Weekly commentary

Economy: Latest US economic data continues to point to a slowdown in economic activity as higher interest rates and oil prices bite into consumer spending. In Australia we continue to forecast strong GDP growth of 4.4% in FY01 driven by strong growth in exports as the benefits of the weak A$ begin to flow through.

Equities: The US equity market was extremely volatile over the past week as the market reassesses company earnings outlook. Technology and telecommunications shares particularly have been hit hard on earnings disappointments.

The NASDAQ recovered by the end of the week after reaching its lowest level since October last year. The market is forecasting fourth quarter earnings growth of 14.4%.

The sigh of relief at passing the October 19th anniversary was heard all around the market.

Australian equities was one of the best performing markets, declining by only 4.0% since the beginning of September while the Dow Jones has declined by 10.2%.

NCP continued to determine where our market was heading, with further news from the

AGM weakening their share price.

TECHNOLOGY STOCKS: Received a battering after some companies warned the market of profit downgrades. Melbourne IT have now warned the market three times, while Solution 6 spooked the market with CEO Neil Gamble announcing an forecasting an unexpected financial loss for the coming year.

Investors continued their rally into Banks, Retail & Utility stocks, providing a shelter from the market volatility.

Resource stocks continue to be sold as most fund managers have a sell on the sector.

One Steel

Overview Onesteel will operate BHP’s Rod & Bar, long products & Tubemakers steel distribution business. Steel production is centred on the Whyalla’s blast furnace & high cost Rooty Hill mini mill. The business is vertically integrated (through production of raw steel at Whyalla, production of finished pipe products & distribution and marketing activities). One steel has already implemented substantial structural initiatives over the past couple of years including the closure of the Newcastle blast furnace to reduce costs. Further significant cost savings & efficiencies are likely to be achieved. Operating margins & profitability are forecast to improve from disappointing FY00 result.

Earnings forecast to improve from a low base of $53m (eps of 25.4cents) for the years FY01 to FY03. Dividend to average 19cents per share (yield 7.2%).

Capital Flows

The Nasdaq increased by .9% over the week, recovering slightly after a severe 10.1% decline in the prior week due to earnings disappointments. The Australian Small Industr-ials remained remarkable stable during this period of volatility, moving contrary to the NASDAQ with a decrease of 1.3% over the week & an increase of .6% against the NASDAQ plunge. We expect ongoing volatility in the US market to continue to impact Australian Small Industrials. None-theless we consider that the past two weeks supports our view that the Australian Small Industrials market has significantly less growth picked into it, thereby limiting the downside risk.

Quality companies such as CXP, IFM, KAZ and LAC continue to perform. These stocks have low risk, high growth earnings streams and offer considerable share price performance in the face of market uncertainty. We continue to recommend the key themes of service companies, strong franchises & select technology stocks, and regard any NASDAQ led weakness as a buying opportunity in our preferred stocks.

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