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EFTA01089722 Dataset 9 44 pages Download original PDF
UBS For marketing purposes only CIO WM Global Investment Office External Version CIO monthly video For smartphone users: scan the code with an app like "scan" UBS CIO Monthly Extended July 2012 Published 29 June 2012 Please see important disclaimer and disclosures at the end of the document. The content of this publication reflects the view of UBS Wealth Management & Swiss Bank's Chief Investment Office (ao). The relative asset class preferences in this publication refer to an investment horizon of 6 months following the publication date - if not indicated differently - and will be updated on a monthly basis. The preferred investment themes have a time frame of either 3-12 months or >12 months since inception, as indicated. The information does not constitute UBS financial research and therefore may not reflect or be fully aligned with the views of UBS Research expressed in other publications. The statutory regulations regarding the independence of financial research are not applicable to this publication. Investments may be subject to jurisdictional and regulatory restrictions and may therefore not be available - please discuss the availability and appropriateness of specific investments with your client adviser. EFTA01089722 Table of Contents Section 1 Base slides 3 Section 2 Asset class views 12 2.A Equities 13 2.B Fixed income 23 2.0 Foreign exchange 30 2.D NTAC: Commodities, Listed real estate, Hedge funds and Private equity 34 t EFTA01089723 Section 1 Base slides *UBS EFTA01089724 Summary "With the global economy continuing to muddle through, we believe that US corporate bonds offer the best risk return." • Economy The successful formation of a Greek government after the June 17 elections has reduced the risk of an imminent Greek exit from the Eurozone. However, the Euro debt crisis persists, and further reform and consolidation efforts in Spain and Italy are needed. In the US, economic data weakened recently, but it remains in line with our forecast of moderate growth of around 2% in 2012. The Fed extended "Operation Twist" until the end of the year and is ready to do more if the economic situation deteriorates materially. Meanwhile, Chinese activity data is showing signs of stabilization and inflation remains low. We expect the Chinese economy to gradually pick up in the second half of 2012. • Equities Despite our relatively positive outlook for US and Chinese economic growth, ongoing Eurozone issues keep us neutral on global equities. We think US companies are better positioned than their European peers, and thus keep our longer-standing preference for US equities. US earnings are relatively robust and the recovery of the domestic economy continues to support revenues. Furthermore, we keep a moderate overweight in emerging market (EM) equities as valuations are attractive and we expect growth to accelerate in the second half of the year. In the near term EM currency weakness remains a risk factor. • Fixed Income High grade government bond yields remain extremely low due to ultra-expansive monetary policy and ongoing investor concerns over global growth. While we expect yields to only rise very gradually in the near term, we continue to see better investment opportunities in other fixed income segments. US high yield remains our favorite asset class, given attractive valuations and a favorable default outlook. We also keep our overweight recommendations on investment grade and EM bonds. • Commodities We avoid broad commodity exposure as we see further price weakness ahead. While the worst of the oil sell-off is likely behind us, we see no reason for higher prices in the near term and expect roll costs to weigh on positions. • Foreign Exchange In light of the ongoing Eurozone troubles, we continue to prefer the US dollar over the euro. We also prefer the Canadian dollar, given its relatively good growth dynamics, a possible rate hike, and relatively high short rates. UBS Please see important disclaimer and disclosures at the end of the document. 3 EFTA01089725 Cross-asset preferences Equities Fixed income Commodities 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 • Event-driven and relative value hedge funds • EM corporate bonds • • • USD GBP CAD Least preferred • Europe • Developed market government bonds • CHF • EUR • Agriculture • Energy $ Recent upgrades ta Recent downgrades Hedge Funds/ 5% private Equity 10% seitrihtaUSA 10% Levities Europe 20% EmMa Equities 6% Portfolio weights Commodities 3% Liquidity Real Estate 10% High Grade Bondf 6% My Grade Corp0rateS Bonds 9% High Yield Bonds 6% Emerging Markets Bonds 6% Equities Other 9% 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. 