UBS CIO WM Global Investment Office

UBS CIO WM Global Investment Office UBS CIO Monthly Extended November 2012 Published 25 October 2012 CIO monthly video For smartphone users: scan the code with an app like "scan" 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. EFTA01089678 Table of Contents Section 1 Base slides 2 Section 2 Asset class views 11 2.A Equities 12 2.B Fixed income 22 2.0 Foreign exchange 29 2.D NTAC: Commodities, Listed real estate, Hedge funds and Private equity 33 EFTA01089679 Section 1 Base slides *UBS EFTA01089680 Summary "Global growth is showing broad-based signs of improvement." • Economy Global growth is showing broad-based signs of improvement, supported by decisive monetary policy from the world's major central banks. In the US, the housing market recovery continues and the labor market remains on a modest uptrend. This has helped improve the sentiment of US consumers, and consumption remains the most important contributor to US GDP growth. Growth has also begun to pick up in key areas of the emerging markets, including China and Brazil. While the Eurozone economy remains weak, we expect Q3 2012 to mark the bottom, and that growth will begin to get "less bad" from Q4 2012. • Equities Equity markets have been supported by central bank action and the recent improvements in economic data. Our preferred markets remain the US and Emerging Markets (EM). Investor funds have started to flow back into EM, as economic data is improving and inflation remains under control. Canada and Australia remain our least favored regions due to falling earnings. • Fixed Income US high yield bonds remain supported by strong corporate fundamentals, modest economic growth, and the broad demand for yield-generating assets. Given this, we see potential for further spread tightening. Meanwhile, benchmark rates are expected to rise gradually on better economic data, while short rates remain ultra-low. While investment grade corporate bond spreads are approximately fair value, we continue to view their absolute yields as attractive. • Commodities We keep a neutral stance on commodities. Increased global liquidity has pushed prices up over the last few months, however, for a more sustained price increase we likely need to see further evidence of an acceleration in global growth. • Foreign Exchange We remain underweight the Japanese yen. The Japanese economy continues to weaken against its peers, leading to rising pressure for the Bank of Japan to engage in further quantitative easing. We have closed our preference for the Canadian dollar following its recent strength, and therefore close our offsetting short CHF position. UBS Please see important disclaimer and disclosures at the end of the document. 3 EFTA01089681 Cross-asset preferences Equities Fixed income Commodities Foreign exchange Most preferred • US • Western winners from EM growth • High quality dividend yields • Event-driven and relative value hedge funds • Natural gas growth gainers • US high yield • Global investment grade credit • EM corporate bonds • Event-driven and relative value hedge funds • GBP • Emerging markets (7I) Least preferred • Canada • Australia • Developed market government bonds • JPY $ Recent upgrades y Recent downgrades Hedge Funds Private Equity 10% Equities USA 10% Portfolio weights Commodities 5% Liquidity Real Estate 10% High Grade 5% Bonds 7% Equities Europe 21% Inv Grade Corporates Bonds 9% High Yield Bonds 6% Emerging Market; Bonds 3% Equities Other EmMa Equities 6% 6% Note: Portfolio weights are for an advisory client with a "EUR moderate" profile. For portfolio weights related to other risk profiles please contact your client advisor. UBS Please see important disclaimer and disclosures at the end of the document. EFTA01089682 Recommended tactical asset allocation Tactical asset allocation deviations from benchmark* underweight neutral overweight Cash vl a = a WEquities total US Eurozone UK Japan EM Other N o c co Bonds total Government bonds Corporate bonds (IG) High yield bonds EM bonds (USD) N o a -0 o E o L.) Commodities total Precious metals Energy Base metals Agricultural Listed Real Estate ■ new old Source: UBS CIO WM Global Investment Office - as of 25.10.2012 Currency allocation underweight USD EUR GBP JPY CHF SEK NOK 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 slightly deviate from the "unconstrained' asset allocation shown above, depending on benchmarks, currency positions and for other implementation considerations. UBS Please see important disclaimer and disclosures at the end of the document. EFTA01089683 Preferred themes • High quality dividend yields (sourced from existing European and UK equities) High quality companies with geographically diversified business models that pay sustainable dividends offer an attractive income stream in a low yield world. Historically, dividends have made a substantial contribution to total returns, and we expect this to remain the case in the current environment. • Western winners from emerging market growth (sourced from existing equity holdings) 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 to outpace 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. • Natural gas growth gainers (sourced from existing equity holdings) Natural gas is a relatively clean source of energy, and we think it will benefit from continued substitution for other energy sources over the long term. We have examined the dynamics of the global market and the various components of the gas value chain, and identified the areas we see as the most significant beneficiaries currently. These include producers in Europe and Asia, suppliers of infrastructure, services and related machinery, and Master Limited Partnerships (MLPs) in the US, that offer both attractive yields and growth. • EM corporates: a growing asset class (sourced from global government bonds - CIO UW) Given our relatively constructive current view on risk, we regard EM corporate debt as more attractive than EM sovereign debt due to its higher overall yield. Over a 6-month horizon, we expect EM corporate bonds to outperform US Treasuries and deliver total returns of close to 4%. • Government bond alternatives (sourced from government bonds - CIO UW) Developed world government bonds offer a comparatively small cushion against future interest rate hikes and many face increasing credit risk. We expect selected bonds of supranational or national agencies, sub-national governments, multinational corporates, and covered bonds to outperform government bonds. We recommend switching out of government bonds into these alternatives. • US high yield corporate bonds (sourced from government bonds — CIO UW) Positive economic growth, robust corporate earnings and healthy balance sheets provide support to US high yield corporate bonds. Current yield spreads of 540 basis points still price in a more dire economic outcome than we expect. Historically, US high yield bonds have delivered similar returns as US equities with lower volatility. We continue to believe that US high yield corporate bonds represent a more favorable risk/return potential than equities and expect mid single digit returns over the next 6 months. Senior loans are exposed to similar positive fundamentals, and offer an attractive, floating rate alternative to US high yield. • The place to be in Hedge Funds Growth in most developed markets remains muted. In this environment, less directional hedge fund strategies, such as relative value and event driven, should offer above average returns. • EM currencies: An underappreciated asset class (sourced from government bonds - CIO UW) The currencies of emerging 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. = New theme UBS Please see important disclaimer and disclosures at the end of the document. 6 EFTA01089684 Global economic outlook - Summary Key questions • What are the prospects for the global economy in 4Q 2012 and 1Q 2013? • What are the risks that the US economic recovery will falter in the near term? • When is the European economy likely to emerge from contraction? • What is the near-term outlook for the Chinese economy? CIO View (Probability: 75%) Sluggish expansion • Global economic activity has shown signs of improvement over the last month - albeit from a low base. Importantly, the .IPM global composite PMI (a survey measuring economic activity) rose significantly to 52.5 in September from 50.9 in August. The increase was driven by improvements in both manufacturing and service sector activity. Thus, the global manufacturing PMI rose marginally to 48.9 from 48.1, while the services PMI jumped two index points to 54. • Geographically, improvements were concentrated in the emerging markets and the US. Indeed, we think that downside risks in the US have diminished lately and we expect the moderate recovery to continue ahead. Chinese data are still mixed, but we think that an improvement in the economic momentum is in the cards in 4Q. In the EMU and UK, recent PMI surveys deteriorated but we still expect the EMU to improve gradually in coming quarters. Overall, we expect the moderate improvement in global economic activity to continue ahead. A key driver here is the latest wave of ultra-expansionary monetary policy. Downside risks have diminished somewhat in recent months. We expect Greece to stay in the euro this year and sign a new memorandum in November. In the US modest fiscal tightening is expected with the Fed mitigating downside growth risks. The risk of an idiosyncratic slowdown in Asia has declined as the latest Chinese data confirms that the economy has bottomed." • Global consumer price inflation peaked in summer 2011 and has since fallen gradually. Base effects and rising commodity prices since June may push up the global headline rate of inflation in coming months. 76 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 by early 2013 and the US economy grows above trend. & Negative scenario (Probability: 1S%*) Recession • There are three key downside risks to the global economy: 1) a significant escalation of the Eurozone debt crisis; 2) a sharp fiscal contraction in the US, and 3) a sharp deceleration of the Chinese economy. Each of these risks could precipitate a significant downturn of the global economy. Key dates TBA 2 Nov 6 Nov 8 Nov 22-23 Nov Troika report on Greece Nonfarm payrolls and unemployment rate for October US presidential and congressional elections The 18th National Congress of the Communist Party of China European Council Global growth expected to be around 3% in 2012 and 2013 00si GOP rowth 20n 2011F 2013E 2011 2012F 2013E Anialkas US 1.a 2.1 1_3 3.1 2.1 1.7 Canada 2.0 2.0 1_3 2.9 2.0 23 Waal 2.7 IS 03 6.5 5.4 63 Asla/PactfIc Aryan 09 23 2.0 03 00 0.3 MASSY 2.1 33 12 3.0 1.7 23 Chna 9.3 7.5 72 5.4 25 16 nth) 65 5.5 6.5 60 7.5 7.0 (wog. EurOZOOe 1.5 .0.1 0.2 2.7 2.1 1.9 GOMW9 3.1 0.9 1.1 25 1.7 1.5 Force 1.7 02 01 2.1 2.0 1.3 nor 0.5 -2.1 42 29 33 2.7 Span OA •1a 3.1 25 2.7 UK 0.9 .0-3 1.0 AS 2.7 2.3 Sxtualvd 1.9 1.1 La 0.2 0.5 1.2 RUSS. 0.3 3.11 3.7 05 5.1 &II World 3.2 2.7 3.1 3.9 2.9 3.0 Source: UBS CO, as of 24 October 2012 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, 3-month moving averages) 65 60 55 so 45 40 35 08 09 10 11 12 —Manufacturing —Services —Composite — No-change line Source: Bloomberg, UBS CIO, as of September 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 Dirk Faltin, and CIO economist Ricardo Garcia, Please see important disclaimer and disclosures at the end of the document. 