ubs cio monthly extended october report

UBS CIO Monthly ExtendedOctober 2012

CIO WM Global Investment Office

CIO monthly videowww.ubs.com/cio-video

For smartphone users: scan the code with an app like "scan"

Published 28 September 2012

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.

http://www.ubs.com/cio-video

C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot

1

Table of Contents

Section 1 Base slides 3

Section 2 Asset class views 12

2.A Equities 13

2.B Fixed income 23

2.C Foreign exchange 30

2.D NTAC: Commodities, Listed real estate, Hedge funds and Private equity 34

Section 1

Base slides


3

Summary

Economy The economic landscape was dominated by central bank action in September. First, the

European Central Bank announced "Outright Monetary Transactions" (OMT) to support

bond spreads of countries that enter an official aid program. Later in the month, the US Fed announced open-ended quantitative easing (QE3) targeting agency mortgage-backed securities. And the Bank of Japan increased its own QE program by Y10tr. While those measures clearly reduce tail risks, the global growth picture remains mixed.

Equities The US remains our most preferred market due to its relatively favorable earnings outlook

and better economic growth prospects. While EM equities have lagged their developed peers year-to-date, we expect the region to be supported by extended global liquidity injections by the world's central banks, and a bottoming out of growth in the region. Canada and Australia are our least favored regions due to falling earnings.

Fixed Income Corporate bonds continue to benefit from healthy balance sheets and low default rates.

Although spreads have tightened towards long-term averages, we continue to see good returns ahead in US high yield and investment grade credit. However, we advise profit taking in emerging market sovereign debt (USD), a long-standing overweight position, as they have now reached fair value. We reiterate our preferred theme on EM corporate bonds, which have lagged the recent rally for its sovereign peers. While we expect government bond rates to increase only gradually over time, we see much better prospects in credit.

Commodities We raise commodities to neutral via closing our energy underweight, as extended monetary stimulus across the globe is likely to continue to push

commodity prices higher

over the coming 6 months. Still, for a sustained rise in commodity prices, the global growth picture likely needs to improve.

Foreign Exchange We closed our preference for USD over EUR on September 12 due to

lower Eurozone tail

risks and another round of QE in the US. In our view, the risks for the two currencies are now more balanced. GBP and CAD remain our preferred currencies, while the JPY remains our least preferred currency, on the back of a weakening Japanese economy and more easing likely from the Bank of Japan.

"Central bank actions to support a moderate pro- risk stance "

Please see important disclaimer and disclosures at the end of the document.


4

Commodities5%

Real Estate5%

Hedge Funds / Private Equity

10%

Equities USA10%

Equities Europe

23% EmMa Equities6%

Equities Other6%

Emerging Markets Bonds

3%

High Yield Bonds

6%

Inv Grade Corporates

Bonds9%

High Grade Bonds

7%

Liquidity10%

Cross-asset preferences

•

CAD •

GBP •

CHF

•

JPY

•

Developed market government bonds

•

US high yield•

Global investment grade credit•

EM corporate bonds•

Event-driven and relative value hedge funds

•

US Housing

Most preferred Least preferred

•

US •

Western winners from EM growth

•

High quality dividend yields•

Event-driven and relative value hedge funds

•

Natural gas growth gainers

•

Canada•

Australia

Recent upgrades Recent downgrades

Equities

Fixed income

Foreign exchange

Commodities

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.

Portfolio weights



5

Recommended tactical asset allocation


Source: UBS CIO WM Global Investment Office – as of 24.09.2012

Tactical asset allocation deviations from benchmark* Currency allocation

* 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.

Cash

Equities total

US

Eurozone

UK

Japan

Switzerland

EM

Other

Bonds total

Government bonds

Corporate bonds (IG)

High yield bonds

EM bonds (USD)

Commodities total

Precious metals

Energy

Base metals

Agricultural

Listed Real Estate

Equ

itie

sB

on

ds

Co

mm

od

itie

s

new old

neutralunderweight overweight

USD

EUR

GBP

JPY

CHF

SEK

NOK

CAD

NZD

AUD

new old



6

Preferred themes

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 580 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.

US Housing (sourced from government bonds – CIO UW)

There are a range of investment opportunities related to US housing, but their relative performance will vary depending on where we are in the cycle. While recent indicators have generally shown signs of stabilization and overall improvement in the US housing market, the recovery is likely to remain gradual. In this environment, we believe that Agency Mortgage Backed Securities (Agency MBS), and related US Agency Mortgage REITS, are amongst the best investment opportunities. Agency MBS offer a positive spread to government bonds with minimal volatility, have a favorable supply and demand balance, and would likely benefit from any future quantitative easing in the US. US Agency Mortgage REITS are leveraged exposures to the same type of underlying bonds.

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.

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.

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 5%.



7

30

35

40

45

50

55

60

2008 2009 2010 2011 2012

ManufacturingServicesNo-change line

Key dates1 Oct

US: ISM manufacturing purchasing managers index for September

8 Oct

Eurozone: Eurogroup meeting

18–19 Oct

Eurozone: European CouncilMid/late Oct

China: The 18th National Congress of the Communist Party of China (tentative)

Key questions• What are the prospects for the global economy in 4Q12 and 1Q13?

• When is the European economy likely to return to sustainable economic expansion?

• What are the risks that the US economic recovery will falter in the near term?

• How much room do emerging market policy makers have left for monetary easing?

CIO View (Probability: 70%*) Sluggish expansion •

Global economic activity remained weak in August, with both the

manufacturing and the service PMIs

falling marginally. Global shipping costs also continued to fall, pointing to still subdued global trade activity. In our estimate, global GDP expanded at a year-on-year rate of about 2.7% in August, which is more or less unchanged compared to the previous month. However, we note that the long-standing deceleration in global trade seems to have found a bottom in 1H12. Importantly, further monetary easing measures by major central banks, including in particular the US central bank's decision to increase its MBS purchases, should help to support economic growth in coming months. •

Geographically, the US is relatively strong, with fiscal policy

expected to provide only moderate

headwinds in 2013. The Eurozone is struggling to emerge from recession or stagnation, but is expected to show an improved performance from 4Q12. Catch-up growth in Japan after the 2011 natural disaster is slowing notably, while we think that the economic momentum in China will improve more meaningfully from 4Q12 on the back of past monetary and fiscal stimulus. Emerging market (EM) policy rates have reached the lows of the past easing cycle. Asian central banks still have more room for additional easing measures compared to the rest of EM. •

Overall, we continue to expect a very moderate improvement in global economic activity in coming

months. Global consumer price inflation peaked in summer 2011 and has since fallen gradually. Base effects and rising commodity prices will likely push up global inflation in the next months.

7

Global economic outlook – SummaryGlobal growth expected to be around 3% in 2012 and 2013

Source: Bloomberg, UBS, as of August 2012

Note: Past performance is not an indication of future returns. *Scenario probabilities are based on qualitative assessment.

For further information please contact CIO economist Dirk Faltin, [email protected] and CIO economist Ricardo Garcia, [email protected]


Services and manufacturing diverging(Global PMIs, 3-month moving averages)

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: 20%*)

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.

Source: UBS, as of 25 September 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.

Real GDP growth in % Inflation in %2011 2012F 2013F 2011 2012F 2013F

Americas US 1.8 2.2 2.3 3.1 2.1 1.7Canada 2.4 2.0 2.3 2.9 2.0 2.3Brazil 2.7 1.6 4.8 6.5 5.3 6.5

Asia/Pacific Japan -0.8 2.3 2.0 -0.3 0.0 0.3Australia 2.1 3.7 3.2 3.4 1.7 2.5China 9.3 7.5 7.8 5.4 2.8 3.6India 6.5 5.5 6.5 8.0 7.5 7.0

Europe Eurozone 1.5 -0.4 0.2 2.7 2.4 1.9 Germany 3.1 0.9 1.1 2.5 1.7 1.5 France 1.7 0.2 0.4 2.1 2.0 1.3 Italy 0.5 -2.4 -0.2 2.9 3.3 2.7 Spain 0.4 -1.6 -1.7 3.1 2.4 2.7UK 0.8 -0.5 0.8 4.5 2.7 2.1Switzerland 1.9 1.1 1.4 0.2 -0.5 1.2Russia 4.3 3.8 3.7 8.5 5.0 6.6

World 3.2 2.7 3.1 3.9 2.9 2.9


88

Key financial market driver 1 – Eurozone crisis

CIO View (Probability: 65%*) Austerity and weak growth•

The ECB has announced plans to buy government bonds of countries

submitting to an official aid

program (so-called Outright Monetary Transactions or OMT). This has compressed yields, especially in Italy and Spain. The net effect on growth should be positive, but we think that other issues, such as the uncertainties regarding Greece, will remain dampers in coming months. Economic momentum is still weak and we think that GDP growth will remain more or less flat in 4Q12 and 1Q13. •

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 a similar aid package to Spain. •

OMT bond purchases will focus on maturities of up to three years. 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, which we

think the ECB's pari-passu promise cannot fully mitigate. 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 memorandum with a few adjustments by

October, although further delay is possible. We think that Greece's failure to meet targets may trigger a cut-off from funding and a gradual exit by early 2013. Portugal and Ireland should remain on track with their bailout packages, Cyprus will likely get a new package and

Slovenia is likely to ask for help soon.

For further information please contact CIO analyst Thomas Wacker, [email protected] andCIO economist Ricardo Garcia, [email protected]


Key questions• What do we expect from the economy and ECB 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?

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. Negative scenario

(Probability: 20%*)

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.

Purchasing managers indices suggesting small contraction in Q3 similar to in Q2

Source: Bloomberg, UBS, as of September 2012

Yield of Spanish and Italian 10-year bonds over German Bunds (in bps)

Source: UBS, Bloomberg, as of 17 September 2012

Note: Past performance is not an indication of future returns.

* Scenario probabilities are based on qualitative assessment.Key datesTBD

Troika report on Greece

4 Oct

ECB press conference8 Oct

Eurogroup

meeting

18–19 Oct

European Council24 Oct

Eurozone composite purchasing managers index

0

100

200

300

400

500

600

700

03/2011 06/2011 09/2011 12/2011 03/2012 06/2012 09/2012

Italy Spain

253035404550556065

07 08 09 10 11 12Manufacturing Services

Composite No-change line


9

CIO View (Probability: 65%*) Sluggish expansion•

The economy stays on a moderate growth path but the unemployment rate comes down only very

gradually with a year-end 2012 forecast of 8.0%. 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 1.5%

in 3Q 2012 (consensus: 1.8%) and 1.8% in 4Q 2012 (consensus: 2.1%). 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 introduce upside risk to our current growth forecasts.•

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.•

Against the backdrop of 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 "sequestration" spending cuts. Such a fiscal decision would lower the federal deficit by 0.7% of GDP, but the GDP impact would likely be lower as households could buffer the loss in income with lower savings.

9

Key questions• Will the economic outlook deteriorate further? 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")?

Key dates1 Oct

ISM manufacturing purchasing managers index for September

5 Oct

Nonfarm payrolls and unemployment rate for September24 Oct

FOMC meeting

6 Nov

US presidential and Congressional elections

Moderate US growth to continue into 2013

Source: Thomson Datastream, UBS, as of 11 September 2012

For further information please contact US economist Thomas Berner, [email protected]


Impact of US fiscal cliff on 2013 GDP

Key financial market driver 2 – US economic outlook

US real GDP and its components, quarter-over-quarter annualized in %

Note: AMT = Alternative Minimum Tax, ACA = Affordable Care Act

Source: CBO, UBS, as of 11 September 2012

* Scenario probabilities are based on qualitative assessment.


Possible negative effects on 2013 GDP of changes in provisions under current law, in % of UBS estimate of 2013 GDP

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: 25%*) Growth recession

• US fiscal deleveraging and an escalating Eurozone crisis weigh on the cyclical recovery and 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 (3.7% of UBS estimate of 2013 GDP) in 2013. The US credit rating is downgraded.