4 EFTA01089726 Reference portfolio Tactical asset allocation deviations from benchmark* Currency allocation underweight Cash Equities total US Eurozone UK 3 cr Japan Switzerland EM Other Government bonds -a c Corporate bonds (IG) High yield bonds EM bonds (USD) Commodities total Precious metals Energy Base metals Agricultural Listed Real Estate neutral overweight Source: UBS CIO ■ new old underweight USD EUR GBP JP‘f CHF SEK NOK CAD NZD AUD neutral • new old overweight * 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. Also note that the implementation in advisory or discretionary products might slightly deviate from the 'unconstrained' asset allocation shown above, depending on benchmarks, currency positions and for other implementation considerations 4re UBS Please see important disclaimer and disclosures at the end of the document. EFTA01089727 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 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. cat UBS • 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 select 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 roughly 660 basis points still price in a much 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 represent a more favorable risk/return potential than equities and expect total returns of approximately 7% over the next 6 months. • The place to be in Hedge Funds Recent economic data has shown signs of improvement, but 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 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 8% p.a. 6 Please see important disclaimer and disclosures at the end of the document. EFTA01089728 Global economic outlook - Summary Key questions • Can emerging markets (EM) continue to offset developed market (DM) weakness to buoy global growth? • What are the risks of near-term faltering of the US economic recovery? • When is the European economy likely to return to sustainable economic expansion? CIO View (Probability: 60%*) • Global economic activity remains moderate; the growth impulse stems largely (some 80%) from the EM region. As expected, China started to ease monetary policy. The country is better placed than other EM and particularly DM countries to counter growth weakness with further monetary and fiscal stimuli. Thus, we expect EM growth to stabilize soon and pick up in 2H 2012. • US economic indicators have on balance been disappointing recently, especially data related to business fixed investment and employment growth. Thus, we lowered our 2Q 2012 real GDP growth forecast to an annualized rate of 1.5% from 2%. We still expect growth slightly above 2% in 2H 2012. We think that the risk that the Fed will take measures in addition to the extension of "Operation Twist" is still significant. • Large parts of Western Europe are in recession or stagnation. We expect the economies of the Eurozone and the UK to show mild improvement in 2H 2012. Still, economic activity is likely to remain very sluggish despite support from lower oil prices and less rigorous fiscal austerity. The Bank of England may support the UK economy by increasing its amount of bond purchases soon. The probability that the ECB will take further action to support the economy has risen significantly. X Positive scenario (Probability: 15%*) • The Eurozone crisis abates. Financial market conditions recover, mitigating the drag from fiscal austerity. • Growth in Western Europe is marginally positive (Eurozone stagnates) in 2012 and the US economy grows moderately above trend. Negative scenario (Probability: 25%*) • 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 one of these risks could precipitate a significant downturn of the global economy. Key dates 2 July 5 July 24 July 22-25 July USA: ISM manufacturing PMI for June Eurozone: ECB press conference Eurozone: purchasing managers indices (PMI), July estimates China: HSBC flash manufacturing purchasing managers index (Jul) Global growth expected at just under 3% in 2012 Kest GDP growth in '- 2011 20121 2013F 2011 20121 20131 America US 1.7 2.1 2.6 3.1 21 1.7 Canada 2.4 2.1 2.4 2.9 2.1 23 wan 2.7 2.0 9.8 65 52 65 Allaolractik Japan 2.5 2.0 -0.3 0.2 05 alraI 2.1 3.7 3.5 3.4 1.6 25 Dina 92 8.2 0.5 5.4 3.0 4.0 bide 6.5 6.0 7.0 7.8 69 7.0 Europe Eundone 1.5 -0.4 0.4 2.7 2.3 2-0 Gonnany 3.1 IA 1.1 2.5 1.7 IS Nate 1.7 0.3 0.4 2.1 2.5 22 tatr 0.5 •18 0.2 2.9 3.4 3.9 Spain 0.7 -1.6 -1.3 3.1 1.9 1.9 UK 0.7 02 1.3 9.5 2.8 1.9 Switzerland 2.1 1.3 1.7 0.2 -0.4 t.4 Rum 43 3.8 3.7 8.5 9.5 69 World 32 2A 3.3 3.9 3.0 3.0 Source: UBS CIO, as of 28 June 2012 In developing the OO economic forecast. CIO economists worked in collaboration with economist employed by UBS Investment Research. Forecasts and estimates are current only as of the date of this publication and may change without notice. Global economic momentum is deteriorating (UBS GDP tracker) 14 12 10 8 6 4 2 0 .2Jan Jan Jan Jan .4 OS 06 07 08 •6 —Global —DM — EM• 95 Jan Jan Jan 10 11 12 May 6.3% 3.1% 1.0% Jan 13 Source: Bloomberg, UBS ao, as of 22 June 2012 • DM= developed markets, EM = emerging markets 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, Please see important disclaimer and disclosures at the end of the document. 7 EFTA01089729 Key financial market driver 1- Eurozone crisis Key questions • What is the way forward for Eurozone banks? • What is the most likely course of events in Spain, Italy and Portugal? • In what direction will the economy and the ECB go? CIO View (Probability: 65%•) Austerity and weak growth • Support for the banking sector is a major political agenda item, and the request for external support for Spanish banks can be seen as the starting point for greater European support and oversight for banks, to be discussed at the upcoming European Council. • Greece's debt remains unsustainable, but the risk of a euro exit over the next six months has diminished after the 17 June elections, which have produced a viable government coalition. The Troika may only accept moderate adjustments to the second Greek package. Portugal is likely to receive an increased bailout package and is unlikely to default in 2012. Progress on reforms and consolidation in Spain and Italy is most crucial for the near-term development of the crisis. Risk premiums would rise strongly on any failure to meet deficit targets; we expect bond