7 EFTA01089685 Key financial market driver 1- Eurozone crisis Key questions • What do we expect from the economy and EC8 policy? • Can Spain and Italy continue to tap the primary market if they ask for a support program? • How much more support will Greece receive and will it be able to stay in the Eurozone next year? CO View (Probability: 70%*) Austerity and weak growth • We think the Eurozone economy troughed in 3Q. We expect flattish growth in 4Q 2012 and 1Q 2013 (in line with consensus). Beyond this, uncertainties regarding the debt crisis and continuing fiscal austerity efforts will likely keep the pace of recovery subdued. The ECB is still in easing mode but after announcing a conditional bond purchasing program, it would take a marked worsening of the debt crisis and/or a worsening of economic data to trigger any further policy action. • There is political pressure on Spain to apply for official financial support (OMT by the ECB and direct support from the EFSF/ESM). However, the government may hesitate until market pressure rises and/or clear political benefits are on offer. We think that Italy will have to apply for an aid package similar to Spain's. We see a high probability of Spain being downgraded to junk by at least one rating agency. • OMT bond purchases in the secondary market will focus on maturities of up to three years and countries will be expected to maintain their funding profiles by also issuing longer-dated bonds. Hence, longer yields should stay elevated as bondholders remain concerned about countries' ability and willingness to implement necessary reforms, and about the de-facto subordination to ECB holdings and official loans. The central banking supervision at the ECB is unlikely to be ready by January 2013, meaning that direct bank recapitalization through the ESM remains unavailable. • We think Greece will not exit the euro in 2012 but will sign a new memorandum by November, although further delay is possible. We think that Greece's failure to meet targets may trigger a cut-off from funding by early 2013 and a possible gradual exit later. Portugal and Ireland should remain on track with their bailout packages, Cyprus will likely get a new package and Slovenia may ask for help soon. $ Positive scenario (Probability: 15%•) Return to macro stability • Bond yields are contained as peripheral countries' budgets stay on track and economic activity recovers faster than expected. Greece complies with the new austerity plans and market confidence is restored. N Negative scenario (Probability: 15%*) Major shock • Major shocks include Spain and Italy being fully cut off from bond markets, i.e. requiring all new funding through EFSF/ESM/IMF loans, with European rescue funds only able to cover them until the end of 2013; resistance from core countries against the ECB program and further support; a Portuguese default; a Greek euro exit before the end of 2012; or a major external shock. Key dates TBD Troika report on Greece 8 Nov ECB press conference 12 Nov Eurogroup meeting 15 Nov Eurozone GDP 3Q: first estimate 22 Nov Eurozone composite purchasing managers index 22-23 Nov European Council Purchasing managers indices point to ongoing contraction in 3Q 65 60 55 50 45 40 35 30 25 07 08 09 10 11 12 — Manufacturing —Services —Composite — No-change line Source: Bloomberg, UBS, as of October 2012 Yield of Spanish and Italian 10-year bonds over German Bunds (in bps) 700 600 500 400 300 200 100 0 03.2011 0612011 092011 122011 03/2012 062012 09/2012 —Italy —Spain Source: UBS, Bloomberg, as of 16 October 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 analyst Thomas Wacker, and CIO economist Ricardo Garcia, Please see important disclaimer and disclosures at the end of the document. EFTA01089686 Key financial market driver 2 - US economic outlook Key questions • Is the nascent growth recovery sustainable? Will the Fed stimulus boost growth? • How will the election result change fiscal policy deliberations? • Can politicians find an agreement to avoid a sharp fiscal contraction in early 2013 (i.e. the "fiscal cliff')? CCO View (Probability: 70%*) Moderate expansion • The economy stays on a moderate growth path but the unemployment rate comes down only very gradually - the September report exaggerated the pace of improvement. Core personal consumption expenditure (PCE) inflation stays slightly below or close to the Federal Reserve's target of 2%. UBS forecasts real GDP growth of 2.0% in 3Q 2012 (consensus: 1.8%) and 1.6% in 4Q 2012 (consensus: 1.9%). The Fed has added considerable stimulus: it extended Operation Twist and its interest rate forward guidance, indicated that it will stay highly accommodative even after the recovery strengthens, launched an open-ended agency mortgage -backed securities (MBS) purchase program of USD 40bn per month, and shows a strong easing bias tied to the state of the labor market. The Fed actions effectively mitigate downside growth risks, but they are unlikely to dramatically boost growth. • In the elections, Republicans will likely lose seats in the House on a net basis but retain a majority; we expect them to be even with Democrats in the Senate. Obama will likely retain the White House. Such an electoral outcome would prolong the existing gridlock between Republicans and Democrats. • Due to the ongoing political gridlock, we expect modest fiscal tightening. The government will likely let unemployment benefits phase out and payroll tax cuts expire, but postpone income tax hikes and sequester spending cuts. Such a decision would lower the federal deficit by 0.7% of GDP, with a likely lower real GDP growth impact as households could buffer the income loss with lower savings. 