UBS CIO WM Global Investment Office

UBS CIO WM Global Investment Office CIO monthly video For smartphone users: scan the code with an app like "scan" UBS CIO Monthly Extended March 2013 Published 21 February 2013 This report has been prepared by UBS AG. Please see important disclaimers and disclosures at the end of the document. Past performance is no indication of future performance. The market prices provided are closing prices on the respective principal stock exchange. This applies to all performance charts and tables in this publication. EFTA01089574 Table of Contents Section 1 Base slides 3 Section 2 Asset class views 13 2.A Equities 14 2.B Fixed income 24 2.0 Foreign exchange 31 2.D NTAC: Commodities, Listed real estate, Hedge funds and Private equity 35 EFTA01089575 Section 1 Base slides EtUBS EFTA01089576 Summary "The recent rise in yields highlights the risks in owning government bonds. We prefer corporate bonds and equities." UBS • Economy We see global growth on a stronger footing than last year. In the US, rising house prices and ongoing job growth support private consumption. We expect politicians to strike another last- minute fiscal deal and US GDP to grow by around 2% in 2013. The Eurozone economy is expected to lag, and recent data shows large regional divergence. While German business sentiment has improved, the outlook for the French economy remains weak as fiscal tightening still has to catch up to other European countries. Meanwhile, the Chinese economy remains on an uptrend, supported by strong credit growth and rising exports. • Equities Equities remain supported by improving global growth momentum and we maintain our moderate overweight recommendation. US companies continue to show the strongest earnings momentum, and we expect US earnings to grow by a solid 6% in 2013. Conversely, Canadian equities face relatively weak earnings dynamics, which will likely be made worse by the strong CAD, and are relatively expensive. As a result, this month we have increased our overweight to US equities, and introduced a new underweight position in Canadian equities. We also remain constructive on emerging market (EM) equities. Accelerating economic growth in key countries, stabilizing profit margins and decent valuations speak in favor of the region. • Fixed Income Government bonds reacted strongly to the improving growth picture and 10-year yields on US Treasuries and German Bunds have risen considerably since the beginning of the year. While we expect rates to remain broadly stable over the next 6 months, real returns on government bonds will likely be negative and hence we maintain our large underweight position. Better alternatives can be found in investment grade (IG), high yield (HY) and emerging market (EM) corporate bonds. IG corporate bonds are expected to achieve a better total return despite limited spread tightening potential. HY corporate bonds still offer good investment opportunities due to low expected default rates and attractive risk premiums over other fixed income segments. And EM corporate bonds offer yield income and some potential for tighter spread, with relatively low volatility. • Commodities While in particular cyclical commodities profit from accelerating global growth, we see better risk return prospects in other asset classes and maintain a neutral stance. Platinum: Attractively valued remains a CIO Preferred theme. • Foreign Exchange The British pound is our most preferred currency. After weakening year to date, we expect that the currency will be supported as economic data begins to improve. The euro, on the other hand, looks relatively expensive, especially given political risks around the Italian elections. We remain underweight the single currency. 3 Please see important disclaimer and disclosures at the end of the document. EFTA01089577 Cross-asset preferences Equities Fixed income Commodities Foreign exchange Most preferred • US • Emerging markets • US mid caps • Western winners from EM growth • Swiss high quality dividend yields • Relative value and equity long/short hedge funds • US high yield • Global investment grade credit • EM corporate bonds • Corporate hybrids • Developed Asia banks • Relative value hedge funds • Emerging markets • GBP(71) • Platinum Least preferred • Canada (SO • European telecoms • Too expensive government bonds (SO • EUR (V) %h Recent Recent upgrades a downgrades Portfolio weights Commodities U• • quidity Real Estate 5% 5% 9% High Grade Bonds Hedge Funds/ p 5% Private Equity 10% OPP.Equities U II% Equities Europe 23% hy Grade Corporates Bonds 9% High Yield Bonds 3% EM Soy. Bonds 3% EM Corp. Bonds 3% Equities Other 8% Equities EM 6% Note: Portfolio weights are for an advisory client with a "EUR moderate profile. For portfolio weights related to other risk profiles or currencies please contact your client advisor. UBS Please see important disclaimer and disclosures at the end of the document. EFTA01089578 Recommended tactical asset allocation Tactical asset allocation deviations from benchmark* underweLght neutral over•wrght Cash in a, E 3 cr Equities total US Eurozone UK Japan Switzerland EM Other MI -o v. c o co Bonds total Government bonds Corporate bonds (IG) High yield bonds EM sovereign bonds (USD) EM corporate bonds (USD) w v. : al -o E E o u Commodities total Precious metals Energy Base metals Agricultural Listed Real Estate • new old Source: UBS CIO WM Global Investment Office — as of 21.02.2013 Currency allocation** undeNteight USD EUR GBP JPY CHF SEK N0K CAD NZD AUD neutral overweight ■ new old * Please note that the bar charts show total portfolio preferences and thus can be interpreted as the recommended deviation from the relevant portfolio benchmark for any given asset class and sub asset class. The UBS Investment House view is largely reflected in the majority of UBS Discretionary Mandates and forms the basis of UBS Advisory Mandates. Note that the implementation in Discretionary or Advisory Mandates might deviate slightly from the 'unconstrained" asset allocation shown above, depending on benchmarks, currency positions and due to other