risk premiums to remain elevated for Spain and Italy over the next six months. • Following stagnation in 1Q 2012, economic surveys are commensurate with a quarterly GDP contraction of around 0.3% at present. Business survey evidence points to a general wait and see mode. The risk to the outlook for a stabilization of economic growth in the second half of 2012 is skewed to the downside. The ECB remains on hold, but the bar to support the economy and markets has been lowered substantially. We see a significant probability of policy action in early July, including the possibility of a rate reduction. Despite all the talk about political measures to support growth and increased tolerance for budget slippages, there is practically no leeway for fiscal stimuli. The near-term growth impact of any fiscal measure will at best be marginal, in our view. 7f 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 fully complies with the austerity plans and receives further support. Market confidence is restored, and economic growth stagnates in 2012. 11 Negative scenario (Probability: 20%•) Major shock • Major shocks could include Spain being pushed into a full IMF/EU program, possibly by a rating cut to junk, enhancing pressure also on Italy; serious political disagreement in core countries (for instance after Dutch elections, etc.); a possible Portuguese default; a Greek euro exit or a major external growth shock. Key dates 5 July ECB press conference 9-10 July Eurogroup/ECOFIN-Meeting 24 July Eurozone purchasing manager indices (PMI), July estimates Bottoming in Eurozone leading indicators (PMI) in June? 65 60 55 50 45 40 35 30 06 07 08 09 10 11 12 — Manufacturing —Services —Composite Source: Bloomberg, UBS CIO, as of 21 June 2012 (estimates) Yield of Spanish and Italian 10-year bonds over German Bunds (in bps) 6C0 SW 41:0 3120 240 ico 0 01/2011 04/2011 07/2011 10/2011 01/2012 0402012 — Italy — Spain Source: 1)85 CIO, Bloomberg, as of 18 June 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 8 CIO economist Ricardo Garcia, Please see important disclaimer and disclosures at the end of the document. EFTA01089730 Key financial market driver 2 - US policy Key questions • Will the economic outlook deteriorate? Will QE3 become necessary? • How will the election outcome change fiscal policy deliberations? • Can politicians find an agreement to avoid sharp fiscal contraction in early 2013 ("fiscal cliff")? CIO View (Probability: 65%*) No QE3, political gridlock and some fiscal tightening • The economy stays on a moderate growth path, coupled with stable core PCE inflation close to the Fed's target of 2%. UBS forecasts real GDP growth of 1.5% in 2Q 2012 (consensus: 2.1%) and 2.3% in 3Q 2012 (consensus: 2.4%), with some downside risk due to rising uncertainty. The Fed has decided to extend so called "Operation Twist' until the end of the year. More near-term monetary easing is still possible, but it is currently not our central scenario. • In the elections, Republicans will likely lose seats in the House overall, but retain a majority; we also expect them to win a narrow majority in the Senate. Obama will likely retain the White House. Such an electoral outcome would confirm the existing gridlock between Republicans and Democrats. • Against the backdrop of ongoing political gridlock, we expect only moderate fiscal tightening of about 0.9% of GDP in 2013. The government will likely let unemployment benefits and the payroll tax cut expire, but postpone income tax hikes and sequestration spending. $ Positive scenario (Probability: 10%*) No QE3, Democratic sweep and more fiscal tightening • Propelled by ultra-expansive monetary policy and improved confidence, cyclical forces surmount the structural hindrances and thus growth accelerates. More rapid growth leads to higher inflation, and the Fed responds by tightening monetary policy sooner. • The improved economic outlook raises the odds for an Obama re-election and makes it harder for Republicans to win a majority in the Senate. US fiscal consolidation efforts are facilitated by faster rising tax collections. A Democratic stronghold leads to some tax hikes and limited spending cuts. Fiscal policy tightens by about 1.2% of GDP in 2013. N Negative scenario (Probability: 25%*) QE3, political dysfunction and huge fiscal tightening • Structural hindrances dominate and weigh on the cyclical recovery, thus growth weakens or turns negative. The Fed embarks on QE3, most likely in the form of agency MBS and Treasury purchases. • Weaker economic conditions raise the odds for a larger Republican majority in Congress, but Obama remains President. The debt limit is reached earlier and the Treasury runs out of money before year-end. The political gridlock becomes dysfunctional, thus fiscal policy tightens by USD 600 billion (3.7% of UBS estimate of 2013 GDP) in 2013 ("fiscal cliff"). The US credit rating is downgraded. Key dates 2 July 6 July 6 Nov ISM manufacturing PMI for June Nonfarm payrolls and unemployment rate for June US Presidential and Congressional elections US moderate growth to continue US real GDP and its components, quarter-over-quarter annualized in % 8% 6% 4% 2% 0% 2% -4% -6% -8% -10% 12% Q12036 QI 2007 Q12008 QI 2009 QI 2010 Q12011 QI 2012 =Consumption • Gemmemai real estate investment =Capitalexpenstoures =Residential investment hventonts =Net Exports • Government — Real GDP Mel annual1444) Source: Thomson Datastream, UBS OO, as of 20 June 2012 US fiscal cliff at year-end 2012 Fiscal effects of change in provisions under