at available at very attractive prices.

The market will not grow as quick as in the previous years but within a time frame of one to two years the ICT sector will belong again to the most promising stocks of the market. And long before that time the other stocks will have made good much of the losses incurred in the prevous months.

The division of a model portfolio, always dependent on your time horizon and your acceptance of risk, for a long time stock investor should consist out 75% stocks, 10% bonds and 10% property and 5% cash. The stock allocation should for example be balanced between the European and US stock markets with a bit more attention to the European markets. A small percentage should be allocated to the Asian tiger markets and the emerging markets. We could envisage the following allocation 35% in the European markets, 30% in the US market, 5% in the Asian tiger markets and another 5% in the emerging markets.

This stock allocation will benefit from the increases of the western markets after the recent decline and at the same time position yourself for the promising developments of the much talked about Asian century.

There are two ways to invest your money, the easiest way is to invest in mutual funds with a region or sector allocation. This is a safe way to invest without having the need to follow the markets every day. It is also possible with smaller amounts of money to enjoy the advantages of a wide spread portfolio.

Secondly, is to invest into stocks directly, which will need a better understanding of the market and a larger amount of money to make it feasible and worthwhile.

The US portfolio

The US stock market offers numerous opportunities, even as the market analysts are suspicious and does therefore not look that promising on the short term. Especially the ICT sector will face a rather difficult year. On the medium term the US economy will stabilise and the slow down will most probably will be a soft landing. The markets will react positively on this and the prospects for the future look good.

We continue to expect a good performance from the oil and energy sector. We like companies like Exxon, Royal Dutch/Shell, British Petroleum but also the oil service/offshore companies like Schlumberger, Halliburton, Baker/Hughes and Diamond Offshore.

The pharmaceutical sector also will remain an above average player, we like in this sector Pfizer, Merck, Johnson&Johnson, Bristol-Myers-Squib and Schering Plough. Beside the pharmaceuticals we like the HMO sector as they will get better returns every year. Here we like Caremark, Community Health, Health Management, Trigon Healthcare, Omnicare, United Health Group and Universal Health Services.

The closely related Biotechnology sector will make a return to the better performing stocks. Here we like companies like, Biogen, Biomet, Curagen and InvitroGen.

The financial/insurance sector will remain one of the better performers on the stock market. Companies like Citigroup, American Express, J.P. Morgan, State Street, AIG, Providian Financial, American General, Fleet/Boston financial, Freddie Mac, Fannie Mae and Allstate will most probably belong to the winners in this sector. But also large trading houses like Merril Lynch and Goldman Sachs will do allright.

The defense sector is finally coming out of the problems from the restructuring and the lower expenditures. The large companies with big stakes in the digitization and advanced technologies will deliver the best performance. Companies like Boeing, Lockeed, Northrop Grumman and General Dynamics will do very well.

Other companies we like are General Electric. Ford and Ballard Power Systems.

In the more defensive kind of companies we like the food and beverage sector with Heinz, Sara Lee and Pepsico, in the utlities sector we like Colonial Gas, Duke energy, AES and Eastern Utilities. But also consumer companies like Procter and Gamble and Gilette. And finally companies like Safeway and Walmart.

The ICT sector is another ball game were the first group promise a better performance within 6 months, the ICT sector will need 9 to 18 months to recover from the slump in sales, revenues and profits. On the long term ICT is one of the most promising sectors as the product package on offer and in the pipiline is very promising.

The following companies are likely to recover from the current situation and regain the strength they used to have. We like companies like Dell, Sun, Palm, HP, Texas Instruments, Intel, AMD, Applied Materials, Xilink, Microsoft, Oracle, Peoplesoft, Adobe, Red Hat, Linux VA, Cisco Systems, CSC, CA, Wind River Systems, Juniper, Sycamore, IBM, Ebay and Amazon.

In the telecomunication sector we like companies like Nokia, Qwest, BellAtlantic, Vodafone and SBC.

The European portfolio

The European market is much more fragmented than the US market. Every country has its own exchange and even wit the increased cooperation between the exchanges it is much more difficult to trade on all.

The economy and stock markets of Europe have not been through the same kind of booming period. The European bourses were thus also less hit by the sell off of the last months. But to be fair the economies of the European countries were also less succesfull. This will probably change on the short to medium term. The European economies should be able to increase their growth to a stable and enduring 3% a year,

In the financial sector we like BBV Argentaria, Deutsche Bank, Commerz Bank, Society Generale, BNP, Fortis, ABN-AMRO, ING, Royal Bank of Scotland, HSBC, Lloyds TSB, Banca Intesa, Banca di Roma and Mediobanca.

In the insurance group we like Allianz, Muencher Ruck, Zurich Group, Generali Ass. and Prudential.

The oil/energy group will also continue to perform very well, here we like companies like Royal Dutch/Shell, BP Amoco, Enterpise oil, TotalFina/Elf, and E.on.

The ICT sector also has some companies which could deliver some nice returns on the medium to long term. Here we like companies like Alcatel, Cap Gemini, Siemens, Infineon, SAP, Nokia, Logica, Sage and Invensys.

In the communication sector we like British Telecom, France Telecom, Deutsche Telekom, KPN/Qwest and Tiscali.

The pharmaceutical sector remains a growth sector with companies like Bayer, Roche, Astra-Zeneca and Glaxo-SmithKline.

In the defensive sector we like the food and beverage sector, with companies like Nestle, Numico, Danone, Diageo, Cadbury Schweppes and Unilever.

In the automotive industrial sector we like Daimler-Chrysler, BMW, Buderus, MAN, Mannesman, Peugeot, ABB, Sulzer and Rolls Royce.

And finally companies like Sanofi-Synthelabo and LMVH and Vivendi.

May 2000

May 2000

Financial Affairs, volatility on the US stock market

The markets in the first quarter

The US and for that matter the world’s stock markets have delivered an incredible growth during the first quarter of the new millennium. New all time highs were reached on several stock markets around the world but especially the U.S. based Internet, Technology, Communication, ITC, companies doubled or even tripled in value. The emerging markets also reached new highs as they could continue the recovery started in 1998. The markets in general carried over their bull tendency from the last quarter of 1999.

This essentially lasted until the second week of April 2000, Friday the14th, saw an very large drop in the share prices, were especially the ITC markets experienced a nearly free-fall, the Nasdaq index lost over a quarter of its value. The unbelievable growth of the first three months was wiped away within a couple of days.

The drop in share prices happened in an economic situation were the economic growth in the U.S. was equal to the previous years with only a small increase in the inflation which is caused by the increased oil prices, from $ 12 to $ 28 dollar a barrel. The economic growth is based on strong fundamentals as U.S. companies keep on turning out good earnings figures with over 70 percent of the companies coming out with earnings above expectations. The U.S. economy is in better shape than ever before and seems able to stay in very good shape. The economies of the world are at the same time improving. Europe is slowly growing to the growth figures of the U.S. of the last decade, around 4 percent where as Japan and the emerging markets are definitely on the road to recovery with growth figures of over 5 percent annually. The Asian economy has the additional benefit that the foundation of the new growth is stronger than ever before. More money into productive sectors, no short term debt and restructured companies.

The economic forecasts, fundamentals, are therefore very promising. The recent correction is only of limited effect as the share prices are and were of a large number of companies much to expensive and based on unrealistic expectations. The internet/tech craze created a bubble which at some moment had to burst..

The correction of the stock markets, especially the ICT stocks, could turn out to be very healthy to the stock markets in general. The blue chips and the socalled old economy stocks, which lagged behind in the first quarter, or for that matter in the previous quarters, have now the chance to improve and at least partially recover their former position and role. ICT will remain strong players but the old economy companies still have something to offer in products, profits and potential especially if the new technologies are applied in their businesses.

Volatility in the future

The large drop in share prices and indexes after a period of big gains and the up and down movement is a perfect example of the volatility in the stock markets.

The correction ghost was already around for some time. The stock markets, the fund managers, needed in this kind of situation only a small incentive to drop the overvalued ICT stocks of which a number never had turned in profits and/or had a earning per share in the 80 + range. The threatening interest rates rise and/or an earning warning from a tech or tech related company could start the sell off. As it did.

The correction will however not eliminate the volatility in the market. It will take some time until the markets will move up strongly and decisively. The market will remain cautious as some economic data like the deflator figure, unemployment number, the employment cost index and the costs of durable and consumer goods may lead to an interest rate hike and consequently to some more selling.

The sell off, correction, might be, as mentioned before, be favorable as it punctured the bubble of the very high prices, will dampen the spending of the consumer, will make the effects of an interest rate hike smaller, will create new opportunities and very importantly it will divide the good ICT companies from the bad. As figures and performance will become more important than expectations.

There are now opportunities to buy the most promising and profitable companies at reasonable prices. And this inflow of new money will turn the sell off, bearish mood, into a bull again within four to six months. This will be inevitable as the performance of the economy will remain positive, the good earnings and returns of a large number of companies will remain at the same level as in the first quarter and as the old economy stocks will most likely participate in the next rally. The interest rates will influence the stock market but the consequences will be much smaller than expected. They will create volatility on the short term but they will not influence the market on the medium term, the market, economy, is simply to strong to be curbed at the moment.

The third quarter might deliver a wide based rally with the best of the ICT companies and the majority of the old companies benefitting from the impulse from the booming, world, economy and the advantages of the new economy.

The only disadvantage will be that the future growth of the stock market could and will most likely lead to another bubble, although smaller than the previous one, and will consequently lead to a new correction. As the people will be enthousiastic about the good results and buy into the bull market, essentially creating a vicious circle. Beside the home grown volatility, volatility will also be induced as long as the legal and financial structures in the emerging countries remain unclear and as long as the consequences of the new economy, technological capabilities, are not fully understood and not, wrong or not fully applied at home and abroad.

The future of stock investing

The best way to invest your money will remain the stock market. The largest gains can be made here over the long term. This growth and especially large exceptional growth will lead to tensions and to corrections but they are part of the game. The stock market is a very efficient instrument and will reward good and punish the bad companies but on the long term it will deliver the highest return.

The market will gain the most during periods of an economical boom but this will automatically lead to some very high expectations of some companies which never can be met. Everybody wants to be in the new group and this will consequently make the stocks very expensive, if not to expensive. As such a group, like the ICT stocks at the moment, are part of a revolution in doing business, they will be very vulnerable to high expectations and will become a victim of insecere and even uncapable companies who just want to get their part and cash in.

To avoid the bad stocks and paying to much, stock picking will be the name of the game, especially in a relatively new group like the ICT group of companies. The good ICT companies will continue to improve and become the shooting stars of the market again. Stock picking is an absolute necessity in the volatile market of 2000.

The stock market will receive a boost from the increased attractivity of the old economy companies which continue to deliver respectable returns and those who can make the turn to the new technologies best will receive the largest rewards. This wide based growth will be less susceptible to a collapse and any correction will have a lesser impact. A broad based growth secures a balanced growth and a shortfall, correction, can be made up by the elasticity of the ICT companies which have shown a very big resilience in the last years.

The following ICT stocks will most likely belong to the good group of companies and will therefore deliver above average returns. They are very often the market leader with one or more products, have clear concepts and have the capability to bring good ideas to the market. We have listed some hardware, backbone and productsuppliers with a large internet content who have been succesfull and do possess a large potential. Companies like Lucent, Cisco, Nortel, Qualcomm, Oracle, CSC, CA, AOL/Time Warner, Amazon, Ebay and Charles Schwab. In the tech sector we like Intel, Sun Microsystems, CMGI, Dell, IBM, Texas Instruments, Applied Materials, Red Hat and for the people with the stomach for risk Microsoft. In the communication sector we like Nokia, Ericsson, Motorola, Vodafone, Bell South, MCI-Worldcom, KPN/Qwest and AT&T and its wireless offspring.

