LONDON, 7 July 2003 — The S&P500 has gained 26 percent since the low registered from the middle of March to the middle of June. We believe that the equity market rally was too fast, and we expect that there will be a short-term correction:

Technical Indicators show short-term sell signals

For example, the Advance-Decline Line indicates an extremely overbought situation. The Advance-Decline Line subtracts the number of shares with falling prices from the number of shares with rising prices.

Private investors in the US are already very bullish on stocks again. Stock prices are ahead of profit expectations, the rise of the price/earnings ratio was too fast.

Is this an argument for reducing the equity component of out investment strategy (tactical asset allocation)?

Despite our expectation of a short-term correction on equity markets, we are not reducing the equity exposure of our investment strategy. We do not expect any downturn in the equity markets in the mid to long-term. Why is this?

Only the short-term technical indicators are showing sell signals

Based on the risk premium that provides an indication of the attraction of stocks in relation to bonds, equities are still quite cheap

The price/earnings ratio (P/E) is not extremely high

The improvement in the US surveys of both consumers and producers points to a continuation of the moderate economic upturn

The profit momentum that was previously based primarily on cost savings should be driven higher by rising sales figures.

Clariden’s equity strategy is to reduce the Materials sector. The Materials sector shows a high relative P/E Since the end of last year. Profit expectations for the Materials sector were revised downward by 6 percent.

Only the Consumer Staples sector shows worse profit momentum. However, we are already under weighted in this sector. Alternatively, we will invest the funds freed up as a result of reducing the materials sector in the Consumer Discretionary sector where, up until now, we have been under weighted. This sector is favorably valued, based on the relative P/E. At the same time, the recovery of consumer’s confidence after the downturn at the beginning of the year is a sign that this sector should be weighted at least neutrally.

At the beginning of the year, in March, when bond yields reached new lows (the yield on ten-year US Treasury bonds was about 3.6 percent), and then subsequently shot up, the bond rally was considered to be over. However, this was not the case. Since May, fears of deflation have sent bond yields back down again, and in mid-June, the ten-year US government bonds reached a new historical low of about 3.1 percent. Unfortunately, our bond strategy (short duration) did not pay off.

So what next? Will yields hear even further down and again reach new record lows? We assume that the bottom has been reached, at least in the US. We believe that the current fears of deflation will disappear in the near future. US authorities are so watchful to avoid deflation at all costs (also because in such an event, government debt would weigh in heavily) that they will achieve this goal by overshooting (in particular, through an aggressively accommodating monetary policy and generous fiscal policy), which in turn may fuel inflation.

Based on these assumptions, it makes sense to analyze inflation-linked bonds (TIPS-treasury inflation protected securities) more closely. Fears of deflation have allowed inflation expectations derived form US TIPS to drop to 1.6 percent. Investors, that expect US inflation to be above this figure in the future, should consider investing in inflation-protected bonds. Since our 2003 and 2004 inflation forecasts of 2.4 percent and 2.3 percent respectively, are well above the inflation expectations derived from TIPS, and last buy not least, based on the interesting risk/yield characteristics of such securities, we have decided to invest in US inflation-protected bonds.

(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)