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CIO WM Global Investment Office
CIO monthly video
www.ubs.com/cio-video
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UBS CIO Monthly Extended
November 2012
Published
25 October 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.
Table of Contents
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Section 1 Base slides 2
Section 2 Asset class views 11
2.A Equities 12
2.B Fixed income 22
2.C Foreign exchange 29
2.D NTAC: Commodities, Listed real estate, Hedge funds
and Private equity 33
1
Section 1
Base slides
Summary
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"Global growth
is showing
broad-based
signs of
improvement."
�
�
�
�
�
Economy
Global growth is showing broad-based signs of improvement, supported by decisive
monetary policy from the world's major central banks. In the US, the housing market
recovery continues and the labor market remains on a modest uptrend. This has helped
improve the sentiment of US consumers, and consumption remains the most important
contributor to US GDP growth. Growth has also begun to pick up in key areas of the
emerging markets, including China and Brazil. While the Eurozone economy remains weak,
we expect Q3 2012 to mark the bottom, and that growth will begin to get "less bad" from
Q4 2012.
Equities
Equity markets have been supported by central bank action and the recent improvements
in economic data. Our preferred markets remain the US and Emerging Markets (EM).
Investor funds have started to flow back into EM, as economic data is improving and
inflation remains under control. Canada and Australia remain our least favored regions
due to falling earnings.
Fixed Income
US high yield bonds remain supported by strong corporate fundamentals, modest
economic growth, and the broad demand for yield-generating assets. Given this, we see
potential for further spread tightening. Meanwhile, benchmark rates are expected to rise
gradually on better economic data, while short rates remain ultra-low. While investment
grade corporate bond spreads are approximately fair value, we continue to view their
absolute yields as attractive.
Commodities
We keep a neutral stance on commodities. Increased global liquidity has pushed prices up
over the last few months, however, for a more sustained price increase we likely need to
see further evidence of an acceleration in global growth.
Foreign Exchange
We remain underweight the Japanese yen. The Japanese economy continues to weaken
against its peers, leading to rising pressure for the Bank of Japan to engage in further
quantitative easing. We have closed our preference for the Canadian dollar following its
recent strength, and therefore close our offsetting short CHF position.
Please see important disclaimer and disclosures at the end of the document.
3
Cross-asset preferences
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Most preferred
Least preferred
Portfolio weights
Equities
Fixed income
• US
• Western winners from EM
growth
• High quality dividend yields
• Event-driven and relative value
hedge funds
• Natural gas growth gainers
• US high yield
• Global investment grade credit
• EM corporate bonds
• Event-driven and relative value
hedge funds
• Canada
• Australia
• Developed market
government bonds
Commodities
5%
Real Estate
5%
Hedge Funds /
Private Equity
10%
Equities USA
10%
Liquidity
10%
High Grade
Bonds
7%
Inv Grade
Corporates
Bonds
9%
High Yield
Bonds
6%
Emerging
Markets Bonds
3%
Equities
Equities Other
Europe
23% EmMa Equities
6%
6%
Note: Portfolio weights are for an advisory
client with a "EUR moderate" profile. For
portfolio weights related to other risk profiles
please contact your client advisor.
Foreign
exchange
• GBP
• Emerging markets (�)
• JPY
Commodities
�
Recent upgrades
�
Recent downgrades
4
Please see important disclaimer and disclosures at the end of the document.
Recommended tactical asset allocation
Tactical asset allocation deviations from benchmark*
Currency allocation
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underweight
neutral
overweight
underweight
neutral
overweight
Cash
USD
Equities total
US
Eurozone
EUR
GBP
Equities
UK
Japan
Switzerland
EM
JPY
CHF
SEK
Other
NOK
Bonds
Bonds total
Government bonds
Corporate bonds (IG)
High yield bonds
CAD
NZD
AUD
EM bonds (USD)
Commodities total
new
old
Commodities
Precious metals
Energy
Base metals
Agricultural
Listed Real Estate
new
old
* Please note that the bar charts show total portfolio preferences and thus can
be interpreted as the recommended deviation from the relevant portfolio
benchmark for any given asset class and sub asset class.
The UBS Investment House view is largely reflected in the majority of UBS
Discretionary Mandates and forms the basis of UBS Advisory Mandates. Note
that the implementation in Discretionary or Advisory Mandates might slightly
deviate from the "unconstrained" asset allocation shown above, depending on
benchmarks, currency positions and for other implementation considerations.
Source: UBS CIO WM Global Investment Office – as of 25.10.2012
5
Please see important disclaimer and disclosures at the end of the document.
Preferred themes
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�
�
�
�
High quality dividend yields (sourced from existing European
and UK equities)
High quality companies with geographically diversified business
models that pay sustainable dividends offer an attractive income
stream in a low yield world. Historically, dividends have made a
substantial contribution to total returns, and we expect this to remain
the case in the current environment.
Western winners from emerging market growth (sourced from
existing equity holdings)
Emerging economies continue to grow faster than developed
economies. With little need to deleverage and repair balance sheets,
Asian economies are also well positioned to continue to outpace their
Western peers in the years ahead. We have identified companies from
a variety of sectors in Europe, the US and Japan which have significant
exposure to the rapidly growing emerging regions. We believe a
diversified portfolio of these companies will reward investors seeking
to profit from the robust demand growth in emerging economies.
Natural gas growth gainers (sourced from existing equity
holdings)
Natural gas is a relatively clean source of energy, and we think it will
benefit from continued substitution for other energy sources over the
long term. We have examined the dynamics of the global market and
the various components of the gas value chain, and identified the
areas we see as the most significant beneficiaries currently. These
include producers in Europe and Asia, suppliers of infrastructure,
services and related machinery, and Master Limited Partnerships (MLPs)
in the US, that offer both attractive yields and growth.
EM corporates: a growing asset class (sourced from global
government bonds – CIO UW)
Given our relatively constructive current view on risk, we regard EM
corporate debt as more attractive than EM sovereign debt due to its
higher overall yield. Over a 6-month horizon, we expect EM corporate
bonds to outperform US Treasuries and deliver total returns of close to
4%.
� Government bond alternatives (sourced from government bonds –
CIO UW)
Developed world government bonds offer a comparatively small cushion
against future interest rate hikes and many face increasing credit risk. We
expect selected bonds of supranational or national agencies, sub-national
governments, multinational corporates, and covered bonds to outperform
government bonds. We recommend switching out of government bonds
into these alternatives.
� US high yield corporate bonds (sourced from government bonds –
CIO UW)
Positive economic growth, robust corporate earnings and healthy balance
sheets provide support to US high yield corporate bonds. Current yield
spreads of 540 basis points still price in a more dire economic outcome
than we expect. Historically, US high yield bonds have delivered similar
returns as US equities with lower volatility. We continue to believe that
US high yield corporate bonds represent a more favorable risk/return
potential than equities and expect mid single digit returns over the next 6
months. Senior loans are exposed to similar positive fundamentals, and
offer an attractive, floating rate alternative to US high yield.
�
�
The place to be in Hedge Funds
Growth in most developed markets remains muted. In this environment,
less directional hedge fund strategies, such as relative value and event
driven, should offer above average returns.
EM currencies: An underappreciated asset class (sourced from
government bonds – CIO UW)
The currencies of emerging countries, collectively as an asset class and
measured using total returns (i.e. including interest received), have the
potential to contribute positively to the longer-term returns of a welldiversified
portfolio. We believe that this is especially relevant now that
the developed world is settling into an extended period of very low
interest rates.
= New theme
Please see important disclaimer and disclosures at the end of the document.