-12%

-10%-8%

-6%-4%-2%

0%2%

4%6%8%

Q12006

Q12007

Q12008

Q12009

Q12010

Q12011

Q12012

Q12013

Consumption Commercial real estate investmentCapital expenditures Residential investmentInventories Net ExportsGovernment Real GDP (q/q annualized)

UBS CIO forecastsq/q annualized


1010

Key financial market driver 3 – China growth outlook

CIO View (Probability: 70%*)

Stabilization in economic momentum •

Economic data is still rather subdued on balance. Trade activity remains weak and tardy, and rather

muted political stimulus measures have so far failed to support a meaningful economic turnaround. Infrastructure investment is picking up pace, but this can in our view only offset slower property and recently also weaker manufacturing investment. Against this background,

UBS has lowered its GDP

growth forecasts for 2012 and 2013 to 7.5% and 7.8% from 8% and 8.3%, respectively. •

However, after five months of decline, construction starts reaccelerated in August. Combined with the

potential onset of the peak construction season, this could help to stabilize real estate investment activity

soon. On balance, we expect the economic momentum to improve, possibly leading to a modest sequential recovery in 4Q12.•

We are cautious on the significance of recent large stimulus plans from local governments and the

accelerated approvals of infrastructure projects. These projects often span several years and some of them

are already part of the 12th Five-Year Plan. Funding also remains a key challenge for local governments.

• Political uncertainty should diminish after the 18th

National Congress of the Communist Party of China,

likely to be held in mid to late October, and execution of existing stimulus measures may improve. We believe that top leaders may have reached preliminary agreement on the power transition, which will take place at the 12th

National People’s Congress in March 2013.

• Inflation has bottomed out and the recent pick-up in home prices may limit the scope for further

interest rate cuts by the central bank. However, real interest rates could turn negative again next year. We think a reserve requirement cut is still possible, especially

as a liquidity management tool on weak FX

inflows.

For further information please contact CIO analyst Gary Tsang, [email protected], Glenda Yu, [email protected], Patrick Ho, [email protected]


Key questions• Why is economic growth weaker than expected and when will it turn around again?

• How significant are the recently announced infrastructure projects?

• What important political events are coming up?

Key dates 1 Oct Manufacturing purchasing managers index (September)11–15 Oct

New bank lending, M2 (September)

18 Oct 3Q12 GDP, fixed asset investment, industrial production (September) Mid/late Oct

The 18th

National Congress of the Communist Party of China (tentative)

Look for further pick-up in infrastructure investment

Source: Bloomberg, UBS, as of 13 September 2012


* Scenario probabilities are based on qualitative assessment.

Trimming GDP growth forecasts for China


Positive scenario (Probability: 20%*)

Higher-than-expected growth

• Chinese GDP grows above 7.8% in 2012, which is Bloomberg's latest consensus forecast. This would

probably 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 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.

Section 2

Asset class views

Section 2.A

Asset class views

Equities


13

Equities overviewPreferences (6 months)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. Recently announced monetary easing by the US Federal Reserve should provide additional support for the economy and thereby also the earnings generation by US companies.•

We keep our neutral stance on

Eurozone equities. The European Central Bank's conditional bond-

buying plan has significantly reduced downside risks stemming from the Eurozone debt crisis. Value is attractive, however, due to the recession in several countries the earnings dynamics remains weak.•

We have an

overweight position in EM equities.

Monetary easing as well as fiscal stimulus in key

countries, as well as relatively attractive valuations are supporting factors. Renewed monetary easing by the US central bank speaks for a strengthening of EM currencies relative to the US dollar.•

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. The recent drop in iron ore prices affects earnings of

Australian mining companies negatively. Overall, realized earnings continue to come down for the Australian market.•

We keep our neutral stance on Swiss equities. Companies show a relatively solid earnings generation.

But valuation looks a bit stretched compared to other developed markets.Note: Preference in hedged terms (excl. currencies)

Global equity sectors – Key points

• We upgrade global Utilities following improved earnings visibility, more attractive valuations and

reduced regulatory risks.

• We reduce our overweight in Consumer Staples after recent outperformance, which has reduced

the sector's relative value. The sector remains less affected by cyclical risks.

• We reiterate our preference for global IT

due to a superior growth outlook and as we have entered

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.

Source: UBS

For further information please contact CIO asset class specialists Markus Irngartinger, [email protected], or Carsten Schlufter [email protected].


Equitiestotal

USA

Canada

EMU

UK

Switzerland

Sweden

Australia

Hong Kong

Japan

Singapore

Global EM

No

rth

Am

eric

aEu

rop

eA

PAC

EM

new old


Consumer Discretionary

Consumer Staples

Energy

Financials

Healthcare

Industrials

IT

Materials

Telecom

Utilities

new old

neutral-- ++


14

US equities Preference: overweight

Recommendations

Tactical (6 months)•

Following recent weak performance, we upgrade Utilities to Neutral. We downgrade Healthcare to underweight as valuation is less attractive.

• We continue to like IT. Product launches support superior earnings growth. Cash rich companies offer solid balance sheets.

• Industrials and Consumer Staples also belong to our preferred US sectors.

• We are still cautious on Telecom, due to the high valuations, as well as Materials, where margins remain under pressure.

Strategic (1 to 2 years)•

We like medium-sized US companies, which should benefit from robust earnings growth in the long term.

Our sector stance in the US

S&P 500 (26 Sep): 1,433 (last publication: 1,413)

UBS View S&P 500 (6-month target): 1475

• We keep our preference for US equities relative to other developed equity markets. The earnings

generation by US companies continues to remain relatively robust. Modest economic growth enables decent earnings growth by US companies. We forecast 5% earnings growth for the coming 12 months.• The recently announced easing measures by the US central bank (Fed) reduces growth risks, as well as

supports asset markets more directly. Compared to other regions, we see this pro-active monetary policy

reaction function, underlying the Fed's approach, as a clear advantage for the local equity market.•

We expect near term only limited potential for a further re-rating in terms of increases in the price-to-

earnings ratio (P/E) of the S&P 500. US equities have had a strong run in recent weeks and have already re-rated considerably to about 14.0x (on trailing earnings). Still,

a remaining 20% discount compared to

the long-run average should provide a decent cushion for uncertainty related to the looming fiscal cliff.

For further information please contact CIO asset class specialist Markus Irngartinger, [email protected]


Source: UBS


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.

Negative scenario

S&P 500 (6-month target): 1,230

• The US slides into a recession and corporate earnings fall slightly over the coming 12 months. If this

were coupled with an escalation of the Eurozone debt crisis, we would expect the P/E multiple to contract towards 12.5x trailing earnings.

Note: Scenarios refer to global economic scenarios (see slide 7)

What we're watching Why it matters

Business sentiment The ISM is the key indicator for US manufacturing and services. Key dates: 1 Oct, ISM manufacturing; 3 Oct, ISM non-manufacturing

The Fed Hints on further quantitative easing can influence equities. Key date: 24 Oct, Fed meeting

Labor market Improvement in the labor market would support stronger consumption. Key date: 5 Oct, US labor market report for September

Sectors US


Consumer Staples

Energy

Financials

Healthcare

Industrials

IT

Materials

Telecom

Utilities


15

Recommendations


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 indicators continue to signal weakness.

•

We remain cautious on Financials – especially Banks and diversified

Financials. The need for recapitalization remains a major concern.


We have a preference for stocks paying high-quality dividends.

•

We like companies with high exposure to rapidly growing emerging markets.

Eurozone equities Preference: neutral

Our sector stance in the Eurozone

Euro Stoxx (26 Sep): 247 (last publication: 243)

UBS View Euro Stoxx (6-month target): 252

• We keep our neutral stance on Eurozone equities. The ECB recently provided details on its plan to buy

short-term government debt. While the sovereign debt crisis remains a risk factor (see slide 8), ECB action in conjunction with the introduction of the ESM has significantly reduced downside risks. • Economic performance in the Eurozone clearly lagged other regions in the first three quarters of 2012.

We do not expect this gap to widen further in coming months. Rather than contracting, the Eurozone overall is likely to return to mildly positive growth over the coming quarters.• Still, 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.

For further information please contact CIO's asset class specialist Markus Irngartinger, [email protected]


Source: UBS


Positive scenario

Euro Stoxx (6-month target): 325

• 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 11.5x.

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 close 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 months time period. Note: Scenarios refer to global economic scenarios (see slide 7)


Growth indicators Economic growth indicators provide information on the development of a potential Eurozone recession. Key dates: 1 Oct, final PMI manufacturing; 3 Oct, final PMI services Eurozone; 9 Oct, EMU industrial production; 24 Oct, Ifo

business sentiment index, Germany

Policy action Decisions by European politicians and the ECB affect the course of the debt crisis. Key dates: 5 Oct, ECB meeting

Sectors Eurozone


Consumer Staples

Energy

Financials

Healthcare

Industrials

IT

Materials

Telecom

Utilities


16

UK equities Preference: neutral

UK market trades at a P/E discount, based on realized earnings

Recommendations


We like the Energy sector in the UK due to its attractive valuations. Renewed monetary easing in the US might lead to liquidity-induced inflows into commodity related sectors.


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.

FTSE 100 (26 Sep): 5,768 (last publication: 5,774)UBS View FTSE 100 (6-month target): 5,875

• We keep our neutral stance on UK equities. While the UK market is attractively valued, we are missing

the trigger to unlock this valuation potential over the coming months. • The earnings dynamics is lagging global equities. Earnings had to be revised down more than in other

countries. The weakness in base metal prices negatively affects the earnings of the Materials sector.• The price-earnings-ratio (P/E) of the UK market, at about 11.1x trailing earnings, indicates attractive

value relative to global equities. This measure implies a discount of about 25% relative to global equities, which is higher than the historical average discount.•

Based on our estimate of about 5% earnings growth over the coming 12 months, we expect UK equities

to advance slightly over the next six months.

For further information please contact CIO asset class specialist Markus Irngartinger, [email protected]


Source: Thomson Reuters, UBS, as of 24 September 2012


Positive scenario

FTSE 100 (6-month target): 7,000

• Continued global growth and recovering demand from emerging markets should support demand for

commodities, helping the Energy and Materials sectors to lead the market higher. The market could re- rate to a P/E multiple of 13.0x, and we would expect earnings growth of 5–10% over 12 months.

Negative scenario

FTSE 100 (6-month target): 4,775

• A global recession drags UK earnings down by 15–20% over 12 months. 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 10x.


What we're watching

Why it matters

Growth indicators

Commodity prices

Business survey indicators provide information on economic development in the UK. Key date: 1 Oct, PMI manufacturing; 3 Oct, PMI services

Energy and Materials together comprise about 30% of the UK market according to market capitalization. Developments in commodity prices affect earnings estimates.

Policy action Loose monetary policy by the Bank of England supports equities. Key date: 4 Oct, Bank of England policy meeting

6

9

12

15

18

21

24

27

30

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

FTSE 100: realized P/E MSCI World: realized P/E


17

SMI (26 Sep): 6,540 (last publication: 6,388)UBS View

SMI (6-month target): 6,680

• We remain neutral on Swiss equities. Swiss companies show relatively robust earnings and are less

affected by the global slowdown in manufacturing activity. Swiss companies are trying to mitigate

concerns about global economic prospects using tight cost controls. This should allow them to maintain operating margins in 2012 above its historical average. •

While the Swiss franc is 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

and margin effects by end-2012, compared to the previous year.•

The P/E ratio of the market has narrowed recently relative to global equities. Overall, we keep our

neutral stance on Swiss equities.

Swiss equities Preference: neutral

Recommendations


We favor large over small caps.

•

Within defensives, we favor the sectors Healthcare and Consumer Staples.

•

Among the cyclical companies, we prefer those with a broad emerging markets exposure and/or cheap valuation, including insurers.


We like stocks paying high and sustainable dividends.

•

We favor leaders in regards to the two key Swiss success factors: innovation and globalization.

For further information please contact CIO's asset class specialist Stefan Meyer, [email protected]




Positive scenario


• 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 15x and earnings to grow by 5% over the next six months.