71 Positive scenario (Probability: 10%*) Strong expansion • Propelled by expansive monetary policy and a fading Eurozone crisis, growth accelerates persistently above 3.0%. This leads to higher inflation and the Fed responds by halting QE3 and raising rates sooner. • The better economic outlook raises the odds of an Obama reelection and makes it harder for Republicans to gain seats in Congress. Faster-rising tax collection and a Democratic stronghold leads to some tax hikes and limited spending cuts. Fiscal policy tightens by about 1.2% of GDP in 2013. Negative scenario (Probability: 20%*) 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 much further. The Fed massively purchases agency MBS and Treasuries under its QE3 program. • The debt limit is reached earlier and the Treasury runs out of money before year-end. Political gridlock becomes dysfunctional, thus sending the country over the 'fiscal cliff," with fiscal policy tightening by USD 607 billion (32% of UBS estimate of 2013 GDP) in 2013. The US credit rating is downgraded. Key dates 30 Oct 1 Nov 2 Nov 6 Nov Conference Board consumer confidence ISM manufacturing purchasing managers index for October Nonfarm payrolls and unemployment rate for October US presidential and Congressional elections US growth to pick up throughout 2013 US real GDP and its components, quarter-over-quarter annualized in % 8% grqamutikeed 4% 11J-2% 096 -2% -6% 8% 10% 12% QI QI QI Q1 QI Q1 01 Q1 2006 2007 2008 2009 2010 2011 2012 2013 Consumption • Capitalexpemitures Inventories • Gerrerivrent 0Cormierciel real estate imestment 0Residential investment Net Exports — Real GDP (gAi ant1":0940 Source: Thomson Datastream, UBS, as of 15 October 2012 Budget impact of US Cumulative budget effects of UBS estimate of 2013 GDP fiscal cliff in 2013 fiscal cliff components, in % of $ e $ .$5 ‘tb e t c if 4p.c.F. el i xp se e ,c,* s4` it .1 e- e o- i Fat*A .) Note: AMT = Alternative Minimum Tax, ACA = Affordable Care Act Source: CBO, UBS, as of 9 October 2012 " Scenario probabilities are based on qualitative assessment. Note: Past performance is not an indication of future returns. UBS For further information please contact US economist Thomas Berner, Please see important disclaimer and disclosures at the end of the document. 9 EFTA01089687 Key financial market driver 3 - China growth outlook Key questions • What are the drivers for a modest sequential growth recovery? • What is our policy expectation? • How strongly will the recently announced infrastructure projects boost growth? CIO View (Probability: 70%*) Stabilization in economic momentum • We continue to expect a sequential recovery in the growth momentum in the current quarter. Inventory reductions should be less of a drag on growth and the government is rolling out more investment plans. At the same time, political uncertainty should diminish after the power handover in November. We think that real GDP will grow 7% y/y in 4Q (consensus: 7.7%) before improving mildly to 7.3% in 1Q 2013 (consensus: 7.9%). • Indicators measuring inventory levels have fallen recently, showing that the destocking cycle is well advanced. In addition, domestic prices for some major raw materials appear to have bottomed out, which should support a mild rebound in production activity in the coming months. However, this may not be sustainable without a genuine recovery in final demand. • While the government has recently announced trillions of infrastructure investment projects, the spending will span several years and the source of funding remains unclear. In addition, real estate investment growth is likely to stabilize but not rebound strongly in the months ahead. We therefore do not expect a sharp rise in investment growth. Fiscal support measures should help to stabilize economic growth, but are unlikely to result in a strong growth boost. • The 18th National Congress of the Communist Party of China will be held on 8 November, which is exactly the same date as in the previous leadership handover in 2002. With the transition of the senior Communist Party leadership taking place in this meeting, political uncertainties should be reduced. Execution of policy easing measures could improve, although a substantial new stimulus is unlikely in the near term. In terms of monetary policy, we do not expect any interest rate cut for the rest of the year, but a reserve requirement cut is still possible to manage liquidity. 71 Positive scenario (Probability: 20%*) Higher-than-expected growth • Chinese GDP grows above 7.7% in 2012. This would require more effective fiscal and monetary policy support from the government and possibly also a fast improvement in the Eurozone debt crisis. Negative scenario (Probability: 10%*) Hard landing • Chinese GDP grows below 6%, i.e. a hard landing of the economy. This could be triggered by a global financial crisis/recession, causing a slump in Chinese exports, or domestic policy staying adrift during the leadership transition period. Other risks include a sharp movement in residential property prices, or a surge in inflation that forces the PBoC to significantly tighten monetary policy. Key dates 1 Nov 8 Nov 9 Nov 10-15 Nov Manufacturing purchasing managers index (October) The 18th National Congress of the Communist Party of China Consumer price inflation, industrial production, fixed-asset investment (October) New bank lending, M2 (October) Nascent rebound in domestic commodity prices Atte-10 Oen10 Aott11 Oct.1 t AD8.12 —Ste* —Cement —Coal Oet.12 Source: CEIC, Wind, UBS, as of 15 October 2012 Investment staying supportive to growth 60 50 40 30 20 10 0 Growth rate lac. ley 3foiriai (10) 2006 2007 2006 2009 2010 2011 2012 —Infrastructure —Real estate development —Manufacturing Source: Bloomberg, UBS, as of 15 October 2012 Note: Past performance is not an indication of future returns. " Scenario probabilities are based on qualitative assessment. UBS For further information please contact 00 analyst Gary Tsang, Glenda Yu, S Patrick Ho, Please see important disclaimer and disclosures at the end of the document. 