6
Global economic outlook – Summary
Key questions
• What are the prospects for the global economy in 4Q 2012 and 1Q 2013?
• What are the risks that the US economic recovery will falter in the near term?
• When is the European economy likely to emerge from contraction?
• What is the near-term outlook for the Chinese economy?
CIO View (Probability: 75%*)
Sluggish expansion
• Global economic activity has shown signs of improvement over the last month – albeit from a low base. Importantly,
the JPM global composite PMI (a survey measuring economic activity) rose significantly to 52.5 in September from 50.9
in August. The increase was driven by improvements in both manufacturing and service sector activity. Thus, the
global manufacturing PMI rose marginally to 48.9 from 48.1, while the services PMI jumped two index points to 54.
• Geographically, improvements were concentrated in the emerging markets and the US. Indeed, we think that
downside risks in the US have diminished lately and we expect the moderate recovery to continue ahead. Chinese data
are still mixed, but we think that an improvement in the economic momentum is in the cards in 4Q. In the EMU and
UK, recent PMI surveys deteriorated but we still expect the EMU to improve gradually in coming quarters. Overall, we
expect the moderate improvement in global economic activity to continue ahead. A key driver here is the latest wave
of ultra-expansionary monetary policy. Downside risks have diminished somewhat in recent months. We expect Greece
to stay in the euro this year and sign a new memorandum in November. In the US modest fiscal tightening is expected
with the Fed mitigating downside growth risks. The risk of an idiosyncratic slowdown in Asia has declined as the latest
Chinese data confirms that the economy has bottomed."
• Global consumer price inflation peaked in summer 2011 and has since fallen gradually. Base effects and rising
commodity prices since June may push up the global headline rate of inflation in coming months.
� 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: 15%*)
Recession
• There are three key downside risks to the global economy: 1) a significant escalation of the Eurozone debt crisis; 2) a
sharp fiscal contraction in the US, and 3) a sharp deceleration of the Chinese economy. Each of these risks could
precipitate a significant downturn of the global economy.
Key dates
TBA
Troika report on Greece
2 Nov Nonfarm payrolls and unemployment rate for October
6 Nov US presidential and congressional elections
8 Nov The 18th National Congress of the Communist Party of China
22–23 Nov European Council
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Global growth expected to be around 3% in
2012 and 2013
Real GDP growth in % Inflation in %
2011 2012F 2013F 2011 2012F 2013F
Americas US 1.8 2.1 2.3 3.1 2.1 1.7
Canada 2.4 2.0 2.3 2.9 2.0 2.3
Brazil 2.7 1.5 4.5 6.5 5.4 6.5
Asia/Pacific Japan -0.8 2.3 2.0 -0.3 0.0 0.3
Australia 2.1 3.7 3.2 3.4 1.7 2.5
China 9.3 7.5 7.8 5.4 2.8 3.6
India 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 2.7
UK 0.9 -0.3 1.0 4.5 2.7 2.3
Switzerland 1.9 1.1 1.4 0.2 -0.5 1.2
Russia 4.3 3.8 3.7 8.5 5.1 6.8
World 3.2 2.7 3.1 3.9 2.9 3.0
Source: UBS CIO, as of 24 October 2012
In developing the CIO economic forecasts, CIO economists
worked in collaboration with economists employed by UBS
Investment Research. Forecasts and estimates are current
only as of the date of this publication and may change
without notice.
Services and manufacturing diverging
(Global PMIs, 3-month moving averages)
65
60
55
50
45
Manufacturing Services
40
Composite No-change line
35
08 09 10 11 12
Source: Bloomberg, UBS CIO, as of September 2012
Note: Past performance is not an indication of future returns.
*Scenario probabilities are based on qualitative assessment.
For further information please contact CIO economist Dirk Faltin, dirk.faltin@ubs.com and CIO economist Ricardo Garcia, ricardo-za.garcia@ubs.com
Please see important disclaimer and disclosures at the end of the document.
7
Key financial market driver 1 –
Eurozone crisis
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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 next year?
CIO View (Probability: 70%*)
Austerity and weak growth
• We think the Eurozone economy troughed in 3Q. We expect flattish growth in 4Q 2012 and 1Q 2013 (in line with
consensus). Beyond this, uncertainties regarding the debt crisis and continuing fiscal austerity efforts will likely keep
the pace of recovery subdued. The ECB is still in easing mode but after announcing a conditional bond purchasing
program, it would take a marked worsening of the debt crisis and/or a worsening of economic data to trigger any
further policy action.
• There is political pressure on Spain to apply for official financial support (OMT by the ECB and direct support from
the EFSF/ESM). However, the government may hesitate until market pressure rises and/or clear political benefits are on
offer. We think that Italy will have to apply for an aid package similar to Spain’s. We see a high probability of Spain
being downgraded to junk by at least one rating agency.
• OMT bond purchases in the secondary market will focus on maturities of up to three years and countries will be
expected to maintain their funding profiles by also issuing longer-dated bonds. Hence, longer yields should stay
elevated as bondholders remain concerned about countries' ability and willingness to implement necessary reforms,
and about the de-facto subordination to ECB holdings and official loans. The central banking supervision at the ECB is
unlikely to be ready by January 2013, meaning that direct bank recapitalization through the ESM remains unavailable.
• We think Greece will not exit the euro in 2012 but will sign a new memorandum by November, although further
delay is possible. We think that Greece's failure to meet targets may trigger a cut-off from funding by early 2013 and
a possible gradual exit later. Portugal and Ireland should remain on track with their bailout packages, Cyprus will
likely get a new package and Slovenia may ask for help soon.
� Positive scenario (Probability: 15%*)
Return to macro stability
• Bond yields are contained as peripheral countries' budgets stay on track and economic activity recovers faster than
expected. Greece complies with the new austerity plans and market confidence is restored.
� Negative scenario (Probability: 15%*)
Major shock
• Major shocks include Spain and Italy being fully cut off from bond markets, i.e. requiring all new funding through
EFSF/ESM/IMF loans, with European rescue funds only able to cover them until the end of 2013; resistance from core
countries against the ECB program and further support; a Portuguese default; a Greek euro exit before the end of
2012; or a major external shock.
Key dates
TBD
Troika report on Greece
8 Nov ECB press conference
12 Nov Eurogroup meeting
15 Nov Eurozone GDP 3Q: first estimate
22 Nov Eurozone composite purchasing managers index
22–23 Nov European Council
Purchasing managers indices point to
ongoing contraction in 3Q
65
60
55
50
45
40
35
30
25
Source: Bloomberg, UBS, as of October 2012
Yield of Spanish and Italian 10-year bonds
over German Bunds (in bps)
700
600
500
400
300
200
100
07 08 09 10 11 12
Manufacturing Services
Composite No-change line
0
03/2011 06/2011 09/2011 12/2011 03/2012 06/2012 09/2012
Italy
Spain
Source: UBS, Bloomberg, as of 16 October 2012
Note: Past performance is not an indication of future returns.
* Scenario probabilities are based on qualitative assessment.
For further information please contact CIO analyst Thomas Wacker, thomas.wacker@ubs.com and
CIO economist Ricardo Garcia, ricardo-za.garcia@ubs.com
Please see important disclaimer and disclosures at the end of the document.
8
Key financial market driver 2 –
US economic outlook
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Key questions
• Is the nascent growth recovery sustainable? Will the Fed stimulus boost growth?
• How will the election result change fiscal policy deliberations?
• Can politicians find an agreement to avoid a sharp fiscal contraction in early 2013 (i.e. the "fiscal cliff")?