current law, USD billion annualized 1Q13 2Q13 3Q13 4Q13 GYZ013 -70 -16 -55 -157 -132 -109 -34 -27 40O -60 -68 -76 -76 -16 -16 -16 -17 -38 -58 -58 -65 -164 -156 -137 -172 0 -374 -125 -29 -94 -34 -114 -34 -114 -34 -114 -34 -27 -27 -27 -27 - - 34 Source: Goldman Sachs, UBS OO, as of 20 June 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 EFTA01089731 Key financial market driver 3 - China growth outlook Key questions • When will the economy bottom out? • What economic policy responses can we expect to support the economy ahead? • How significant is the contagion risk from a possible downturn in the Eurozone? CIO View (Probability: 70%*) Modest policy easing to support growth in 2H12 • The latest economic data suggest that economic activity is showing signs of stabilization, albeit at a comparatively low level. However, we have yet to see meaningful pick-up in activity. We think that policy measures to support the economy should have more visible effect on activity in the second half of the year. • To this effect, the People's Bank of China (PBoC) has recently cut interest rates by 25bps - the first such move since late 2008. With investment demand still sluggish, we don't expect the measure to have a significant near-term effect on growth. Still, the cut confirms the leadership's commitment to support the economy. Importantly, with the rate cut, measures were announced to increase the banks' ability to set interest rates, which should bolster private household spending power in the future. • The rate reduction took place against a backdrop of falling price inflation. Thus, inflation is no obstacle for further measures to ease monetary policy. However, at this point we don't expect further rate cuts this year; especially since increased interest rate flexibility should contribute to an easing of monetary conditions ahead. If anything, we think the PBoC may implement more reductions in banks' reserve requirement rates to ensure sufficient liquidity provisions. Thus, we think the real focus has to be on the fiscal policy measures now, including possibly an acceleration of infrastructure investments, measures to support consumer spending and selective relaxation in the property market (while keeping home-purchase restrictions intact). 7; Positive scenario (Probability: 20%*) Higher-than-expected growth • Chinese GDP grows above 8.5% in 2012. For this we would probably need to see stronger-than-expected fiscal and monetary policy support from the government. A speedy improvement in the Eurozone debt crisis could also lead to this positive scenario. 11 Negative scenario (Probability: 1O%*) Hard landing • Chinese GDP growth 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. Other risks include a sharp decline in Chinese residential property prices—which would slow investment growth, a large-scale default of local government debt, or a surge in inflation that forces the PBoC to significantly tighten monetary policy. Key dates 1 Jul 13 Jul 11-15 Jul 22-25 Jul cat UBS Manufacturing purchasing managers index (Jun) Fixed asset investment, industrial production (Jun), 2Q12 GDP New bank lending, M2 (Jun) HSBC flash manufacturing purchasing managers index (Jul) For further information please contact CO analyst Gary Tsang, First interest rate cut since 2008 3 0 2 3 e 8 .a 5 5 i o r. co o o • $ .a k e 2 — 1-year lending rate — I-year deposit rate Source: Bloomberg, UBS CIO, as of 18 Jun 2012 Pick-up in infrastructure investment 6: 50 40 30 2C 10 Year.on.yeat %, 1C 12 05 06 07 08 09 10 11 F xed asset investment —Infrastructure -Peal estate development -Manu'actv Source: Bloomberg, UBS CIO, as of 18 Jun 2012 Note: Past performance is not an indication of future returns. • Scenario probabilities are based on qualitative assessment. Glenda Yu, S Patrick Ho, Please see important disclaimer and disclosures at the end of the document. EFTA01089732 Section 2 Asset class views 4 UBS EFTA01089733 Section 2.A Asset class views Equities 4 uss EFTA01089734 Equities overview Global equity markets - Key points • We keep an overall neutral allocation to equities (see summary on slide 3). • The US remains our preferred developed market. The domestic economy is expected to continue to grow. This should underpin earnings growth for US companies. With labour costs in check, profit margins should stay around the current high levels. • We keep our overweight position on EM equities. Monetary easing in key countries continues, and relatively attractive valuations remain key supporting factors. However, near-term economic and currency weakness remains a major concern for investors — especially those domiciled in hard currency regions (e.g. USD, EUR). Until year-end, we expect some growth acceleration and therefore stay overweight. • The UK remains a preferred market. It offers a solid earnings outlook compared to other European markets. Moreover, the valuation is attractive at a trailing P/E ratio close to 10. • We keep our negative stance on Eurozone equities. The economy remains very weak affecting earnings growth negatively. The sovereign debt crisis remains a major risk (see page 8). • We remain cautious on Australian equities. The earnings prospects are still being revised down by analysts. The domestic economy is moving at two speeds with the strong part getting its impulse from the mining sector. We maintain a small underweight. • We keep a moderate underweight in Swiss equities, as valuation looks expensive relative to world equities. The negative earnings impact of the strong Swiss franc