implementation considerations. **Note: The currency allocation has been changed on 8 February 2013, introducing the overweight in GBP and the underweight in EUR. UBS S Please see important disclaimer and disclosures at the end of the document. EFTA01089579 CIO preferred investment themes (1/2) Liquidity & Foreign Exchange • Emerging market currencies: An underappreciated asset class The currencies of EM countries, collectively as an asset class and measured using total returns (i.e. including interest received), have the potential to contribute positively to the longer-term returns of a well-diversified portfolio. We believe that this is especially relevant now that the developed world is settling into an extended period of very low interest rates. • GBP — the best of the majors The pound has come under pressure after comments from incoming Bank of England Governor Carney suggesting changes to monetary policy targets, Prime Minister Cameron's proposal for a referendum on the UK's membership of the EU, and weak economic data. However, we believe that the weakness of Sterling is overdone and first signs point to stronger economic data in the months to come. As a result, the pound is our preferred major currency. Fixed Income Yield pickup with corporate hybrids The corporate hybrid segment is a lesser known segment of the investment grade credit world that has lagged the broad-based spread recovery. As a consequence, we see attractive opportunities for investors with a suitable risk tolerance or trading-orientation. We expect mid- to high-single-digit returns on selected instruments over a 12-month period. US high yield corporate bonds Positive economic growth, robust corporate earnings, and healthy balance sheets provide support to US high yield (HY) corporate bonds. Current yield spreads of -495 basis points still price in a more dire economic outcome than we expect. Historically, US high yield bonds have delivered similar returns to US equities with lower volatility. We continue to believe that US high yield corporate bonds have a favorable risk/return and expect mid-single digit returns over the next six months. Senior loans are exposed to similar positive fundamentals, and offer an attractive, floating rate alternative to US HY. UBS Emerging market corporates: A growing asset class Within EM hard currency debt, we prefer corporate to sovereign due to its more attractive valuation and higher overall yield. Moreover, our relatively constructive current view on risk is another reason to prefer EM corporate over sovereign debt. Over a 6-month horizon, we expect EM corporate bonds to deliver total returns of more than 4%. Top-notch Asian banks shine amid weak competition Highly rated banks in developed Asia benefit from a consolidation in the banking industry in Europe and the US, while growth in emerging Asia continues to underpin their fundamentals. These issuers are, on average, AA- rated and we expect them to benefit from the ongoing global bank ratings downtrend. Senior bonds of these developed Asian banks provide moderate yields, whilst subordinated bank bonds of the same issuers provide good potential for credit spread tightening, given the scarcity value of Basel 2 compliant bank capital securities and the absence of regulatory bail-in regimes. Overall, we expect an excess return of a basket of subordinated and senior Asian bank bonds of more than 1% over comparable global issues over the next 6-12 months. Too expensive Government bonds' Improving economic data has already lead to an increase in government bond yields in most major markets. While tight fiscal budgets and high debt burdens in the US and Europe are unlikely to allow for a large increase in interest rates, even a small further rise would lead to negative total returns on benchmark government bonds, and we believe that the risk-reward in the bonds of most weaker countries is currently poor. We therefore recommend switching out of the affected bonds, which are identified in this theme. 1 = New investment theme The CIO preferred investment themes represent the CIO's highest conviction, thematic investment ideas. We aim to recommend ideas that are attractive on a risk-reward basis and which are expected to deliver positive absolute returns. It will include the best investment themes for each of our TAA overweights, further aligning the asset allocation and themes recommendations, along with a range of other short-, medium-, long-term, and SRI themes. 6 Please see important disclaimer and disclosures at the end of the document. EFTA01089580 CIO preferred investment themes (2/2) Equities • US mid caps: The sweet spot US economic data has begun to stabilize and forecasts now show an acceleration of growth in 2013. The greater domestic sales exposure of US mid caps, and their more cyclical sector make-up, give greater leverage to the US recovery. For these reasons we believe that mid-cap companies will outperform large caps in the US over the next 6-12 months. • Swiss high quality dividends The Swiss equity market currently offers a dividend yield of around 3.0%, while bond yields in the Swiss franc fixed income market are typically below 1%. Before 2009, dividend yields tended to be lower than bond yields. Moreover, unlike in the past, the Swiss dividend yield is now clearly higher than in the US and comparable to European peer markets. Overall, Swiss dividends are very attractive, in our view, in particular if investors focus on companies with high quality dividends - meaning that dividends are sustainable and steadily rising. • Emerging market equities We expect real GDP growth in emerging markets (EM) to accelerate to 5.1% in 2013 from 4.5% in 2012, which should support EM corporate earnings. We see EM earnings growth of around 11% over the next 12 months, as global monetary policy should remain accommodative. EM equities are trading below their longer-term averages on several valuation metrics, and will likely be supported by stronger EM currency performance against the US dollar over the next six months. • Western winners from emerging market growth Emerging economies