January 2000

January 2000

Portfolio management in the new millennium

The new millennium

A century and millennium are over and a new one has just started. A millennium with many promisses but also with instability, volatility and a continuation of conflicts which are born out of the end of the Cold War. The world has become saver and more prosperous for one part but for the other part the world has become poorer and more dangerous. The old contradictions, capitalism versus communism – developed versus un- or less developed world, are not valid anymore. The new contradiction is developed or developing countries who embraced some form of democracy and a free market / capitalistic system versus the authoritarian less or undeveloped countries who are forced to live under a system of suppression, controlled markets and economy and who are mostly involved in some kind of internal or even external conflict. A new kind of first world versus a second world, but this time not only based on economic performance but also on political system.

Portfolio management for the next millennium and the year 2000 will be about taking advantage of the positive developments in the first world and avoiding the second world and the occasions when the two meet. As these meetings will be rarely opportunities, for example if some leader of a second world country has become or will become a threat to a vital interest of the first world. The only opportunities are if a second world country changes its government system and wants to become a member of the first world. But this change has to be internally induced. The first world can do little to nothing unless the people of a second world country are making the first step. Only then the first world can and will be able to give support.

The world economy

The development of the world economy can be divided in a growing economy in the first world and a small to negative growth in the second world economy. Or better sum of economies.

The first world economies can be divided, firstly, into the developed economies of the western world, Europe, Australia and the U.S.A, and the Asian Pacific economies of Japan, Singapore, South Korea, Taiwan and to a lesser extent Hong Kong. And, secondly, the developing economies of the emerging markets in Eastern Europe, Latin America and Asia, South-East Asia. The economic growth will be in a moderate to positive scenario in the developed world in the 2,5 to 5 % range and in the developing countries in the 5 to 8 % range.

The second world economies are the un- and less developed countries which can be found on nearly the whole African continent, in the Middle East, on the Indian subcontinent, some parts of South-East Asia and on the territory of the former Soviet Union. The economic growth will be very low to non-existent as the political system and internal and/or external problems are using all available resources. The resources are with other words used for the enrichment of a small group of the population, to stay in power and to continue the conflict in which they are involved. Thereby destroying every possibility of growth.

The first world economies

The first world economies will continue to perform very well. The financial situation of these countries are getting better, the revenues and expenditures are more in line, the debts are becoming lesser and inflation remains stable or at least controllable. And more importantly the life line of every country the business community is doing well and will most likely to continue doing well.

A large number of the medium to large companies, especially export industrial-, tech-, telecommunication-, and the financial sector, have shown a very good performance, a stable growth around the two digit figure over the previous 5 years, and have promising forecasts for the coming years. All indicators and forecasts about the production, demand and counsumer confidence are rising while the cost of money remains stable.

A negative development is that in some countries, especially Europe and Japan, the small companies are staying behind and are a little bit weaker as the larger companies. And there are some sectors which have not participated in the boom on the stock markets. Their growth have been moderate but their was no large interest in the companies.

A number of small companies have some difficulties in reducing the costs and global competition does not make live easier. But if the current trend continues their sales and profits will experience an improvement.

The laggards of the stock market in the U.S.A. will not be able to create a break trhough in the coming year. Their sector in general and the forecasts in particular have been negative and this will remain to be the case as the income expectations and forecasts do not promiss any large improvements. Certainly not in comparison to the tech stocks.

The rising interest rates in Europe and the U.S.A. have had a dampening effect on the markets as investments in the stock market became less profitable. The rates did not destroy the economic growth. In Europe the demand and market confidence was not influenced to much by the higher cost of money. In the U.S.A. the small interest rates hikes were helpfull in slowing down of the economy. But the somewhat lower demand and the increase in productivity have been mainly responsible that the inflation has been kept in check. The low inflation has been further supported by the unexpected low warehouse figures of several industries and the lesser mergers and acquisitions activities. All these factors have created the pre-conditions for a soft landing of the hot U.S. economy.

The rates in Europe and the U.S.A. will remain in 2000 at about the same level as at the end of 1999, in the 3+ % and 5,5 % range. This will be enough to control inflation and give the economy a chance to continue to grow.

The much talked about millennium bug will have none to little impact on the economies of the first world countries, especially not in western Europe and the U.S.A. The majority of the systems at the government and large and medium businesses have been checked and repaired. A number of the smaller companies are not yet been checked and repaired but the consequences of a failure are much less dangerous as with the larger companies. And remember that the dates of 1-1-1999 and 9-9-1999, which also could pose a software problem, went by without any mentionable problems.

The first world economies are not endangered at the turn of the year. Economic growth will not decrease it will most likely increase. The U.S.A. will continue to grow only at a more comfortable speed. Europe will benefit from improving economies of nearly all countries in Europe. The next decade promisses to be the European decade with the European Union becoming larger and stronger, more unified regulations, the introduction of the Euro as a currency, more and intensified business relations and growing economies. Japan has been able to make the turn around. Consumer demand seems to be rising, companies are restructuring and finally the first actions are being undertaken to solve the bad loan problem. After years of shrinking, the economy is moving upwards, there have been growth in the first half year of 1999. The forecasts promisses some growth for the year 2000. The emerging markets have been active in solving the problems which had caused problems in their countries. The improvement of the Japanese economy meant automatically an improvement of the economies of the emerging markets. This improvement will continue in 2000 and can only be stopped, or better limited, by a medium to major conflict in the region.

The improving economies in the first world will lead to a rather high chance of large volatility in the year 2000. There have to be made changes into the portfolios of investors which will lead to some larger sell offs. The resulting profit taking and the fear, disbelieve, of the continuing bull market will create further volatility. And finally the interest rate hikes in the U.S.A. and Europe to combat the threat of inflation will also create volatility.

At the end of the year 2000 the stock markets of the first world countries will deliver an average growth between 8 % and 15 %. But with some large up and down movements.

The United States of America

The U.S.A. will experience a soft landing of its economy. Growth will be around the 3 % instead of the 4+ % of 1997 and 1998 and approximately 3,75 % for 1999. The business growth will also be somewhat lower, instead of double digit figures of the U.S. business community responsible for the stock market growth, they will only grow at about 8 to 9 % in 2000. The high stock valuations of those highly succesfull stocks, the price earnings ratio, will remain high, so do the interest rates and this will therefore lessen the attractivity of the U.S. stock market. The U.S. stock market will show a slower growth then in previous years. It will not be bad or disappointing but the returns elswhere will be larger.

Europe

The European economies are growing, the large companies are restructured and able to compete on the world market and the low value of the Euro will promote exports. The weaker smaller companies still face some difficulties about improving their profitability but with a growing market these problems can be dealt with. The unemployment remains at unacceptable high levels but the increased consumer demand and the increasing number of service companies might bring some relief.

The most important factor is however that consumer confidence has been improved after years of lagging demand. And this will deliver the largest improvements to the European economy.

European stocks are because of the improving economy much more interesting than U.S. stocks. The stock valuations, P/E ratio, are also much lower and therefore more promising on the short to medium term.

Australia

Australia, New Zealand included at some distance, are benefitting the most from the recent improvements in the economies of the Asia-Pacific rim countries. The Asian area has been traditionally an important market for products out of Australia. As the Asian market collapsed during the crisis Australia managed to enter new and enlarge existing markets in Europe and the U.S.A. Consequently the Australian and New Zealand economies have not been that dramatically hit by the Asian crisis and its economic fall out.

The return of the traditional markets has had a positive effect on the Australian and New Zealand economies. The business communities in both countries have gained a lot in strength. The results have been very promising and will continue to be promising in 2000.

Australian stocks are not cheap but it remains worthwhile to increase the investments in Australia and New Zealand. Especially Australia will expernience one of the best years in its history.

The Asian-Pacific rim countries

The economies of the developed Asian-Pacific rim countries like Japan, South Korea, Taiwan, Singapore and Hong Kong have experienced a large improvement in 1999. The existing problems like the very high debt ratio of many businesses, the inter-business relationships and the government involvement is in the process of being corrected. The improved internal but especially external demand has been very benificial for the economies of the above mentioned countries.

The economic growth will continue in the year 2000 and will most likely with the exception of Japan reach the 4 to 6 % level. Japan as the most developed country in the region will in the most positive scenario achieve a growth of around 1 to 2 %. But this a large improvement to the previous years of a shrinking economy. Japan is a case of its own, there are still some worrying problems. The large and industrial companies are doing very well. The smaller and non-industrial companies are still weak and do not expect an increase in sales and profitability. The consumer demand has improved but is still very weak. Japan will see growth in 2000 but it is not yet very stable.

The stocks in those countries are therefore very attractive as the majority of the companies in those countries will deliver above expected results in the next two to three years. The stock valuations are also very positive. The stock markets of the Asian Pacific rim group of countries are therefore very promising on the short to medium term.

The emerging markets

The emerging countries in the first world group of countries are also very promising. Countries who belong to this group are Thailand, Malaysia, the Philipinnes, Poland, the Baltic states, Hungary, Czech republic, Slowakia, Slovenia, Turkey, Mexico, Chile, Brazil and Argentina.

The South-East Asian countries made the first efforts and even partly implemented the necessary changes to create a healthy economy. The following cases are going to be or are introduced; financial regulations, control mechanisms and business changes to increase profitability.

The first signs of growth in South East Asia became visible in the first half year of 1999. The second half was somewhat lower but in general the trend is upwards.

This same is valid for the Latin American economies. The governments of those countries were better off as they did not need to make that dramatic incissions in the company structure of the country. But the pressure on the currencies and the decreasing exports pushed the economic performance downwards. After measurements of the government and support of the IMF the currencies could be stabilised and the subsequent Asian-Pacific re-emergence improved the situation in Latin America. On the negative side, Brazil is having some problems with the transfer of companies from state owned to private owned. This is damaging the confidence in the Brazilian market. And Argentine is struggling with its currency which is closely connected with the US dollar. Argentinian products are therefore relatively expensive.

The Eastern European countries were depressed by the Russian economic and financial crisis. A number of Eastern European countries are still dependent on Russia as it is the largest buyer of products out of Eastern Europe. The simultaneous privatisation programme, the change to a market economy, has not been that easy as expected. The change initially has created a relatively large economic growth in the years just after the dissolution of the Warsaw pact and as the output of Soviet production system became very low.

The continuation of the privatisation programme at a slower pace, prudent government policy, support from the European Union, the improved economies in western Europe and the growing attractivity and strength of Eastern Europe for investments and an improved internal and external market have changed the position of Eastern Europe. Eastern European economies have experienced a larger growth in 1999 and the growth will continue in 2000.

There are some worries about the Y2K, millennium, problem in Eastern Europe, and in nearly all other countries except the U.S.A. and western Europe, as the majority of the companies have done little to nothing to fix the problem. The consequences of a Y2K problem in Eastern Europe will be much less dangerous as in western Europe or the U.S.A. The computer penetration level is in Eastern Europe much lower as in the west and much less advanced, e.g. very often they even do not have a time/date option installed and very often are the computer systems of a new/young generation of which might be expected that they are millennium save. The penetration level of computers is in all countries except in western Europe and the U.S.A. relatively low and the impact of an failure will be much lower. And the largest number of the computers are thereby new, five to six year old, so with some luck already 2000 proof.