CIO View (Probability: 70%*)
Moderate expansion
• The economy stays on a moderate growth path but the unemployment rate comes down only very gradually – the
September report exaggerated the pace of improvement. Core personal consumption expenditure (PCE) inflation stays
slightly below or close to the Federal Reserve's target of 2%. UBS forecasts real GDP growth of 2.0% in 3Q 2012
(consensus: 1.8%) and 1.6% in 4Q 2012 (consensus: 1.9%). The Fed has added considerable stimulus: it extended
Operation Twist and its interest rate forward guidance, indicated that it will stay highly accommodative even after the
recovery strengthens, launched an open-ended agency mortgage-backed securities (MBS) purchase program of USD
40bn per month, and shows a strong easing bias tied to the state of the labor market. The Fed actions effectively
mitigate downside growth risks, but they are unlikely to dramatically boost growth.
• In the elections, Republicans will likely lose seats in the House on a net basis but retain a majority; we expect them
to be even with Democrats in the Senate. Obama will likely retain the White House. Such an electoral outcome would
prolong the existing gridlock between Republicans and Democrats.
• Due to the ongoing political gridlock, we expect modest fiscal tightening. The government will likely let
unemployment benefits phase out and payroll tax cuts expire, but postpone income tax hikes and sequester spending
cuts. Such a decision would lower the federal deficit by 0.7% of GDP, with a likely lower real GDP growth impact as
households could buffer the income loss with lower savings.
� Positive scenario (Probability: 10%*)
Strong expansion
• Propelled by expansive monetary policy and a fading Eurozone crisis, growth accelerates persistently above 3.0%.
This leads to higher inflation and the Fed responds by halting QE3 and raising rates sooner.
• The better economic outlook raises the odds of an Obama reelection and makes it harder for Republicans to gain
seats in Congress. Faster-rising tax collection and a Democratic stronghold leads to some tax hikes and limited
spending cuts. Fiscal policy tightens by about 1.2% of GDP in 2013.
� Negative scenario (Probability: 20%*)
Growth recession
• US fiscal deleveraging and an escalating Eurozone crisis weigh on the cyclical recovery. Falling profit margins weigh
on business capital expenditures. Real GDP growth deteriorates much further. The Fed massively purchases agency
MBS and Treasuries under its QE3 program.
• The debt limit is reached earlier and the Treasury runs out of money before year-end. Political gridlock becomes
dysfunctional, thus sending the country over the "fiscal cliff," with fiscal policy tightening by
USD 607 billion (3.7% of UBS estimate of 2013 GDP) in 2013. The US credit rating is downgraded.
Key dates
30 Oct Conference Board consumer confidence
1 Nov ISM manufacturing purchasing managers index for October
2 Nov Nonfarm payrolls and unemployment rate for October
6 Nov US presidential and Congressional elections
US growth to pick up throughout 2013
US real GDP and its components, quarter-over-quarter
annualized in %
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
Q1
2006
q/q annualized
Q1
2007
Consumption
Capital expenditures
Inventories
Government
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
2012
Q1
2013
Commercial real estate investment
Residential investment
Net Exports
Real GDP (q/q annualized)
Source: Thomson Datastream, UBS, as of 15 October 2012
UBS CIO
forecasts
Budget impact of US fiscal cliff in 2013
Cumulative budget effects of fiscal cliff components, in % of
UBS estimate of 2013 GDP
Note: AMT = Alternative Minimum Tax, ACA = Affordable Care
Act
Source: CBO, UBS, as of 9 October 2012
* Scenario probabilities are based on qualitative assessment.
Note: Past performance is not an indication of future returns.
For further information please contact US economist Thomas Berner, thomas.berner@ubs.com
Please see important disclaimer and disclosures at the end of the document.
9
Key financial market driver 3 –
Key questions
• What are the drivers for a modest sequential growth recovery?
• What is our policy expectation?
• How strongly will the recently announced infrastructure projects boost growth?
China growth outlook
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Nascent rebound in domestic commodity
prices
CIO View (Probability: 70%*)
Stabilization in economic momentum
• We continue to expect a sequential recovery in the growth momentum in the current quarter. Inventory reductions
should be less of a drag on growth and the government is rolling out more investment plans. At the same time,
political uncertainty should diminish after the power handover in November. We think that real GDP will grow 7% y/y
in 4Q (consensus: 7.7%) before improving mildly to 7.3% in 1Q 2013 (consensus: 7.9%).
• Indicators measuring inventory levels have fallen recently, showing that the destocking cycle is well advanced. In
addition, domestic prices for some major raw materials appear to have bottomed out, which should support a mild
rebound in production activity in the coming months. However, this may not be sustainable without a genuine
recovery in final demand.
• While the government has recently announced trillions of infrastructure investment projects, the spending will span
several years and the source of funding remains unclear. In addition, real estate investment growth is likely to stabilize
but not rebound strongly in the months ahead. We therefore do not expect a sharp rise in investment growth. Fiscal
support measures should help to stabilize economic growth, but are unlikely to result in a strong growth boost.
• The 18th National Congress of the Communist Party of China will be held on 8 November, which is exactly the same
date as in the previous leadership handover in 2002. With the transition of the senior Communist Party leadership
taking place in this meeting, political uncertainties should be reduced. Execution of policy easing measures could
improve, although a substantial new stimulus is unlikely in the near term. In terms of monetary policy, we do not
expect any interest rate cut for the rest of the year, but a reserve requirement cut is still possible to manage liquidity.
Source: CEIC, Wind, UBS, as of 15 October 2012
Investment staying supportive to growth
� Positive scenario (Probability: 20%*)
Higher-than-expected growth
• Chinese GDP grows above 7.7% in 2012. This would require more effective fiscal and monetary policy support from
the government and possibly also a fast improvement in the Eurozone debt crisis.
� Negative scenario (Probability: 10%*)
Hard landing
• Chinese GDP grows below 6%, i.e. a hard landing of the economy. This could be triggered by a global financial
crisis/recession, causing a slump in Chinese exports, or domestic policy staying adrift during the leadership transition
period. Other risks include a sharp movement in residential property prices, or a surge in inflation that forces the PBoC
to significantly tighten monetary policy.
Key dates
1 Nov Manufacturing purchasing managers index (October)
8 Nov The 18 th National Congress of the Communist Party of China
9 Nov Consumer price inflation, industrial production, fixed-asset investment (October)
10-15 Nov New bank lending, M2 (October) Source: Bloomberg, UBS, as of 15 October 2012
Note: Past performance is not an indication of future returns.
* Scenario probabilities are based on qualitative assessment.
10
For further information please contact CIO analyst Gary Tsang, gary.tsang@ubs.com, Glenda Yu, glenda.yu@ubs.com, Patrick Ho, patrick-ww.ho@ubs.com
Please see important disclaimer and disclosures at the end of the document.
Section 2
Asset class views
Section 2.A
Asset class views
Equities
Equities overview
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Global equity markets – Key points
• We keep an overall neutral allocation to equities (see summary on slide 3).
• We keep our preference for US equities. Resilient company earnings still speak for an overweight
stance. Continued economic growth should underpin earnings also in 2013.
• We keep our neutral stance on Eurozone equities. Value is attractive compared to global equities.
However, due to the recession in several countries the earnings dynamics remains weak. In addition,
uncertainty as to when and under what conditions Spain will sign a memorandum of understanding keeps
us from taking a more positive stance.
• We have an overweight position in EM equities. Monetary easing as well as fiscal stimulus in key
countries, coupled with relatively attractive valuations, are supporting factors. Economic activity is likely to
improve gradually over the coming quarters, supporting company earnings.