continue to grow faster than developed economies. With little need to deleverage and repair balance sheets, Asian economies are also well positioned to continue outpacing their Western peers in the years ahead. We have identified companies from a variety of sectors in Europe, the US and Japan which have significant exposure to the rapidly growing emerging regions. We believe a diversified portfolio of these companies will reward investors seeking to profit from the robust demand growth in emerging economies. SUBS No turnaround for European telecoms Despite having already underperformed the broader Eurozone equity index, we expect further relative downside in the coming months. Operating results, free cash flows and, most of all, dividends will stay in free fall, and further adjustments to consensus estimates are required for 2013 projections and onward, in our view. Hence, we recommend investors to reduce exposure to Eurozone telecoms. Hedge Funds & Private Equity • The place to be in Hedge Funds The favourable conditions for relative value remain unchanged in 2013. A continued improvement in global growth and the supportive monetary policy backdrop supports spread products such as corporate bonds and securitized loans. Moreover, the decline in the number of market participants due to the Volcker rule should provide more opportunities to strategies such as fixed income arbitrage. We now also like equity long short which should benefit from stronger equity markets. The associated lower correlations among stocks should allow good performance for managers picking under- and overvalued stocks. We are now less keen to own event driven strategies as we do not expect distressed debt managers to be able to repeat their excellent 2012 performance in an improving economic environment. Commodities • Platinum: Attractively valued Platinum remains our most preferred precious metal. Production costs continue to rise, with marginal production costs now above USD 1,600/oz. If this supply backdrop meets with improved economic activity in the latter part of 1H13 and in 2H13, the platinum market will be undersupplied by 4.5% in 2013. With this supportive backdrop, we target a move toward USD 1,800- 1,850/oz during 2013.. 7 Please see important disclaimer and disclosures at the end of the document. EFTA01089581 Global economic outlook - Summary Key points • We expect the US economy to remain on its moderate but steady growth path. • In the Eurozone we think that economic activity is rebounding on the basis of rising sentiment in business surveys and less fiscal austerity relative to 2012. • In the emerging markets, we expect real GDP to grow at 5% in 2013. CIO View (Probability: 75%*) Sluggish expansion • We expect the US economy to remain on its moderate but steady growth path over the next six months. Stronger private sector demand and reaccelerating inventory accumulation will likely be offset by reemerging fiscal policy uncertainty. We expect Fed's open-ended QE3 program to last till year end and the government to reach another deficit deal. This deal replaces the current sequester spending cuts but does not include further spending reductions. • In the Eurozone, the sentiment in recent business surveys continues to improve, signaling that the recession will end in 1Q 2013. We expect a return to moderate growth rates in 2013 as the pressure from fiscal tightening declines and the increased macro stability supports business investment spending. Inflation is expected to continue to trend downward below 2%. The ECB is concerned about the risks to money market rates from the early LTRO repayments and the rise of the euro. At this juncture though, the ECB remains in wait-and-see mode. • The Chinese economy is in a moderate upswing cycle. 3Q12 marked the cyclical bottom in terms of year-on-year growth. Real GDP growth rebounded to 7.9% in 4Q12 and we expect around 8% growth on average in 2013. Headline CPI inflation is likely to rise gradually to 4% by year end. The government aims to keep inflation below 4% so it could be a policy concern later this year. While economic conditions are supportive in Asia and Latin America, EMEA continues to lag in the cycle. We are likely to see increased inflationary pressures in H2 2013, leading to an upward drift in EM rates. In Brazil, Russia and India, inflation has already become a policy constraint. $ Positive scenario (Probability: 10%*) Return to long-term trend • The Eurozone crisis abates. Financial market conditions recover, mitigating the drag from fiscal austerity. • Growth in Western Europe turns decisively positive in the early months of the new year and the US economy grows above trend. • Negative scenario (Probability: 15%*) Recession • There are three key downside risks to the global economy: 1) a significant escalation of the Eurozone debt crisis; 2) a protracted government shutdown and a sharper fiscal contraction in the US; and 3) a sharp deceleration of the Chinese economy. Each of these risks could precipitate a significant downturn in the global economy. Key dates 24/25 Feb 1 Mar 1 Mar 5 Mar 7 Mar 20 Mar 21 Mar EMU: Italian parliamentary elections US: ISM manufacturing purchasing managers' index (PMI) for February China: Manufacturing PMI (February) China: National People's Congress EMU: ECB press conference US: FOMC meeting results EMU: PMI Composite for March (flash) Global growth expected to be 3.0% in 2013 R•olg GDP row* .1 inflation in 2011 2012E 2013F 2011 2012,2013F Americas US 1.8 22 2.3 3.1 21 1.6 Canada 2.6 20 20 21 1.6 1.9 Iran 2.7 1.1 40 6.5 5.8 6.2 Asia/Pacific Lain .0.6 2.1 1.3 .0.3 0.0 0.3 A62443 2A 3.6 3.0 3.3 1.8 2.4 Chna 93 72 8.0 541 2.7 3.5 India 55 6.5 8.1 7.4 Europe world Et00204e 1.5 -OA 0.1 2.7 2.5 2.1 German, 3.1 09 08 75 21 two 17 0.2 0.4 21 20 1.3 0.5 -23 -0.4 2.9 3.4 2.6 fWn as -1.6 3.1 2,5 3.2 UK 0.9 00 0.8 65 28 7t stnuerliod 1.9 1.0 0.9 02 41.7 Ruzia 4.3 34 35 8.5 5.1 6.8 3.2 27 30 31 2.9 2.9 Source: U8S, as of 12 February 2013 In developing the CIO economic forecasts, CIO economists worked in collaboration with economists employed by UBS Investment Research. Forecasts and estimates are current only as of the date of this publication and may change without notice. Services and manufacturing diverging Global PMis 65 60 ss 50 rs. H 60 r 35 30 25 07 08 09 10 11 12 13 No-change line —Manufacturing —Services —Composite Source: JP Morgan, Bloomberg, UBS; as of January 2012 Note: Past performance is not an indication of future returns. *Scenario probabilities are based on qualitative assessment. UBS For further information please contact CIO economist Ricardo Garcia, Please see important disclaimer and disclosures at the end of the document. 