10 EFTA01089688 Section 2 Asset class views *LBS EFTA01089689 Section 2.A Asset class views Equities UBS EFTA01089690 Equities overview Global equity markets - Key points • We keep an overall neutral allocation to equities (see summary on slide 3). • We keep our preference for US equities. Resilient company earnings still speak for an overweight stance. Continued economic growth should underpin earnings also in 2013. • We keep our neutral stance on Eurozone equities. Value is attractive compared to global equities. However, due to the recession in several countries the earnings dynamics remains weak. In addition, uncertainty as to when and under what conditions Spain will sign a memorandum of understanding keeps us from taking a more positive stance. • We have an overweight position in EM equities. Monetary easing as well as fiscal stimulus in key countries, coupled with relatively attractive valuations, are supporting factors. Economic activity is likely to improve gradually over the coming quarters, supporting company earnings. • We keep our negative stance on Canadian equities. Corporate earnings continue to decline, showing a weak development relative to the global trend. In addition, valuation is not compelling. • We are cautious on Australian equities. Realized earnings continue to come down for the market. • We are neutral on Swiss equities. Companies show solid earnings growth, which is expected to hold up better than in other regions. Although the Swiss franc is still overvalued, the weakening to the USD and related currencies since this summer provides additional earnings support. • We keep our neutral view on UK equities. In the UK the earnings dynamics lags behind other markets. Also, the recent strengthening in the pound is a drag for earnings measured in local currency terms. Global equity sectors - Key points • We keep our overweight in Consumer Staples. Among the defensives it offers good earnings growth prospects due to its geographically diversified revenue generation. • We reiterate our preference for global IT due to a superior growth outlook and as we are in the seasonally strong second half year. With healthy balance sheets and good cash flows, sector valuation is in line with the overall market, while we believe it deserves a larger premium. • We continue to like Healthcare as it offers solid long-term earnings prospects with low volatility and strong balance sheets. We reiterate our underweight in Telecoms, where we expect ongoing weak revenue growth as well as margin pressure. • We are negative on Consumer Discretionary as earnings expectations may be too optimistic. With leading indicators in major regions still deteriorating, we keep our underweight in Industrials. We have concerns over weak manufacturing momentum leading to increased earnings revisions. • The earnings outlook for US and Asian Financials is solid. We are neutral globally on Financials. While the ECB's OMT program reduces tail risk for Financials, it has limited impact on sector earnings. Preferences (6 months) underweght neutral Prenseght quit. LOW USA - Canada I EMU UK Switzerland Sweden Australia Hong Kong a Japan Singapore 3 Global EM H ■ new old Note: Preference in hedged terms (en/. currencies) undeMtght neutral overweight Consumer Discretionary Consumer Staples Energy Financials Healthcare Industrials Materials Telecom Utilities ■ new old Source: UBS UBS For further information please contact CIO asset class specialists Markus Irngartinger, or Carsten Schlufter Please see important disclaimer and disclosures at the end of the document. 13 EFTA01089691 US equities Preference: overweight S&P 500 (24 Oct): 1,409 (last publication: 1,433) UBS View S&P 500 (6-month target): 1,460 • We keep our preference for US equities relative to other developed equity markets. Earnings continued to hold up better than in other regions during the recent economic slowdown. Continued economic growth should allow companies to show mid single digit earnings growth over the coming 12 months. • The US central bank's (Fed) very pro-growth oriented policy stance is a clear advantage for the local equity market the recent introduction of additional quantitative easing (QE 3) is positive for riskier assets. • We still expect some potential for re-rating over the coming 6 months, in terms of increases in the price- to-earnings ratio (P/E). • The debate around the fiscal cliff implies increased uncertainty over the coming months. However, we think that a 20% discount compared to the long-run PE-average provides some cushion, and our base case assumes that politicians will finally achieve a compromise to avoid economic contraction. A Positive scenario S&P 500 (6-month target): 1,700 • An accelerating US and global economy reduces risks to company earnings. Investors begin to shift funds into more cyclical sectors such as Industrials 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. SI Negative scenario S&P 500 (6-month target): 1,250 • The US slides into a recession and corporate earnings fall over the coming 12 months. If this were coupled with an escalation of the Eurozone debt crisis, we would expect the PIE multiple to contract towards 12.5x trailing earnings. Note: Scenarios refer to global economic scenarios (see slide 7) Recommendations Tactical (6 months) • We continue to like IT. The sector trades at the lowest valuation