• We keep our negative stance on Canadian equities. Corporate earnings continue to decline, showing
a weak development relative to the global trend. In addition, valuation is not compelling.
• We are cautious on Australian equities. Realized earnings continue to come down for the market.
• We are neutral on Swiss equities. Companies show solid earnings growth, which is expected to hold up
better than in other regions. Although the Swiss franc is still overvalued, the weakening to the USD and
related currencies since this summer provides additional earnings support.
• We keep our neutral view on UK equities. In the UK the earnings dynamics lags behind other markets.
Also, the recent strengthening in the pound is a drag for earnings measured in local currency terms.
Preferences (6 months)
North
America
Europe
APAC
EM
underweight
Equities
total
USA
Canada
EMU
UK
Switzerland
Sweden
Australia
Hong Kong
Japan
Singapore
Global EM
neutral
new old
Note: Preference in hedged terms (excl. currencies)
overweight
Global equity sectors – Key points
• We keep our overweight in Consumer Staples. Among the defensives it offers good earnings growth
prospects due to its geographically diversified revenue generation.
• We reiterate our preference for global IT due to a superior growth outlook and as we are in the
seasonally strong second half year. With healthy balance sheets and good cash flows, sector valuation is in
line with the overall market, while we believe it deserves a larger premium.
• We continue to like Healthcare as it offers solid long-term earnings prospects with low volatility and
strong balance sheets. We reiterate our underweight in Telecoms, where we expect ongoing weak
revenue growth as well as margin pressure.
• We are negative on Consumer Discretionary as earnings expectations may be too optimistic. With
leading indicators in major regions still deteriorating, we keep our underweight in Industrials. We have
concerns over weak manufacturing momentum leading to increased earnings revisions.
• The earnings outlook for US and Asian Financials is solid. We are neutral globally on Financials. While
the ECB's OMT program reduces tail risk for Financials, it has limited impact on sector earnings.
underweight
Consumer Discretionary
Consumer Staples
Energy
Financials
neutral
overweight
Healthcare
Industrials
IT
Materials
Telecom
Utilities
Source: UBS
new
old
For further information please contact CIO asset class specialists Markus Irngartinger, markus.irngartinger@ubs.com, or Carsten Schlufter carsten.schlufter@ubs.com
Please see important disclaimer and disclosures at the end of the document.
13
US equities
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Preference: overweight
S&P 500 (24 Oct): 1,409 (last publication: 1,433)
UBS View S&P 500 (6-month target): 1,460
• We keep our preference for US equities relative to other developed equity markets. Earnings continued
to hold up better than in other regions during the recent economic slowdown. Continued economic
growth should allow companies to show mid single digit earnings growth over the coming 12 months.
• The US central bank's (Fed) very pro-growth oriented policy stance is a clear advantage for the local
equity market; the recent introduction of additional quantitative easing (QE 3) is positive for riskier assets.
• We still expect some potential for re-rating over the coming 6 months, in terms of increases in the priceto-earnings
ratio (P/E).
• The debate around the fiscal cliff implies increased uncertainty over the coming months. However, we
think that a 20% discount compared to the long-run PE-average provides some cushion, and our base case
assumes that politicians will finally achieve a compromise to avoid economic contraction.
� 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): 1,250
• The US slides into a recession and corporate earnings fall over the coming 12 months. If this were coupled
with an escalation of the Eurozone debt crisis, we would expect the 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
Nov, ISM manufacturing; 5 Nov, ISM non-manufacturing
The Fed
Hints on further quantitative easing can influence equities. Key date: 11 Nov,
minutes of Fed meeting (of 24 October)
Labor market
Improvement in the labor market would support stronger consumption. Key
date: 2 Nov, US labor market report for October
Recommendations
Tactical (6 months)
• We continue to like IT. The sector trades
at the lowest valuation multiples seen
since the early 1990s. Product launches
support superior earnings growth.
• Industrials are preferred as they benefit
from a pick up in manufacturing activity.
• Consumer Staples is our preferred
defensive sector offering the best
combination of dividend growth and
attractive valuation.
• We are still cautious on Telecoms, due to
high valuations, as well as Materials,
where margins remain under pressure.
Strategic (1 to 2 years)
• We like medium-sized US companies,
which are expected to show good longer
term earnings growth.
Our sector stance in the US
Sectors
Consumer Discretionary
Consumer Staples
Energy
Financials
Healthcare
Industrials
IT
Materials
Telecom
Utilities
US
�
�
�
�
�
�
�
�
�
�
Source: UBS
Note: Past performance is not an indication of future returns.
For further information please contact CIO asset class specialist Markus Irngartinger, markus.irngartinger@ubs.com
Please see important disclaimer and disclosures at the end of the document.
14
Eurozone equities
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Preference: neutral
Euro Stoxx (24 Oct): 247 (last publication: 247)
UBS View Euro Stoxx (6-month target): 249
• We keep our neutral stance on Eurozone equities. While the sovereign debt crisis remains a risk factor
(see slide 8), the conditional bond buying program by the ECB (OMT) and the introduction of the ESM have
significantly reduced downside risks.
• Near-term we might see volatility increasing as politicians wrangle about the steps needed to provide a
more lasting solution to the debt crisis (setup of a single banking regulator, solving the banking related
problems in Spain, etc. ). We think that attractive valuations sufficiently compensate for those risks.
• The weak economic environment with recessions in the southern countries continues to weigh on
corporate earnings. Consensus expectations (bottom up) of about 10% to 15% earnings growth in 2013 is
too high, in our view. In contrast, we forecast just about 3–5% earnings growth next year.
� Positive scenario Euro Stoxx (6-month target): 320
• Global economic growth reaccelerates and Eurozone growth shows clear signs of bottoming out,
enabling mid-single-digit earnings growth over the next six months. The trailing P/E ratio could re-rate to
about 14.5x from its current reading of about 11.7x.
� Negative scenario Euro Stoxx (6-month target): 200
• The debt crisis leads to renewed pressure on Spain and Italy. However, downside risks are expected to be
less severe now, after the ECB has put its new bond-buying program in place.
• Earnings could fall about 5% to 10% from current levels over the coming six months, and the trailing P/E
ratio could drop to a level around 10x over a six-month period.
What we're watching
Growth indicators
Policy action
Note: Scenarios refer to global economic scenarios (see slide 7)
Why it matters
Economic growth indicators provide information on the development of a
potential Eurozone recession. Key dates: 2 Nov, final PMI manufacturing,
EMU; 6 Nov, final PMI services EMU; 22 Nov, flash PMI manufacturing,
EMU, France and Germany; 23 Nov, Ifo business sentiment index,
Germany
Decisions by European politicians and the ECB affect the course of the debt crisis.
Key dates: 8 Nov, ECB meeting
Recommendations
Tactical (6 months)
• We continue to recommend defensive
sectors like Consumer Staples and
Healthcare. We also like the Energy
sector.
• We are negative on Industrials and
Consumer Discretionary as industry
sentiment remains subdued.
• We remain cautious on Financials –
especially Banks and diversified
Financials. The need for recapitalization
remains a major concern.
Strategic (1 to 2 years)
• We have a preference for stocks paying
high-quality dividends.
• We like companies with high exposure
to rapidly growing emerging markets.
Our sector stance in the Eurozone
Sectors
Eurozone
Consumer Discretionary �
Consumer Staples
�
Energy
�
Financials
�
Healthcare
�
Industrials
�
IT
�
Materials
�
Telecom
�
Utilities
�
Source: UBS
Note: Past performance is not an indication of future returns.