8 EFTA01089582 Key financial market driver 1- Eurozone crisis Key points • We expect the Eurozone to gradually emerge from recession. Fiscal policy will be less restrictive than in 2012. • The Eurozone debt crisis is not over but ECB policy provides a credible backstop. • We think that Spain will need external support in coming months. The debt situation in Cyprus, a possible rating downgrade of Spain to junk, and general elections in Italy could further exacerbate the situation. CIO View (Probability: 70%•) Austerity and weak growth • The Eurozone economy is expected to leave recession behind in 1H 2013 after a weak fourth quarter. We believe that Spain will apply for an aid program in 1H 2013. Italy also risks needing support due to contagion from Spain and its own election uncertainty. Greece's debt remains highly unsustainable, but a near-term euro exit is unlikely. Ireland continues to recover gradually, but is highly indebted. We expect France to deliver negative headlines in 1H 2013 due to rising concerns about its fiscal slippage on the back of economic weakness. • We expect the Eurozone economy to grow slightly in 1H 2013 (moderately above consensus), with minor downside risks. The latest economic indicators support our base case that the recession will end in 1H 2013 and return to modest positive growth. The increased macro stability on the back of the improving peripheral current accounts and the OMT should support the improving economic trend. Consumer price inflation continues to fall, driven by pressure on output prices and commodity base effects. The ECB is carefully watching the strengthening of the euro and monitoring money market rates following the LTRO repayments, but remains in wait-and-see mode for now. • We think a revision of Spain's deficit targets by February could lead Moody's to cut the country's credit rating to junk. This would increase the cost of covering its large funding needs and push Spain into a program in the first half of 2013. Italy should remain rated investment grade if the new government continues the recent reform path. • Even with OMT support, longer-term peripheral yields should stay sensitive to countries' debt trajectories as debt levels remain very high. Banking supervision at the ECB will likely be operational by 2014, but a banking union is unlikely to be formed in the next few years, with the most controversial aspect being joint deposit insurance. • We think that Greece will fail to meet targets and exit risks will again increase if the current government loses its majority over further austerity demands from the IMF, possibly in 2H 2013. 71 Positive scenario (Probability: 15%•) Growth and fiscal stabilization • Bond yields converge as peripheral countries' budgets stay on track and economic activity across the Eurozone recovers faster than expected. Greece complies with the new austerity plans and market confidence is restored. Negative scenario (Probability: 15%•) Major shock • Major shocks include Spain and Italy being cut off from bond markets, i.e. requiring all new funding through ESM/IMF loans, with European rescue funds only able to cover them until the end of 2013; resistance from core countries against further support; a near-term Portuguese debt restructuring; a Greek euro exit in 1H 2013; massive fiscal slippage in France; or a major external shock. Key dates 24/25 Feb 7 Mar 14/15 Mar 21 Mar Italian parliamentary elections ECB press conference European Council conference PMI Composite for March (flash) Purchasing managers' indices point to improving momentum 65 60 55 50 45 40 35 30 25 07 08 09 10 11 — No-change line — Manufacturing —Services —Composite 12 Source: Bloomberg, UBS; as of January 2013 Yields of Spanish and Italian 5-year bonds In % 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 03/2011 08201 1 01/2012 06/2012 11/2012 —Italy — Spain —Bond Source: UBS, Bloomberg; as of 12 February 2013 Note: Past performance is not an indication of future returns. • Scenario probabilities are based on qualitative assessment. 13 UBS For further information please contact 00 analyst Thomas Wacker, and 00 economist Ricardo Garcia, g Please see important disclaimer and disclosures at the end of the document. EFTA01089583 Key financial market driver 2 - US economic outlook Key points • US growth should remain moderate, with accelerating private sector growth partially offset by fiscal tightening. • Inflation is expected to stay slightly below the Fed's target of 2% over the next six months. • The Fed's open-ended QE3 has dampened downside growth risk but hasn't dramatically boosted activity. CIO View (Probability: 70%*) Moderate expansion • We expect the economy to stay on a moderate growth path and the unemployment rate to come down gradually over the next six months. UBS forecasts real GDP growth of annualized 3.0% in 1Q 2013 (consensus: 1.5%) and 2.9% in 2Q 2013 (consensus: 2.1%), as private sector demand remains solid and very lean inventories give way to faster inventory accumulation. Inflation should stay slightly below the Fed's target of 2%. • Relative to 2012 policy, Congress has raised ordinary income, capital gains and dividend income tax rates for high- income earners and curtailed their allowable income exemptions. It has also allowed the payroll tax to expire for all households, raised the estate tax, and introduced healthcare reform tax hikes. The federal budget impact of these policy changes amounts to 0.9% of GDP, but the 2013 GOP growth impact will be more muted as households