2002 outlook FFG Global Investment Research February 2002.

2002 outlook

FFG Global Investment ResearchFebruary 2002

FFG

February 2002

FORUM FINANCE GROUP S.AG

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hInvestment Perspectives 2002 - Outlook Investment Perspectives 2002 - Outlook

Copyright Forum Finance Group S.A.2

2002 a long road to recovery

• Recovery underway• consumer demand

• housing and construction

• inventory correction

• But it may be a bumpy ride• excess capacity

• unemployment on the rise

• corporate profits depressed

• global recovery delayed

FFG

February 2002


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The Recovery

US Personal Spending

-2

-1

0

1

2

3

4

5

6

7

Jan-90 Jan-93 Jan-96 Jan-99 Jan-02

US Consumer Confidence

40

60

80

100

120

140

160


• Consumption remains healthy - near LT average

• Confidence appears to have stabilized– expectations component steadily increasing

FFG

February 2002


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The Recovery

• Low financing costs keep housing market bouyant– Durable goods sales appear steady in January

• Construction spending maintained

US Construction Spending

-20

-15

-10

-5

0

5

10

15

20


US Housing Starts

600

800

1000

1200

1400

1600

1800

2000


FFG

February 2002


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The Recovery

• Inventory Correction is nearing its end– Largest decline in post war history

• Businesses are becoming more Positive

Philadelphia Fed Business Outlook

-50

-30

-10

10

30

50


US Business Inventories

-8

-6

-4

-2

0

2

4

6

8

10

12


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February 2002


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The Headwinds

• Unemployment on the rise– historically rises long after GDP bottom

• Personal Income growth continues to slow– Is the consumer out of gas?

US Personal Income

0

1

2

3

4

5

6

7

8

9

10


Unemployment Rate US

3

4

5

6

7

8


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February 2002


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The Headwinds

• Capex Lag– Capex trails Industrial Production bottom by 3-9 months

• Capacity Utilisation near all time lows– Tech sector extremely depressed, together argues for longer lag

this time around

Capacity Utilization US

50

55

60

65

70

75

80

85

90

95


Non Tech

Tech

US CAPEX vs. IP

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

30.00

Mar-71 Mar-74 Mar-77 Mar-80 Mar-83 Mar-86 Mar-89 Mar-92 Mar-95 Mar-98 Mar-01

% change annual

3 month lag6 month lag

9 month lag 6 month lag

??

Capex

IP

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February 2002


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The Headwinds

• Depressed Corporate Profits– Little cash for expansion of business spending

• Fed is pushing on a String– Low rates not enticing borrowing yet.

US Corporate Profits % change

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Jan-74 Jan-78 Jan-82 Jan-86 Jan-90 Jan-94 Jan-98

Bank Commercial CreditSeasonally Adjusted

Jan-02

FFG

February 2002


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The Headwinds

• Global Economy in a recession– lagging US trends

• Europe continues to falter– Employment and growth continue to fall

EU Unemployment-35

-30

-25

-20

-15

-10

-5

0

5

Dec-92 Dec-95 Dec-98 Dec-01

6

7

8

9

10

11

12

EU Consumer Confidence LHS

RHS

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2


EU Business Climate

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February 2002


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Conclusion

• Economy– Recovery will be slow

• Inventory led growth in Q1

• Lull into Q2/3 as end demand lags

• Capex begins to recover in late 2002

• 2003 real year of acceleration

• US leads EU growth by at least 1 quarter

• Euro remains weak until 2nd half of year

FFG

February 2002


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Markets• Equity Valuation

– Early recovery priced in • Long term DDM indicates fair value at these levels

• Short term risk as temporary economic lull may be coming

• Implied Growth in Tech sector still too high

• Yield Curve– Interest rate have likely bottomed in the US, close in Europe

– Look for higher short term rates by year end

25%

21%

12%13%

0%

5%

10%

15%

20%

25%

30%

Technology

ImpliedImplied EstimateEstimate

Non-Tech

Implied Growth Analysis S&P 500 DDM

EARNINGS $ 51 52 53 54 55 56 57 58P/E

RATES %

4.40% 1623 1655 1686 1718 1750 1782 1814 1845 324.50% 1488 1517 1546 1575 1604 1633 1663 1692 294.60% 1373 1400 1427 1454 1481 1508 1535 1562 274.70% 1275 1300 1325 1350 1375 1400 1425 1450 254.80% 1190 1213 1237 1260 1283 1307 1330 1353 234.90% 1116 1138 1159 1181 1203 1225 1247 1269 225.00% 1050 1071 1091 1112 1132 1153 1174 1194 215.10% 992 1011 1031 1050 1069 1089 1108 1128 195.20% 939 958 976 995 1013 1032 1050 1068 185.30% 893 910 928 945 963 980 998 1015 18

FFG

February 2002


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• Asset Allocation– Underweight market slightly - await second leg of correction– Fixed Income allocation focused on 2-4 years, and increased exposure to lower grade

corporate bonds

• Sector Allocation (focus on)– Consumer cyclical

• Favor electronics and apparel for second half 2002– Valuations favourable, (Radio Shack, Abercrombie & Fitch)

– Energy• Favor large cap Integrated and Oil Services

– Valuations depressed, earnings growth implied too low (Total Fina, Schlumberger, BJ Services)

– Technology• Telecom equipment no recovery until late in 2002• Favor software, enterprise networking, wireless operators, semi-equipment (Oracle, Cisco, Vodafone,

KLA tencor)

Markets

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February 2002


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Conclusion

• Markets– Underweight slightly in asset allocation -risk of correction

• Focus on Select technology, Energy and Consumer cyclicals

• Equities should outperform in 2nd half 2002

• Increase equity weighting in event of market sell off.

– Overweight near term maturities and corporate debt in fixed income allocation

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2002 outlook FFG Global Investment Research February 2002.

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