Negative scenario


• The global economy slides into a recession. Despite being less dependent on the economic cycle, Swiss

companies will also feel the slide in global demand. In this scenario, corporate earnings are likely to drop slightly over the next six months and we would expect the P/E to

contract toward 12.0x.


Swiss market relative to world equities

Key corporate announcement dates: 9 Oct, Givaudan; 15 Oct, Kühne+Nagel; 16 Oct, Roche; 18 Oct, Nestlé; 23 Oct, GAM; 25 Oct, ABB, CS Group, Logitech, Novartis & SGS; 30 Oct, Geberit, Oerlikon

and Straumann

Corporate news

Key Swiss monetary policy dates that could impact Swiss equities: 1 Oct, SNB meeting

Monetary and economic policy

Key announcements of domestic economic indicators: 28 Sep & 26 Oct, KOF Swiss leading indicator; 5 Oct, KOF October economic forecast

Economic indicators

Why it matters What we're watching

6

10

14

18

22

26

30

2003 2005 2007 2009 2011

SMI: realized P/E MSCI World: realized P/E


18

Japanese equities Preference: neutral

RecommendationsTactical (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.


A weaker USDJPY may drive Japanese companies’

earnings recovery beyond a

technical recovery from natural disasters. Japanese exporters in particular would benefit from such a development.

Japanese realized earnings likely to recover further going forward

Topix (26 Sep): 743 (last publication: 763)

UBS View

Topix (6-month target): 756

• We expect earnings growth of about 25% over the coming 12 months. This high growth rate is

due to

last year's sharp decline caused by two natural disasters. Still, so far the earnings recovery has disappointed. Earnings growth continues slowing, and is expected

to converge towards more normal

single digit growth in 2013.•

In our baseline scenario, 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 and capping the earnings upside.

• The government started implementing its JPY 18trn recovery budget in 4Q 2011; we expect it to boost GDP by 0.5-1.0% in FY2012, and about 0.5% in 2013.

• We expect the TOPIX trailing P/E to drop to around 13.5x from 15.3x over the coming months, mainly due to the earnings recovery; this provides room for only moderate price increases.

For further information please contact CIO asset class specialist Toru Ibayashi, [email protected]


Source: Thomson Reuters, UBS, as of 26 September 2012Note: Past performance is not an indication of future returns.

Positive scenario


• 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 additional upside to earnings. The TOPIX target is based on 16.0x trailing P/E.

Negative scenario


• Faltering global growth leads to weak exports, triggering negative earnings surprises. USDJPY

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 over the coming six months.



JPY and exports The exchange rate is an important factor for the Japanese equity market. Japan’s

trade balance could be in deficit and may impact USDJPY rates. Key date: 22 Oct, Japanese trade balance

BoJ’s monetary policy board meeting

If the Bank of Japan makes additional commitments to its asset-purchase program, which is currently JPY 70trn in size, it would lead to a weaker yen, in our view. Key date: 05 Oct, BoJ policy meeting

(5)

5

15

25

35

45

55

65

75

85

95

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Topix: 12m realized earnings per share


19

Emerging market equities Preference: overweight

Recommendations


The September liquidity announcements by the ECB, the Fed and the Bank of Japan support higher-beta markets, in our view. The tail risks have been lessened for the smaller European emerging equity markets (Turkey, Hungary, Poland), but their equity markets are susceptible to setbacks. 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.


Strategically, we would advise that EM portfolios tilt toward cash-rich and faster-

growing Asia.

Country preferences within emerging markets (relative to MSCI EM)

MSCI EM (26 Sep): 990 (last publication: 969)

UBS View

MSCI EM 6-month target: 1,040

• The measures announced in September by the ECB, the Fed and the

Bank of Japan, imply more, not less,

global liquidity in search of higher yielding emerging market (EM) assets: including EM currencies, EM bonds and EM equities. •

One implication of these policies, we believe, will be to enhance 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

over the next six months. Over the next 12 months, we expect EM earnings growth of around 11% (in line with consensus).•

Compared to a month ago, the ECB's

new "outright monetary transactions programme," in which it

commits to buy the bonds of compliant Eurozone governments, has also reduced the contagion risks for Central Eastern Europe (Hungary, Poland, the Czech Republic, Turkey and Russia).

For further information please contact CIO asset class specialist Costa Vayenas, [email protected]



Emerging market monetary policy

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 and Turkey (3 Oct), Brazil (5 Oct), China and India

(15 Oct), and South Africa (24 Oct)

Food and oil prices Recent spikes in food prices might increase inflationary pressure in EM, but negative output gaps and lower energy prices should counterbalance this.

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.


Current most Current leastpreferred markets preferred marketsBrazil IndonesiaChina MalaysiaSouth Korea South Africa


20

Asian equities (ex-Japan) Strategy changes•

With the Fed's implementation of QE3, we expect Asia ex-Japan to gradually trade back up to its 10-year historical average of 12x forward P/E, which is a potential upside of 12% from current levels of 10.6x forward P/E.

• Traditionally more defensive markets like Singapore and Malaysia should underperform. Higher beta markets like South Korea, Taiwan, Hong Kong and China should outperform.

• We therefore downgrade Singapore to Neutral and Malaysia to Least Preferred, and upgrade South Korea to Most Preferred and Taiwan to Neutral.

MSCI Asia ex-Japan (26 Sep): 510 UBS View MSCI Asia ex-Japan (6-month target): 540

• Despite the soft macro data for the Hong Kong and Singapore economies, we see solid earnings, low

interest rates and strong corporate balance sheets supporting their equity markets. We have seen new measures in both economies to cap recent rallies in their housing markets, especially in the smaller units. The solid property market year-to-date should support companies' earnings going forward.• China's sluggish economic growth momentum for August was expected. We may have seen most of the

earnings downgrades after the results season, and a seasonal pick-up in activities and low base of comparison last year could become a positive catalyst for the market. Valuations of MSCI China remain extremely attractive as the market continues to price in a hard landing scenario. In India, the government has failed to break policy deadlock on key economic reforms and consensus GDP forecasts have downside risk, in our view, while Indonesia's economic momentum is on track.•

We expect 10% earnings-per-share growth over 12 months for the MSCI Asia ex-Japan. It trades on

12.4x realized earnings (or 10.6x 12-m forward earnings). We expect a stable earnings multiple in the next

six months. Economic growth should stabilize and earnings downgrades come to an end towards end- 2012.

Positive scenario

MSCI Asia ex-Japan (6-month target): 665

• More supportive monetary and fiscal policy, stable inflation, sustained domestic demand growth, and

an improved global growth outlook lead to a better earnings outlook. In such a scenario, we expect earnings growth of 15% and a trailing P/E of about 15.0x.

Negative scenario

MSCI Asia ex-Japan (6-month target): 395

• A hard landing in China with a global recession leads to negative earnings revisions for 2012. In this

scenario, Asia ex-Japan could trade down to about 10.5x realized earnings.


Growth Investors should keep track of the potential rebound in the Hong Kong and

Singapore economies, and when growth will reaccelerate. Key dates: 4 Oct, HK retail sales

Policy responses Some other countries in the region have near-term macroeconomic issues due to fiscal and current account deficits, and hiccups in market and economic reforms. Policy responses often come on an ad-hoc basis.

Country preferences within Asia ex Japan

(relative to MSCI Asia ex Japan)

Current most preferred markets

Current least preferred markets

ChinaKorea

MalaysiaIndonesiaPhilippines

We currently have a neutral view on the remaining equity markets in our Asia ex-

Japan universe, which includes China, Hong Kong, India, Indonesia, South Korea, Malaysia, Taiwan, Thailand, Philippines and Singapore.

For further information please contact CIO asset class specialist Patrick Ho, [email protected]



21

Equity stylesRegional differentiation

• In the US, prefer mid caps to large caps. Moderate economic growth should support their earnings generation.

• In the US, there are opportunities in value names that also show strong growth.

• Within Europe, avoid small caps and instead rotate into large caps.

Strategic (1 to 2 years)

• We expect value strategies to outperform the European market over a multi-year time horizon.

• Mid-cap stocks provide attractive opportunities over the longer term.

UBS View Prefer mid caps in US, large caps in Europe

• We believe medium sized companies (mid caps) will outperform large caps in the US. US economic data

is forecast to stabilize and then show moderate economic growth in the second half of 2012. The greater domestic sales exposure of US mid caps reduces the earnings risk

coming from Europe.

• In Europe, we prefer companies with a large market capitalization (large caps) over ones with a small

one (small caps) in the current very challenging economic environment. Small caps generate more sales in Continental Europe than large caps. Thus, they are more negatively affected by weak domestic demand. Small caps also have a more cyclical earnings exposure than large caps.• Globally, high-quality dividend paying stocks promise to provide a real and stable income stream to

investors in the current low-yield environment. Furthermore, they give exposure to the long-term potential of equity markets while tending to suffer less in declining markets.

For further information please contact CIO's asset class specialist Christopher Wright, [email protected]


Source: Thomson Reuters, UBS, as of 31 July 2012

Note: Past performance is no indication for future returns.

Avoid small caps and favor large caps in Europe DJ STOXX small over large and business confidence

Positive scenario

Prefer value, low quality and small caps

• Leading indicators continue to move higher, and risks related to the Eurozone debt crisis subside. In this

case, add deep cyclical value (cheap price/book, price/earnings) regardless of sector, with high beta and

high leverage. In such an environment, small- and mid-cap stocks should also perform well. A dividend

strategy would be too defensive to outperform the market.

Negative scenario

Prefer quality and large caps

• The global economic picture deteriorates markedly. In this case, buy high-quality growth companies and

large caps. Do not look for value opportunities, but be as defensive as possible with your equity exposure. Look to high-quality, dividend-paying stocks for yield.

Note: Scenarios refer to global economic scenarios (see slide 7).


Earnings revisions – see

chart

(3-month moving average upgrades vs. downgrades)

Watch for signs of improvement in earnings revisions (aggregated from stock

level). An improved earnings outlook would cause investors to add more risk – influencing our preferences among equity styles.

US and Eurozone PMIs PMIs are important for earnings generation and preferences for value, growth and size. Key dates: 1 Oct, PMI manufacturing Eurozone (final); 1 Oct, US ISM manufacturing

0.40

0.45

0.50

0.55

0.60

0.65

Jul.04 Jul.05 Jul.06 Jul.07 Jul.08 Jul.09 Jul.10 Jul.11 Jul.12

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

DJ Stoxx Europe small over large caps Business sentiment Eurozone (rhs)

Large caps

outperforming

Section 2.B

Asset class views

Fixed income


23

USD

EUR (DE)

GBP

JPY

CHF

CAD

AUD

new old

neutralshort duration long duration

Bonds overview

For further information please contact CIO's asset class specialists Achim Peijan, [email protected] and Daniela Steinbrink Mattei, [email protected]


Preferences (6 months)Government bonds –

Key points

• Benchmark government bond yields are extremely volatile torn between recent uncertainties if and

when Spain will apply for external help and the ECB backstop, which significantly reduced the tail risk of a Eurozone breakup. Yields were initially also supported by the German Constitutional Court ruling on the ESM and the pro-Europe Dutch election results. In the US, the open-ended purchases of MBS agency mortgages coupled with the labor market conditionality allowing for more and/or broader asset buying should kick-start the economy. At the same time, the clear shift in focus on

the labor market, rather than

inflation targeting, increases inflation expectations and speaks for steeper yield curves. In sum, these

factors should bring benchmark interest rates back to the slightly higher ranges seen late 2011/early 2012. •

However, a plethora of challenges such as the Troika report on Greece, Spanish local elections and the

possible delayed request for additional external support, along with the US fiscal cliff will add to short- term volatility.

• Overall, we suggest keeping duration close to neutral, as we expect global growth to remain lackluster

and central banks to continue supporting bond markets.