multiples seen since the early 1990s. Product launches support superior earnings growth. • Industrials are preferred as they benefit from a pick up in manufacturing activity. • Consumer Staples is our preferred defensive sector offering the best combination of dividend growth and attractive valuation. • We are still cautious on Telecoms, due to high valuations, as well as Materials, where margins remain under pressure. Strategic (1 to 2 years) • We like medium-sized US companies, which are expected to show good longer term earnings growth. Our sector stance in the US Sectors US Consumer Discretionary Consumer Staples 71 Energy Financials What we're watching Why it matters Healthcare bi Business sentiment The ISM is the key indicator for US manufacturing and services. Key dates: 1 Industrials 71 Nov, ISM manufacturing; 5 Nov, ISM non-manufacturing IT 71 The Fed Hints on further quantitative easing can influence equities. Key date: 11 Nov, minutes of Fed meeting (of 24 October) Materials Telecom Labor market Improvement in the labor market would support stronger consumption. Key date: 2 Nov, US labor market report for October Utilities 4 Source: UN Note: Past performance is not an indication of future returns. UBS For further information please contact CIO asset class specialist Markus Irngartinger, Please see important disclaimer and disclosures at the end of the document. 14 EFTA01089692 Eurozone equities Preference: neutral Euro Stoxx (24 Oct): 247 (last publication: 247) UBS View Euro Stoxx (6-month target): 249 • We keep our neutral stance on Eurozone equities. While the sovereign debt crisis remains a risk factor (see slide 8), the conditional bond buying program by the ECB (OMT) and the introduction of the ESM have significantly reduced downside risks. • Near-term we might see volatility increasing as politicians wrangle about the steps needed to provide a more lasting solution to the debt crisis (setup of a single banking regulator, solving the banking related problems in Spain, etc. ). We think that attractive valuations sufficiently compensate for those risks. • The weak economic environment with recessions in the southern countries continues to weigh on corporate earnings. Consensus expectations (bottom up) of about 10% to 15% earnings growth in 2013 is too high, in our view. In contrast, we forecast just about 3-5% earnings growth next year. 7 Positive scenario Euro Stoxx (6-month target): 320 • 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 P/E ratio could re-rate to about 14.5x from its current reading of about 11.7x. NI Negative scenario Euro Stoxx (6-month target): 200 • The debt crisis leads to renewed pressure on Spain and Italy. However, downside risks are expected to be less severe now, after the ECB has put its new bond-buying program in place. • Earnings could fall about 5% to 10% from current levels over the coming six months, and the trailing P/E ratio could drop to a level around 10x over a six-month period. Note: Scenarios refer to global economic scenarios (see slide 7) What we're watching Why it matters Economic growth indicators provide information on the development of a potential Eurozone recession. Key dates: 2 Nov, final PMI manufacturing, EMU; 6 Nov, final PMI services EMU; 22 Nov, flash PMI manufacturing, EMU, France and Germany; 23 Nov, Ifo business sentiment index, Germany Decisions by European politicians and the ECB affect the course of the debt crisis Key dates: 8 Nov, ECB meeting Growth indicators Policy action *UBS Recommendations Tactical (6 months) • We continue to recommend defensive sectors like Consumer Staples and Healthcare. We also like the Energy sector. • We are negative on Industrials and Consumer Discretionary as industry sentiment remains subdued. • We remain cautious on Financials — especially Banks and diversified Financials. The need for recapitalization remains a major concern. Strategic (1 to 2 years) • We have a preference for stocks paying high-quality dividends. • We like companies with high exposure to rapidly growing emerging markets. Our sector stance in the Eurozone Sectors Eurozone Consumer Discretionary Consumer Staples Energy Financials Healthcare 2/ Industrials IT Materials Telecom Utilities Source: UBS Note: Past performance is not an indication of future returns. For further information please contact CO's asset class specialist Markus Irngartinger, Please see important disclaimer and disclosures at the end of the document. IS EFTA01089693 UK equities Preference: neutral FTSE 100 (24 Oct): 5,805 (last publication: 5,768) UBS View FTSE 100 (6-month target): 5,850 • We keep our neutral stance on UK equities. Earnings have continued to disappoint, showing one of the weakest dynamics within our market universe. Commodity related sectors show steep earnings declines, which is expected to moderate only in a lagged fashion to stabilizing commodity prices. The Healthcare sector suffers from company specific issues which affect earnings also negatively. • With the oil price expected to trade down over the next 3 months, earnings of companies in the energy sector - comprising about 20% of the market — should remain depressed over the coming quarters. Within financials, law suits related to mis-selling of insurance related products represent a special risk factor. • Recent strengthening of the British pound is also a headwind for the competitiveness of UK companies, as earnings measured in the local currency are negatively affected. • The PE of UK equities looks attractive at first sight. But over the past 10 years, UK equities traded on average at a discount to global equities. 