Eastern Europe will experience growth in 2000, especially the countries selected to enter the European Union will do very well. The connections with western Europe will become ever stronger. Eastern Europe is at the moment more dependent on western Europe for its economic well being than from Russia. And western Europe will be very promising in the coming decade, so Eastern Europe will benefit from it.

Finally a word to Rumania and Bulgaria. These two countries are the worsest performers of the group of former Warsaw pact countries. Their economy is weak and there are many unemployed. It will take time and work to change this situation. The Kosovo problem could have a positive effect on these two countries as their support during the conflict has led to additional promisses from the European Union to support Rumania and Bulgaria to improve their economy. On the medium term these two countries might offer some better potential and investment opportunities.

Countries in between

A number of countries do not belong to the second world group of countries. They are not that easy to group and belong to their own group. The countries in between are mostly democratric or semi-democratic countries which have a weak economy and very often some kind of internal problem.

Countries like Egypt, South Africa, Venezuela, Ecuador, Peru, some middle American countries, Russia, Ukraine, India and maybe Vietnam belong to this group.

The economic prospects of these countries are weak and will remain so on the medium to long term. They will first have to solve the internal weaknesses before economic growth can set in. In the mean time those countries will not be a viable investment opportunity. An investment in those countries is associated with a very high risk. For example an investment in a Russian oil company could be very profitable but the uncertain legal and ownership situation, the very often unclear alliances and the conflict in Chechnya could change the fortunes of these companies overnight.

The special case is China it does not belong to this group or the second world economies group but because of its size, power and theoretical potential it is essentially a group of its own. China is a large country with many opportunities but it is having and will have in the future considerable problems with the development of the country. The government system fuells nepotism, the creation of little empires in the country and will promote corruption. The unclear legal system and accounting and business practices will make it unreliable. The division and contradictions between good and bad companies, coastal and inner provincial regions, between rich and poor will increase and will be responsible for internal tensions. The social dissatisfaction and non-existence of a workable economical system will create many problems. Not to mention the ethnic/secession problems in the western China. All this taken together can only be controlled or hold together with the massive use of security forces. And in an environment of suppression self created and sustained economic growth has no chance.

China will be able to mask its problems for some time by its seducing (false) opportunities, its large financial reserves, the inflow of foreign investment and the number of companies which are performing very well but in the end somebody has to take up the tab. The large number and the scale of the problems can not be solved by economic growth. China would need two to three decades of at least 8 to 9 % of economic growth each year and the inflow of very large sums of foreign investments, to solve only its economical problems, e.g changing the country from an agri-cultural society with a large number of government owned inefficient loss making enterprises into an industrial-service society with profitable companies. And this is something of an impossibility. In short, structural problems like these demand structural solutions.

The second world economies

The second world economies are the group of countries which have a very bad economic performance, little potential on the short term, an autocratic government and are often involved in some kind of internal or external conflict. You should think about countries like Iraq, Iran, Syria, Algeria, Sudan, Liberia, Sierra Leone, Uganda, Rwanda, Burundi, Congo, both, Angola, Somalia, Ethiopia, Eritrea, Georgia, Armenia, Azerbaidjan, Tajikistan, Kyrgyzstan, Afghanistan, Pakistan, Sri Lanka, Burma, Cambodia, Laos, North Korea and Indonesia.

The government structure, the internal problems, sometimes tensions or even external conflicts, the undeveloped economy, high unemployment and the disuse/abuse of the resources make any progress and economic growth very unlikely on the short, medium and long term. In the long term there is change possible but only if there is a change of government, e.g. government structure. Not only the replacement of people but of the system as well. Until that time it is even unnecessary to consider investing in those countries.

Portfolio distribution

To have a succesful portfolio it will be necessary to spread the risks and optimise the returns. There are essentially four groups of investments to include in your portfolio. Stocks, bonds, property and cash in one or more currencies or short term depositos. Each category has its own risk and return ratio. Stocks have the highest risk but also the highest return. Bonds, commercial and government, have, depending on the grade, a much lower risk but also a lower return. Property also has a smaller risk factor and mostly a lower return. Cash has the lowest risk, if it is a stable currency, but ofcourse also will deliver the lowest return on your investment.

There are other investment oportunities like derivatives or commodities. Derivatives are options and futures or combinations of both. The number of possible derivatives is unlimited as every day, every hour new instruments are created by the financial institutions of the world. Derivatives gives you the right or obligation to buy or sell an underlying stock, currency or whatever at a negotiated date in the future. Derivatives are developed to hedge your investments against losses or will guarantee the possession of a given product. But you can also use the derivatives to speculate as the value of derivatives will change just like the underlying product. It can give you the opportunity to buy or sell products at a tenth of the actual price of a product without possesing the product so benefitting from the positive or negative developments of a product. But always remember you can loose everything if the development you anticipated goes in the other direction and nobody has an interest in your derivative or the underlying product.

So we only advise to buy or sell derivatives if you need to have a given stock, currency or other product in some time, if you want to protect, hedge, your investments against an expected unwanted development of the market or if you need the value of your investment at a time in the future.

Commodities are products like silver, gold, orange juice, pork bellies, other agri-cultural products and so on. Your are essentially buying or selling these products or the derivatives of these products on the expected availability of them in the future. This will make them very volatile and speculative.

The portfolio for 2000

A balanced portfolio should consist out of stocks, bonds, property and/or cash. The quantity of each part should be based on the time horizon, e.g. the number of years willing to invest, and the willingness to accept risk. And ofcourse the goal of the investments, which is mostly connected with the time horizon. It might be savings, pension, a house, some other much wanted very expensive item, the college education of the children, income now or later. The portfolio can and will change during its existence as the motive, time horizon an risk acceptance changes during time.

There is a scheme which gives an summary of the combination of time horizon, composition of the portfolio and the to expected return on your investment. The to expected returns only gives an indication based on historical data and does not guarantee the performance in the future.

If you are willing to invest for a period of at least 1 year, the portfolio should consist out of 50 % bonds and 50 % cash, the return would be in the range of 4 to 5 %.

If you are willing to invest for a period of at least 3 years, the portfolio should consist out of 20 % stocks, 5 % property, 45 % bonds and 30 % cash, the return would be in the range of 5,5 to 6,5 %.

If you are willing to invest for a period of at least 6 years, the portfolio should consist out of 30 % stocks, 10 % property, 50 % bonds and 10 % cash, the return would be in the range of 6,5 to 7 %.

If you are willing to invest for a period of at least 10 years, the portfolio should consist out of 60 % stocks, 15 % property, 20 % bonds and 5 % cash, the return would be in the range of 7,5 to 8,5 %.

If you are willing to invest for a period of at least 15 years, the portfolio should consist out of 75 % stocks, 10 % property and 15 % bonds, the return would be in the range of 9 to 10 %.

If you are willing to invest for a period of at least 25 years, the portfolio should consist out of 90 % stocks, 5 % property and 5% bonds, the return would be in the range of 10 to 11 %. With this time horizon you might increase the quantity of stocks to 100 % and receive a return of 11 to 11,5 %. A 100 % stock portfolio carries some disadvantages. For example if the market is temporarily down and you would need some cash there is no other option then to sell stocks below value or ofcourse lend it from a bank. But that is mostly expensive in a time of a tight money market and a depressed stock market. In those times bonds and property mostly keep their value.

These five portfolio models deliver an idea how to allocate your assets. Which pattern should be selected belongs to your individual wishes and demands. After establishing the right portfolio allocation the next question is the allocation of the individual part.

Cash is best placed in for example short term gilts or depositos in a stable currency. Going into exotic currencies can be more profitable but is more risky and mostly expensive. Especially if you want to remain into currency investing for a longer term.

Bonds can be divided into government and commercial bonds and the interest rate depends on the trustworthiness of the company or goverment issuing the bond. The trustworthiness is determined by the credit rating the issuing company or government received. If the rating is high, triple A or AA, the bond is reliable and probably has an average interest rate. If it is however B then there is considerable risk of default and consequently the interest rate is higher. We advise bonds with a high credit rating as they are best tradeable and keep the highest value in time. If you want risk go into stocks there is more to gain.

Property are the stocks into property funds. Property funds are essentially companies who plan, built, buy, manage, rent out and sell property. Property is a reliable stock as it is based on the buildings. The property stocks are not fast growing stocks, except in times of high demand, but they are very stable and reliable in their returns.

At the moment the property stocks in Europe and the U.S.A. have delivered a very nice return on the investments. Their price, especially in Europe, is still relatively low. Because Europe is at the beginning of an economic growth cycle European property stocks are very promising. The Asian-Pacific property stocks are more dangerous as the economy is still recovering from the crisis and there is an oversupply of commercial buildings. It is therefore still to early to enter the Asian-Pacific property market. Except if you have the necessary stamina and an appetite for risk and living dangerously.

Stocks, part ownership of companies, are the investment opportunities, outside derivatives and commodities, with the highest possible return on investment but they inhibit a certain risk. The volatility of stocks is famous, the value of stocks can be halved within a day if bad news reaches the market. Stocks have been however on the long term the most profitable and savest way of investment. If you take a time horizon of over 15+ years all business cycles are included and balanced out. If the company is a good company after 15+ years it should have grown and become more valuable. If it would deliver a bad performance over time the company would have been closed or taken over. But long before you would have sold your stocks in that particular company and invested it in another company.

The growth and returns of stocks is very differentiated. Some sectors perform very well, even if a number of companies have none to little returns and profits. Where as other sectors have delivered over years a stable growth of two to three percent but the stock remained at the same level or even decreased in value.

The following sectors promise the best growth on short to medium term. In general the large cap global players like General Electric, Citigroup, Dell, CSC, Ford, Procter and Gamble and Coca Cola. To mention a number of companies which offer the right potential. Companies with the size and abilities the play on several markets, with several products and which are lean and mean but still with enough human and financial resources.

In particular the export industrial companies, the tech industry in its various forms and sizes, telecommunications, the regional, commercial and integrated financials, oil and oil service industry, entertainment and hotels and resorts, luxury retail and large retail groups with a good sales and control system and if you have some patience the drug sector, and then the companies with a large product pipeline and the necessary scale to assure continuation.

Stock Allocation

Stock allocation, stock picking, is one of the most difficult parts of the investment business. To be succesful you have to select growth stocks. Quality stocks have to be selected which promiss to outperform the market. Those stocks belong to companies who have little to no weaknesses. Management, production, R+D, sales, marketing, the product and product pipeline and the forecasts have to be good.

First select the right and most promising sector and in that select the most promising companies. Through the globalisation, nearly the whole earth is your working area. After a balanced portfolio has been built of quality companies be sure to take a long term policy of little movement, changes, in the structure of the portfolio.

The U.S. stock market will be somewhat depressed because of the lower growth, high P/E valuation and negative advance-decline line. A correction of up to 20 % will not be unlikely in the second or third quarter of 2000. It will take some time to make good the correction. Instead of the usual 2 to 3 months it could now take up a year to reach the old high stock market levels.

The European, Asian and Latin American markets will do better as their home markets, export opportunities and business figures improve. The medium and small size companies also have their problems but the improving economy and demand, the steady shrinking number of unemployed and the continued changes in the effectivety of the companies will create a more broad based economic growth. The European, Asian and to a lesser extent Latin American markets will outperform the U.S. stock market.