For further information please contact CIO's asset class specialist Markus Irngartinger, markus.irngartinger@ubs.com
Please see important disclaimer and disclosures at the end of the document.
15
UK equities
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Preference: neutral
FTSE 100 (24 Oct): 5,805 (last publication: 5,768)
UBS View FTSE 100 (6-month target): 5,850
• We keep our neutral stance on UK equities. Earnings have continued to disappoint, showing one of the
weakest dynamics within our market universe. Commodity related sectors show steep earnings declines,
which is expected to moderate only in a lagged fashion to stabilizing commodity prices. The Healthcare
sector suffers from company specific issues which affect earnings also negatively.
• With the oil price expected to trade down over the next 3 months, earnings of companies in the energy
sector - comprising about 20% of the market – should remain depressed over the coming quarters. Within
financials, law suits related to mis-selling of insurance related products represent a special risk factor.
• Recent strengthening of the British pound is also a headwind for the competitiveness of UK companies,
as earnings measured in the local currency are negatively affected.
• The PE of UK equities looks attractive at first sight. But over the past 10 years, UK equities traded on
average at a discount to global equities.
� Positive scenario FTSE 100 (6-month target): 7,000
• A fast strengthening in global growth and recovering demand from emerging markets leads to fast rising
commodity prices, helping the Energy and Materials sectors to lead the market higher. The market could
re-rate to a 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): 4,750
• A global recession drags UK earnings down by 15–20% over 12 months. The market's traditionally
defensive characteristics would only partly offset its strong exposure to commodity-related sectors. We
would expect the trailing P/E multiple to drop towards 10x.
Note: Scenarios refer to global economic scenarios (see slide 7)
Recommendations
Tactical (6 months)
• The UK offers an attractive 4% dividend
yield. We still like companies with high
quality income streams.
• We like Consumer Staples in the UK. The
sector should provide steady earnings
growth through its exposure to
emerging markets.
Strategic (1 to 2 years)
• The UK market's close to 4% dividend
yield provides a good income stream.
• Companies with pricing power are
expected to deliver superior earnings
growth.
UK market trades at a P/E discount,
based on realized earnings
24
21
18
What we're
watching
Growth indicators
Commodity prices
Policy action
Why it matters
Business survey indicators provide information on economic development in the
UK. Key date: 1 Nov, PMI manufacturing; 5 Nov, PMI services
Energy and Materials together comprise about 30% of the UK market according
to market capitalization. Developments in commodity prices affect earnings
estimates.
Loose monetary policy by the Bank of England supports equities. Key date:
8 Nov, Bank of England policy meeting
15
12
9
6
2003 2006 2009 2012
FTSE 100: realized P/E MSCI World: realized P/E
Source: Thomson Reuters, UBS, as of October 24, 2012
Note: Past performance is not an indication of future returns.
For further information please contact CIO asset class specialist Markus Irngartinger, markus.irngartinger@ubs.com
Please see important disclaimer and disclosures at the end of the document.
16
Swiss equities
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Preference: neutral
SMI (24 Oct): 6,627 (last publication: 6,540)
UBS View SMI (6-month target): 6,700
• We stay neutral on Swiss equities relative to global ones. Swiss companies are internationally well
diversified, with about 2/3 of revenues generated in the US and in emerging markets. This provides the
basis for solid revenue and earnings, despite economic weakness in Europe.
• Swiss companies are trying to mitigate concerns about global economic prospects and a strong Swiss
franc using tight cost controls. This should protect operating margins.
• While the Swiss franc remains overvalued, the currency is not longer a drag. In fact, after depreciating
since summer versus the USD and related currencies, Swiss companies' earnings will show positive currency
translation and margin effects.
• Especially in an environment of low economic growth we like the properties of decent earnings growth,
solid balance sheets and a reasonable valuation.
� Positive scenario SMI (6-month target): 7,500
• Eurozone economic growth is reaccelerating considerably, providing further relief to Swiss financials as
well as Swiss exporters. Defensive sectors would likely be left behind in a strong global relief rally. In this
scenario, we would expect the equity market P/E to be re-rated to 15x and earnings to grow by 5% over
the next six months.
� Negative scenario SMI (6-month target): 5,600
• The global economy slides into a recession. Despite being less dependent on the global business cycle,
Swiss companies will also feel the drop in global demand. In this scenario, corporate earnings are likely to
drop slightly over the next six months and we would expect the P/E to contract toward 12.0x.
Note: Scenarios refer to global economic scenarios (see slide 7)
Recommendations
Tactical (6 months)
• We favor large caps over small caps.
• We like stocks paying high and
sustainable dividends.
• Within defensives, we favor the
Healthcare and Consumer Staples
sectors.
• Among the cyclical companies, we
prefer those with a broad emergingmarkets
exposure and/or cheap
valuation, including insurers.
Strategic (1 to 2 years)
• We favor leaders in regards to the two
key Swiss success factors: innovation and
globalization.
Swiss market relative to world
equities
30
26
What we're watching
Economic indicators
Monetary and economic
policy
Corporate news
Why it matters
Key announcements of domestic economic indicators: Nov 1, Manufacturing
PMI index; Nov 30, KOF Swiss leading indicator;
Key Swiss monetary policy dates that could impact Swiss equities: Nov 1, SNB
meeting
Key corporate announcement dates: Oct 30, Geberit, Oerlikon, Straumann &
UBS; Oct 31, Lonza & Sika
22
18
14
10
6
2003 2005 2007 2009 2011
SMI: realized P/E MSCI World: realized P/E
Source: Thomson Reuters, UBS, as of October 24, 2012
Note: Past performance is not an indication of future returns.
For further information please contact CIO's asset class specialist Stefan Meyer, stefan-r.meyer@ubs.com
Please see important disclaimer and disclosures at the end of the document.
17
Japanese equities
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Preference: neutral
Topix (24 Oct): 743 (last publication: 743)
UBS view Topix (6-month target): 756
• We expect earnings growth of about 25% over the upcoming 12 months. A relatively high growth rate
still reflects last year's sharp decline caused by two natural disasters. Still, the earnings recovery has
disappointed so far. Earnings growth continues to slow down and is expected to move toward a more
normal single-digit growth in 2013.
• The government started implementing its JPY 18 trillion recovery budget in Q4 2011; we expect it to
boost GDP by 0.5-1.0% in FY2012, and about 0.5% in 2013.
• However, we see only limited scope for an additional earnings boost from the local economic recovery.
Slowing export markets also curtail the outlook. June quarter-earnings results revealed emerging market
demand was below expectation, capping earnings growth.
• We expect the TOPIX trailing P/E to drop to around 13.5x from 15.0x over the coming months, mainly due
to the earnings recovery; this provides room for moderate price increases only.
� Positive scenario Topix (6-month target): 970
• Stronger global demand and stabilizing European markets lead to improved risk-taking. Falling risk
aversion is likely to lead to a weaker yen, providing an additional increase in earnings. We expect 10-15%
EPS growth in FY2013 and the TOPIX target is based on 16.0x trailing P/E.
� Negative scenario Topix (6-month target): 575
• Faltering global growth leads to weak exports, triggering negative earnings surprises. USD-JPY rate
strengthening to below 75 and potential economic conflicts with China might serve as an additional drag
on earnings. We would then expect the P/E ratio to contract to 13.0x and earnings to fall during the
upcoming six months.