Corporate and emerging market bonds – Key points

• We maintain a preference for investment grade (IG) and US high yield (HY) corporate credit, while we

have decided to reduce our overweight position in emerging market bonds to neutral. This follows a double digit performance year-to-date, which has brought prices towards a fair level.• Investment grade corporate bonds have achieved a total return of more than 7% so far this year, at

remarkably low volatility. The asset class is likely to continue outperforming government bonds in the

coming six months, offering higher liquidity than HY bonds. We see the highest return potential in the lower-rated IG segments (BBB and A).•

US corporate bonds of lower credit quality (HY) remain fundamentally supported by solid balance

sheets and a benign US growth outlook. Given the low risk of default losses, valuations are attractive at an effective yield of ~6%. For US HY, we expect mid single-digit total returns in the next six months. US senior loans are an attractive alternative to traditional fixed income assets.• Emerging market (EM) bonds should continue to benefit from better fundamentals than those of

developed markets over the medium term. However, valuations have now moved towards a fair level for

sovereign bonds (in USD) and we start to take profits on selected sovereign bond issuers. For EM corporate bonds in USD, there is still some potential for spreads to trend lower in the quarters ahead, and we continue to recommend this area as a CIO preferred theme.

Bonds total

Governmentbonds

Investmentgrade

corporatebonds

High yieldbonds

Emergingmarketbonds

new old


Source: UBS CIO WM Global Investment Office


24

US 10-year (26 Sep): 1.6% (last month: 1.8%)UBS View

US 10-year (6-month forecast): 2.0%

• US 10-year yields corrected from their recent significant rise on uncertainties if and when Spain will apply

for external help. However, as the ECB diminished the tail risks of a euro break up, this reduces the flight to

quality and the risk discount placed on Treasuries which should act as a floor. In addition, the announced open-ended purchases of MBS agency mortgages coupled with the labor market conditionality allowing for more and/or broader asset buying will help to support the floor for US Treasuries.•

Despite the recent decline in yields on increasing debt crisis concerns, the political and economic backstop

provided by the ECB and the Fed should limit the short term downside potential of yields. In addition these actions should boost sentiment and kick-start growth and help yields to return to their slightly higher, previously stable ranges over a six-month horizon. Similarly the focus of the Fed on the labor market rather than inflation targeting will further boost inflation expectations and thus result in a steeper yield curve. •

At the same time, US yields should be capped, as the US economy

continues to be vulnerable to spillover

effects from the Eurozone over the next year. Additionally, structural obstacles from the pending US fiscal consolidation will add to volatility and limit the rise in yields.

For further information please contact CIO's asset class specialist Daniela Steinbrink Mattei, [email protected] see important disclaimer and disclosures at the end of the document.

US rates Duration preference: neutral

USD 10-year yields and forecasts

Positive scenario for US bonds

US 10-year (6-month range): 1.4–1.6%

• The combination of anemic growth data and the ongoing European debt crisis continues to weigh on

yields. Implementation risks in the ECB framework remain, given that Italy and Spain have not yet made the necessary application, which will result in spread widening.

At the same time, Greece is likely to

announce a second debt restructuring and leave the Eurozone the next year. •

The labor market fails to recover, increasing the likelihood of even more MBS purchases or alternative

measures, and yields stay low or fall further.

Negative scenario for US bonds

US 10-year (6-month range): 2.1–2.5%

• If the ECB buying of short-dated Spanish and Italian sovereign bonds increases risk appetite, it would

reduce the flight to quality more substantially and this represents an upside risk to our forecasts.• If EU leaders make progress towards more fiscal integration, and US growth recovers with a rapidly

improving labor market, then yields could rise more significantly. Note: Scenarios refer to global economic scenarios (see slide 7)

What we're watching Why it matters Fed policy The Fed's assessment of the labor market determines its stance on quantitative

easing and is key for yields. Key dates: 23–24 Oct, Fed FOMC meeting

Inflation expectations Current yields reflect low real interest rates, but rather normal inflation expectations. Inflation expectations increased on the back of the latest Fed action, leading to more upside risk for long maturity yields.

US presidential election/ Fiscal cliff & debt ceiling

The US presidential election will guide fiscal spending for the coming years.

Source: Bloomberg, UBS, as of 18 September, 2012


Recommendations


Weak global growth momentum, ongoing bond market support from central banks and the lingering euro crisis are likely to keep yields at extraordinarily low levels for some time. Tactically, we suggest a neutral duration position.


Yields have significant upside potential over the next couple of years given the extraordinarily low current levels of real interest rates in particular. Thus clients with a longer time horizon should focus on bonds with short and medium maturities.

0%

1%

2%

3%

4%

5%

Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

forecasts US 10Y


25

EUR (DE) 10-year (26 Sep): 1.5% (last month: 1.5%)UBS View

EUR (DE) 10-year (6-month forecast): 1.8%

• Bund yields have been volatile over the month. Recent increased

uncertainties if and when Spain will

apply for external help resulted in a renewed flight to safety and thus lower Bund yields. However compared to the lows seen in August, yields are still trading higher. This higher level is supported by the ECB policy shift to act as a lender of last resort by intervening in the secondary markets with unlimited government bonds purchases subject to certain conditions. The positive German Constitutional Court ruling and open-ended conditional Fed stimulus contributed to the initial risk-on mode, providing a cap for short-

term peripheral yields and floor for Bund yields. •

Over a six-month horizon, we expect yields to trend slightly higher, returning to previously higher ranges.

The ECB has provided a very powerful and credible backstop to Eurozone stresses and reduced break-up tail risk. A boost in sentiment speaks for slightly better growth prospects and thus slightly higher yields. • However, growth is still structurally weak, and Spain could delay its application for assistance. Together

with a Greek Eurozone exit within a year, this should result in spread widening and cap Bund yields. The ECB, however, will limit the spread widening, providing a floor to Bund yields as well. •

In the UK, the recent 2Q GDP contraction and failure to achieve

the austerity goals necessary to maintain

their current rating status presents a risk to our base case of a recovery later in the year. •

In Switzerland, yields rose only slightly owing to conflicting economic data. The Swiss National Bank

stressed increased downside risks to the economy in the second half of the year and stands ready to act. With much negative news priced in, we believe Swiss yields will gradually start to normalize.

For further information please contact CIO's asset class specialist Daniela Steinbrink Mattei, [email protected], Sebastian Vogel, [email protected] or Nina Gotthelf, [email protected]


EU 10-year yields and forecasts

European rates Duration preference: neutral

Source: Bloomberg, UBS, as of 18 September, 2012


Positive scenario for German bonds

10-year Bund yield (6-month range): 1.2–1.5%

• Implementation risks in the ECB framework remain, in particular

the need for Italy and Spain to apply for

aid. At the same time, Greece may announce a second debt restructuring and is likely to leave the Eurozone 2013. The ECB could cut rates.• Further non-standard policy measures by the Fed are supportive for Bunds and

speak for lower yields.

Negative scenario for German bonds

10-year Bund yield (6-month range): 1.8–2.3%

• A moderate Eurozone economic recovery kicks in. Spain and Italy

are ahead on their austerity

commitments without needing ECB support. This reduces safe-haven inflows, driving Bund yields higher. Alternatively, Germany gives additional guarantees and the Eurozone moves towards a transfer union.


What we're watching Why it matters Political risks and fiscal cliff

The US fiscal cliff, Greek negotiations, Spanish local elections and Spain delaying

its application for assistance add to policy uncertainty

Central banks Key dates: 4 Oct, ECB rate decision; 23–24 Oct, Fed FOMC meetingEconomic variables Credit conditions (ECB bank lending survey)

Eurozone yield spreads The level of yield spreads to German bonds influences the level of German Bund yields due to safe-haven flows

Recommendations


If the ECB were to intervene with massive amounts in the peripheral bond markets, Bund yields would rise more significantly. But, for the time being, we expect only moderate interventions that do no meaningful harm to Germany's credit quality. We recommend staying neutral on duration tactically.


Yields have significant upside potential over the next couple of years. Thus clients with a long time horizon should focus on bonds with short and medium maturities.

0%

1%

2%

3%

4%

5%

Sep-09 Sep-10 Sep-11 Sep-12 Sep-13forecasts UK 10YGermany 10Y Switzerland 10Y


26

0

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010 2011 2012

EUR Investment Grade USD Investment Grade

Investment grade corporate bonds Preference: overweight

Current global spread (26 Sep): 173bps (last month: 185bps)

UBS View

Spread target (6-month): 170bps

• Given the recent rally in investment grade (IG) bonds, spread tightening potential is now limited as IG

spreads have approached fair levels, in our view. Still, IG bonds will likely continue to outperform government bonds, offering low volatility and stable income.• We expect IG corporate bonds to achieve a total return of 1–2% over the next six months. Our spread

target of 170bps is based on our outlook for sluggish but positive global growth, ongoing investor appetite for income-generating assets, and expected negative net issuance.• Non-financial corporates: While total yields are at record lows, the

pickup over government bonds and

money market rates is still attractive. Aggressive re-leveraging by companies looks unlikely. Credit quality should remain good and non-financial corporate bonds continue to deliver low, stable income.•

Financial corporates: Due to regulatory challenges, spreads are

expected to remain above past averages.

The ECB's action ("OMT") reduces tail risks for European banks but "bail-in" risks for bond holders persist.

Yield spreads

Source: Bloomberg, UBS, as of 24 Sep 2012


For further information please contact CIO’s asset class specialist Philipp Schöttler, [email protected]


bps

Recommendations


We keep an overweight in IG corporate over government bonds.

• Internationally diversified companies from non-financial sectors offer a low but stable income stream for conservative investors.

• We recommend bonds from the lower IG rating segments (BBB and A) over higher-

rated issuers.


We prefer corporate over sovereign assets given how much more robust companies are compared to the structural weakness of public finance in many countries.

Positive scenario


• Global growth accelerates more forcefully than expected. This could compress spreads closer to pre-

crisis levels. Spreads for Financials are likely to remain elevated due to regulatory challenges. However, in this case, rising benchmark yields would likely lead to slightly negative IG returns over six months.

Negative scenario


• Main risks include a sharp slowdown of the US economy (e.g. the

"fiscal cliff"). Also, risks in the

Eurozone persist (e.g. Greek exit, Spain/Italy getting cut off from private funding). Still, we would be unlikely to see spread levels reached in 2009, given companies’

superior balance sheet positions.

European financial issuers would be most at risk. Note: Scenarios refer to global economic scenarios (see slide 7)


Core market yields Developed market sovereign yields are only expected to increase gradually. A

sudden rise and high volatility would hurt IG credit. Key dates: 4 Oct, ECB rate decision; 24 Oct, US Fed rate decision

Corporate fundamentals Robust corporate earnings and low leverage on corporate balance sheets should help prevent defaults. Key dates: 9 Oct, US earnings season begins

New issuance As companies continue to deleverage, net negative supply on the IG market should support higher prices.


27

0

500

1,000

1,500

2,000

2,500

2005 2006 2007 2008 2009 2010 2011 2012

EUR High Yield USD High Yield

High yield corporate bonds Preference: overweight

Spread USD HY (26 Sep): 580bps (last month: 585bps)

UBS View USD HY spread target (6-month): 475bps

• We lower our spread target by 50bps to 475bps based on the considerable change in the macro and risk

environment after the European Central Bank and the US Fed proved their determination to provide strong monetary support. In particular, the Fed's buying of mortgage-backed securities (MBS) is likely to provide further support for the credit universe. Thus, US high yield (HY) bonds continue to offer attractive value although spreads tightened considerably in Q3. We think the recent rally has been justified in light of the favorable default outlook and central bank action.•

The ongoing slow recovery of the US economy, healthy company balance sheets, robust earnings, and

strong investor appetite for yield assets continue to push spreads lower. US HY thus remains our preferred asset class.• Despite the recent uptick in defaults, in the absence of a renewed US recession, we expect the default

rate to remain stable at 3.5% until the end of the year. A heavy load of new issuance so far this year means

that HY companies will be faced with a lower risk of failed refinancing going forward (e.g. in case of an unexpected economic slump).

Yield spreads

Source: Bloomberg, UBS, as of 24 Sep 2012


For further information please contact CIO’s asset class specialist Philipp Schöttler, [email protected]


bps


US high yield corporate bonds offer an attractive return outlook and should be overweighted.