can lower their savings to offset the drop in after-tax income caused by higher tax rates. Congress extended all other tax and spending provisions and delayed the sequester budget cuts until 1 March. We expect the sequester spending cuts to kick in temporarily and fierce negotiations to bleed into a brief government shutdown after the current continuing resolution expires on 27 March. The culmination will likely be another deficit deal that replaces the current sequester spending cuts but does not include additional spending reductions. The political rift will likely lead to another US sovereign rating downgrade. • The Fed's open-ended QE3 program linked to labor market conditions - USD 85bn in Treasury and agency MBS purchases - mitigates downside growth risks, as weaker labor market data implies more easing, but has not dramatically boosted growth prospects. We expect QE3 to last until year-end with total purchases of USD 1.2trn. 74 Positive scenario (Probability: 15%•) Strong expansion • Growth accelerates persistently above 3%, propelled by expansive monetary policy, a resolution to the US long-term debt problem, strong growth in housing investment, and improved business and consumer confidence. This leads to higher inflation and the Fed responds by halting QE3 and raising rates sooner. • Faster-rising tax collection allows the government to cut deficits more aggressively. Fiscal policy tightens by more than 1% of GDP in 2013. 11 Negative scenario (Probability: 15%*) Growth recession • US fiscal deleveraging and an escalating Eurozone crisis weigh on the cyclical recovery. Falling profit margins weigh on business capital expenditures. Real GDP growth deteriorates. The Fed makes massive purchases of agency MBS and Treasuries under its QE3 program. • Political gridlock becomes totally dysfunctional, thus leading to a protracted government shutdown in the first half of 2013. The US credit rating is downgraded by multiple notches. Key dates 1 Mar 8 Mar 13 Mar 15 Mar 20 Mar ISM manufacturing purchasing managers' index for February Nonfarm payrolls and unemployment rate for February Advance retail sales for February University of Michigan consumer sentiment for March (preliminary) FOMC meeting results US growth to rebound after 4Q12 contraction US real GDP and its components, quarter-over-quarter annualized in % 8% qfq annudized osa 4% 2% 0% -2% -4% 6% B% AtIL 12% Q1 Q1 Q1 2036 2007 2008 Consumption • Cooker expenditures • hventones • Government Q1 Q1 Q1 Q1 C/1 2009 2010 2011 2012 2013 Gemmeroal red estate investment Residential immanent whet Exports —Real GDP (q/q annualized) Source: Thomson Datastream, UBS; as of 12 February 2013 US Current Activity Index (CAI) consistent with moderate growth US real GDP growth, actual and implied by US CAI, in % 6 4 2 0 -2 -6 -8 10 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 — Real GDP guarter-over-guarter annualized in % (actual) —Real GDP annualized in % (implied by US CAP Note: The US Current Activity Index (CAI) is a single composite of 25 growth indicators that correlate strongly with real GDP growth. Source: Bloomberg, UBS; as of January 2013 UBS 10 For further information please contact US economist Thomas Berner, Please see important disclaimer and disclosures at the end of the document. EFTA01089584 Key financial market driver 3 - China growth outlook Key points • We expect a moderate growth recovery in the coming quarters. • Key risks to the recovery could come from uncertainties in external demand, inflation and credit. • Budget for 2013 could be more expansionary than last year's. CIO View (Probability: 70%*) Modest growth recovery • We expect the modest economic recovery to continue in the coming months, driven by some restocking activities, strength in infrastructure investments, moderate recovery in the property sector and the delayed effects of previous easing measures. Our recent on-site meetings with officials and corporations also revealed a cautiously optimistic Chinese macro outlook. We expect GDP growth to improve from 7.8% in 2012 to 8.0% in 2013 (consensus: 8.1%). We think the export sector could underperform the domestic economy given the weak growth in Europe and the battle over the US debt ceiling in the course of the year. • Given the different timing of the Chinese New Year (it was in January last year but February this year), year-on-year macro data for January or February will be heavily distorted, i.e. January data would be particularly strong and February particularly weak. • The National People's Congress will be held on 5 March, with the government presenting the growth target for 2013, which is likely to remain at 7.5%, and the budget for 2013. Fiscal policy could be more expansionary, with a larger budgeted fiscal deficit of CNY 1,200bn in 2013 (about 2% of GDP), up from CNY 800bn in 2012. This could pose a moderate upside risk to consensus GDP growth forecasts. Furthermore, several new heads of the regulatory bodies and the central bank will come on board after the meeting, and new policies regarding wealth management products could be announced. Nonetheless, we do not expect a material shift in policies because of the personnel changes. • The major long-term economic and political reforms will likely be decided in the run-up to the third plenary session of the party's Central Committee in 2H 2013, most likely in October. We believe structural reforms - which aim to rebalance the economy and redistribute incomes and welfare to consumers - will improve the sustainability and quality of China's long-term economic growth. Positive scenario (Probability: 20%*) Growth acceleration • Economic momentum continues to improve and strength persists in 2013. This would require more substantial and effective fiscal, monetary and credit policy support from the government and possibly also a fast improvement in the Eurozone debt crisis and the US fiscal and debt issues. M Negative scenario (Probability: 10%*) Sharp economic downturn • Another round of global financial stress or recession, likely due to the Eurozone debt crisis or a fiscal policy-induced downturn