should ease further in coming quarters. Global equity sectors - Key points • Consumer Staples and Healthcare remain preferred among defensive sectors, as their long-term earnings prospects are very solid. Both sectors also offer strong balance sheets, exposure to favorable demographic trends and emerging markets. • We keep our negative view on Telecom and Utilities. Both sectors suffer from weak revenue growth as well as margin pressure. • Within cyclical sectors, we keep our preference for IT due to a solid earnings outlook and strong corporate balance sheets. Moreover, we reiterate our neutral allocation to Industrials. • Valuations are high and earnings expectations are optimistic for Consumer Discretionary. However, we reduce our Underweight as we become more positive on the sector in the US. • Following the latest oil price decline and a good relative performance, we have reduced our overweight on Energy. However, the earnings outlook remains solid and valuation is very attractive. While Materials are not expensive, we are neutral, as margins remain under pressure. • The earnings outlook for US and Asian Financials is solid, which leads us to be neutral on Financials from a global perspective. However, we maintain our underweight on Eurozone Financials, where sovereign indebtedness and bank capitalization remain major concerns. UBS Preferences (6 months) zUS Canada EMU UK Switzerland Sweden Australia Hong Kong a. Japan Singapore Fa Global EM Ifi • new old Note. Preference in hedged terms (excl. currencies) Consumer Discretionary Consumer Staples Energy Financials Healthcare Industrials IT Materials Telecom Utilities neutral • new old Source: UBS CIO. as of 28 June 2012 ++ 13 For further information please contact OO asset class specialists Markus Irngartinger, or Carsten Schlufter Please see important disclaimer and disclosures at the end of the document. EFTA01089735 The Fed Labor market Earnings reports US equities Preference: overweight S&P 500 (27 June): 1,332 (last month: 1,319) UBS View S&P 500 (6-month target): 1,430 • US firms on average show more resilient earnings than their global and especially European peers. Modest domestic economic growth supports US companies' revenue and thereby earnings growth. About two thirds of revenues are generated in the US. • While profit margins are slightly higher than their average over the last 30 years, we expect them to hold up in coming quarters. Pressure from rising wages on margins is rather muted. So company earnings are forecast to develop in line with revenues. • In the next six months, we forecast the price-to-earnings ratio (P/E) of the S&P 500 to rise to about 14.0x realized earnings from slightly above 13.0x currently. • The combination of expected moderate earnings growth and an expansion of the valuation multiples make the US one of our preferred equity markets. 71 Positive scenario S&P 500 (6-month target): 1,580 • 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 15x. 11 Negative scenario S&P 500 (6-month target): 1,115 • The US slides into a recession and corporate earnings fall by around 15% over the coming 12 months. Coupled with an escalation in the Eurozone debt crisis, we would expect the PIE multiple to contract towards 12.0x trailing earnings. Note: Scenarios refer to global economic scenarios (see slide 7) What we're watching Why it matters Business sentiment The ISM is a leading indicator for US manufacturing and services. Key dates: 2 July, ISM manufacturing; 5 July, ISM non-manufacturing The direction of monetary policy and hints on further quantitative easing can influence equities. Key date: 11 July, minutes from June FOMC meeting Improvement in the labor market is key for domestic consumption. Key date: 6 July, US labor market report for June Earnings season in the US, with 60% of the S&P 500 companies reporting in July. Key date: 9 July, Alcoa, first major earnings report in July Recommendations Tactical (6 months) • We have adopted a neutral allocation between defensive and cyclical sectors. • Among defensives, we still like Consumer Staples, while IT is a preferred cyclical sectors. We also like Energy. • We are cautious on Materials, where we expect margin pressure to continue, as well as Telecom and Utilities, due to high valuations. Strategic (1 to 2 years) • We like medium-sized US companies, which should benefit from robust earnings growth in the long term (see also slide 21). Our sector stance in the US Sectors US Consumer Discretionary Consumer Staples Energy Financials 4 Healthcare 4 Industrials 4 IT Materials Telecom Utilities Source: U8S CIO, as of 28 June 2012 Note: Past performance is not an indication of future returns. UBS 14 For further information please contact CIO asset class specialist Markus Irngartinger, Please see important disclaimer and disclosures at the end of the document. EFTA01089736 Eurozone equities Preference: underweight Euro Stoxx (27 June): 217 (last month: 215) UBS View Euro Stoxx (6-month target): 223 • The crisis in the Eurozone will remain the main driver in the coming months. After the elections in Greece, progress on the reform program will be closely monitored. Spain and Italy will also remain in the spotlight with levels of government bond yields too high for being sustainable. • With the sovereign debt crisis dragging on we expect the Eurozone market to stay highly volatile in coming months. • Economies in peripheral countries increasingly feel the burden of austerity. The economic weakness affects company earnings