As we have seen above the economies of the first world are improving. Nearly all countries in the first world experience growing economies. The companies in those countries are performing well to very well. This could have an effect on the share price. It will go up for the big cap companies which are operating all over the world and profiting from the global growth. This is valid for the big caps in the U.S.A., Europe and the Asian-Pacific region. A number of U.S. big cap with a high P/E valuation will however experience a slower growth in comparison to its European and Asian counterparts.

The medium to small companies in the U.S.A. will have a harder time. They will face a slower growing U.S. economy, an expensive dollar, somewhat lower demand and some price pressures. This will lead to a lower growth figure, disappointing many analysts. Consequently, the advance-decline line remains negative. Only a small group of companies will be able to move forward with the majority staying behind. The number of laggards in the market will become larger. 1999 did not deliver the much needed broad based growth of the market. At first it looked promising as the paper and other cyclical stocks started moving up but it could not hold on to the growth.

In Europe, Asia and Latin America the medium and small companies have some better prospects. The growing economies and the increased demand will provide them with better opportunities and results and weaknesses can be covered by the growth. The stock prices of those companies listed on the stock exchanges will however only show none to little growth. The results are not that convincing to fool the analysts.

Only the sectors mentioned, listed, in the previous chapter will be able to beat the market in 2000 as it did in 1999. To be on the winning side of stock investing take care to be in those sectors and preferably in the large caps.

To minimize the risk and optimise the returns you have to spread your stocks over several countries and even more companies. For the year 2000 we favor a stock allocation of: 8% Germany, 3 % the Netherlands, 1 % Belgium, 7 % France, 5 % Spain, 1 % Portugal, 3 % Switzerland, 1 % Austria, 6 % Italy, 1 % Denmark, 1 % Norway, 1,5 % Sweden, 0,5 % Finland, 5 % United Kingdom, 1 % Ireland, 0,5 % the Baltic countries, 2,5 % Poland, 1,5 % Czech republic, 1,5 % Hungary, 0,5 % Slovakia, 0,5 % Slovenia, 18 % the U.S.A, 3 % Canada, 2,5 % Australia, 5 % Japan, 1,5 % Hong Kong, 3 % Taiwan, 3 % South Korea, 2 % Singapore, 1,5 % Thailand, 1,5 % Malaysia, 1 % the Philipinnes, 2 % Mexico, 2 % Chile, 0,5 % Argentina and 1,5 % Brazil.

An allocation of this size is only possible with larger funds to invest. With smaller investments you could instead invest in socalled region funds. With 45 % in a West European fund, 7 % in an East European fund, 21 % in North American fund, 21 % in an Asian-Pacific fund and 6 % in a Latin American fund.

November 1999

November 1999

Financial Affairs

The financial road towards 2000

1999 have been until now very volatile at the majority of the stock markets with the exception of the far east. The Pacific-rim stock markets have been performing very well. It seems as they have succeeded in the economical turn around after approximately 2 years of recession.

The US stock markets have been very volatile and experienced several ups and downs. Very generalised the year looked like this. January and the first part of February positive, to end of February and March negative and April and half way May were the most positive of the year. The summer months were very flat and moving sideways with now and then a small growth spurt but overall with a negative tendency. To reach new lows for the year in October as the psychology, e.g. the fear of the high stock valuations, and the possible increasing inflation, e.g. rising interest rates, pushed the markets down to the Dow Industrials 10.000 point level. The European markets were more or less following the US trend but remained more positive in general. The far east and the emerging markets were also influenced by the US trend but they could gain back much of what they had lost in the last two years. Especially the numbers in Japan were very promising as the Nikkei 225 reached the 17.000-17.500 level.

The United States of America

The decline of the stock markets in the US were, as mentioned above, mainly based on psychological factors. It is therefore to early to speak about a bear market. As a possible rise in interest rates are now more or less included in the stock market, an actual rise will only cause moderate damage. The Y2K problem could lead to some more problems especially in the last quarter of 1999 and the first quarter of 2000. Y2K remains however to our understanding and estimates more a virtual threat than a reality.

But remember a decline is also an opportunity to get into some new stocks which were before exorbitantly expensive.

The current situation can be better described as that the bull takes a rest to continue at the end of 1999 or in the third and fourth quarter of 2000. The economic fundamentals are still to good to start a bear market.

The threatening inflation and the high stock valuations will remain however a problem in the US even as the actual figures, especially the inflation indicators, are not as bad as expected. The Producers Price Index was higher than expected but they were distorted by the non-inflationary rise in tobacco, car and oil prices. The Consumer Price Index was more moderate and in line with expectations. The CPI will deliver a better, or correct, view on the US economy and that inflation is not yet that dangerous. The majority of the US companies are thereby performing better than expected. They continue to beat the market expectations. These positive indications should lead to some additional growth but nothing of the kind is happening. All gains of one day are being eliminated the next day.

There is some kind of war going on between interest rates and the earnings growth of the companies. The interest rates have a depressing effect on the market where as the good results should support the market. The federal reserve, fed, will continue, with the big stick of rates, to calm down the market with the goal of avoiding inflation. The fed considers the high stock valuations and the fast growth of the stock market as an unwelcome development which could stimulate inflation. Occassional interest rate rises, speeches of the chairman Allan Greenspan of the fed and especially the threat of even more rate hikes depress the stock market. Consequently a very likely movement of the market is, after the 10 to 15 % drop of September-October, sideways with a slight negative trend on the short to medium term. We estimate the Dow Industrials at the end of 1999 in the 10.500 – 11.500 range, but most likely at the bottom side of the estimation. It remains a volatile market with some companies are performing very well where as other are not able to break the trend.

The US economy is hot but not overheated and a soft landing is certainly possible. As is indicated by the production/order estimates for the coming months which estimates a lower production for the next two to three months.

The stock market’s health is further looked after, protected, by the fed. Even if it can be thought that the control of the stock market is not the job of the fed it could be usefull as to forego the creation of a bubble on the stock market. If some air can get out now, the markets could continue with a stable growth in the next couple of years of 15-20 % per annum instead of the very high return of 25-30 % growth of recent years.

The US market

It will be ever more difficult to select the right stocks. Some groups of the economy will continue to outperform the others but it will increasingly dependent on the individual company’s performance if a company is a growth stock or a laggard. We will give some indications of some sectors and about their situation.

The pharmaceutical sector is still very expensive and even if the returns are above expectations and the product pipeline is promising, every negative publication will be used to sell the sector. On the short term the drugs stocks will be flat but on the longer term they will be very promising. A healthy financial position, a promising product package and an increasing group of customers, e.g. higher demand, will make the sector very interesting.

The tech sector is ambivalent, the hardware sector, with exception of Apple and some chipmakers, is depressed by the Y2K threat perception. The software side is divided into general and maintenance/implementation software providers, the likes of Microsoft, CSC and CA, and the application companies, the ERP, internet technology and like group. Were the first group will remain profitable the second group will be depressed by the Y2K problems and contract deferments until the first or second quarter of 2000. The internet provider and E-commerce business group of companies will remain growing in scale and returns. The subscription numbers continue to grow but the e-commerce sales remain a little behind expectations. In general this group will remain positive. The high stock valuations of the internet companies is the only limitation for a strong growth of this sector.

The telecommunication sector will see a stable growth. All will profit from the increased use of telecommunication services by the internet users. Not only voice but especially data transfer will be a major boost to the returns of the telecommunication companies. In this competitive sector only proper management, product management and cost control will divide the better companies of the group which can and will outperform their competitors. The sector will probably not deliver any large increases in stock price as they are occupied in digesting the latest acquisitions and fusions. But we do not exclude a pleasant surprise in this sector. Some of the baby-bells and medium sized operations could become very attractive as they might grow faster than expected. On the medium to long term the telecommunication sector remains very interesting.

The other tech related group are the consumer electronic producers and distributors. This group will be very profitable if they are in the right group of products. The companies in the DVD, flat screen and mobile phone equipment production and distribution will show a very nice growth in the coming quarters. Especially the retailers will profit from the upswing in consumers electronics.

The financials are on the edge as interest rate hikes will undermine the sector but if the Y2K problem is actually depressing the stock market and the inflation indicators remain moderate then there will be no interest rate rise which will be benifial to the financial sector. The financial sector will most likely make good the territory they have lost in the first three quarters of 1999 as the latest scenario is the most likely to happen.

Energy will continue to be one of the best performing groups in the market. The higher oilprice and the increasing demand, winter time in the northern hemisphere and the improved economic situation in South-East Asia, will continue to boost the performance of the energy sector. All parts of the energy chain will be promising, exploration, procesing and distribution will experience booming markets.

The auto/car producers and sub contractor sector will continue to do well. The best years might be over but the next couple of years will not bring to much feared collapse in car sales. The sales in the US might remain more or less the same but the rest of the world will see an increased demand for cars and trucks.

Other sectors like paper, specialist chemicals and even the Caterpillars will see improved sales and a rising stock price. Where as US demand will not see any large improvement, world wide demand will improve the numbers of those companies. A weaker dollar will additionally reinforce their position on the world market.

The Aerospace and defence sector will also experience better times. Especially the defence sector will see after the recent drop in the share prices a clear improvement. Beside the good domestic market these companies will receive more international demand. This moment is the right time to enter this sector as they only can become better.

The European markets

The European stock markets have been and will be influenced by the sideway movement of the US markets, it will not receive any support, upward pressure, from the US like they had in the last couple of years. This will somewhat limit European growth but this could be benificial to the market as overheating and a bubble will be less likely to occur. The majority of the European markets will experience growth as the European economies are improving. Their home markets will become more healthy, the emerging markets improve and the US market will remain stable. In general the European markets are very promising for the coming quarters.

There will be however a clear division in Europe. Western Europe, the members of the European Union, will outperform Eastern Europe. In general Western European countries will grow in 1999 around 2,5 % with a low inflation of 1+%. The growth estimates for the year 2000 will be better as all indicators, production, marketconfidence, export and consumer demand are better than before. The European economy is expected to grow at an average 3+ % for the year 2000 with a core inflation of about 1 to 1,5 %. The countries of the European Union are going to experience a wide based growth in the coming years. Not only the export oriented companies will be performing well but also the domestic markets will see an above average growth.

The forecasts for Eastern Europe are not that rosy. As Eastern Europe has been badly hit in 1998 by the spill overs from the Russian crisis which put an end to the economic recovery after the dissolution of the Soviet empire. The southern part of Eastern Europe have been additionally hurted by the Kosovo conflict in 1999. The Kosovo conflict limited economic activities, destroyed the trust in the markets and increased the government expenditures.

Eastern Europe’s economic performance in 1999 will be lower than expected as the exports are lower than estimated, government expenditures are to high, the inflation remains high and the foreign investments have become lesser since the Russian crisis. Eastern Europe can be divided for the year 2000 into roughly three groups. The first group with an annual growth for 2000 of above 3 %. The second group with a growth of 2 to 3 %. And the third group with a growth of lesser than 2 %. Countries in the first group are Hungary, Polen and Slovenia. The second group, Czech Republic, Slowakia and the Baltic countries. And the third group, Rumania, Bulgaria, Russia, Ukrania and Belorussia. Were the last two even might experience zero growth or even an negative growth figure fo 2000. Where as the Ukrania only has problems with the performance of the economy, Belorussia has additional problems because of the ineffective and incompetent political leadership. The problems in Russia surpass them all. In Russia the problems are about a bad performing economy, political indecisiveness and struggle for positions and even more dangerous, a little war in Chechnya.