What we're watching
JPY and exports
Why it matters
Note: Scenarios refer to global economic scenarios (see slide 7)
The exchange rate is an important factor for the Japanese equity market. Japan’s
trade balance could be in deficit and may impact USD-JPY rates. Key date: Nov
21, Japanese trade balance
Recommendations
Tactical (6 months)
• Japanese value stocks have underperformed
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 costreduction
initiatives to maintain price
competitiveness during periods of yen
strength.
Strategic (1 to 2 years)
• A weaker USD-JPY rate may drive
Japanese companies’ earnings recovery
beyond a technical recovery from natural
disasters. Japanese exporters and
companies owning international
operations would benefit from such a
development.
Japanese realized earnings likely to
recover further going forward
95
85
75
65
55
45
35
25
15
5
BoJ’s monetary policy
board meeting
If the Bank of Japan makes additional commitments to its asset-purchase
program, which is currently JPY 70 trillion in size, it would lead to a weaker yen,
in our view. Key date: Oct 30, BoJ policy meeting
(5)
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Topix: 12m realized earnings per share
Source: Thomson Reuters, UBS, as of October 22, 2012
Note: Past performance is not an indication of future returns.
For further information please contact CIO asset class specialist Toru Ibayashi, toru.ibayashi@ubs.com
Please see important disclaimer and disclosures at the end of the document.
18
Emerging market equities
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Preference: overweight
MSCI EM (24 Oct.): 995 (last publication: 990)
UBS View MSCI EM 6-month target: 1,040
• The downward revisions to the emerging market GDP growth forecasts appear to be coming to an end.
We expect emerging market GDP growth to accelerate to 5.3% in 2013 from this year's 4.7%.
• Monetary policy in the US, the Eurozone, and Japan remains supportive. One implication of these low
interest rate policies, we believe, will be to enhance emerging market (EM) equity returns in USD by
supporting EM currencies more broadly against the USD over the next six months.
• In our base case, we see the P/E multiple of the MSCI EM Index staying around the current level of 11x
trailing (i.e. realized) earnings over the next six months. Over the next 12 months, we expect EM earnings
growth of around 11% (slightly below consensus).
• Over the past month, structural reforms that will have longer-term benefits were announced in India
(retail sector), Russia (energy sector) and Mexico (labor market). This highlights that the emerging
economies have options to improve the competitiveness of their economies, if they choose to do so.
� 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.
What we're watching
Emerging market
monetary policy
Food and oil prices
Note: Scenarios refer to global economic scenarios (see slide 7)
Why it matters
Investors are trying to figure out which emerging market central banks still have
room to ease monetary policy and where rates may be heading up. Inflation
data is due for Russia (6 Nov), Brazil (7 Nov), China (9 Nov), India (14
Nov) and South Africa (21 Nov).
The prices of grains and oil are higher than this time last year. For now, negative
output gaps should counterbalance some of this inflationary pressure.
Recommendations
Tactical (6 months)
• Within emerging markets, we have a
preference over six months for the large
equity markets, Brazil, China and South
Korea. We expect an acceleration of
growth into 2013 in Brazil and South
Korea, and a stabilization in the case of
China. We see relatively less upside for
more defensive Malaysia. We believe that
South Africa and Indonesia are expensive.
The ECB's announcement that it stands
ready to buy the bonds of compliant
Eurozone governments has lessened the
tail risks for the smaller European
emerging equity markets (Turkey,
Hungary, Poland), but their equity markets
are susceptible to setbacks.
Strategic (1 to 2 years)
• Strategically, we would advise that EM
portfolios tilt toward cash-rich and fastergrowing
Asia.
Country preferences within emerging
markets (relative to MSCI EM)
Current most
preferred markets
Brazil
China
South Korea
Current least
preferred markets
Indonesia
Malaysia
South Africa
For further information please contact CIO asset class specialist Costa Vayenas, costa.vayenas@ubs.com
Please see important disclaimer and disclosures at the end of the document.
19
Asian equities (ex-Japan)
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
MSCI Asia ex-Japan (24 Oct): 518 (last publication: 510)
UBS view MSCI Asia ex-Japan (6-month target): 545
• China released a set of positive data for September. While the headline 3Q GDP number only met
expectations at +7.4% YoY (consensus +7.4%, prior +7.6%), the higher frequency data was better.
Industrial production of +9.2% YoY (consensus +9.0%, prior +8.9%), retail sales of +14.2% YoY
(consensus +13.2%, prior +13.2%), and fixed asset investment of +20.5% (+20.2% consensus, prior
+20.2%) all came in higher.
• Chinese H-Shares are up almost 10% in the last month, while the S&P 500 is within 0.4 index points of
where it was a month ago. Valuations of MSCI China remain extremely attractive as the market
continues to price in a hard landing scenario, although sentiment is clearly turning. In India, the
government has proposed several key economic reforms, but there are implementation risks and
consensus GDP forecasts still have downside risk, while Indonesia's economic momentum is on track.
• We expect 12.8% earnings-per-share growth over 12 months for the MSCI Asia ex-Japan. It trades on
11.0x 12-m forward earnings and 1.6x price-to-book. We expect a stable earnings multiple in the next six
months. Economic growth should stabilize and earnings downgrades come to an end toward the end of
2012.
� Positive scenario MSCI Asia ex-Japan (6-month target): 670
• 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): 400
• 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.
Recommendations
Tactical (6 months)
• The Fed's implementation of QE3 provides
support to Asia ex-Japan equities. In
conjunction with improving growth
prospects we see good near term upside.
• Should economic growth surprise to the
upside, more defensive markets such as
Singapore and Malaysia are likely to
underperform. Instead, higher beta,
export-oriented markets like South Korea,
Taiwan, Hong Kong and China are likely to
take advantage from a strengthening in
global growth.
Strategic (1 to 2 years)
• Consider a portfolio mix of high yield
stocks largely found in Singapore, Taiwan
& HK, complemented by growth-oriented
stocks in the rest of Asia.
Country preferences within Asia ex
Japan (relative to MSCI Asia ex Japan)
China
Hong Kong
underweight
neutral
overweight
What we're watching
Politics
Policy responses
Why it matters
Leadership in China is set to change, resulting in a newly defined future
economic policy. The US Presidential elections have implications on the
outcome of the Fiscal Cliff. Key dates: Nov 6, 57 th US Presidential
Elections; Nov 8, 18 th Communist Party Congress
Some other countries in the region have near-term macroeconomic issues due
to fiscal and current account deficits, as well as hiccups in market and economic
reforms. Policy responses often come on an ad-hoc basis.
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Others
new
old
20
For further information please contact CIO asset class specialist Kelvin Tay, kelvin.tay@ubs.com
Please see important disclaimer and disclosures at the end of the document.
Equity styles
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
UBS view
Prefer mid caps in US, large caps in Europe
• We believe that 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 and into
2013. 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.
� 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 the 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).
Regional differentiation
• In the US, we 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, we 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.
Avoid small caps and favor large caps
in Europe
DJ STOXX small over large and business
confidence
1.3
1.2
10
5
0
What we're watching
Earnings revisions – see
chart
(3-month moving
average upgrades vs.
downgrades)
US and Eurozone PMIs
Why it matters
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.
PMIs are important for earnings generation and preferences for value, growth
and size. Key dates: Nov 2, PMI manufacturing Eurozone (final); Nov 1,
US ISM manufacturing
1.1
(5)
(10)
1.0
(15)
Large caps (20)
0.9
outperforming
(25)
0.8
(30)
(35)
0.7
(40)
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Small cap over large cap Eurozone business sentiment (rhs)
Source: Thomson Reuters, UBS, as of September 29, 2012
Note: Past performance is no indication for future returns.