• We prefer US over European issuers given the increasing proportion of peripheral and financial issuers in the European HY universe and the poorer economic outlook in Europe.

• Inflows into HY mutual funds have been strong so far in 2012. New issuance was strong in Q3.


We expect US defaults to remain at below-

average levels for longer. Significant re- leveraging is unlikely in the medium term.

• We believe US high yield corporate bonds will provide good returns both relative to other fixed income and for absolute return-oriented investors.

Positive scenario

USD HY spread target (6-month): 400bps

• Even

in the positive economic scenario, spreads are unlikely to tighten to pre-crisis lows of below 300bps

due to lower liquidity and a generally higher risk premium after the financial crisis. Benchmark yields

would rise, limiting HY returns to around 7%. European HY outperforms the US.

Negative scenario

USD HY spread target (6-month): 1,000bps

• A global recession is the major risk for high yield bonds. Based

on the robust state of the corporate

sector, we would not expect spreads to surpass "usual" recession levels around 1,000bps. Although short-

term spikes are possible due to liquidity suddenly drying up, we expect a quick normalization.



Credit quality/

default cycleUS earnings were roughly flat in 2Q compared to 1Q. A modest pickup is expected in 2H.

Balance sheets are backed by high cash levels and low debt ratios. Against this backdrop the default rate will likely remain below its long-term average.

New issuance For now, favorable conditions in the primary market have mainly been used for refinancing. More aggressive issuance activities should be monitored.

Bank lending standards Bank lending provides an important source of funding. US banks relaxed standards further in early 3Q. Key dates: late October, US Fed Senior Loan Officer Survey


28

EMBI Global / CEMBI spread (26 September): 304bps / 370bps (last month: 322bps / 383bps)

UBS View

EMBI Global / CEMBI spread target (6-month): 275bps / 290bps

• Based on improving fundamentals and recent central bank action we cut our spread targets from

340bps to 275bps on EM sovereign (EMBI) and from 350bps to 290bps on EM corporate bonds (CEMBI). So, current spread levels of EM sovereign bonds are roughly in line with fundamentals and we close the overweight position taking profits. We think valuations of EM corporate bonds are now more attractive than valuations of EM sovereign bonds. Additionally, the gradual

recovery in EM we expect over coming

quarters should support the performance of EM corporate bonds relative to EM sovereign bonds. Corporate bonds tend to outperform sovereign bonds during periods of accelerating growth.•

However, absolute returns of EM bonds will be lower than in the

past, we think, as the room for

spreads to tighten further has become more limited. We expect total returns of roughly 2% for EM sovereigns and close to 4.5% for EM corporate bonds over the next six months.•

Negative headlines out of the Eurozone or global growth fears might put renewed short-term pressure

on EM bond prices. We think that periods of price weakness offer attractive entry points.

Emerging market bonds Preference: neutral

Source: JP Morgan, UBS, as of 24 September 2012


For further information please contact CIO's asset class specialist Michael Bolliger, [email protected] and Kilian Reber, [email protected]


Recommendations Tactical (6 months)•

EM corporate bonds are particularly attractive due to their favorable valuations, solid fundamentals, and relatively short duration. We advise clients to focus on investment grade bonds in the current environment. We recommend taking profit on selected EM sovereign bonds. Please refer to our EM bond list for issuer-

and bond-specific

guidance.


EM bonds are attractive for longer-term investors looking for higher yields.

• Local markets in Asia offer interesting opportunities for longer-term investors because of a supportive currency outlook.

Positive scenario


• Yield stability in Europe's core markets and higher-than-expected growth in the US would provide a

favorable backdrop for EM fixed income spreads. In such an environment, issuers of lower credit quality would likely fare better. Average spreads could tighten to below

240bps in such an environment.

Negative scenario


• An environment of renewed escalating risk aversion in Europe, deteriorating EM funding markets,

weakening global growth prospects, and lower commodity prices could impact EM credit negatively. Liquidity in emerging market bonds could dry up and spreads could spike.


EM sovereigns relatively expensive to EM corporatesSpreads of EM bonds over US Treasuries, in bps

What we're watching Why it matters Core market yields The direction of US Treasury and German Bund yields are important for EM fixed

income spreads, especially for USD- and EUR-denominated bonds.

Key date: 4 Oct, European Central Bank meetingCapital flows The European debt crisis may lead to further periods of outflows

and weaker

prices, which could offer attractive entry levels for investors.

Monetary policy cycles Monetary policy easing remains a key topic for local currency bonds. We look for central bank policy announcements in key markets. Key policy rate announcement dates:

3 Oct, Poland; 10 Oct, Brazil; 11 Oct, Indonesia

200

250

300

350

400

450

500

550

600

Sep

09

No

v 0

9

Jan

10

Mar

10

May

10

Jul 1

0

Sep

10

Nov

10

Jan

11

Mar

11

May

11

Jul 1

1

Sep

11

No

v 1

1

Jan

12

Mar

12

May

12

Jul 1

2

Sep

12

EM Sovereigns (USD) EM Corporates (USD)

Section 2.C

Asset class views

Foreign exchange


30

Foreign exchange overview

For further information please contact CIO asset class specialist Thomas Flury, [email protected]


Preferences (6 months)Foreign exchange – Key points

• The ECB's announcement of Outright Monetary Transactions (OMT) has reduced tail risk in the Eurozone considerably, while weak labor market data in the US led to the Federal Reserve announcing a new round of potentially unlimited asset purchases at their 13 September meeting.

• Given that the ECB action was EUR-positive and the Fed action USD-negative, EURUSD has jumped considerably in recent weeks. We believe the risks to the pair are now more balanced, and see a range between EURUSD

1.28–1.32 for the months ahead.

• The CAD

remains supported by better growth dynamics in Canada, QE in the US and rate hike

expectations for the Bank of Canada. Higher short-term rates on CAD bonds than on bonds denominated in USD or EUR also make the currency more attractive

and we recommend an overweight.

• We keep the overweight position in the GBP despite the current asset purchasing program by the Bank of England (BoE). The BoE eased monetary conditions to protect the UK financial market against contagion effects spilling over from the continent. However, we think the GBP remains well supported given the recent rebound in economic data and because investors are seeking liquid alternatives to the EUR, the USD and the JPY and because the bold policy making in the UK continues to impress.

• EURCHF

has traded higher in our 1.20–1.23 range recently and we continue to see it in that range. The

SNB protects the downside, while a strong upside is also limited by a potential flare up in the euro crisis

and reserve unwinding of the SNB at some point. Nevertheless, with a stabilization in the euro crisis the risks are skewed more to the upside currently.

• Sweden and Norway stand out for their lower debt-to-GDP ratios and current account surpluses. Both the SEK

and NOK

have appreciated in recent months on diversification and safe-haven inflows, but

economic data in both countries has become weaker recently. We expect them to trade sideways from here.

• Longer-term debt issues and weak competitiveness of major exporters are

hurting the Japanese

economy and PMIs have disappointed. We therefore think the Bank of Japan and Ministry of Finance will maintain an expansive policy and continue trying to weaken the JPY. We are underweight JPY.

• For commodity currencies, the AUD and NZD continue to trade at the top of their well established ranges. We expect a further rate cut in Australia, given weaker Australian and Chinese data. Don't buy AUD above AUDUSD 1.00. We have a slight preference for the NZD over the AUD.

• Our most preferred emerging market currencies are currently the MXN, ZAR, PLN, KRW and SGD.We expect the CNY

to appreciate 2% against the USD, moving towards 6.20 over the coming 12 months.

Internationally marketable instruments (such as CNH, the offshore version of the Chinese currency traded in Hong Kong) have similar appreciation potential.


USD

EUR

GBP

JPY

CHF

SEK

NOK

CAD

NZD

AUD

new old



31

G10 currenciesRecommendationsTactical (6 months)•

We have closed the EURUSD short position and moved neutral on EURUSD.

• We continue to have a preference for the GBP and CAD as they benefit from diversification out of EUR and USD. We keep the short in the JPY and the CHF as both currencies sees limited upside.


We recommend that investors diversify from large USD and EUR exposures into minor currencies. Structural financing issues weigh on all the major currencies.

• The best diversifiers based on long-term macroeconomic fundamentals are the CAD and the SEK. The AUD, NOK and CHF should only be added at better entry levels. The GBP also remains attractive.

UBS View

See table for current exchange rates and CIO forecasts•

We believe the risks to the EURUSD

currency pair are now more balanced, as tail risks on the European

side have been considerably reduced. • The GBP

trended higher despite stimulus measures by the Bank of England. The main reason is the need

for diversification out of the EUR and USD and decisive UK policy making. We maintain an overweight and expect the recent rebound of economic data to lead the GBP higher.

• The CAD remains our top pick as it continue to have better growth dynamics and benefit from higher bond yields relative to EUR and USD-denominated bonds.

• The SNB has shown that it can defend the CHF floor and with tail risk reduced we initiate an underweight as risk are skewed to the upside and the downside is

capped.

• We expect stronger policy intervention in Japan to weaken the JPY

over the coming months.



Positive scenario

FX targets: EURUSD >1.35 / EURJPY 115

• A stronger-than-expected acceleration of global growth or further European integration would be EURUSD positive, as would an announcement of unlimited QE in the

US. EURUSD should trade above

1.35 in this case. Yen weakness should come as the Bank of Japan intervenes to weakens its currency.

Negative scenario

FX targets: EURUSD <1.25 / EURJPY 90

• The European growth outlook deteriorates further with continued recession in 2013. The euro could rapidly fall below 1.25. A European debt default cascade (possibly triggered by a disorderly Greece euro exit) is a tail risk for the single currency. Risk aversion would lead to an extended USD and JPY rally.



Chinese growth We expect Chinese growth to land softly and then recover. Should China

disappoint with a hard landing, then risk-unwinding would support USD and JPY vs. risk-taker currencies. In the base case, a Chinese recovery should support the AUD in the medium term, but a dip below parity is likely in the short term.

European sovereign crisis, ECB policy

With Greek elections out of the way, the main focus lies on Spain and a second potential ECB rate cut. Any improvement in Spain should support the euro; a rate cut would probably hurt it. Key date: 4 Oct, ECB meetings

US growth and Fed policy response

Will the Fed add further QE, possibly even unlimited? How will the presidential elections change political power in Washington? Key dates: 24 Oct, FOMC meeting; 6 Nov, US presidential elections

UBS CIO FX forecasts

For further information please contact CIO asset class specialist Thomas Flury, [email protected]



32

27.09.2012 3-month 6-month 12-monthAmericasUSDBRL 2.04 1.95 1.90 1.85USDMXN 12.8 12.7 12.5 12.3AsiaUSDCNY 6.30 6.30 6.30 6.20USDINR 53.3 53.0 54.0 55.0USDIDR 9'590 9'400 9'400 9'400USDKRW 1'119 1'100 1'080 1'050USDSGD 1.23 1.21 1.20 1.19EMEAEURPLN 4.15 4.30 4.15 3.90EURHUF 285 290 300 300EURCZK 25.0 26.0 25.0 24.3USDTRY 1.79 1.75 1.75 1.72USDZAR 8.22 8.10 7.90 7.70USDRUB 31.3 33.0 32.0 31.0

EM currenciesRecommendationsTactical (6 months)•

Several EM currencies look attractive at current levels and we advise investors to keep existing holdings for further gains while increasing exposure to our preferred EM currencies (KRW, SGD, MXN, ZAR), using the JPY, USD, and EUR for funding.


We recommend EM currencies backed by stable fundamentals as a strategy to diversify currency exposure.

• Our favorites include the Chilean peso, Czech koruna, Polish zloty, Chinese renminbi, Korean won, Malaysian ringgit and Singapore dollar.