negatively. Analysts' earnings growth forecasts (consensus) for 2012 have come down to about 3% for this year, but we see this as still too high against the weak economic backdrop. • All in all, the ongoing risks stemming from the sovereign debt crisis lead us to the view that Eurozone equities will underperform other major markets. X Positive scenario Euro Stoxx (6-month target): 275 • Global economic growth reaccelerates and Eurozone growth shows clear signs of bottoming out, enabling 2-4% earnings growth over the rest of the year. The trailing PIE ratio could re-rate to 12x from the current reading close to 10x. JI Negative scenario Euro Stoxx (6-month target): 165 • Europe slides into a deep recession, and the debt crisis leads to severe pressure on Spain and Italy. In a major crisis, earnings could fall by 10% to 15% from current levels until year-end, and the trailing PIE ratio could drop to 8.5x by the end of 2012. Note: Scenarios refer to global economic scenarios (see slide 7) What we're watching Why it matters Growth indicators Economic growth indicators provide information on the development of a potential Eurozone recession. Key dates: 2 July, Final PMI manufacturing Eurozone, Germany, France for June; 24 July, Flash PMI Eurozone, Germany, France for July; 25 July, IFO business climate Germany Policy action Decisions by European politicians and the ECB affect the course of the debt crisis. Key dates: 5 July, ECB meeting Earnings season Earnings reports of the Euro Stoxx companies. Key dates: Mid July until mid August Recommendations Tactical (6 months) • We continue to recommend defensive sectors. We like Consumer Staples and Healthcare. • We also like the Energy sector, where the valuation is very attractive. • Because of risks stemming from the sovereign debt crisis, we keep a cautious stance on Financials — especially Banks and diversified Financials. Strategic (1 to 2 years) • For investors with a multiyear horizon, we believe there are attractively valued opportunities in core Europe (see also slide 21). Our sector stance in the Eurozone Sectors Eurozone Consumer Discretionary SI Consumer Staples Energy Financials SI Healthcare 73 Industrials IT Materials Telecom Source: U8S CIO, as of 28 June 2012 Note: Past performance is not an indication of future returns. UBS 15 For further information please contact CIO's asset class specialist Markus Irngartinger, Please see important disclaimer and disclosures at the end of the document. EFTA01089737 UK equities Preference: overweight FTSE 100 (27 June): 5,524 (last month: 5,266) UBS View FTSE 100 (6-month target): 5,785 • We continue to like UK equities relative to global ones. An expected improvement in the global economy over the coming quarters should support UK companies as 70% of revenues are generated abroad. • Energy is the largest sector of the UK market. While the oil price eased sharply over the past months, we expect it to stabilize in the second half of 2012. An attractive valuation of the energy sector at 6.5x trailing earnings provides some buffer for earnings volatility going forward. • Profitability of UK banks is reasonable. They are less affected by the sovereign debt crisis than their Eurozone peers. While the recent easing of collateral requirements by the Bank of England is supportive in the short-term, the profitability of the domestic operations could be negatively affected by the implementation of the ring-fencing bank reform by 2015. • UK equities' P/E, at about 10.0x trailing, indicates attractive value relative to global equities. Based on our 12-month forward earnings growth estimate of about 5% and the P/E multiple slightly expanding to 10.3x, we expect UK equities to show good returns over the next six months. 71 Positive scenario FTSE 100 (6-month target): 6,650 • Continued global growth and strong demand from emerging markets should support demand for commodities, helping the Materials and Energy sectors to lead the market higher. The market could re-rate to a P/E multiple of close to 12.0x, and we would expect earnings growth of 5-8% over 12 months. II Negative scenario FTSE 100 (6-month target): 4,400 • A global recession drags UK earnings down by 15-20%. The market's defensive characteristics would only partly offset its strong exposure to commodity -related sectors. We would expect the trailing P/E multiple to drop towards slightly below 9x. Note: Scenarios refer to global economic scenarios (see slide 7) What we're watching Why it matters Growth indicators Business survey indicators provide information on the economic development in the UK. Key date: 2 July, PMI manufacturing for June; 4 July, PMI services for June; Commodity prices Energy and Materials together are about 30% of the UK market by market capitalization. Developments in commodity prices affect earnings estimates. Policy action Loose monetary policy by the Bank of England (BoE) supports equities. Key date: 05 July, Bank of England policy meeting Recommendations Tactical (6 months) • We like the Energy sector due to attractive valuations; Consumer Staples is another preferred sector Because of its defensive qualities. • Approaching the end of the patent cliff should remove some uncertainty on the Healthcare sector and enable a re- rating. Strategic (1 to 2 years) • As commodity -related sectors, Energy and Materials should benefit from robust demand in emerging markets. • The UK market's 4% dividend yield provides a good income stream. UK market trades at a P/E-discount (based on realized earnings) 30 25 20 15 