For further information please contact CIO's asset class specialist Christopher Wright, christopher-zb.wright@ubs.com
Please see important disclaimer and disclosures at the end of the document.
21
Section 2.B
Asset class views
Fixed Income
Bonds overview
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Government bonds – Key points
• We expected government bond yields to move towards slightly higher ranges over the next 6 months,
as seen in late 2011/early 2012. This is likely to have a slightly negative effect on most developed
government bond prices, and is likely to result in a total return around zero over this period.
• Price fluctuations in the month ahead could originate from developments in the Eurozone and the US.
They include the Troika report on Greece, Spanish local elections/referendum and the possible delayed
request for additional ECB support in Europe. In the US, the extent of the fiscal cliff is dependent on the
election outcome and the results from the debates in the subsequent lame duck session of congress.
While we expect the full cliff to be avoided, it poses a significant downside risk to domestic growth.
• Overall, we suggest keeping the duration close to neutral, as we expect global growth to remain
lackluster and central banks to continue supporting bond markets.
Preferences (6 months)
short duration neutral
USD
EUR (DE)
GBP
JPY
CHF
CAD
long duration
Corporate and emerging market bonds – Key points
• We maintain a preference for investment-grade (IG) and US high-yield (HY) corporate credit. A strong
(US) corporate sector, the ongoing moderate recovery of the US economy, determined central bank
support and a strong technical backdrop are likely to further support credit segments.
• Investment-grade corporate bonds have achieved a total return of more than 10% so far this year, at
remarkably low volatility. While absolute returns will likely be moderate in the next six months (1-2%),
the asset class should continue outperforming government bonds, 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 above 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 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.
AUD
Bonds total
Government
bonds
Investment
grade
corporate
bonds
High yield
bonds
Emerging
market
bonds
new
underweight
old
neutral
overweight
new
old
Source: UBS CIO WM Global Investment Office
23
For further information please contact CIO's asset class specialists Achim Peijan, achim.peijan@ubs.com and Daniela Steinbrink Mattei, daniela.steinbrinkmattei@ubs.com
Please see important disclaimer and disclosures at the end of the document.
US rates
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Duration preference: neutral
US 10-year (24 Oct): 1.8% (last month: 1.8%)
UBS view US 10-year (6-month forecast): 2.0%
• US 10-year yields traded largely sideways within a narrow range. Improving domestic economic and sentiment data
was balanced by concerns of the elections/fiscal cliff weighing on the US economy. However, both the ECB and the
Fed have provided substantial and credible backstops that significantly reduce tail risks. This reduces the flight to
quality and the risk discount placed on Treasuries in the event of a re-escalation of the European debt crisis. This
represents a clear floor with little chance of retesting the historical lows of July (~1.4%). In addition, the Fed's
willingness to fall behind the curve in support of the domestic labor market will increase inflation expectations over
the medium term. This implies steeper yield curves.
• In addition, the credible and conditional central bank backstops have already improved sentiment and should help
to kick-start growth if politicians provide the necessary tailwinds. Yields will then return to their slightly higher,
previously stable ranges over a six-month horizon (1.8%-2.1%).
• At the same time, US yields should be capped, as the US economy continues to be vulnerable to spillover effects
from the Eurozone. Structurally weak growth which will be dampened by the upcoming US fiscal consolidation, will
add to volatility and limit the increase in yields.
� Positive scenario for US bonds US 10-year (6-month range): 1.4–1.6%
• US fiscal deleveraging beyond our expectations weighs on the cyclical recovery and is a drag on yields.
• A re-escalation of the European debt crisis burdens yields. Implementation risks in the ECB framework remain, given
that Italy and Spain have not yet made the necessary application, which will result in the peripheral spread widening.
At the same time, Greece is likely to announce a second debt restructuring and leave the Eurozone 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 toward increased 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)
Recommendations
Tactical (6 months)
• 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.
Strategic (1 to 2 years)
• 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.
USD 10-year yields and forecasts
What we're watching
Fed policy
Inflation expectations
US presidential
election/Fiscal cliff & debt
ceiling
Why it matters
The Fed's assessment of the labor market determines its stance on quantitative easing
and is key for yields. Key dates: Nov 2, NFP; Dec 11 Fed FOMC meeting
Current yields do not 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.
The US presidential election will guide fiscal spending for the coming years.
Source: Bloomberg, UBS, as of October 15, 2012
Note: Past performance is not an indication of future returns.
24
For further information please contact CIO's asset class specialist Daniela Steinbrink Mattei, daniela.steinbrinkmattei@ubs.com
Please see important disclaimer and disclosures at the end of the document.
European rates
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Duration preference: neutral
EUR (DE) 10-year (24 Oct): 1.6% (last month: 1.6%)
UBS view EUR (DE) 10-year (6-month forecast): 1.8%
• Bund yields have trended sideways over the month, lacking a directional trigger. Markets still await
crucial developments in Spain, Greece and the extent of the US fiscal cliff, and have not fully reflected
mixed but stabilizing fundamentals. However, when compared to the all-time lows witnessed in August
(~1.2%), yields are still trading at decisively higher levels. This is supported by the ECB announcement to
act as a lender of last resort by intervening in the secondary markets with unlimited and conditional
government bonds purchases. In addition, the open-ended Fed stimulus hinging on the labor market
contributed to improving sentiment. This provides a cap for short-term peripheral yields and a floor for
Bund yields.
• Over a six-month horizon, we expect yields to trend slightly higher, returning to previously higher ranges.
The central bank backstops have already improved confidence and resulted in convergence between the
periphery and the core. This speaks for slightly better growth prospects and thus slightly higher yields.
• However, growth is still structurally weak, and short-term uncertainties (US elections, fiscal cliff, Spain)
remain. Consequently, short-term downside risks persist around year end. The ECB, however, will limit the
spread from widening, providing a bottom to Bund yields as well.
• In the UK, economic data stabilized and we expect the BoE to extend quantitative easing in November.
• In Switzerland, yields rose only slightly owing to mixed economic data. The Swiss National Bank stands
ready to act. With much negative news priced in, we believe Swiss yields will gradually start to normalize.
� 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 in 2013.
• US fiscal deleveraging beyond our expectations weighs on the cyclical recovery and is a drag on yields.
• 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.
Note: Scenarios refer to global economic scenarios (see slide 7)
Recommendations
Tactical (6 months)
• 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.
Strategic (1 to 2 years)
• 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.
EU 10-year yields and forecasts
What we're watching
Political risks and fiscal cliff
Central banks
Economic variables
Eurozone yield spreads
Why it matters
The US fiscal cliff, Greek negotiations, Spanish local elections and Spain delaying its
application for assistance add to policy uncertainty.
Key dates: Nov 8, ECB; Dec 11, Fed FOMC meeting
Credit conditions (ECB bank lending survey)
The level of yield spreads to German bonds influences the level of German Bund yields due
to safe-haven flows.
Source: Bloomberg, UBS, as of October 15, 2012
Note: Past performance is not an indication of future returns.
For further information, please contact CIO's asset class specialist Daniela Steinbrink Mattei, daniela.steinbrinkmattei@ubs.com, Sebastian Vogel, sebastian.vogel@ubs.com
25
or Nina Gotthelf, nina.gotthelf@ubs.com
Please see important disclaimer and disclosures at the end of the document.
Investment grade corporate bonds
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Preference: overweight
UBS View
Current global spread (24 Oct): 150bps (last month: 173bps)
Spread target (6-month): 140bps
• Given the recent rally in investment grade (IG) bonds, spreads have approached fair levels, in our view
and are likely to trade more or less sideways in the coming 6 months. Still, IG bonds will likely continue to
outperform government bonds, offering low volatility and stable income.