The Eastern European economies require a lot of investment and even more time before prosperity will become a common good. Their industries are in desparate need of financial and technology support. The wages might be low but outdated equipment, unproductivity and unattractive products destroys the comparative advantage of this group of countries. Beside many low perfoming companies there are some companies which are capable to compete on the world market but these are mostly foreign owned and operated or they are / were a kind of special case, model, company. But they are to low in number to make an impact on the society.

Beside the wage advantage, educated workforce and flexibility some Eastern European companies remain attractive as a bridgehead into a new market. The best companies have already been acquired but with some additional work and ofcourse investments there are still some good companies available. The first hype in Eastern Europe has been over but on the medium to long term Eastern Europe, especially central Europe, remains an attractive market with a well educated population of around 100 million people.

Emerging Markets

The emerging markets of South-East Asia, including Japan, and Latin America are finally recovering from the crisis of 1997. Especially Japan, South Korean and the majority of the countries in South-East Asia have been growing very well in 1999. The situation in Latin America is improving a little more slower but the trend is and will remain positive.

The Pacific-rim

The improvement of the Japanese economic situation is one of the main causes of the improvement of the whole South East Asian region. After years of low consumer demand the Japanese people finally start to spend more money. The economy is not anymore only dependent on export and government spending. The consumer demand is however not that strong as it could replace export.

Which brings us to the next problem. The improvements in the Japanese economy has not only positive effects. The Japanese currency, the Yen, has become more expensive because of the success. And an expensive Yen undermines the export position and finally the economic growth of Japan. The control of the currency is therefore very important to let the Japanese economy continuing to grow.

There is another problem which might undermine the recovery in Asia, minus China. The U.S. Federal Reserve will try to forego inflation in the U.S.A. by limiting the availability of money, e.g. rising interest rates. If this happens the repayment and interest payments of US dollar dominated debts will become more expensive and the availability of investment capital will become more scarce. Two developments which are highly unwelcome to a region recovering from a financial crisis.

The improved Japanese economy, the improved internal political and economical situation in the majority of South-East Asian countries and the increased demand form the west stabilised and stimulated economic growth in the region. This will be boosted by the willingness of investors to re-enter the region.

All countries in the Pacific-rim region will be part of and benefit from the recent economic recovery with the exception of North Korea, China and Indonesia. The internal problems, political, economical and social, of these countries make a recovery very unlikely. Some individual companies in China and Indonesia might do very well but they are clearly the minority. On macro-economic level there are corruption, incompetent management, bad loans, unproductive protected industries and many more problems which only can be dealt with harsh measurements which are unwanted by the ruling elites.

Indonesia might be the only one which is going to introduce the necessary changes but it remains to be seen if there are enough changes and more importantly if they are really carried out.

The other Pacific-rim countries, South Korea, Taiwan, Japan, the Philippines, Malaysia, Thailand, Singapore and with some luck Vietnam are more promising. They are on the road to recovery and will most probably not be caught in the same problem of before 1997. Short term debts, bad loans, nepotism and unproductive investments.

Direct and indirect investments in the above mentioned countries will be secure and profitable again but not as profitable as in the pre-1997 days.

The best performers in the region will continue to be Australia and New Zealand. They will profit the most from any improvement in the region as they will regain markets that were lost during the crisis. The recently acquired new markets in Europe and north America will be further developed and ofcourse Australia will benefit from the additional revenues of the Olympic Games in Sydney.

Latin America

Latin America had its share of problems with the currencies and economic performance. Countries like Brazil and Venezuela have experienced currency devaluations while the currencies of Mexico, Argentina and Chile have come under pressure. For both however it is valid that they experienced a fall back in growth as internal and external demand and investments into the region diminished rapidly. The situation in the other Latin American countries, with the exception of Colombia and Ecuador, have been depressed by currency pressures, lower demand and lacking investments. Colombia is a case on its own as the economy is nearly destroyed by the civil war. Ecuador is on the other hand in deep problems because of the bad government budget situation and the pressures of to much foreign debt.

The Latin American countries, again with the exception of Colombia and Ecuador, have experienced a slow recovery. As the international situation improved demand improved. The internal budget problems and the pressure on the currencies have been alleviated by a combination of government action and IMF support packages.

As long as there is no medium to large increase of the interest rates of the U.S.A this positive economic development will continue. The economic recovery will be slow but stable. The following countries with the largest economies in the region will develop best, the best and fastest to the slower are lined up, Chile, Argentina, Mexico, Brazil and Venezuela. The other countries, again with the exception of Colombia and Ecuador, will follow the five countries mentioned above at about the same pace as Venezuela. Where as the development of Honduras, Nicaragua and Guatamala will be the slowest as they have still not recovered from the destructions of hurricane Mitch.

In general terms Latin America is improving but slowly as the structures of the government, the companies and the economy do not allow for a fast recovery. On the medium to long term Latin America is worthwhile to get your attention and make some investments, especially indirect investments could be profitable. Direct investments into the region,with the exception of Argentina and Chile, are more insecure because of the political and legal instability in some countries. Consider the problems MCI-Wordlcom and AES are facing in Brazil after acquiring a company in that country. A treatment which a Brazilian company would not receive but because it would be more expensive to withdraw from these investments they have no other option then to accept.

April 1999

April 1999

Portfolio management in 1999

A new year with new opportunities to invest, divest or hold your portfolio. Might it be a diversified portfolio of stocks, bonds, real estate and derivatives, a mixed less risky portfolio of treasuries, bonds and some mutual funds or a secure portfolio of treasuries and assetbacked bonds. All need some management or decisions to continue the existence and profitability of the portfolio.

There are essentially two important decisions to make about a portfolio. What is the intention or goal of the portfolio and what level of risk is acceptable. To generate an income or to accumulate wealth. And so secure with a domination of bonds or more risky with stocks and derivatives. These two questions determine the composition of the portfolio. The next step is about the portfolio.

If the personal requirements are established the portfolio can be created. Again a number of decisions have to be taken. Namely active, many trades, or inactive, only the yearly allocation, management of the portfolio. Or a combination of both, active only if necessary. Another option would be to hire a financial institution to do the business for you and leave it to them.

A short history of 1998

1998 was a very volatile year for the economies and on the stock markets. It has shown the best and the worst of what can happen. The U.S. economy showed improved growth figures, Europe showed moderate growth, Asia achieved some kind of stabilisation where as Russia and South America, especially Brazil, experienced a currency devaluation and a shrinking economy.

The stock markets showed an equal volatile behaviour. The first quarter, until April, the stock markets enjoyed an unprecedented growth. After a short interruption in April the markets continued their rise and new records were achieved in July. The Russian crisis and South American currency problems sended shock waves through the world stock markets. The markets turned south and lost between 10 and 20 % of their value. In October an all time low, of the year, was reached.

But at that time the market bottomed as the economic forecasts and company figures proved to be better than anticipated. In November of 1998 a recovery started which would bring the stock markets back to their former heights. The markets closed at a record high on the last day of 1998. After all the year has been better than was expected after the retreat during the late summer and autumn.

The recovery of the stock market was based on a number of reasons. The most important condition for the rebound were the promising economic and business figures of the fourth quarter in the U.S. and to a lesser extent in Europe. This was supported by the low interest rates in the U.S., the strong consumer demand in the U.S., the improving international situation, especially in Asia, the containment of the Russian and Brazilian problems and the availability of an abundance of cash needed to be invested.

1998 ended promising for the next year even if you consider the large number of problems around which could depress the stock markets of the world. Problems like the milennium problem, lagging demand in Europe, the Middle East and Asia, the problems in Russia and South America and an overvaluation of a large number of stocks in the U.S.A. and Europe. But the existence and impact of those problems might prove to be lesser than most of us think.

Rayanalyse internet portfolio

Last year in our 1998 January II issue on our website we proposed and example portfolio. This has been an good mirror on the ups and downs of the stock market. It has shown excellent results but was also hit by the downturn in some sectors like financing and oil and oilservice industries. But even at the lowest level on the stock market indices we still attained a result close to 10 % with the exception of our Asian proposals.

The year result on the portfolio has been in line with the development of the stock markets. If however the portfolio had been managed according to the conditions of low level management the results are above the stock market indices development. Low level management is to act only if the stocks are pressured by developments like accounting irregularities or a loss of more than twenty percent. The rule of cut your losses should then be implemented.

The policy to select quality stocks, stocks of companies with a sound product collection, healthy company structure and finances and superbe management, have been very profitable in 1998. The return of the stock portfolio has been better than anticipated. The average return on our U.S. selection has been over 18 % if no changes were implemented but over 30 % if some little changes, according the above mentioned rules, were used. The European stock portfolio performed more or less the same with a return of over 32 %. The Asian portfolio showed a mixed result. The Asian, Hong Kong, Taiwanese and Singapore, stocks delivered a small positive result of barely 5 %. The Japanese stocks were the disappointing part of our example internet portfolio with a loss of over 6% over the year.

In general the allocation and the selection of stocks of our example internet portfolio has been a right decision in line with the development of economies of the world. Our research, understanding of the markets and our investment policy has proved itself with this performance.

An outlook on 1999

The general situation in the world will be very differentiated. Some parts will be stable but large parts will be very unstable. The unstability is the result from political, economical and social tensions in some countries and regions.

The unstable areas are located in geographical and economical areas which have limited effect on the economies of the leading countries in the world. Regions and countries which have to be dealt with with great care are nearly all underdeveloped and autocratic. Like large parts of Africa, the new countries in the Caucasus, Iraq, Afghanistan, Pakistan, Sri Lanka, Myanmar, Indonesia, parts of the Philippines, North Korea, Haiti, Columbia and Yugoslavia. Other countries with a higher level of risk are Russia, China, some Middle Eastern countries, middle America, Brazil, Venezuela and Cuba.

The countries belonging to the developed world, the U.S.A., Europe, Australia, South American countries like Argenitina and Chile and the Tiger economies in Asia are the most promising in the world. Especially the U.S.A., Europe and Australia will remain as stable as before where as the Tiger economies and South America will see some improvement after the recent problems they experienced.

The economies of the U.S.A., Europe and Australia will continue to show growth. The growth will be lesser than in 1998 but a growth for Europe and Australia of 2-2,5% will be feasible. The U.S. economy will remain the strongest economy in the world. Continuing strong consumer demand will keep U.S. growth at 3,5-4 % in 1999.

1999 will be a good year despite negative comments about the milennium problem, lower demand, high unemployment and an uncertain situation in Russia and Brazil. 1999 does not promise to be paradise and therefore careful stock picking remains very important. And true, some sectors like some parts of the IT industry will experience some slow down but this will pick up in the fourth quarter of 1999 or the first quarter of 2000. Or South America oriented companies will see a drop in sales but a change in markets should be able to alleviate this temporary loss in markets. And finally the market will react brutally on any negative international developments and earnings warnings which will cause a correction. But the strong economic fundamentals in the U.S. and Europe and an improving world economy will stimulate economic growth.

The negative advance/decline line, more stocks loosing value then gaining value, and the high price/earnings valuations of a number of stocks should according to some analysts have a depressing effect on the stock market. This is true for conventional stocks but the majority of the stocks with a high P/E are different from the usual, conventional, companies. These companies value is based on a knowledge based capabilities. Those companies belong to software, pharmaceuticals, insurance and particular strong franchise based operations which allow a higher P/E than used to be in traditional capital and labor intensive companies. This group of companies will continue to boost the stock markets as long as their productline remains in demand.