UBS CIO EM FX forecasts

UBS View

See table for current exchange rates and CIO forecasts

• We think the Fed's announcement of another round of quantitative

easing (QE3) could further support

emerging market currencies in the short term, while the Fed's pledge to keep interest rates low for longer could provide them with further upside potential.•

In the medium term, we maintain a positive view on emerging market currencies, and higher short-term

rates provide a pick-up relative to developed market currencies. We think investors are well-advised to hold EM FX exposure across regions. Lower tail risks in Europe should be especially supportive of the higher-yielding currencies in EMEA and Latin America.•

Long-term investors should diversify into emerging market currencies using USD, EUR, and JPY exposure.

Using these currencies as funding source can lower the volatility for investors as opposed to using only the USD as a funding currency. • We remain cautious on the Hungarian forint and Indian rupee.

For further information please contact CIO's asset class specialists Michael Bolliger, [email protected] or Teck Leng

Tan, [email protected]




Positive scenario

> 6% outperformance of EM FX against G4 currencies over a 6-month horizon

• Macroeconomic data comes in stronger than expected and contagion risks in Europe subside further.

EM exchange rates could appreciate swiftly against G4 currencies (USD, EUR, JPY, GBP).

Negative scenario

> 5% depreciation of EM FX across regions against USD over a 6-month horizon

• Global growth prospects suffer a prolonged deterioration and the European debt crisis intensifies. EM

exchange rates could see a significant, although likely temporary, sell-off across regions. Note: Scenarios refer to global economic scenarios (see slide 7)


Inflation dynamics in EM

Inflation dynamics are important to forecast central bank policy rate

decisions. Monetary easing typically weighs on EM currencies, while rate hikes tend to be supportive. Key policy rate announcement dates:

3 Oct,

Poland; 10 Oct, Brazil; 11 Oct, Indonesia

European sovereign crisis Setbacks in sentiment will likely lead to bouts of EM currency depreciation and elevated volatility across regions, providing attractive entry points for investors.

US growth Growth in the US is key for risk sentiment, growth prospects in EM, and US monetary policy decisions. Positive surprises tend to support EM currencies. Key date: 4 Oct, European Central Bank meeting

Section 2.D

Asset class views

NTAC: Commodities, Listed real estate, Hedge funds and Private equity


34

Commodities overview

For further information please contact CIO's asset class specialists Dominic Schnider, [email protected] or Giovanni Staunovo, [email protected]


Preferences (6 months)Commodities – Key points

•

Broadly diversified commodity indices have appreciated a meagre 1% over the last four weeks. The strongest performance contribution came from base and precious metals, up by 8.3% and 6.7%, respectively. Growth supportive communication/actions from the Fed and the ECB, a weaker USD, and Chinese stimulus measures allowed several sectors to perform well.

•

While a third round of quantitative easing is positive for gold in the next few months, ebbing QE news flow at a later stage (6-12 months) might challenge the necessary investment demand inflows to balance the market.

From a portfolio context we furthermore wish to bring risk slightly down and we

thus stay neutral on gold.•

Fundamental news flow for the

energy sector has been less supportive, which explains the

rather poor performance of crude oil in relative and absolute terms. While we still see weak fundamentals for the oil price in 4Q12, a weaker USD due to QE3,

ongoing social turmoil in the

Middle East and North Africa region and the risk that the Iranian topic has the potential to heat up after the US presidential elections are likely to keep the oil price around USD 105/oz in 6 months. Therefore, we change our allocation from underweight to neutral.

•

The rally in base metals echoed a rise in risk appetite

across financial markets rather than a

change in the underlying supply and demand balance. We therefore suggest that investors do not

chase the recent uptrend in base metals on a broad basis. Monetary and fiscal policy has yet to become growth effective. Moreover, the pace of the uptrend should still be set by China, where we only expect growth momentum to accelerate moderately. A lack of growth acceleration in China will leave the sector vulnerable, as the supply side is likely to react positively on the recent price run up.

•

On an aggregated basis agricultural commodities should crawl higher. Although softs prices

should be under pressure, the grains still have room to appreciate by 10% to 20%. Demand rationing for corn and soybeans remains a key topic for us, as it is unlikely to materialize with current prices. Thus, we should see USDA demand estimates revised higher and weigh on inventories. Risk to this view relates to an upward revision in planted acreage in the US.

On the softs side, firm export activity

from Brazil in sugar and coffee should be a burden until the end of October.

•

In an environment where key central banks pledge their commitment to support economic growth, reduce unemployment, or finance government spending needs, commodities are likely to see higher prices on average. We therefore shift our commodity allocation

from

underweight to neutral.

Commoditiestotal

PreciousMetals

Energy

Base Metals

Agricultural

new old




35

Precious metals Preference: neutral

RecommendationsTactical (up to 6 months)•

Although it is possible for gold to test its all-time high level in the next three months, we are aware that the metal has already appreciated firmly ahead of the QE3 announcement, which requires an ever growing amount of investment demand to hold the current upward trajectory. We would furthermore prefer to reduce risk and therefore keep our neutral stance on gold.


To protect investors' portfolios from unorthodox monetary policy measures, holding gold exposure is a viable and attractive strategy. Alternatively, we recommend palladium as well as platinum. Structural supply issues with regard to platinum and a reduction in Russian stock sales of palladium speak in favor of PGM exposure, despite higher volatility.

Gold (25 Sep): USD 1,765/oz (last month: USD 1,672/oz)

UBS View (gold) Gold 6-month target: USD 1,850/oz•

The gold price has appreciated by 4% since the beginning of September with the Fed's open-ended

quantitative easing mainly driving the rally. Expectations of QE3 triggered purchases of nearly 3 million ounces in physically backed gold exchange-traded funds (ETFs) since Bernanke's speech at Jackson Hole and we have seen a sharp increase in futures and option positions. •

The Fed's commitment to print money in an attempt to lower unemployment will leave real interest

rates in negative territory and put the USD under pressure. We think it is possible for gold to test or even surpass its all-time high of USD 1,921.2/oz over the next three months, as we believe the inflows into gold, combined with physical bar and coin purchases, are unlikely to ebb in the coming months. •

Securing sufficient investment demand to push prices sharply higher is different from securing the

needed demand over a long period of time, and along these lines we see less support for the price over a 6-month perspective. Secondly, from a portfolio perspective we currently prefer to take some risk off the table instead of on, and we thus maintain our neutral stance on gold.



Source: Bloomberg, COT, UBS, as of Sep. 2012


Investment demand for gold has increased steadilyIn million ounces

Positive scenario

6-month target: USD 2,250/oz

• Unorthodox monetary policy measures by the Fed start to weaken the USD persistently. Moreover, the

risk of a Eurozone breakup intensifies, which triggers a tidal wave of investment demand for gold.

Negative scenario

6-month target: USD 1,450/oz

• A hard landing of China and India or the Fed backing off from the recent monetary policy

announcements would be key drag on the yellow metal. The latter would have the strongest impact.


Physical demand/supply Although we have seen weather conditions in India improving and the Indian rupee stabilizing, global jewelry demand is likely to remain extremely weak, which will be visible in the World Gold Council

mid-November release.

We expect mine activity in South Africa to be under pressure until the end of December when ANC elections take place. Hence, we are tracking mining news from South Africa closely, including the aggregated PGM IP numbers.

Investment flow

Monetary policy

In order to see the gold price reaching our target, investment inflows into physically backed ETFs need to continue. To gauge investor interest in gold (sector) a build-up in futures positions is likely to materialize as well.Key dates: 25 Oct, Fed meeting; 4 Oct, ECB meeting

0102030405060708090

100110

Nov-03 Nov-05 Nov-07 Nov-09 Nov-11Net futures positions by non-commercial accountsPhysically backed ETF holdings


36

Energy Preference: neutral


OPEC is in a good position to balance the oil market, which should limit the price weakness. Along with this month's central bank support and with the geopolitical risks remaining we believe that the potential downside for the oil price has decreased and we change our oil recommendation from underweight to neutral.

Strategic (3–5 years)•

We regard the long end of the forward curve in crude oil as mispriced. To satisfy emerging market demand in the long run, prices around USD 90–95/bbl are unlikely to secure the needed investments to keep supply growing adequately. This gives strategically oriented crude oil investors the opportunity to build up some long-

term crude oil exposure over the next three to five years.



Chinese crude oil imports declined sharplyIn million barrels per day

Positive scenario Brent 6-month target: USD 140–180/bbl

• Iranian oil exports are subject to a complete embargo, which would drain another 0.5–0.75 mbpd of

global crude oil supply. Alternatively, a military confrontation that affects crude oil supply via the Strait of

Hormuz would be the ultimate supply shock, requiring crude oil to be rationed on a large scale.

Negative scenario

Brent 6-month target: USD 75–80/bbl

• Political tensions lead to a breakup of the Eurozone or intensify the economic contraction. At the same

time, the Fed is not successful in pumping up growth. Supply-wise, a restoration of Iranian exports and no supply cuts by OPEC would push oil inventories firmly up and weaken Brent prices towards USD 80/bbl.

Brent (25 Sep): USD 111/bbl (last month: USD 115/bbl)UBS View (crude oil)

Brent 6-month target: USD 105/bbl

• Crude oil prices (Brent at around USD 110/bbl and WTI at around

USD 90/bbl) have fallen in recent

weeks, moving close to our 6-month price target.•

Global crude oil demand should grow by less than 0.2 mbpd q/q

in 4Q12. These rather poor figures

would be a continuation of weak Chinese import numbers seen for August. Chinese imports declined by 13% y/y

in August. The US oil demand remains weak as well, declining to

the lowest August (18.6 mbpd)

level in 15 years.•

Supply-wise, we see an increase in non-OPEC output and expect an expansion of 0.8-1 mbpd in 4Q12

after rather disappointing 3Q12 figures. With this increase the market should be adequately supplied and allow inventories to build. • Combining the mentioned demand and supply backdrop, crude oil prices are likely to decline in 4Q12.

However, a weaker USD, reduced economic tail risk for Europe, ongoing social turmoil in the Middle East and North Africa region and the risk that the Iranian topic heats up again after the US presidential elections are likely to keep the oil price around USD 105/oz in 6 months. Therefore, we change our allocation from underweight to neutral.


Iran tensionsThe biggest risk related to a potential military confrontation is an Israeli air strike on nuclear facilities in Iran. A preemptive strike could easily destabilize the region even further and threaten global crude oil supply.

Supply

Demand

Changes in the US gasoline blending mandate with ethanol (made from corn) might fuel higher crude oil prices as spare capacity increases slides further.US crude oil supply progress (room to grow by 1.3 mbpd from 2011

to 2013) is a

vital offsetting factor to supply outages seen in the MENA region.Most of China's demand growth seems to be related to stock building (strategic and by refineries). If this is true, the import side should come

in on the weak side.

Oil market reports - Key date: 12 Oct, IEA Oil market report Source: Bloomberg, UBS, as of Sep. 2012


1.5

2.5

3.5

4.5

5.5

6.5

Jan-04 Jan-06 Jan-08 Jan-10 Jan-12Chinese oil imports 12-month moving average


37


The strong uptick in base metal prices is skating on thin ice, in our view. Real activity has yet to follow and support prices over a

longer time period. 60% of

upside potential on a 6-month horizon is likely to be behind us, making only copper and nickel attractive, with +10% expected return.

Strategic (2 years )•

Although the strongest performance should be visible in zinc and lead, with existing mine capacity expected to peak in 2014/15, the recent price strength makes such an investment unattractive based on timing. Given a structurally solid supply side, investors should avoid aluminum and nickel. A firmer supply side should also limit the upside in copper.