10 5 0 01.90 01_92 01.94 01.96 01.911 01.00 01.02 01.04 01.06 01.0B 01.10 01.12 — FiSt 100(941:46PA — WatIrmuedM Source: Thomson Reuter; UBS CO, as of 21 lune 2012 Note: Past performance is not an indication of future returns. UBS 16 For further information please contact CIO asset class specialist Markus Irngartinger, Please see important disclaimer and disclosures at the end of the document. EFTA01089738 Swiss equities Preference: underweight SMI (27 June): 5,997 (last month: 5,818) UBS View SMI (6-month target): 6,200 • Swiss listed companies generate a high share of profits in economies outside Switzerland. Consequently, the Swiss equity market is affected by the recent weakening in global growth. • Swiss companies try to mitigate concerns on the global economic prospects by maintaining tight cost controls. This should allow to maintain relatively robust operating margins in 2012. • While the Swiss franc remains overvalued, we expect the currency impact to gradually become less of a drag. In fact, at current exchange rates, Swiss companies' earnings would show some positive currency translation effects by end 2012, compared to the previous year. • Still, the PE-ratio of the market is relatively high compared to the global average, indicating less attractive value. The SMI is trading at about 12.8x realized earnings. We are thus more cautious on the ability of the market to deliver further multiple expansion in a challenging market environment. As a result, we maintain a small underweight stance on Swiss equities. 'I Positive scenario SMI (6-month target): 6,900 • Eurozone economic growth reaccelerates meaningfully, providing relief to Swiss financials as well as Swiss exporters. Defensive sectors would likely be left behind in a relief rally. In this scenario, we would expect the equity market P/E to re-rate to 14x and earnings to grow by 5% over the next six months. JI Negative scenario SMI (6-month target): 5,075 • The sovereign debt crisis re-escalates, leading to further downside for Swiss financials and the export- focused Industrials and Materials sectors. In this scenario, corporate earnings could drop by 5-10% over the next six months and we would expect the P/E to contract significantly, toward 11.5x. Note: Scenarios refer to global economic scenarios (see slide 7) What we're watching Economic indicators Monetary and economic policy Corporate results Why it matters Key announcement dates of domestic economic indicators: 2 July, PMI manufacturing; 27 July, KOF Swiss leading indicator Key Swiss/European monetary policy dates that can impact Swiss equities: 2 July, SNB meeting; 5 July, ECB Governing Council meeting Key corporate announcement dates that could move the market: 5 July, Barry Callebaut; 12 July, Partners Group; 16 July, K0hne+Nagel; 17 July, Georg Fischer & SGS; 19 July, Actelion; 20 July, Sulzer 25 July, Rieter & Lonza; 26 July, ABB, CS Group, Logitech & Sika Recommendations Tactical (6 months) • We favor companies with a strong and broad foothold in emerging markets, as well as innovative companies able to market their products and services efficiently and globally. • We continue to favor large caps. Strategic (1 to 2 years) • We like stocks paying high and sustainable dividends. • Moreover, we favor leaders in regards to the two key Swiss success factors: innovation and globalization. Swiss market trades at a PIE-premium (based on realized earnings) 4. 35 28 21 1,1 7 2003 2005 2007 2009 2011 — MSCI Switzerland realeed Pit — NISCIWorid realeed ME Source: Thomson Reuters, UBS CIO, as of 25 June 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. 7 EFTA01089739 Japanese equities 1Preference: neutral Topix (27 June): 745 (last month: 721) UBS View Topix (6-month target): 780 • We expect earnings growth of about 45% over the coming 12 months. This exceptional high growth is mainly due to the two natural disasters last year, as well as tax regulation changes which caused a number of one-time losses to be booked in the fiscal year that ended in March 2012. • In our base case scenario, we see only limited scope for an additional earnings boost from the local economic recovery, given the slowing in export markets. Japanese companies are expected to continue their cost reduction efforts to counter the impact of a strong yen. • The Japanese government has started implementing its JPY 18tn recovery budget in 4Q 2011, and we expect the budget to boost Japanese GDP by 1-1.5% in FY2012. • Mainly due to the earnings rebound, we expect the TOPIX trailing PIE to drop from around 16.5x to 14x - 14.5x by year end; still the earnings rebound should provide some room for moderate price increases. A Positive scenario Topix (6-month target): 900 • Stronger global demand and stabilizing European markets provide an additional boost to earnings, and also lead to improved risk taking. Falling risk aversion is likely to lead to a weaker yen, providing further upside to earnings. TOPIX target is based on 16.0x trailing PIE. 11 Negative scenario Topix (6-month target): 600 • Faltering global growth leads to weak exports, triggering negative earnings surprises. A strengthening USDJPY below 75 in response to rising risk aversion might provide an additional drag on the economy and earnings. We would then expect the P/E ratio to contract to 13.5x, even if earnings show no recovery. Note: Scenarios refer to global economic scenarios (see slide 7) What we're watching Why it matters JPY and exports BoJ's monetary policy board meeting The exchange rate is an important