Global chip sector termed "underweight"

SEOUL/LONDON: Merrill Lynch flipped its recommendation on the global semiconductor sector to "underweight" from "overweight", saying it believed the shares offered no upside from current levels.

Merrill also cut its recommendations on a number of semiconductor firms including Intel Corp., the world's largest chip maker, and European companies STMicroelectronics and Infineon.

Both Britain's ARM and Dutch semiconductor equipment maker ASML were also downgraded. Merrill separately cut its rating on semiconductor equipment makers to "neutral" from "overweight".

"Stock prices have declined, but we believe that they have the potential to decline further, and at a minimum we think that semiconductor equities offer no upside from current levels," the investment bank said in a note to clients.

Chip stocks slipped in Europe, with ARM down 2 percent, ASML off 1.3 percent, Infineon down 1.1 percent, and STM 1 percent lower by 0936 GMT.Merrill cut both ASML and Infineon to "neutral" from "buy", and cut ARM and STMicro to "sell" from "neutral".

Intel shares traded in Germany were down to the equivalent of $26.09 after closing on the Nasdaq at $26.57 on Friday. Merrill cut Intel to "neutral" from "buy".

Merrill said it was beginning to doubt whether the inventory rebuild needed in order to support its industry estimates would occur. That in turn raised the risk that the industry would move closer to supply-and-demand equilibrium in 2004, and into oversupply in 2005.

"Any weakness in average selling prices will feed through quickly to profit margins, and earnings. We believe that the risk of a material downward adjustment in the financial outlook for the semiconductor business is higher now than at any point since early 2002," it said.

Merrill cut its forecast for the sector's 2005 revenue growth to six percent from 16 percent, citing weaker average selling price assumptions and a lower unit forecast.