in the US, would weigh on Chinese exports. • Despite soft aggregate demand and economic activity, residential property prices and/or consumer price inflation rise rapidly, which constrains policy maneuvers and its effectiveness in stimulating economic growth. • A major crackdown on shadow banking tightens liquidity and credit conditions and negatively affects growth. Key dates 1 Mar 5 Mar 9 Mar Manufacturing PMI (February) National People's Congress Industrial production, fixed asset investment, retail sales (January and February) Softening in official PMI was largely due to seasonal factors 35 --35 — 3" Source: Bloomberg, UBS; as of February 2013. Index above/below 50 indicates expansion/contraction Demand from developed economies still casts shadow over export recovery 60 40 * 20 fij 0 I 3 C20) DecC8 Dec'09 UO10 Dec-11 —)pct's —ImpOrM Deco2 Source: Bloomberg, UBS; as of February 2013 Note: Past performance is not an indication of future returns. " Scenario probabilities are based on qualitative assessment. UBS For further information please contact CIO's analysts Gary Tsang, 11 Glenda Yu, S and Patrick Ho, Please see important disclaimer and disclosures at the end of the document. EFTA01089585 Section 2 Asset class views EFTA01089586 Section 2.A Asset class views Equities 4 UBS EFTA01089587 Equities overview Global equity markets - Key points • We recommend an overall overweight allocation in equities (see summary on slide 3). • We have increased our preference for US equities. Company earnings remain stronger than in other regions. Recent economic data confirms that domestic demand is holding up solidly, underpinning revenue growth. The recent US-dollar weakness provides additional support for company earnings. • We maintain our neutral stance on Eurozone equities. Value is attractive compared to global equities. However, due to recessions in several countries and the recent strengthening of the euro, earnings dynamics remain weak. • We maintain the overweight position in emerging market equities. Economic activity in key countries has bottomed out and is improving (e.g. industrial production, exports). Accordingly company earnings show signs of stabilization in some of the larger emerging markets and we expect them to improve going forward. • We are adopting a cautious position on Canadian equities. Company earnings are currently weaker than in other countries. The currency remains strong, and valuations are high compared to other markets. • We remain neutral on Australian equities. The earnings dynamics of Australian companies continue to lag those of other markets. Still, the pace of downward revisions on earnings in the Materials sector is clearly slowing. Improving commodity demand from China and the recent rise in the iron ore price speak for a more benign outlook. • We are neutral on Swiss equities. Companies are showing solid earnings growth due to the defensive sector composition. On the other hand, the market is trading at a premium to global equities. • We maintain our neutral view on UK equities. In the UK, earnings dynamics lag other markets. The market is trading at a valuation discount, and we expect earnings dynamics to improve over the coming quarters. Global equity sectors — Key points • We reiterate our overweight on IT as the sector should benefit from increased corporate and consumer spending. With earnings trends and cash flow generation strong, sector valuation is very attractive. • We confirm our positive view on Materials as the global economic outlook is improving, which provides a favorable backdrop for improving sector earnings. We prefer US materials and UK mining over European materials. • We keep our overweight on Consumer Staples and Healthcare which offer superior and long-term earnings growth with low volatility and high free cash flow generation. Both sectors have strong balance sheets, and attractive dividend yields as well as dividend growth prospects. Within Healthcare, we prefer European companies over US ones. • We remain underweight on Telecoms as revenue growth is weak and pricing/margin pressure is high. • We confirm our underweight on Utilities as the business environment (weak demand, regulatory pressure, and lower power prices) remains tough. The earnings outlook remains muted. • Consumer Discretionary should benefit from solid consumer confidence in major countries. While sector earnings growth should continue to be superior, valuation is relatively high. We reiterate our neutral view. • Despite some headwinds in major regions (e.g., regulatory risks, low interest rates), earnings trends for Financials are improving and we keep our neutral view. • With expected gradual improvement in leading indicators and early signs of a better global macro environment, Industrials should benefit. However, we remain neutral as the current sector valuation is fair. Preferences (six months) neutral ovenveight Equities USA Canada EMU UK Switzerland Australia Hong Kong Japan Singapore 2 Global EM 'a (Ins) n new old Note: Preference in hedged terms (excl. currency movements) Sector preferences within global equity markets Current most preferred sectors Consumer Staples Health Care IT Materials Source: UBS Current least preferred sectors Telecom Utilities UBS For further information please contact CIO asset class specialists Markus lrngartinger, 14 or Carsten Schlufter, Please see important disclaimer and disclosures at the end of the document. EFTA01089588 US equities Preference: overweight S&P 500 (20 Feb): 1,512 (last publication: 1,495) UBS View S&P 500 (six-month target): 1,570 • We maintain our preference for US equities relative to other developed equity markets. The recent Q4 earnings season revealed solid earnings growth of about 6% year-over-year. In our base case of ongoing economic expansion, the upcoming fiscal policy issues do not derail the economic recovery. • This is a precondition for solid earnings growth of 5-7%, which we expect in 2013. This forecast is mainly built on solid revenue growth in 2013. With margins already at high levels, we do not expect margin expansion to drive earnings growth. • Short-term, the recent US-dollar weakness provides an additional support to earnings. • The Fed's very pro-growth monetary policy stance is a clear advantage for the local equity market. The end of Operation Twist has been followed by additional large (net) bond buying, which we expect to last late into this year. • US equities are forecast to gradually advance with earnings growth. Improving manufacturing activity should allow for some modest re-rating in the price-to-earnings ratio from the current level of 14.5 times realized earnings. 