LONDON, 16 September — Starting with Germany, a weak economic sentiment was prevalent. The Information und Forschung (IFO), based on surveys of 2,500 companies, business climate or Sentiment Index unexpectedly dropped for the third time to 88.8, with manufacturers leading the decline. The recovery seems to be far from coming. The economic sentiment is wavering: The unpredictable outcome of the elections, the flood catastrophe, and the related postponed tax reform (from 2003 to 2004) as well as disastrous budget balance and a deteriorating Iraq crisis cloud the picture. We, nevertheless, still believe in recovery, but it will be gradual and slow.

In Switzerland, the Swiss Purchasing Manager Index (PMI) fell to 45.4 clearly below the critical value of 50, indicating a contraction in manufacturing production. This is due to the difficult global economic environment, which for Switzerland as a small open economy is essential. The Konjunkturforschungsstelle (KOF) barometer, which forecasts economic performance, still points upward. As the KOF indicator reflects the total economy, we should watch the August release on Sept. 27.

The weakness in the IFO is not just a German story! The euro area overall PMI fell from 51.6 in July to 50.8 in August, after a long period of strong recovery from October 2001 to May 2002. For the euro area, output fell 0.9 points, new orders fell 1 point, employment fell 1.7 points, and unwanted inventories rose 0.5 point. Across countries, German PMI fell by 1 point, the French PMI fell by 1.3 points, and the Italian PMI fell by 0.2 point. Therefore, we believe that the expectation of an interest cut continues to be premature.

Consumer confidence seems to find a floor. The Sentiment Index fell slightly below 88, and expectations as well as the current conditions components fell. The drop back in the sentiment index and weaker income suggests weaker consumer spending. But: Cheap borrowing costs support discretionary spending thus cushioning any slowdown in spending. The actual reading of the consumer confidence index indicates that private consumption increases with a strong 3 percent rate.

In Japan, there were big revisions in the gross domestic products (GDP) growth. For example, the GDP figures for the second quarter 2002 released on Aug. 31 came in at 1.9 percent stronger than expected. Main driver for the first growth since more than a year were consumer spending and net exports.

The new method of calculating GDP wiped away the first quarter’s 5.7 percent growth to -0.1 percent.

Consequently, with the new calculations method, Japan’s economic sentiment is in a more severe state than previously thought, however recovery has begun. In the United States there was an opposite trend as reflected by the Chicago PMI and the Institute for Supply Management (ISM) Index. The US manufacturing sector remains stagnant.

The ISM survey shows that, after July’s sharp drop in activity, manufacturing output in August was flat. In other words, growth in the US manufacturing sector was almost non-existent for the second consecutive month, adding to pessimism on the outlook for the US economy. That is no disaster, but it still means that economic recovery phase is growing below its potential growth rate of about 3 percent.

The ISM index remained at 50.5 in August, adding to the unease among investors about the economic recovery sentiment, which has struggled over the past few months and exacerbated a decline in world equity markets.

Conclusions for our investment policy, based on the above economic sentiments and indicators, are as follows:

— Outlook for Germany/Europe might clear after the elections

— Outlook for economic recovery in the US is intact

— Recovery speed at 2.5 percent — 3.5 percent and not 4 percent — 5 percent

— Valuations continue to be very low

— Re-affirm our view that equities will out-perform bonds in the medium term

— In the short term, however, the technical correction will continue.

(The information contained herein is for information only and should not be construed as an offer or a solicitation to purchase, subscribe, sell or redeem any investments. While Clariden Bank uses reasonable efforts to obtain information from sources, which it believes to be reliable, Clariden Bank makes no representation or warranty as to the accuracy, reliability or completeness of the information)