Base metals Preference: neutral

Current (25 Sep) (last month): Copper USD 8,176/mt(7,628);

Nickel

USD 17,930/mt(16,422);

Aluminum USD 2,058/mt(1,890)

UBS View

6-month target: Copper: USD 8,800/mt; Nickel: USD 19,000/mt; Aluminum: USD 2,200/mt

• Base metals have been one of the biggest beneficiaries of the recent risk-on mood of financial markets,

with the DJ UBS base metals index up 8.3% m/m. The cheap valuation of LME prices relative to Chinese prices and from a production-cost standpoint, combined with pessimistic growth expectations, provided ideal ground for unorthodox monetary policy statements to trigger a revaluation.• As China remains the biggest consumer of base metals, we think signs of stronger demand growth for

base metals has to follow in order to keep prices trending higher. Intentions to bring forward investment spending were well received by the market, which suggests that the deceleration in industrial activity should come to an end in late 3Q12. That said, to call for a sharp IP acceleration is still too early.•

Investors aiming to chase the rally should be very selective, as some metal prices may fall back. Our

former top pick – aluminum –

might see supply strengthening after the run-up, which would allow the

market surplus to grow. The same applies to zinc, where mine production of ore and concentrate has been strong and can quickly weaken prices again.•

We are less worried about nickel and copper. In the case of nickel, price strength still has some room

considering lower export activity from Indonesia. For copper, the potential outlook of restocking activity should not be underestimated. Although Chinese import demand for

copper has been solid this year,

partially due to financing deals, potentially higher demand from end consumers could keep import

activity up. With increased interest for real assets, investment demand in copper is likely to gear up as

well.



Source: Bloomberg, UBS, as of Sep. 2012


Positive scenario

• China eases monetary policy aggressively, pushing credit growth

to 20% y/y. In the US the Fed is able to

lift GDP growth via QE3 and the ECB puts an effective backstop to declining industrial activity.

Negative scenario

• Chinese authorities keep GDP growth on a constant deceleration path. A severe escalation of the

Eurozone crisis (room for a break-up) triggers a setback in investment activity – including in Germany.


Demand

Since central banks seem to be committed to growth, potential restocking activity

could lift metal prices higher in the short run –

focus on trade flows.

With regards to copper, the investment community is only marginally net long, which leaves room for more long positions to be built up.

SupplyCorporate mining news and especially production developments must be closely followed after the price rally. Indonesia's new export rules and

mining decisions

should have a price-supportive impact on aluminum, nickel and tin.

Economic data/forward curve

Chinese economic data (especially IP and loan growth by financial institutions and the GDP release for 3Q12) Key date: 18 Oct

Global industrial activity has yet to follow higher metal prices

-50%

-30%

-10%

10%

30%

50%

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

40

45

50

55

60

DJ UBS Indu. Spot Index change 3m/3m (lhs)Global Manufacturing PMI (rhs)


38

Agriculture Preference: neutral

Current (25 Sep) (last month): Soybeans, USD 16.14/bu (17.38); Corn, USD 7.43/bu (8.02);

Wheat, USD 8.89/bu (8.68)

UBS View

6-month target: Soybeans: USD 17.0/bu; Corn: USD 9.00/bu; Wheat: USD 9.50/bu

• The latest USDA monthly report turned out to be bearish for grains, with year-end inventories revised

higher for corn and soybeans. Additional pressure for corn came from cheaper Brazilian corn prices, which grabbed export market share from the US. Although Brazilian corn exports can continue to weigh on US corn exports in the very short run, the tight global corn balance remains in place for 2012/13. For soybeans, only the South American crop can mitigate supply tightness –

a topic for the market in

December. Black sea and Australian production remains the focus of the wheat market. Despite being undersupplied by 3% of global wheat demand, sufficient inventories can digest the market deficit. •

The

softs are likely to battle with higher inventories. Sugar and coffee exports from Brazil should

remain strong in the coming months, thereby exerting a certain drag on prices. That said, renewed price weaknesses of 10% and more can be used to build up some longs from a 12-month perspective. The strength seen in cocoa prices is making the risk/reward for the commodity unattractive.•

Aggregating the above points, the risk/reward for being long the entire sector is not a given. We

therefore reiterate our neutral sector stance.



Positive scenario Corn 6-month USD 10/bu; Soybeans 6-month USD 19/bu

• With forecasts for a milder El Niño, the yield potential for South American crops is likely to be lower.

Any deterioration in South American supply prospects would require additional demand to be rationed.

Negative scenario Corn 6-month USD 6/bu Soybeans 6-month USD 12.5/bu

• A change of the US ethanol-gasoline blending mandate would be a game changer. Increases in planted

acreage combined with a steep decline in US demand for exports and feed would weigh on prices.


USDA WASDE report (monthly)

Revisions in acreage and yield estimates for the US crops remain a topic. Demand

estimates are important, too, as they are key drivers behind inventory levels at the end of the year. Key date: 11 Oct

US grains stock report(quarterly)

We expect the upcoming stock data for grains to be higher than the current estimates for ending stock of 2011/12. Weaker demand and early harvest should add to stock building. Key date: 28 Sep

USDA crop progress (weekly, Monday)

The US grain harvest is likely to be completed earlier than usual; this will exert limited downward pressure due to the strong cuts in production estimates.

COT (weekly, Friday) Investors' net long positions in futures are at high levels, but stable

RecommendationsTactical •

Despite the recent setback in corn prices, risk-seeking investors should still hold on to long positions in corn. Demand rationing is still required to limit the drag on inventories. The expected return target for a long position in corn stands at 15–20%.

Strategic •

Our expected return outlook for grains stands at around –12% over the next 12 months. With grain prices around historical highs, the supply side is highly likely to expand meaningfully in 2013/14 and pressurize prices at a later stage. On the soft side, 3Q12 does not offer the right timing to build up positions.

Source: Bloomberg, UBS, as of Sep. 2012


Diverging price performance of grains and softsDJ UBS Spot Indices

100

200

300

400

500

600

Jan-09 Jan-10 Jan-11 Jan-12

Grains Softs


39

Listed real estate Preference: neutral


We continue to be neutral as listed real estate is expensive relative to equities. But is on the other hand supported by the low interest rate environment with solid earnings and inflation linked rent generating a stable cash flow.


Real estate is expected to deliver attractive return on investment as valuation levels remain overall fair to supportive. We anticipate gradually higher payout ratios coupled with portfolio optimizations and ongoing cost-cutting. A weak economy limits future rental growth, but income is mostly protected from inflation.

Positive scenario UBS Global Index DTR (6-month target): 1,650

• Positive economic surprises in the US and Europe continue to successfully inflate investors' preference for

risk after recent deterioration, supported by monetary easing in the US, Europe and China. Also future

rental income growth expectation improves a little as refinancing costs remain low. •

Negative scenario UBS Global Index DTR (6-month target): 1,300

• US, European and Chinese growth rates disappoint investor expectations and cause the comparatively

high valuation levels in the US to partially correct, in turn significantly affecting global real estate. Furthermore, a more severe recession in Europe triggers a tightening of credit standards, making listed real estate more dependent than ever on bank financing at a time when

credit markets are already fragile. In

this environment, real estate may underperform global equities. Note: Scenarios

refer to global economic scenarios (see slide 7)

For further information please contact CIO's asset class specialist Thomas Veraguth, [email protected]


Source: UBS, as of 17 September 2012


* This is our relative preference within the global real estate sector based on UBS Global Real Estate Index domestic total return, which is not the overall sector view

UBS Global Index DTR (17 Sep): 1,500 (last month: 1,452)UBS View UBS Global Index DTR (6-month target): 1,600• Listed real estate has been one of the best performing asset classes year to date as valuations have gone

from being relatively cheap to fairly valued. As we have reduced tail risks in Europe and the US Fed has

extended its forward rate guidance this supports listed real estate. Listed real estate companies have been able to refinance their debt at lower yields and extend the duration boding well for continued profitability. Earnings yields over five-year swap rates are currently attractive due to low interest rates. •

Low to decent supply of commercial surfaces across the globe has led vacancy rates to gradually decline,

and low capitalization rates in core markets support capital values. Also, rental yields remain attractive compared to high grade bond yields. However, we see further capital appreciation as limited. The overall low interest rate and low growth environment means that listed real estate can still moderately perform.• Asia remains the positive performance generator, driven by very

low interest rates. Monetary easing by

the European Central Bank will continue to stabilize Europe, helping to offset poor performance in weaker countries. Japan's market fundamentals remain comparatively weak. We upgrade North America to neutral due to supportive Fed policy and also move Europe to neutral based on the backup of the ECB. Overall we maintain a relative preference for Asia ex Japan.

Preference (6 months)Our market preferences for listed real estate*

What we're watching Why it matters Capitalization rates and rental yields

We do not expect capitalization rates to decrease much from now. Rental yields have already been pushed down by decreasing bond yields; we see diminishing but still positive support from the interest curve, which has already flattened.

Transaction volumes and future rental growth in direct markets

Global commercial real estate transaction volumes are down year-on-year due to a lack of product in core markets and constraints in debt financing. Rental growth is subdued in the US or slightly negative for office surfaces (JP, HK).

Credit markets and financing costs

Lending conditions are still challenging for developers and private investors. Well financed public companies by contrast have a good access to credit and capital.

Australia

Singapore

Hong Kong

Japan

UK

Continental Europe

North America

Old New

-- ++neutral- +


40

Hedge fundsRecommendationsStrategic (1 to 2 years)•

Recommendation: Active risk management is instrumental for capital preservation during adverse market conditions. At the moment, we therefore favor relative-value and event-driven strategies, since they are less correlated to equity markets and other risky assets than trading.

• Value proposition: Hedge funds should achieve robust performance over an extended horizon, while displaying limited volatility vis-à-vis equities and other risky assets. Hedge funds try to minimize downside losses in adverse market conditions (e.g. active risk management), which plays a crucial role in wealth appreciation. Similarly, hedge fund managers attempt to capture most of the upside of risky assets owning to valid value preposition.

UBS View Prefer Relative-value and Event-driven

• We expect hedge funds (HF) to offer positive asymmetric return characteristics due to active risk

management and stop-loss strategies. On the active risk side of the equation, we have seen lower gross exposure and net-market exposure within the overall hedge funds group, with traders being cautiously positioned. With systemic risk at bay, relative-value (RV ) and event-driven (ED) are favored. • The inherent hedging in relative-value is appealing. Credit relative-value managers should perform well

in this environment of higher fixed income volatility and increasing pricing anomalies created by central bank interventions and limited competition.•

While ED managers share some of the performance drivers, idiosyncratic bets reduce the correlation to

markets. The real reason to own this strategy, however, is the potential for outsized returns in distressed, high yield, and other credit investments as the Eurozone crisis plays out.

For further information please contact CIO's asset class specialist Cesare Valeggia, [email protected]


Source: HFRI, UBS, as of 31 July 2012


Performance, year-to-date

Positive scenario Prefer Equity long-short

• Reduced uncertainty (e.g. resolution in Europe) lowers equities' correlation and volatility. This helps

bottom-up fundamental analysis and equity long/short managers the most. Also, CEOs will likely make

more corporate transactions that can be monetized by event-driven managers, and a clearer macroeconomic environment with more persistent trends would support CTA managers.

Negative scenario

Prefer Trading (Global Macro + CTA)

• So far this year, the market has remained plagued by short-term reversal, due to central banks'

intervention and stimulus effects, an obstacle for trend-following managers. Still, if the European deleveraging (or fiscal cliff, China hard landing) is unmanaged,

this could threaten risky assets. Trading

can do well if such a scenario unfolds. Note: Scenarios refer to global economic scenarios (see slide 7).

What we're watching

Why it matters

Global equity direction/ economic cycle

The outlook for global equities is an important HF performance driver. The economic cycle impacts the strategies differently.

Correlation Correlation is an important performance/alpha driver for equity long/short, the largest HF strategy by assets under management.

Leverage Gross and net leverage are key to monitoring risk.

Volatility The direction influences certain HF strategies (e.g. convertible arbitrage).

Liquidity Particularly for large HF that are less nimble, to enter and exit their strategies.Regulation Volcker rule, USCITS III/IV


41

Private equityRecommendationsStrategic (1 to 2 years)•

We prefer small-/mid-cap buyouts in

North America given the better economic outlook vs. Europe, higher transaction

certainty and more attractive entry prices. •

Investors looking for downside protection during economic uncertainty can consider large-cap buyouts in the US, which offer exposure to large, diversified companies at more attractive prices and ar

e

supported by liquid debt markets.•

In Europe, the crisis and ongoing deleveraging have led to attractive

opportunities for special situations. We

thus recommend investing in distressed

debt to benefit from the macroeconomic adjustment process and selling pressure

for many European banks. •

We advise investors make an ongoing allocation to private equity in emerging markets, which offers an attractive way to capture superior long-term growth and

gain access to small-/mid-cap companies

unavailable on the stock market.