71 Positive scenario S&P 500 (six-month target): 1,750 • Accelerating US and global economies reduce risks to company earnings. Investors begin to shift funds into more cyclical sectors such as Industrials, IT and Materials in light of better growth prospects. In this scenario, we would expect earnings to grow by around 10% in the next 12 months, and the trailing P/E multiple to expand to around 16x. Negative scenario S&P 500 (six-month target): 1,300 • The US and global economies slide into a recession; failed debt ceiling negotiations might add additional drag. Given such an outcome, corporate earnings would fall over the coming 12 months, and we would expect risk aversion to rise sharply. We would also expect the WE multiple to contract towards 12.5x trailing earnings. Note: Scenarios refer to global economic scenarios (see slide 8) What we're watching Business sentiment The Fed Labor market US earnings season Why it matters The ISM is the key indicator for US manufacturing and services. Key dates: 1 Mar, ISM manufacturing; 5 March, ISM non-manufacturing Hints on its monetary policy stance can influence equities. Key date: 20 Mar, Fed meeting Improvement in the labor market would support stronger consumption. Key date: 8 Mar, US labor market report for February Consensus forecasts about 3% y/y earnings growth for Q4 results. Recommendations Tactical (six months) • We keep our exposure to global cyclical sectors within the US equity market that should benefit from a sustained rebound in global growth. • We confirm our existing overweight tilts in Industrials, IT and Materials as broadening economic growth should translate into higher earnings. • We remain cautious on Utilities, Healthcare and Telecoms, where revenue growth is low and valuations are unattractive. Strategic (one to two years) • We like medium-sized US companies, which are expected to show good longer-term earnings growth. Current most preferred sectors Industrials IT Materials Current least preferred sectors Health Care Telecom Utilities Source: U8S Note: Past performance is not an indication of future returns. UBS 15 For further information please contact CIO asset class specialist Markus lrngartinger, Please see important disclaimer and disclosures at the end of the document. EFTA01089589 Eurozone equities 1Preference: neutral Euro Stoxx (20 Feb): 267 (last publication: 269) UBS View Euro Stoxx (six-month target): 271 • We maintain a neutral stance on Eurozone equities. Earnings weakness is balanced by attractive valuation. • The conditional bond-buying program by the ECB (OMT) implies much reduced downside risks from the sovereign debt crisis (see slide 9). Spain will have major refinancing needs in the coming weeks, and we could see higher volatility if it faces problems issuing bonds. • Italian elections on 24/25 February add additional uncertainty, though our base case calls for a market friendly outcome. • Besides those uncertainties, economic weakness and Southern European countries being in recession are still dragging down earnings in the Eurozone. The strengthened euro is weighing on overseas earnings. • Consensus earnings growth expectations for 2013 (bottom-up) have come down to about 7% in recent weeks. We see this growth figure as still too high; we forecast 3% to 5% earnings growth. Still, we expect further re-rating as signs of economic stabilization emerge over coming months, which should more than compensate for earnings misses. 2 Positive scenario Euro Stoxx (six-month target): 330 • Global economic growth reaccelerates and Eurozone growth shows clear signs of bottoming out, enabling mid- single-digit earnings growth over the next six months. The trailing PIE ratio could re-rate to about 14.5x from its current reading of 12.4x. Negative scenario Euro Stoxx (six-month target): 210 • Recession and debt crisis lead to renewed market pressure. However, downside risks are expected to be less severe now that the ECB has put its bond-buying program (OMT) in place. • Earnings could fall about 5% to 10% from current levels over the coming six months, and the trailing PIE ratio could drop to a level of around 10x over a six-month period. • Failure of debt ceiling negotiations in the US is also likely to affect Eurozone equities negatively. Note: Scenarios refer to global economic scenarios (see slide 8) What we're watching Why it matters Growth indicators Economic growth is important to avoid a flare-up of the debt crisis. Key dates: 1 March, final PMI manufacturing, EMU; 5 March, final PMI services, EMU; 21 March, flash PMI manufacturing and flash PMI services, EMU; 22 March, Ifo business sentiment index, Germany Policy action Decisions by European politicians and the ECB affect the course of the debt crisis. Key date: 7 March, ECB meeting Recommendations Tactical (six months) • We confirm our overweight on Consumer Discretionary as we see increasing evidence of strengthening global growth, which should support sector earnings. • We like Consumer Staples and Healthcare, which offer good earnings growth, solid balance sheets and growing dividends. • We are negative on Utilities and Telecoms as earnings trends are negative, balance sheets are stretched and dividends at risk. • We keep our underweight on Materials as valuations are too high. Strategic (one to two years) • We have a preference for stocks paying high- quality dividends. • We like companies with high exposure to rapidly growing emerging markets. Current most preferred sectors Cons Discretionary Consumer Staples Health Care Current least