The negative advance/decline line is more worrisome. The growth of especially the U.S. stock market and to a lesser extent the European stock markets is based on a small group of companies. These companies are mostly knowledge intensive and aimed at the home markets. A wider spread of growth would be desireable but will only happen if the cyclicals and the export and manufacturing oriented companies, or better the world economy, improve. A full recovery will be doubtful in 1999 but the first improvements, a higher demand for manufactured goods and the slow improvement of the world economy, especially South East Asia, will become visible in the fourth quarter of 1999.

1999 will be volatile as there are to many uncertainties and depressing factors around. Growth and corrections will follow but at the end of 1999 the market indices will have reached new highs and the majority of the stock market indices will end far above the current level.

The second halve of 2000 and the first quarter of 2001 will finally bring a decisive improvement in the world economy as the crisis will diminish and demand increase.

Asset allocation in 1999

The need for a balanced portfolio based on quality stocks and bonds which are able to gain a profit in a difficult and volatile year as 1999 will be even more necessary as in 1998. Weak countries and stocks should be avoided as any change in the market will be violent and large. Losses of over halve of the value are possible in such a volatile situation as we are now experiencing.

A portfolio, with limited risk, good growth perspectives, for the medium to long term and with low level management, should be structured like this; 50% stocks, 35% bonds and treasuries,10% property and 5% in liquidities. The low inflation, shorttime opportunities like repos or gilts and the promising opportunities in the fourth quarter of 1999 makes the availability of some extra capital an attractive and profitable option.

The geographical allocation could be like this; 38% in Europe, 5% in Eastern Europe, 42 % in the U.S.A., 4% in South America, especially Argentina and Chile, 4% in Australia/New Zealand, 4% in South-East Asia and 3% in Japan and Hong Kong.

You can either invest directly into the stockmarket or into one or more of the many funds which are offered by several financial institutions. These funds offer an opportunity, with lesser capital, to invest into a larger number of companies than would otherwise be possible. These funds are related to a stock market index, an industrial sector or a geographical region. This would decrease risk, optimise your possibilities and limit the workload and the commissions.

It is certainly adviseable to invest into funds if one or more of these conditions are present; with a limited sum to spend, in emerging countries, if the government regulations are complicated and if information and accounting rules are below western standards.

The markets

As mentioned before there are several opportunities to invest. In country, region, index and industry funds and/or directly into companies which are listed on a stock market.

Investments into Eastern Europe, Hong Kong, Japan, South East Asia and South America can be best done, because of the small scale of the investments of our example portfolio in those areas, through a country, region or industry fund. With the selection of such a fund you should pay some attention to who is managing the fund, what is the track record and how is the assessment of the market and the companies which are part of the fund.

The Eastern European market looks promising in 1999. The influence of the Russian crisis will get lesser as the Eastern European countries are becoming more and more part of the Western European culture and economy. Especially Poland, the Czech republic, Hungary and Slovenia are becoming more stable and are promising the biggest growth of the group in 1999.

The Baltic countries, Slowakia, Croatia, Romania and Bulgaria are still having problems with the change to a market oriented society. High unemployment, poverty, high debts and a large uncompetitive industrial sector are causing problems and are limiting growth. These countries will not see a positive change in 1999. It will take at least another 5 years before they have reached the level of Poland, the Czech republic, Hungary and Slovenia.

Hong Kong has experienced a drop in business activities and growth in 1998. They have managed to keep the currency stable and will most probably be able to do so in 1999. The close connections with China will inhibit growth in 1999. A stabilisation of the current situation is the best what can be achieved. A participation in a fund is the best way to profit from a possible improvement in the economic situation in Asia which might start at the end of 1999. An investment in Hong Kong, China and Japan is however very risky as it might take over two years before a profit can be realised.

The situation in Japan is unlikely to improve in 1999. As long as the population does not consume more, the bad debt problem is not eliminated and the Japanese pecularities of government involvement and criminal activities in the economy are not eliminated the market will remain depressed. The national economy is in a bad shape and a large number of companies are in equal difficulties. Some Japanese companies will however be able to show some growth in earnings and profits. A participation in a Japanese fund with food, retail and export oriented companies could deliver a substantial increase in 1999.

The situation in South East Asia, with the exception of Indonesia, has stabilised. This will lead to a slow recovery in 1999. A participation in a Souh East Asian fund with interests in telecommunications, transport and export manufacturing companies will most probably show the biggest improvement in 1999.

The South American situation is more complicated. Middle America, Columbia, Paraguay, Peru, Ecuador, Bolivia, Guyana, Surinam do not promise to deliver a positive development in 1999. Venezuela and Brazil could show an improvement of the economic situation in the third or fourth quarter of 1999. The new government in Venezuela and an improved oil price could deliver some improvement of the economic situation. Brazil could in the second part of 1999 also show an improvement as the currency and debt problems are solved or brought back to manageable proportions. Only Argentina and Chili seem to be able to generate some growth. The economies of both have been hit by the Asian crisis and the Brazilian currency crisis but the impact could be minimized. A stabilisation and an improvement of the world economy will substantially improve the earnings position of the Argentinian and Chilian companies.

European markets

The international problems and the European inefficiencies in the economy have been a drag on the economic development of Europe. The introduction of the Euro, the new European currency introduced by the majority of European Union members except the U.K., Denmark, Sweden and Greece, have been a positive development to Europe. It will not create short term advantages but on the medium and long term it will strengthen Europe.

The European economy or better the collection of European economies will deliver moderate growth in 1999. An average growth of 2 to 2,5 %, we believe, especially if the world economy improves, a growth of 3-3,5%, will be attainable. There are many problems but the strong economic fundamentals, the slow economic recovery in Asia, the stabilisation in Brazil, the resistance of the majority of the other South American economies to the Brazilian crisis and the positive prospects in Eastern Europe have left the European economies in a good position to expand their growth on the short term, the second part of 1999 or at last in the second quarter of 2000.

1999 will be volatile but it will have a positive direction as the largest economies of Europe, Germany and France, are climbing out of the slow growth period of the last years. The export and consumer demand will continue to be moderate in 1999. It will improve at the end of the year at earliest or at last in the third or fourth quarter of 2000.

The economic outlook for 1999 is moderate positive. But some sectors will perform very well, like financial, pharmaceuticals and services where as capital goods and basic industries will underperform.

The United States of America

The largest economy of the world has experienced an enormous growth in the last four years. The economy expanded at an averge of four percent a year. Increased export and above all very strong consumer demand stimulated growth. It seems as the growth is slowing down somewhat in 1999. This will be lesser than anticipated. The strong fundamentals and the improving world economy will support the U.S. economy. A growth of 3,5-4% will be easily attainable in 1999.

The U.S. will remain strong and the people will profit from this situation. And even more important more savings were realised in the first quarter of 1999 as the personal income rose stronger then personal spending. The increases in personal income does not fuel inflation as the rises are within the production growth of the U.S. economy.

This economy will keep on booming as the performance of companies remains good, interest rates low anf demand high. After 2000 the growth will continue as the world economy, South-East Asia, will finally experience a substantial improvement.

The stock market will mirror this performance in 1999. But volatility with a number of corrections and afterwards recoverings remain a part of the game. The stock markets will see the growth based on a wider group of companies, a rotation from computer manufacturers to oil and oil services industries and continued strength in the pharmaceuticals, financials, retail, telecommunications and some IT companies.

Attractive listings

Nearly all stock markets have a couple of interesting companies which promise to deliver a stabile growth or even outstanding growth in the coming year. These expectations should be based on the performance and capabilities of a company and any company which growth is based on a hype or special media coverage should be avoided.

The companies we list are promising for some growth next year, are based on a good product and are masterfully managed, at least according to our research. We especially like stocks in Europe and the U.S.A. as they are the most promising and less risky.

In the U.S.A. we like AT&T, Bell South, MCI/Worldcom in the telecommunication sector. In the ICT sector we like the software-services side of the business like Computer Sciences, Computer Associates, Wind River, IBM, Lucent, Cisco Systems, and Unisys. In the more hardware side we like Hewlett Packard, Applied Material and Sun Microsystems. In the financial sector we like BancOne, American Express, Citigroup, BankAmerica, Chase, Union Planters Bank, Fleet Financial, Washington Mutual Inc., American International Group, Merrill Lynch and Charles Schwab. In the retail industry we like Walmart, Kroger, Dayton Hudson, Kmart and the GAP. We continue to like in the oil / energy industry Exxon, Texaco, BP/Amoco, Mobil, Unocal and Burlington Resources. In the oilservices industry we like Schlumberger, Diamond Offshore, Baker-Hughes and Transocean Offshore. In the pharmaceutical sector we like Bristol-Myers-Squibb, Eli Lily, Johnson&Johnson, Pfizer, Schering-Plough and Beckman Coulter. We further like General Electric, Lockeed Martin, Raytheon, Textron, General Dynamics and United Technologies in the defence sector. Home Depot, Staples and Abercrombie and Fitch in the office equipment and apparel combination. In the media sector we like Time Warner, Walt Disney and the more technology focussed companies AOL, Barnes and Noble.Com and Amazon.Com. Finally we like, which are more risky and better suited at the third or fourth quarter of 1999, Intel, Texas Instruments, Federal Express, United, Dupont and Monsanto.

In Europe we like the British, Dutch, French, Swiss, Italian and Spanish stock markets and we eye the German stock market with some care. But we continue to support some German stocks. We like DaimlerChrysler and Porsche in the automobile industry. We like Siemens, Mannesmann and MAN in the electric-engineer sector. We continue to support SAP in the IT sector. We like VEBA and VIAG in the mixed sector. In the financial sector we like Deutsche Bank, Dresdner Bank, Allianz and Muenchener Ruck. And in the pharma/chemical sector we like Bayer and Schering.

In Switzerland we like Novartis and Roche in the pharmaceutical sector. Nestle in the food sector. ABB in the engineering sector. And we like UBS and Zuerich Group in the financial sector.

In the United Kingdom we like BP/Amoco in the energy sector. We like British Telecom and Cable and Wireless in the telecommunication sector. We like Pearson and Sainsbury in the publishing and services sector. In the pharmaceutical sector we like Glaxo Wellcome and SmithKline Beecham. In the food and beverages sector we like Cadbury Schweppes, Diageo and Unilever. And in the financial sector we like HSBC, Barclays Bank and the Royal Bank of Scotland.

In France we like Carrefour, Promodes and Pinault-Printemps-Redoute in the retail sector. We like Danone, L’Oreal and Sanofi in the food and consumer products sector. In the financial sector we like Generale d’Eaux and Societe Generale. And in the energy sector we like Total.

In Italy we like Generali, Mediobanca, Banca di Roma and INA in the financial sector. We like Olivetti in the services sector. And we like Telecom Italia in the telecommunication sector.

In the Netherlands we like ABN-AMRO, ING, Aegon and Fortis Amev in the financial sector. We like Unilever, Nutreco and Numico in the food sector. We like Ahold in the retail sector. We like Getronics and Cap Gemini in the IT sector. And we like Royal Dutch Shell/Koninklijke Olie in the energy sector.

To conclude this little list we like Fortis and Tractabel in Belgium. And in Spain we like Argentaria, Banco Bilbao Vizcaya, Iberdrola, Endesa and Telefonica.

August 1998

August 1998

Is the bull getting tired? – Conflicts turning violent

Is the bull getting tired?

The Asian crisis turned all emerging markets, Russia and South America, moving south. Currencies got under pressure and markets disappeared. The solution of the Asian crisis is largely dependent on the economic recovery of Japan. And as long as Japan is not seriously solving their economic problems, clean up the bad loans, restructure their financial system, eliminate the connections between business, government and crime and restore confidence into the government, Asia and the other emerging markets will not be able to stem the tide.