71 Positive scenario FTSE 100 (6-month target): 7,000 • A fast 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 PIE multiple of 13.0x, and we would expect earnings growth of 5-10% over 12 months. Negative scenario FTSE 100 (6-month target): 4,750 • A global recession drags UK earnings down by 15-20% 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 PIE multiple to drop towards 10x. Note: Scenarios refer to global economic scenarios (see slide 7) What we're watching Growth indicators Commodity prices Policy action Why it matters Business survey indicators provide information on economic development in the UK. Key date: 1 Nov, PMI manufacturing; 5 Nov, PMI services Energy and Materials together comprise about 30% of the UK market according to market capitalization. Developments in commodity prices affect earnings estimates. Loose monetary policy by the Bank of England supports equities. Key date: 8 Nov, Bank of England policy meeting Recommendations Tactical (6 months) • The UK offers an attractive 4% dividend yield. We still like companies with high quality income streams. • We like Consumer Staples in the UK. The sector should provide steady earnings growth through its exposure to emerging markets. Strategic (1 to 2 years) • The UK market's close to 4% dividend yield provides a good income stream. • Companies with pricing power are expected to deliver superior earnings growth. UK market trades at a P/E discount, based on realized earnings 2.1 12 9 6 2003 2006 2009 2012 — FTSE 100 maltte094 PASCINeort0 roaleed9h Source: Thomson Reuters, UBS, as of October 24, 2012 Note: Past performance is not an indication of future returns. UBS For further information please contact CIO asset class specialist Markus Irngartinger, Please see important disclaimer and disclosures at the end of the document 16 EFTA01089694 Swiss equities Preference: neutral SMI (24 Oct): 6,627 (last publication: 6,540) UBS View SMI (6-month target): 6,700 • We stay neutral on Swiss equities relative to global ones. Swiss companies are internationally well diversified, with about 2/3 of revenues generated in the US and in emerging markets. This provides the basis for solid revenue and earnings, despite economic weakness in Europe. • Swiss companies are trying to mitigate concerns about global economic prospects and a strong Swiss franc using tight cost controls. This should protect operating margins. • While the Swiss franc remains overvalued, the currency is not longer a drag. In fact, after depreciating since summer versus the USD and related currencies, Swiss companies' earnings will show positive currency translation and margin effects. • Especially in an environment of low economic growth we like the properties of decent earnings growth, solid balance sheets and a reasonable valuation. 7i Positive scenario SMI (6-month target): 7,500 • Eurozone economic growth is reaccelerating 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 be re-rated to 15x and earnings to grow by 5% over the next six months. Negative scenario SMI (6-month target): 5,600 • The global economy slides into a recession. Despite being less dependent on the global business cycle, Swiss companies will 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 the PIE to contract toward 12.0x. Note: Scenarios refer to global economic scenarios (see slide 7) What we're watching Why it matters Economic indicators 1 Key announcements of domestic economic indicators: Nov 1, Manufacturing PMI index; Nov 30, KOF Swiss leading indicator; Monetary and economic Key Swiss monetary policy dates that could impact Swiss equities: Nov 1, SNB policy meeting Corporate news Key corporate announcement dates: Oct 30, Geberit, Oerlikon, Straumann & UBS; Oct 31, Lonza & Sika Recommendations Tactical (6 months) • We favor large caps over small caps. • We like stocks paying high and sustainable dividends. • Within defensives, we favor the Healthcare and Consumer Staples sectors. • Among the cyclical companies, we prefer those with a broad emerging - markets exposure and/or cheap valuation, including insurers. Strategic (1 to 2 years) • We favor leaders in regards to the two key Swiss success factors: innovation and globalization. Swiss market relative to world equities — SMt reatzedP4 — MSC! vivid iNitted Source: Thomson Reuters, UBS, as of October 24, 2012 Note: Past performance is not an indication of future returns. UBS For further information please contact CIO's asset class specialist Stefan Meyer, Please see important disclaimer and disclosures at the end of the document. 17 EFTA01089695 Japanese equities 1Preference: neutral Topix (24 Oct): 743 (last publication: 743) UBS view Topix (6-month target): 756 • We expect earnings growth of about 25% over the upcoming 12 months. A relatively high growth rate still reflects last years sharp decline caused by two natural disasters. Still, the earnings recovery has disappointed so far. Earnings growth continues to slow down and is expected to move toward a more normal single-digit growth in 2013. • The government started implementing its JPY 18 trillion recovery budget in Q4 2011; we expect it to boost GDP by 0.5-1.0% in FY2012, and about 0.5% in 2013. • However, we see only limited scope for an additional earnings boost from the local economic recovery. Slowing export markets also curtail the outlook. June quarter-earnings results revealed emerging market demand was below expectation, capping earnings growth. • We expect the TOPIX trailing P/E to drop to around 13.5x from 15.0x over the coming months, mainly due to the earnings recovery; this provides room for moderate price increases only. 74 Positive scenario Topix (6-month target): 970 • Stronger global demand and stabilizing European markets lead to improved risk-taking. Falling risk aversion is likely to lead to a weaker yen, providing an