factor for the Japanese equity market, and central bank intervention is a key swing factor. Japan's trade balance could be in deficit and may impact USDJPY rates. Key date: 09 July, Japanese trade balance The Bank of Japan's (Bel) additional commitment to its asset purchase program, which is currently JPY 65tn in size, would lead to a weaker yen, in our view. Key date: 12 July, BoJ policy meeting irS UBS Recommendations Tactical (6 months) • The earthquake in Japan and recent floods in Thailand have impacted Japanese earnings negatively. A recovery from these disasters should benefit auto and industrial stocks in particular. • We prefer companies that continue cost reduction initiatives to maintain price competitiveness during the period of yen strength. Strategic (1 to 2 years) • A weaker USDJPY may drive Japanese companies' earnings recovery beyond a technical recovery from natural disasters. • A rapidly aging population and the lack of a powerful and stable government remain negative for the country's longer- term economic prospects. Japanese realized earnings likely to recover going forward as 75 65 55 45 35 25 75 1988 1990 1992 1994 1996 1998 2000 2CO2 211 2086 2008 2010 2012 — Topa 12entoolipcloarnrss poi two Source: Thomson Reuters, UBS CIO, as of 21 June 2012 Note: Past performance is not an indication of future returns. For further information please contact CIO asset class specialist Toru Ibayashi, Please see important disclaimer and disclosures at the end of the document. EFTA01089740 Emerging market equities 1Preference: overweight MSCI EM (27 June): 913 (last month: 907) UBS View MSCI EM 6-month target: 1,000 • Currency weakness hurt emerging market (EM) equity performance in US-dollar terms year-to-date. We expect EM FX to appreciate against the USD from current levels over a six-month horizon. • As expected, China has started to ease monetary policy. We believe there is also room to do more on the fiscal side, helping to support China's economic growth outlook for the second half of 2012 and into 2013. The 2Q GDP numbers are expected to represent the low point in the current cycle. • Given the above, in our base case, we see scope for some multiple expansion for the MSCI EM Index, from the current 10.3x realized price-to-earnings ratio to closer to 11x over the next six months. We expect earnings growth of around 10% over the next 12 months. • Within EM, we believe that Asia is best positioned for economic growth in the second half of 2012. In emerging Asia, we prefer China. In Latin America, we prefer Brazil and Mexico. Central and Eastern Europe remains the most vulnerable region, and we remain neutral on Russia. 7/ Positive scenario MSCI EM (6-month target): 1,190 • The outlook for the global economy improves, boosting EM's ability to grow more strongly in 2013. Stronger economic growth leads to earnings growth of 15%. Investor confidence improves, leading to a better P/E multiple of 12.5x trailing earnings. More cyclical Korea and Taiwan would benefit. SI Negative scenario MSCI EM (6-month target): 730 • Serious negative developments (e.g. a further deterioration of the Eurozone crisis, the US fiscal cliff, or a Chinese hard landing) hit trade and thus the economic prospects of emerging markets. In this case, we would expect a 25% decline in earnings. More defensive Malaysia would do better, whereas more cyclical Korea and Taiwan would underperform. We assume, however, that the market would also be expecting some recovery in earnings for 2013, helping the PIE multiple to recover to 9.5x trailing earnings. Note: Scenarios refer to global economic scenarios (see slide 7) What we're watching Emerging market monetary policy Oil prices & EM FX 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 due for Russia (4-9 July), Brazil (7 July), China (9 July), Mexico (9 July), India (13 July), South Africa (18 July). Recent declines in oil prices are helping to reverse some of the inflationary impact of earlier rises, but the exchange rate matters, too. Recommendations Tactical (6 months) • In Asia, we expect Chinese equities to benefit as the Chinese economy avoids a hard landing. In Latin America, we prefer Brazil and Mexico. Strategic (1 to 2 years) • Structural factors (e.g. stronger fiscal position, more favorable demographics) should continue to support stronger economic growth than in the developed economies. • Strategically, we would advise a tilt in EM portfolios toward cash-rich and faster- growing Asia. Emerging market country preferences Current most preferred markets Brazil China Mexico Current least preferred markets Hungary Indonesia Poland We currently have a neutral view on the remaining emerging equity markets in the MSCI EM index. UBS For further information please contact OO asset class specialist Costa Vayenas, Please see important disclaimer and disclosures at the end of the document. 9 EFTA01089741 Asian equities (ex-Japan) 1Preference: overweight MSCI Asia ex-Japan (27 June): 469 (last month: 466) UBS View MSCI Asia ex-Japan (6-month target): 515 • The region continued to show high volatility last month, with its P/BV temporarily close to 2008 lows. • Hong Kong and Singapore markets' domestic fundamentals remain solid. Hong Kong should benefit from China's gradual recovery in 2H 2012, while Singapore's economy is rebounding and corporate balance sheets and earnings remain solid. After the rate cut early June, we expect China to have more policies to support growth in 2H 2012. China is our most preferred market, while Indonesi