The European and U.S. economies on the other hand are doing allright. The Asian crisis forestalled the threatening ghost of inflation in the booming U.S. and the recovering Europe. The stock markets on the old and new continent have reached in the mean time new records. The Dow broke the 9300, the Dax the 6000 and also the smaller markets like the Dutch AEX broke trough the 1300 level.

How long can the Western markets continue this growth? If Asia would return to their former might everything would be OK but this will take another two or three years at least. The growth of the western markets has also to be carried by the home markets and the markets in Eastern Europe which are less influenced by Asia then the other emerging markets. The economic fundamentals are thereby not that bad for the majority of the companies but there are a number of buts which could have a negative effect on the development of the stock market.

One of those buts is the price/earnings ratio. The market valuation is becoming very expensive. The Standard and Poor 500 index is traded at 20 times earnings, the best performers of the S&P even 35 times earnings and the profit expectations for 1999 are just a mere 1,5 till 1,9 %. The weak position of the U.S. stock market becomes more clear by a look on the advance-decline line of a combination of the NYSE and the Nasdaq, it is dropping. There are reported fewer new highs but more new lows. The booming stock markets are builded on the just a few strong stocks, the breadth is very small. And finally money is moving out ot the stock market and into the money and bond market.

The European valuation situation is not yet that worse as in the U.S. but the earning forecasts are just as disappointing as in the U.S. Disappointing is not the right word, they just not that impressive as before. The economic performance in especially the manufacturing sector will deliver single digit growth where as the financial, telecommunication and some tech stocks are however still able to deliver double digit growth. This small breadth of high performing stocks will disappoint the analysts and the investors.

This will result in a lost of trust in the strenght of the market. A lot of people will take profits and wait to re-enter the market at a better price. And more dangerously the stock community will react very harshly on most of the earnings warnings which might be given by companies. Consequently there will be some ups and downs but the year to date growth will remain positive for the quality stocks.

The earnings growth of several companies will be less then in the preceding years and this will limit the growth of the market. The volatility of the stock market will continue till the end the year. It can be described as a slow down but to call it the beginning of the bear cycle might be a little premature. The overall economic position is still to positive. The economic outlook on the world economy for 1999 is despite the Asian crisis promising, especially the U.S. and European economies are responsible for the well being of the economy. The last quarter of 1998 or the first quarter of 1999 will show some improvement to the market. The earnings situation will get better at that time. The improved market/economy with a cheaper stock price because of the slow-down/correction will improve the valuations and this will boost further growth in 1999. The bull will continue in 1999, it is only taking a little break in the second half of 1998.

The third quarter and possibly the fourth quarter will bring some volatility. This could include a correction of 10-15 %. This will not have a lasting impact. But if you want to be on the save side and have good night sleep you could consider to protect the profits you have gained till now by the use of a put-call option combination. This will protect you to any losses and it will keep your portfolio unimpaired. This can be done at little cost because the majority of the costs will be covered by the earnings of the put. This little exciting operation will protect your holdings but will limit the growth chances of the second part of 1998, there are however some more exotic derivative combinations which could increase your gains even more. But this is attached with a higher risk.

Conflicts turning violent

The world in 1998 is still not a peacefull place. There are several regions where people, organisations, groups, religions and sometimes even states have differences with eachother. Some of those problems can be solved by mediation but some will use violence as a way to improve their position. In Kosovo most of the above mentioned differences are present , included the preferred way to solve it.

Kosovo, bushfire or war

The conflict in Kosovo gets worser by the time. Both groups, the Kosovo-Albanians and the Serbian security forces increase the use of violence towards eachother but also against the civilian population.

The Serbs and the Albanians are getting far away from a diplomatic solution. The demands of both sides essentially rules out a diplomatic solution. The Serbians want to keep Kosovo part of Yugoslavia with no special position. The Albanians are insisting on independence or a possible link up with Albania proper and a part of Macedonia to create a Greater Albania.

The major party which represents the Albanians have become the UCK/KLA who have more or less controlled a large part of Kosovo before the Serbian/Yugoslav forces started their operations. The military power of the UCK/KLA is limited. The numbers are relatively small and the armament beside the personal arms of the fighters is limited to heavy machine guns, mortars and grenade launchers including AT systems. This is enough to carry out a querrilla war but it is not enough to impress or defeat the Serbian security forces. Especially, what is the case, when they receive support from the Yugoslav army. The Yugoslav army will be the decisive factor. They can deliver the necessary military weight, MBTs, artillery and manpower to destroy the UCK/KLA military power. But they could, in the end, also force the Serbians politicians to accept a diplomatic solution. The Yugoslav army are not loyal supporters of Serbian president Milosevic and his policy. This could mean a chance for a diplomatic solution. But in the beginning they will support Milosevic to destroy the UCK/KLA because they pose a danger to the integrity of Yugoslavia. A strong UCK/KLA can not be tolerated by the army but a less threatening querilla force could be an acceptable negotiation partner.

The intensified fighting between the UCK/Albanians and the Serbian/Yugoslav forces pushed the former in the defensive. The Serbian military operations to regain control over the important roads between Pristina and Prizren and between Pristina and Pec proved to be a dangerous development for the UCK/KLA. Because the Serbians already controlled the border with Albania, incidentally they even followed the UCK/KLA into Albania and clashed with the Albanian border troops, the UCK/KLA got trapped in its hide out around the town of Malisevo. Malisevo is the HQ of the UCK/KLA and it is situated in the centre of the triangle Pristina-Pec-Prizren. And the line Prizren-Pec is about 10 KM of the border which is under control of the Serbian security forces. The intensed fighting in the triangle led to loss of the UCK/KLA HQ and this was a bad development. They not only lost a clear sign of their power but they also lost morally. They are not that strong as was thought and they are also not able to protect the Kosovo-Albanians from the Serbian terror. It was essentially the end of a myth.

The fighting will be in the advantage of Serbia. The military fortunes of the UCK/KLA are bad. They are pushed back by the Serbian/Yugoslav forces and they will be finished as conventional force very quickly. After that they will only be able to operate as a querilla force. The situation is further deteriorated by the fact that the logistic support of the UCK/KLA has become very difficult because the Serbian security forces control and “evacuated” the border territory with Albania. The Serbian forces are thereby willing to eliminate the Albanian support of the UCK/KLA in Albania proper. They have moved into Albania and destroyed UCK/KLA forces over there.

Time will be advantageous to the Serbian forces. The resistance of the UCK/KLA will be further undermined by the coming winter which is very harsh in those regions. The many displaced persons who fled because of the agression can be of no help to the UCK/KLA in their resistance. The resulted uninhabited villages can not be used as a hide out for the UCK/KLA. And local support is necessary in a querilla war.

The position of the UCK/KLA is finally undermined by their own policy to try to get the support of all Albanians in the region and their insistence on maximum demands. The UCK/KLA has become a powerfull force in the area and they try to rally support not only from the Albanians in Kosovo but also in Macedonia and Albania proper. This could draw three countries into Kosovo-conflict. Albania might like the idea of a greater Albania even if it would create a ungovernable country and that it is not clear who will run the country. The other involved entities, Yugoslavia, Macedonia and the international community, would however fundamentally oppose such a development.

The military operations in Kosovo has forced the UCK/KLA in the defensive. They had to give up the limited/conditional control they possessed over some areas. They are hard pressed because of the operations of the Serbian/Yugoslav forces. They even called for intervention by the international community. The UCK/KLA might be tempted to use a possible cease fire to regroup and reinforce their positions and try to save what is possible.

The demand for international intervention might be to late. The military operations in Kosovo might soon be over as the military power of the UCK/KLA is broken. The Serbian security forces can handle the querilla threat by the Kosovo-Albanians on their own with the usual terror. The political position of the Kosovo-Albanians will then be weaker then before and a low-level querilla war will be the only mean of resistance leftover.

The Serbian leaders will feel encouraged by the demand for international intervention because that is the evidence that they are stronger and can solve the Kosovo problem their way. The silence of the international community during the recent military operations will also give Milosevic the idea that the West does not object to the steps taken to keep Kosovo within Yugoslavia.

To prevent a forced military solution by the Serbians the UCK/KLA and other political organisations in Kosovo like the LDK should unite and work together. With one strong voice they should then try to get as much as international support as possible. If they at the same time are willing to accept a compromise solution of autonomy within the state Yugoslavia it could be feasible to reach it. The international community could press Milosevic to accept that compromise especially now the Yugoslav army has been involved into the conflict.

The psychology of the people in the region however encourages the choice of maximum demands and any compromise is a sign of weakness. Their thinking is black and white. You win or loose and something in between is not possible. If the Kosovo-Albanians let traditional feelings run their policy they will loose.

The Kosovo conflict will be a limited conflict. The threatened new Balkan war is very unlikely. The UCK/KLA is to small, politically and militarily, to really influence the outcome of the conflict. The Albanians in the region are thereby not in a position to create a Great Albania. They have to many internal differences and they are simply to poor. The neighbouring states have intrests in the region but they have little in common with wishes of the Albanians and they are certainly not willing to die for Pristina or a Great Albania.

January 1998, II

January 1998, II

Portfolio management in 1998

1997 have been a year of incredible growth figures in the stock market. The first three quarters of the year were an investors dream. It seemed as the market knew only one direction: Up. The last quarter brought back the reality, what can go up can come down. Volatility was the word which can be best used for the situation in the final quarter of 1997. Big number number losses but relatively small percentage losses have been recorded, which could be straighten out within one or two months. But the year as a whole have been good to the investor.

Disappointing figures and some profit warning of some companies and especially the spreading economic and financial crisis in Asia created havoc, not only on the Asian stock market but they also had a major impact on the western stock markets. The markets in the West could recover from the bad news out of Asia but the uncertainty is still out there and waiting to strike back.

The volatility of last year will also be very active in 1998. Uncertainty about the outcome of the crisis in Asia and disappointing sales and profits in the coming year especially in comparison with the preceding years will limit the growth of the stock market. Only a small number of companies will show some impressive growth. 1998 will be the year of carefull stock picking.

A portfolio example

The balanced portfolio of 1998 will show some changes. The portfolio as a whole will be in the first six months of 1998 more defensive. The exposure to Asia should be limited and a higher percentage should be into bonds.

The coming months will be very volatile. The crisis in Asia will influence all other markets. Therefore you should put most of stocks outside Europe and the U.S.A. on hold. New investments should be into bonds and companies with the ownership and the majority of their sales into Europe and the U.S.A. They are the only companies with a better chance to gain something.

The allocation could be as follows; 55-60 % into stocks, 30-35 % into bonds and 10 % into property. The geographical allocation of the stocks could be; 38 % Europe, 37 % U.S.A., 5 % Eastern Europe, 4 % Russia, 3 % Japan, 2 % Hong Kong / China, 3 % India, 6 % South America and only 2 % in South-East Asia.

If your financial situation permit it you can invest directly into stock markets outside your home country. This can be done to the majority of the developed countries in the world. Beside the direct investment into particular companies one can invest into country or region funds which are offered by most of the major financial institutions. Fund investing is recommendable to countries like India, Russia and regions like Eastern Europe, South America and Africa. The regulations in those countries/regions, the scale of the market or the lack of available information about companies makes such a fund an attractive alternative to direct stock acquisitions.

Fund investing

As we have mentioned above fund investing can be a viable alternative if your financial resources are limited or if you want to invest in emerging countries with tight protective regulations, a small stock market or companies without a clear administration and information policy.