For further information please contact CIO's asset class specialist Stefan Brägger, [email protected]


Note: We emphasize the equal importance of fund manager selection and the commitment strategy. Please note that private equity is an illiquid asset class and must be held at least until the end of the fund (10+ years).

Please note that UBS might not have a product available which reflects our UBS CIO private equity recommendations. Private equity is only suitable for qualified investors (> USD 5m investable

assets).

Positive scenario Prefer small-/mid-cap buyout and secondaries

• An abating Eurozone debt crisis and improved business confidence

would increase deal flow and exit

opportunities for private equity managers, but would also increase entry prices. In such a positive scenario, we would perceive commitment strategies to secondary funds as attractive for building exposure to an invested private equity portfolio.

Negative scenario

Prefer distressed debt

• A renewed escalation of the debt crisis would significantly impact deal activity, the availability of debt

and company owners' willingness to sell. At the same time, it would offer attractive opportunities within distressed strategies and lower entry prices for long-term private equity investors.


Prefer small-/mid-cap buyouts

in US/emerging

markets;

UBS View

distressed debt

in Europe

• The US remains the most active region globally for private equity (PE), with over 370 deals worth USD

34bn in Q2 2012, a +50% increase vs. Q1 and only slightly down (–15%) compared with the same period last year. In contrast, activity in Europe remains sluggish (–45% y/y) and is likely to remain subdued. • New PE transactions have become cheaper in the US, correcting by 8% in 1H 2012 versus last year. In

Europe, prices have not yet come down despite the Eurozone crisis, and remain above the US. However, prices in both markets remain above the low levels seen during 2002–2004 as dry powder remains high. •

We prefer buyout strategies in North America, given reasonable valuations, liquid debt markets and our

house view of economic outperformance vs. Europe. Emerging markets offer compelling opportunities for PE investors, especially outside the main hubs (China, Brazil), which have become expensive.

Source: S&P, UBS, as of September 2012


Entry prices in the US have adjusted and are below Europe despite the Eurozone crisis

What we're watching Why it matters Credit markets In H1 2012, leveraged loan issuance, an important ingredient of PE activity,

dropped 17% y/y in the US, but over 41% in Europe. The US debt market is much deeper than Europe's, raising over EUR 153bn of leveraged debt, while Europe achieved only EUR 16bn in 1H12 at less attractive conditions.

Secondary loan prices Prices for leveraged loans in the secondary market, a good reflector of market sentiment, have improved from the lows seen in September 2011. Average bids were 87.7 (12.3% discount) in Europe in June 2012, and 93.9

(6.1%) in the

US.

Purchasing prices (Enterprise value/EBITDA)

In H1 2012, buyouts in the US occurred at 8.1x, down from 8.8x seen in 2011. Prices in Europe were at 9.1x in the first half of 2012, +3% vs.

last year.

4

5

6

7

8

9

10

2004 2005 2006 2007 2008 2009 2010 2011 1H12

EV/E

BITD

A

Europe US


42

Contact list

UBS WM Global Chief Investment OfficerAlexander [email protected]

UBS WM Head of InvestmentMark [email protected]

UBS WM Global Investment Office

Themes / UHNWSimon [email protected]

Kiran [email protected]

James [email protected]

Christopher [email protected]

Asset Allocation AdvisoryMark [email protected]

Karsten [email protected]

Achim [email protected]

Philipp Schö[email protected]

Asset Allocation DiscretionaryMads [email protected]

Christophe de [email protected]

Walter [email protected]

Markus Irngartinger, [email protected]

Oliver [email protected]

Matthias [email protected]

Regional CIO SwitzerlandDaniel [email protected]

Regional CIO Asia-Pacific (South)Kelvin [email protected]

Regional CIO Asia-PacificYonghao [email protected]

Regional CIO Emerging MarketsJorge [email protected]

UBS WM Regional Chief Investment Officers (CIO)

Regional CIO EuropeAndreas Hö[email protected]

Alternative InvestmentsAndrew [email protected]

mailto:[email protected]























43

DisclaimerUBS CIO WM Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affiliate thereof. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any

investment or other specific product. The analysis contained herein is based on numerous

assumptions. Different assumptions could result in materially different results. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information and opinions

expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is

made as to its accuracy or completeness (other than disclosures relating to UBS and its affiliates). All information and opinions as well as any prices indicated are current as of the date of this report, and are subject to change without notice. Opinions expressed herein may differ or be contrary to those expressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria. At any time UBS AG and other companies in the UBS group (or employees thereof) may have

a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to the issuer of relevant securities or to

a company connected with an issuer. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers

to control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options

trading is considered risky. Past performance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and large falls in value and on realization you may receive back less

than you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or income of an investment. We are of necessity unable to take into account the particular

investment objectives, financial situation and needs of our individual clients and we would recommend that you take financial and/or tax advice as to the implications (including tax) of investing in any of the products mentioned herein. This document may not be reproduced or copies circulated without prior authority of UBS or a subsidiary of UBS. UBS expressly prohibits the distribution and transfer of this document to third parties for any reason. UBS will not be liable for any claims or lawsuits from any third parties arising from the use or distribution of

this document. This report is for distribution only under such circumstances as may be permitted

by applicable law. In developing the Chief Investment Office 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.External Asset Managers / External Financial Consultants:

In case this research or publication is provided to an External Asset Manager or an External Financial Consultant, UBS expressly prohibits that it is

redistributed by the External Asset Manager or the External Financial Consultant and is made available to their clients and/or third parties. Australia: 1) Clients of UBS Wealth Management Australia Ltd:

This notice

is distributed to clients of UBS Wealth Management Australia Ltd ABN 50 005 311 937 (Holder of Australian Financial Services Licence

No. 231127), Chifley

Tower, 2 Chifley

Square, Sydney, New South Wales, NSW 2000, by

UBS Wealth Management Australia Ltd.: This Document contains general information and/or general advice only and does not constitute personal financial product advice. As such the content of the Document was prepared without taking into account the objectives, financial situation or needs of any specific recipient. Prior to making any

investment decision, a recipient should obtain personal financial product advice from an

independent adviser and consider any relevant offer documents (including any product disclosure statement) where the acquisition of financial products is being considered. 2) Clients of UBS AG:

This notice is issued by

UBS AG ABN 47 088 129 613 (Holder of Australian Financial Services Licence No 231087): This Document is issued and distributed by UBS AG. This is the case despite anything to the contrary in the Document. The

Document is intended for use only by “Wholesale Clients” as defined in section 761G (“Wholesale Clients”) of the Corporations Act 2001 (Cth) (“Corporations Act”). In no circumstances may the Document be made

available by UBS AG to a “Retail Client” as defined in section 761G of the Corporations Act. UBS AG’s research services are only available to Wholesale Clients. The

Document is general information only and does not take

into account any person’s investment objectives, financial and taxation situation or particular needs. Austria: This publication is not intended to constitute a public offer or a comparable solicitation under Austrian law

and will only be used under circumstances which will not be equivalent to a public offering of securities in Austria. The document may only be used by the direct recipient of this information and may under no circumstances be passed on to any other investor. Bahamas:

This publication is distributed to private clients of UBS (Bahamas) Ltd and is not intended for distribution to persons designated as a Bahamian citizen or

resident under the Bahamas Exchange Control Regulations. Bahrain: UBS AG is a Swiss bank not licensed, supervised or regulated in Bahrain by the Central Bank of Bahrain and does not undertake banking or investment

business activities in Bahrain. Therefore, Clients have no protection under local banking and investment services laws and regulations. Belgium:

This publication is not intended to constitute a public offering or a

comparable solicitation under Belgian law, but might be made available for information purposes to clients of UBS Belgium NV/SA, a regulated bank under the "Commission Bancaire, Financière

et des Assurances", to

which this publication has not been submitted for approval. Canada: In Canada, this publication is distributed to clients of UBS Wealth Management Canada by UBS Investment Management Canada Inc..

Dubai:

Research

is issued by UBS AG Dubai Branch within the DIFC, is intended for professional clients only and is not for onward distribution within the United Arab Emirates. France: This publication is distributed by UBS (France) S.A.,

French "société anonyme" with share capital of €

125.726.944, 69, boulevard Haussmann F-75008 Paris, R.C.S. Paris B 421 255 670, to its clients and prospects. UBS (France) S.A. is a provider of investment services duly

authorized according to the terms of the "Code Monétaire et Financier", regulated by French banking and financial authorities as the "Banque

de France" and the "Autorité

des Marchés

Financiers". Germany:

The

issuer

under German Law

is UBS Deutschland AG, Bockenheimer

Landstrasse 2-4, 60306 Frankfurt am Main. UBS Deutschland AG is authorized

and regulated

by

the

"Bundesanstalt für Finanzdienstleistungsaufsicht". Hong

Kong: This publication is distributed to clients of UBS AG Hong Kong Branch by UBS AG Hong Kong Branch, a licensed bank under the Hong Kong Banking Ordinance and a registered institution under the Securities and

Futures Ordinance. Indonesia: This research or publication is not intended and not prepared for purposes of public offering of securities under the Indonesian Capital Market Law and its implementing regulations.

Securities mentioned in this material have not been, and will not be, registered under the Indonesian Capital Market Law and Regulations. Italy: This publication is distributed to the clients of UBS (Italia) S.p.A., via del

vecchio politecnico

3, Milano, an Italian bank duly authorized by Bank of Italy to the provision of financial services and supervised by "Consob" and Bank of Italy. Jersey:

UBS AG, Jersey Branch, is regulated and

authorized by the Jersey Financial Services Commission for the conduct of banking, funds and investment business. Luxembourg: This publication is not intended to constitute a public offer under Luxembourg law, but

might be made available for information purposes to clients of UBS (Luxembourg) S.A., a regulated bank under the supervision of the "Commission de Surveillance du Secteur Financier" (CSSF), to which this publication

has not been submitted for approval. Mexico: This document has been distributed by UBS Asesores

México, S.A. de C.V., a company which is not subject to supervision by the National Banking and Securities Commission

of Mexico and is not part of UBS Grupo Financiero, S.A. de C.V. or of any other Mexican financial group and whose

obligations are not guaranteed by any third party. UBS Asesores

México, S.A. de C.V. does not guarantee

any yield whatsoever. Singapore: Please contact UBS AG Singapore branch, an exempt financial adviser under the Singapore Financial Advisers Act (Cap. 110) and a

wholesale bank licensed under the Singapore Banking

Act (Cap. 19) regulated by the Monetary Authority of Singapore, in respect of any matters arising from, or in connection with, the analysis or report. Spain:

This publication is distributed to clients of UBS Bank, S.A. by

UBS Bank, S.A., a bank registered with the Bank of Spain. UAE: This research report is not intended to constitute an offer, sale or delivery of shares or other securities under the laws of the United Arab Emirates (UAE).

The contents of this report have not been and will not be approved by any authority in the United Arab Emirates including the UAE Central Bank or Dubai Financial Authorities, the Emirates Securities and Commodities Authority, the Dubai Financial Market, the Abu Dhabi Securities market or any other UAE exchange. UK:

Approved by UBS AG, authorized and regulated in the UK by the Financial Services Authority. A member of the

London Stock Exchange. This publication is distributed to private clients of UBS London in the UK. Where products or services are provided from outside the UK, they will not be covered by the UK regulatory regime or the Financial Services Compensation Scheme. USA:

This document is not intended for distribution into the US and / or to US persons. UBS Securities LLC is a subsidiary of UBS AG

and an affiliate of UBS Financial Services Inc.,

UBS Financial Services Inc. is a subsidiary of UBS AG.Version 05/2012.

UBS 2012. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights

reserved.

ubs cio monthly extended october report

Documents