additional increase in earnings. We expect 10-15% EPS growth in FY2013 and the TOPIX target is based on 16.0x trailing P/E. 11 Negative scenario Topix (6-month target): 575 • Faltering global growth leads to weak exports, triggering negative earnings surprises. USD-JPY rate strengthening to below 75 and potential economic conflicts with China might serve as an additional drag on earnings. We would then expect the P/E ratio to contract to 13.0x and earnings to fall during the upcoming six months. Note: Scenarios refer to global economic scenarios (see slide 7) What we're watching Why it matters JPY and exports Boils monetary policy board meeting The exchange rate is an important factor for the Japanese equity market. Japan's trade balance could be in deficit and may impact USD-JPY rates. Key date: Nov 21, Japanese trade balance If the Bank of Japan makes additional commitments to its asset-purchase program, which is currently JPY 70 trillion in size, it would lead to a weaker yen, in our view. Key date: Oct 30, BoJ policy meeting *UBS Recommendations Tactical (6 months) • Japanese value stocks have under- performed growth stocks by more than 20% for the last four months. We see this as an overreaction to concerns on the slower global economy, and recommend picking some value stocks with high dividend yields. • We prefer companies that are using cost- reduction initiatives to maintain price competitiveness during periods of yen strength. Strategic (1 to 2 years) • A weaker USD-JPY rate may drive Japanese companies' earnings recovery beyond a technical recovery from natural disasters. Japanese exporters and companies owning international operations would benefit from such a development. Japanese realized earnings likely to recover further going forward 9$ 85 75 65 55 45 15 to 1968 1990 1992 1994 1996 1998 2003 2002 2004 2036 2033 2010 2012 — 11., MOWS toning!. per 1h.le Source: Thomson Reuters, UBS, as of October 22, 2012 Note: Past performance is not an indication of future returns. For further information please contact 00 asset class specialist Toru lbayashi, Please see important disclaimer and disclosures at the end of the document. 18 EFTA01089696 Emerging market equities 1Preference: overweight MSCI EM (24 Oct.): 995 (last publication: 990) UBS View MSCI EM 6-month target: 1,040 • The downward revisions to the emerging market GDP growth forecasts appear to be coming to an end. We expect emerging market GDP growth to accelerate to 5.3% in 2013 from this year's 4.7%. • Monetary policy in the US, the Eurozone, and Japan remains supportive. One implication of these low interest rate policies, we believe, will be to enhance emerging market (EM) equity returns in USD by supporting EM currencies more broadly against the USD over the next six months. • In our base case, we see the P/E multiple of the MSCI EM Index staying around the current level of 11x trailing (i.e. realized) earnings over the next six months. Over the next 12 months, we expect EM earnings growth of around 11% (slightly below consensus). • Over the past month, structural reforms that will have longer-term benefits were announced in India (retail sector), Russia (energy sector) and Mexico (labor market). This highlights that the emerging economies have options to improve the competitiveness of their economies, if they choose to do so. I 71 Positive scenario MSCI EM (6-month target): 1,325 • The outlook for the global economy improves, boosting EM's ability to grow more strongly in 2013. This stronger economic growth leads to earnings growth of 15%. Investor confidence improves, leading to a better P/E multiple of 14x trailing earnings. If oil prices rose too, Russia would benefit in this scenario. Negative scenario MSCI EM (6-month target): 800 • A significant escalation in the Eurozone, a sharp fiscal contraction in the US, and a rapid deceleration in Chinese growth could each hit EM's economic prospects. In such a scenario, we would expect a 20% decline in earnings over six months. More defensive Malaysia would do better, whereas more cyclical South Korea and Russia would underperform. We assume, however, that the market would also be expecting some recovery in earnings for 2014, helping the P/E multiple to recover to 10x trailing earnings. Note: Scenarios refer to global economic scenarios (see slide 7) What we're watching Emerging market monetary policy Food and oil prices Why it matters Investors are trying to figure out which emerging market central banks still have room to ease monetary policy and where rates may be heading up. Inflation data is due for Russia (6 Nov), Brazil (7 Nov), China (9 Nov), India (14 Nov) and South Africa (21 Nov). The prices of grains and oil are higher than this time last year. For now, negative output gaps should counterbalance some of this inflationary pressure. Recommendations Tactical (6 months) • Within emerging markets, we have a preference over six months for the large equity markets, Brazil, China and South Korea. We expect an acceleration of growth into 2013 in Brazil and South Korea, and a stabilization in the case of China. We see relatively less upside for more defensive Malaysia. We believe that South Africa and Indonesia are expensive. The ECB's announcement that it stands ready to buy the bonds of compliant Eurozone governments has lessened the tail risks for the smaller European emerging equity markets (Turkey, Hungary, Poland), but their equity markets are susceptible to setbacks. Strategic (1 to 2 years) • Strategically, we would advise that EM portfolios tilt toward cash-rich and faster- growing Asia. Country preferences within emerging markets (relative to MSCI EM) Current most preferred markets Brazil China South Korea Current least