China and some South East Asian countries are examples of these peculiar countries/regions. To benefit from the possible profits in these markets several China/Asian/Tiger funds are available. At the moment it is however very dangerous to invest in these funds. The economic climate is to volatile to justify an investment.

India seems to be untouched by the developments in Asia. The Indian economy is showing stabile growth figures. The opening of the market have paid off. Several Indian companies, especially in the software sector, are becoming world players. The Indian stock market has shown an equal growth. The Indian law however is still restrictive to foreigners who want to buy Indian stocks. By investing in an Indian country fund you can circumvent these problems and still profit from the positive developments in India.

The situation in Russia is more complicated. The Russian economy has shown some improvement in the last year but the Asian crisis has become a threat to this growth. The Russian currency, the rouble, is because of the introduction of a new rouble with lesser zeroes and the Asian problems in trouble. The Russian government should be restrictive in their expenditures, improve the tax collection, limit organized crime and support the business development without the use of nepotism. If Russia can meet these conditions the growth will continue in 1998. Russian country funds will be an intersting investment next year.

Eastern Europe can be divided into two parts. The countries who are allowed to enter the European Union in the first wave and the ones who have to wait for the next round. The economic performance of the first group, Poland, Hungary, Czech Republic, Letland and Slovenia, can be described as positive despite the little problems some countries, like the currency and trade problems of the Czech Republic, have to rebuild their economy. An investment in a region fund with those five countries will be a good investment. The countries, like Rumenia, Bulgaria and the other Baltic states, who have to improve their economic and political situation before they are allowed to become a member of the European Union are worser off. An investment in a fund with those countries will show a worser performance. Unless you are willing to take a bigger risk this investment can better be avoided.

Africa, the former lost continent, is improving their political and economical situation. Stock markets from Morocco, Uganda, South Africa and Namibia are promising to show some growth in 1998. In a region fund with a number of these countries in their holdings could be an investment opportunity.

South America, the continent which have achieved growth which equals the growth of an emerging Asian country in the last years is now experiencing some negative effects of the Asian crisis. Especially Brazil is the most under threat from the devaluations. The Brazilian currency is under threat and the inflation is rising again. The government is having difficulties solving the problems. The impact of the Asian crisis on the other South American countries is not that extreme. The economic growth will be somewhat limited by the crisis. But a large number of companies will be able to stay profitable. A South America fund is a valuable addition to your portfolio. South America will recover faster from the consequences of the Asian crisis than most of the Asian countries.

Asia

The economical situation in Asia is horrorable. The financial system in a number of Asian countries have nearly collapsed. Only the intervention of the IMF and the international community saved them from bankruptcy. A large number of companies, in the insolvent countries, are also in deep trouble. They can not produce to market terms, they have accumulated a large stock of products, they have invested into to many unproductive glamour projects and are therefore unable to fullfill their credit obligations.

Especially Korea, Indonesia, Philippines and Thailand are affected by this unhealthy situation. Malaysia, Singapore and Taiwan are heavily influenced by the economic downturn in Asia. Japan and Hong Kong / China also have problems, which are similar to the other Asian countries, but because of their respectively financial and industrial resources and the protected currency and large promising home market they will be able to solve the problems with other means then outside support.

It is uncertain to what level the governments in Asia will implement the advise of the IMF, do the Asian governments really support the international demands? Only cosmetic changes to satisfy the IMF and the international community will not be enough to solve the problems. And if the Asian countries would try to export themselve solvent by price dumping they will also hurt their own businesses and economies. On the short term it will generate an extra flow of money to Asia but the already very small profit margins will become losses on every product they sell. This will become even worser on the longer term. If the Asian countries have to procure raw materials and equipment from other countries they will have to pay more because of the weakened value of the Asian currencies.

The Asian economic and financial crisis will affect all other markets in the world. Even at these low stock prices in Asia a buy could be unprofitable. We advise therefore not to invest fresh money in Asia and you should have liquidated or hedged your other holdings. Only a small number of companies in Asia will offer some growth but not enough to justify a buy or enlargement.

If you are willing to accept a higher risk one should limit its acquisitions to Japan, Taiwan, Hong Kong and some lonely riders in South East Asia. In Japan we like Canon, Matsushita, NEC, Sharp, Sony and Yamanouchi Pharma. In Hong Kong we like HSBC, , Hutchinson Whampoa, Swire Pacific and Cheung Kong. In Taiwan we like companies like Formosa Plastic and Taiwan Semi. Other companies in the region which will improve quicker and better from the losses of the last months are Singapore telecommunications, the telecommunication companies in the region look all very promising, Singapore Airlines and Sime Darby.

Europe

The economic situation in Europe is despite the large number of unemployed in some European countries good. All countries in Western Europe promiss an increase of GDP of around 2,5 – 3 % in 1998. All member countries of the European Union except the three who do not want to enter and Greece who does not qualify seem to become members of the single European currency, the Euro.

The economic growth of Europe will be less by 0,5 to 1 % due to the crisis in Asia. The first six months of 1998 will be the most influenced by the crisis. After that the economy will be able to adjust itself better to the new situation and the situation in Asia could be turned in the right direction.

Together with the U.S.A. Europe’s stock markets will show the best performance. The consumer markets of countries who lagged behind in the last years seem to take off in the coming years. This will stimulate the European economy, considering most of the external trade from the European countries is with eachother. The introduction of the single currency will stimulate the trade in the European Union. Companies which are prepared for the Euro can exploit the advantages of a single currency best and this will be very clearly in their stock price.

A number of European stocks will therefore be very promising. Some financial institutions with little exposure in Asia, the pharmaceuticals, the insurance sector, some telecommunication / technology companies, luxury equipment producers and some food companies.

In Germany we like BMW, Daimler Benz, Porsche, Siemens, Mannesman, Preussag, VEBA, VIAG, RWE, Deutsche Bank, Dresdner Bank, Allianz, Muenchener Ruck., Fresenius Medical, SAP and Wella. Those companies are very well positioned on the internal market and also have the U.S.A. as their most important export market. Other companies like BASF and Bayer who also have a large medical operation can see a profit next year but this depends on the performance of their chemical operation which have heavily invested into Asia. The Asia crisis could have a positive on the chemical industry if a number of Asian chemical companies are taken over or closed. But it can also have a negative effect if they would produce even more than needed and dump it on the market.

In Switzerland we expect a lot of Novartis, Roche, UBS, Nestle, SMH and the Zuerich Group. The Swiss multinatonals have the majority of their markets in Europe and the U.S.A. which will boost their sales in 1998.

The FTSE in London had a respectable growth figure in the last year. But also 1998 will bring a number of opportunities. We have listed British Aerospace, British Petroleum, British Telecom, Cable & Wireless, SmithKline Beecham, Glaxo Wellcome, Cadbury Schweppes, Diageo, Asda, Safeway, Tesco, Unilever, Scottish Newcastle, Barclays Bank, Royal Bank of Scotland and General Accident.

The French economy will also see some improvement which will be translated to the stock market. Some export oriented companies but also a few companies with only the French market as a target will show some improvement. In France we like Canal +, Carrefour, Promodes, Danone, Elf-Sanofi, LMVH, L’Oreal, Rhone-Poulenc, Louis Vuitton, Generale des Eaux, Society Generale and Total.

The Dutch AEX market will, with their large multinational companies, offer some opportunities for growth. We especially like ABN-AMRO, ING, Fortis Amev, Koninklijke Olie (Royal Dutch Shell), Unilever, AHOLD, Océ, Baan, Cap Gemini, Getronics, Royal Numico (former Nutricia), Nutreco, IHC Caland, Internatio Muller and AKZO. The fundamentals and the market forecasts of those companies promise growth in the next year.

The Italian market which has performed very well in the last years will also be promising in 1998. We expect more growth from Alleanza, Generali, Mediobanca, Banca di Roma, Olivetti, SAI and Cofide.

The United States of America

The second place were we expect a lot of growth is the U.S. stock market. The economy of the U.S. is still to good to change the course of the market. Companies in the U.S. with a large exposure in Asia will see a slow down in sales in the first six months of 1998. But a large number of companies, small and large cap, will show a positive result in 1998. It will be more difficult to sort them out but if the management, sales, profits, money flow and the product and production facilities are in order things will be promising in 1998. Ofcourse, as mentioned before, the exposure in Asia should be limited to 5 to maximal 10 % of sales.

A number of large cap, quality, stocks look very promising. We like AT&T, GTE, LCI, Bell South and Northern Telecom in the telecommunications sector.

A number of IT companies also offer some growth next year despite the lower stock price in the last quarter of 1997. We like Intel, AMD, Motorola, First Data, Computer Sciences, Honeywell, IBM, Compaq and Dell. Other companies which were badly hit could also see improvement next year, but later and at a higher risk, we mean HP, Lucent Technologies, Applied Materials, Unisys and the biggest gamble of all Oracle.

The financial sector, especially the regional institutions will offer growth in 1998. Like BancOne, Fifth-Third Bancorp and First Bank System. But also Salomon and American Express possess enough stength to continue their growth. The large international banks who are more exposed in Asia should not be written off. In three to six months the situation could be stabilised in Asia and Citicorp, J.P. Morgan, BankAmerica and Chase could easily regain the losses they experienced because of the Asia crisis. The crisis could have a positive effect on the large banks if Asia is implementing the conditions which were demanded by the IMF.

The insurance sector will show a good performance in 1998 and certainly the U.S oriented insurers like Travelers and Allstate.

The retail sector will have no interference of the Asia crisis and it is therefore an interesting investment, you could think about Kroger, Dayton Hudson, Kmart and Ingles Markets.

The food companies are also less affected by the crisis. Companies like Anheuser-Busch, Archer Daniels Midland, Sara Lee and Kellogg. But we also see an opportunity for consument producer Procter & Gamble.

Another protection against the Asian influence are the energy providers like Colonial Gas, Eastern Utilities and Atlantic Energy.

The oil producers and services industry is because of the slump in oil prices less attractive at the moment. But the demand for oil will increase in the future. On the short term they will more or less keep their value but on the longer term they will become expensive. We like large producers like Exxon, Texaco and Mobile. But also the smaller producers like Occidental Petroleum, Amarada Hess and Phillips are attractive. The oil services industry also possesses a bright future. We like Schlumberger, Diamond Offshore, BJ Services, Baker-Hughes and Transocean Offshore in this category. The reason to chose the services companies is that they possess the knowledge of deep-ocean drilling.

The best perfoming sector in 1998 will be the pharmaceutical companies like Bristol Myers-Squibb, Eli Lily, Merck and the darling of the stock market Pfizer.

Further we like General Electric, Lockeed Martin and Raytheon. We also like companies which are mainly domestically oriented like AOL, Staples, Schering-Plough and Sunbeam. And finally the first quarter of 1998 will also be profitable for the transport sector. We like AMR, Delta Airlines and Federal Express.

Not only the large cap companies will see growth. Also a number of small cap companies are very promising. The P/E ratio of small cap companies is at 14 or 15 where as the P/E of the S&P 500 companies is around 20. The orientation on the U.S. market is an another advantage. The small cap companies will maybe capable to beat the performance of the large cap companies in the first months of 1998.

In the small cap league we like Imperial Credit, Redwood Trust, Commerce Capital Investment Services, Method, Vesta, Swiss International, HS Resources, Miravant Medical, IRT technologies, Technitrol, Guildford Mills, Baker Fabrics, US freightways, Comair, Hot Topic and Landries.

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