preferred sectors Materials Telecom Utilities Source: UBS Note: Past performance is not an indication of future returns. UBS For further information please contact O0 asset class specialists Markus Irngartinger, 16 and Carsten schlufter, Please see important disclaimer and disclosures at the end of the document. EFTA01089590 UK equities Preference: neutral FTSE 100 (20 Feb): 6,395 (last publication: 6,198) UBS View FTSE 100 (six-month target): 6,475 • We maintain our neutral stance on UK equities. Earnings have continued to disappoint, showing one of the weakest dynamics within our market universe. Commodity -related sectors have shown steep earnings declines. Realized earnings in the Energy as well as the Materials sector have continued to be revised down by analysts over the last three months. These two sectors account for 30% of the market capitalization. • The Healthcare sector suffers from company-specific issues that affect earnings negatively. • Going forward, the earnings picture is expected to improve gradually. Earnings of materials companies are likely to stabilize in a delayed fashion as iron ore prices have sharply increased since fall 2012. The revision of the Basel Ill liquidity standards will continue to support the earnings of UK banks. • UK equities offer a relatively high dividend yield, and the P/E multiple of about 12.7 times realized earnings is below global equities. However, UK equities have traded on a discount to global equities for most of the past 10 years. 7( Positive scenario FTSE 100 (six-month target): 7,100 • A rapid strengthening in global growth and recovering demand from emerging markets leads to fast-rising commodity prices, helping the energy and materials sectors to lead the market higher. The market could re-rate to a P/E multiple of 13.5x, and we would expect earnings growth of 5% to 10% over 12 months. Negative scenario FTSE 100 (six-month target): 4,900 • A global recession drags down UK earnings by 15% to 20% over 12 months. The market's traditionally defensive characteristics would only partly offset its strong exposure to commodity -related sectors. We would expect the trailing P/E multiple to drop towards 10.5x. What we're watching Why it matters Growth indicators Commodity prices Note: Scenarios refer to global economic scenarios (see slide B) Business survey indicators and consumer spending data provide information on economic developments in the UK. Key dates: 1 Mar, PMI manufacturing; 5 Mar. PMI services Energy and materials together comprise about 30% of the UK market. Developments in commodity prices affect earnings estimates. Policy action Loose monetary policy by the Bank of England supports equities. Key date: 7 Mar, Bank of England policy meeting Recommendations Tactical (six months) • Equity dividends offer an attractive real income stream in a low yield environment. We recommend stocks with dividends which are well covered by earnings and cash flow, are sustainable and growing, and from companies with sound fundamentals • We like companies with strong sales exposure to emerging markets. Strategic (one to two years) • The UK market's dividend yield of close to 4% provides a good income stream. • Companies with pricing power are expected to deliver superior earnings growth. High pricing power provides greater margin stability through the cycle. UK market trades at a PIE discount, based on realized earnings 2001 2006 2009 2012 — FTSE 100: raved rF — AISC1 Wald rethxd PF Source: Thomson Reuters. UBS; as of 18 February 2013 Note: Past performance is not an indication of future returns. UBS 17 For further information please contact OO asset class specialist Markus Imgartinger, Please see important disclaimer and disclosures at the end of the document. EFTA01089591 Swiss equities 1Preference: neutral SMI (20 Feb): 7,626 (last publication: 7,392) UBS View SMI (six-month target): 7,750 • We remain neutral on Swiss equities. Swiss companies are internationally well diversified, with almost two thirds of revenues generated in the US and emerging markets. This provides a basis for solid revenue and earnings growth, despite challenging economic conditions in Europe. • The defensive sector composition also plays an important role. Swings in global manufacturing activity or commodity prices affect Swiss companies' earnings less than those of companies in other countries. • In January the Swiss franc weakened by 3% relative to the euro. This movement is too small and recent to have had a material effect on earnings yet. Should it continue, it could provide important support to earnings growth. • In an environment of moderate economic growth, we like companies with decent earnings growth and solid balance sheets. Unfortunately, these characteristics have their price. Swiss equities trade at a higher valuation than their global peers. Currently they trade at 15.8 times trailing earnings. Positive scenario SMI (six-month target): 8,100 • Eurozone economic growth reaccelerates considerably, providing further relief to Swiss financials as well as Swiss exporters. Defensive sectors would likely be left behind in a strong global relief rally. In this scenario, we would expect the equity market P/E to trade around 16x and earnings to grow by 5% over the next six months. bi Negative scenario SMI (six-month target): 5,900 • The global economy slides into a recession. Despite offering less cyclically sensitive products, Swiss companies would also feel the drop in global demand. In this scenario, corporate earnings are likely to drop slightly over the next six months and we would expect P/E to contract toward 12.5x. Note: Scenarios refer to global economic scenarios (see slide 8) What we're watching Why it matters Interest rates and exchange rates Announcements of domestic interest rates and exchange rate decisions: 1 Mar, SNB meeting Economic indicators Announcements of key domestic economic indicators: 27 Feb, KOF Swiss leading indicator; 1 Mar, Manufacturing PMI index Corporate news Key corporate announcement dates: 22 Feb, Straumann; 26 Feb, Georg Fischer, Implenia, Swissquote and Temenos; 27 Fe