Alcatel, ABN Amro Are Among 2001 European Picks: Taking
Stock
By Alistair Barr
London, Jan. 5 (Bloomberg) -- European computer-related stocks such as Alcatel SA and
Ericsson AB are among top picks for 2001 from investors and analysts after Wednesday's
surprise rate cut by the U.S. Federal Reserve.
``We're shifting out of defensive stocks and back toward technology, and that process will be
accelerated'' now that the U.S. central bank has lowered borrowing costs, said Jason James,
European equity strategist at HSBC Holdings Plc in London.
Financial companies such as ABN Amro Holding NV, the No. 1 Dutch bank, and Axa SA, the
world's biggest insurer, also are expected to climb as lower interest rates raise demand for
lending and boost the value of their fixed-income portfolios.
``Banks have historically been short-term beneficiaries of rate cuts,'' said Anna Mackman,
European equity strategist at Credit Suisse First Boston. ``The Fed is saying that the way to
avoid a credit crunch is not to have one, and that helps the banks.''
CSFB is advising clients to buy shares of UBS AG, the largest Swiss lender.
James said he's recommending that clients purchase stock in Spirent Plc, the No. 1 maker of
telecom testing equipment; CMG Plc, an Anglo-Dutch computer-services and software
company; and Nycomed Amersham Plc, the biggest manufacturer of diagnostic- imaging
equipment.
The Fed lowered the overnight bank lending rate by a half point to 6 percent, citing weaker
corporate sales and production and dwindling consumer confidence. It acted between regularly
scheduled policy meetings, the first time the central bank has done so since October 1998,
after the Russian government's debt default.
Unexpected
The move increased confidence among bullish investors that the central bank can avoid an
abrupt slowdown in the world's biggest economy. For more negative strategists, though, the
unexpected decision suggested that a slump in economic growth may come more quickly than
expected.
Ericsson and Alcatel, Europe's two biggest phone-equipment companies, will likely gain as
lower interest rates boost the perceived value of their future earnings.
Companies' future profits are valued by discounting them against interest rates or bond yields,
and the theoretical value of those profits increases when rates fall. Computer-related stocks
often trade at many times forecast profits and so tend to be more vulnerable after
disappointing investors' expectations than companies trading at lower multiples.
To be sure, some strategists are waiting for more economic data and additional rate cuts in the
U.S. and in Europe before shifting their focus from companies which are considered reliable
profit generators when economic growth weakens, such as drugmakers.
`Defensive Tone'
``There's still a defensive tone to our stock-picking,'' said Khuram Chaudhry, European equity
strategist at Merrill Lynch & Co. in London. ``Tobacco shares look cheap, and the litigation
issues in the industry are receding.''
British American Tobacco Plc, the No. 2 tobacco company, sells for less than nine times
estimated 2000 profit, while the Dow Jones Stoxx 50 Index trades at an average 27 times.
Chaudhry said he's awaiting more economic reports, including today's release of monthly U.S.
employment data for December, and further rate cuts before advising clients to buy shares of
economically sensitive companies, such as Berkeley Group Plc, the No. 2 U.K. homebuilder.
Some strategists were perturbed because the Fed acted between policy meetings. Mackman
said the central bank may be expecting that fourth-quarter earnings reports due from U.S.
companies over the next three weeks will disappoint investors.
``Is there something they know that we don't?'' she asked. ``Why couldn't they wait until the
Jan. 31 meeting?''
As many as 700 U.S. companies are likely to announce fourth- quarter earnings will fall short of
estimates, the most for any period since at least 1995 and possibly the most ever, Chuck Hill,
research director at First Call/Thomson Financial, said Wednesday.
``The Fed may be putting out some good news before these bad earnings coming out,''
Mackman said. |