• We lower our spread target from 170bps to 140bps due to the improved global macro and risk
environment after recent central bank action and the pickup in economic data. IG bonds remain
supported by our outlook for sluggish but positive global growth, ongoing investor appetite for incomegenerating
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.
• Financial corporates: Due to regulatory challenges, spreads are expected to remain above past averages.
US banks are in a more favorable position than their European peers as they are better capitalized and
earnings have been strong recently. US financial spreads are thus likely to tighten further.
� Positive scenario
Spread target (6-month): 130bps
• 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
Spread target (6-month): 380bps
• 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)
What we're watching
Core market yields
Corporate fundamentals
New issuance
Why it matters
Developed market sovereign yields are only expected to increase gradually. A
sudden rise and high volatility would hurt IG credit. Key dates: 8 Nov, ECB
rate decision; 11 Dec, US Fed rate decision
Robust corporate earnings and low leverage on corporate balance sheets
should help prevent defaults. Key dates: US "earnings season" (ongoing)
As companies continue to deleverage, net negative supply on the IG market
should support higher prices.
Recommendations
Tactical (6 months)
• We keep an overweight in IG corporate
over government bonds.
• In Europe, internationally diversified
companies from non-financial sectors
offer a low but stable income stream for
conservative investors.
• Financials in the US are in a better position
than their European peers.
• We recommend bonds from the lower IG
rating segments (BBB and A) over higherrated
issuers.
Strategic (1 to 2 years)
• We prefer corporate over sovereign assets
given how much more robust companies
are compared to the structural weakness
of public finance in many countries.
Yield spreads
700
600
500
400
300
200
100
0
bps
2005 2006 2007 2008 2009 2010 2011 2012
EUR Investment Grade
USD Investment Grade
Source: Bloomberg, UBS, as of 16 Oct 2012
Note: Past performance is not an indication of future returns.
26
For further information please contact CIO’s asset class specialist Philipp Schöttler, philipp.schoettler@ubs.com
Please see important disclaimer and disclosures at the end of the document.
High yield corporate bonds
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Preference: overweight
UBS View
Spread USD HY (24 Oct): 540bps (last month: 573bps)
USD HY spread target (6-month): 475bps
• We reiterate our spread target of 475bps based on still robust corporate fundamentals, a favorable
technical backdrop and the commitment of major central banks 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).
� 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 shortterm
spikes are possible due to liquidity suddenly drying up, we expect a quick normalization.
Note: Scenarios refer to global economic scenarios (see slide 7)
Recommendations
Tactical (6 months)
• 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.
Strategic (1 to 2 years)
• We expect US defaults to remain at belowaverage
levels for longer. Significant releveraging
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.
Yield spreads
2,500
2,000
1,500
bps
What we're watching
Credit quality/
default cycle
New issuance
Bank lending standards
Why it matters
US 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.
For now, favorable conditions in the primary market have mainly been used for
refinancing. More aggressive issuance activities should be monitored.
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
1,000
500
0
2005 2006 2007 2008 2009 2010 2011 2012
EUR High Yield
USD High Yield
Source: Bloomberg, UBS, as of 16 Oct 2012
Note: Past performance is not an indication of future returns.
27
For further information please contact CIO’s asset class specialist Philipp Schöttler, philipp.schoettler@ubs.com
Please see important disclaimer and disclosures at the end of the document.
Emerging market bonds
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Preference: neutral
UBS View
EMBI Global/CEMBI spread (24 Oct): 281bps / 334bps (last month: 292bps /363bps)
EMBI Global/CEMBI spread target (6-month): 275bps/290bps
• Current spread levels of EM sovereign bonds are roughly in line with fundamentals. We think valuations
of EM corporate bonds are 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 less than 2% for EM sovereigns
and close to 4% for EM corporate bonds over the next six months.
• Negative headlines from 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.
� Positive scenario
EMBI Global/CEMBI spread target (6-month): 235bps/230bps
• 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
EMBI Global/CEMBI spread target (6-month): 555bps/750bps
• 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.
Note: Scenarios refer to global economic scenarios (see slide 7)
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.
Strategic (1 to 2 years)
• 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.
EM sovereigns relatively expensive
compared to EM corporates
Spreads of EM bonds over US Treasuries, in bps
What we're watching
Core market yields
Capital flows
Monetary policy cycles
Why it matters
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: Dec 6, European Central Bank meeting
The European debt crisis may lead to further periods of outflows and weaker
prices, which could offer attractive entry levels for investors.
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: Nov 11, Indonesia; Nov 20, Turkey; Nov 22, South Africa;
Nov 30, Mexico
600
500
400
300
200
100
0
Okt-09 Apr-10 Okt-10 Apr-11 Okt-11 Apr-12
Emerging market sovereign bonds (EMBI Global)
Emerging market corporate bonds (CEMBI Broad)
Source: JP Morgan, UBS, as of 15 October 2012
Note: Past performance is not an indication of future returns.
28
For further information please contact CIO's asset class specialist Michael Bolliger, michael.bolliger@ubs.com and Kilian Reber, kilian.reber@ubs.com
Please see important disclaimer and disclosures at the end of the document.
Section 2.C
Asset class views
Foreign Exchange
Foreign exchange overview
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Foreign exchange – Key points
• The ECB's announcement of Outright Monetary Transactions (OMT) has reduced tail risk in the Eurozone
considerably, while the Federal Reserve announcing a new round of potentially unlimited asset purchases
at their September 13 meeting has weakened the USD. Given that the ECB action was EUR-positive and
the Fed action USD-negative, EURUSD has jumped considerably, but since then moved little.
• We believe the risks to the pair are now more balanced, and see a range between EURUSD 1.28–1.35 for
the months ahead. A Spanish ESM/OMT request would be EUR positive. While the US elections and US
fiscal cliff could lead to short term USD strength, we see the USD weaker over the next 6 months.
• The CAD remains supported by better growth dynamics in Canada and QE in the US. However, we believe
the recent appreciation against the USD could see a near-term setback and we close the overweight.
• We keep the overweight position in the GBP despite the current asset purchasing program by the Bank of
England (BoE), which we believe will be terminated in November. The GBP remains well supported given
the recent rebound in economic data, the expectation of a stronger economy in 2013 and because
investors are seeking liquid alternatives to the EUR, the USD and the JPY.
• EURCHF has traded higher in our 1.20–1.23 range recently and we continue to see the pair in that range.
The SNB protects the downside, while a strong upside move is also limited by a potential flare-up in the
euro crisis and reserve unwinding of the SNB at some point. Given this balance, we have decided to close
the underweight in the CHF.
• Sweden and Norway stand out for their lower debt-to-GDP ratios and current account surpluses. Both the
SEK and NOK have appreciated on diversification and safe-haven inflows, but economic data in both
countries has become weaker recently, which led to a setback in the SEK. A rate cut in Sweden cannot be
ruled out, but seems to be priced in already.
• 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 bias 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 got the expected rate cut in Australia and expect another cut by year end. Do not buy AUD
above AUDUSD 1.00. We have a preference for the NZD over the AUD.
• We maintain a positive medium-term view on emerging market (EM) currencies. This is supported by
higher short-term rates which provide an attractive yield pick-up relative to developed market currencies
as monetary policies are expected to remain loose for longer. We think investors should increase EM FX
exposure across regions. Lower tail risks in Europe should be especially supportive of the higher-yielding
currencies in EMEA and Latin America.
• 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.
Preferences (6 months)
underweight
neutral
USD
EUR
GBP
JPY
CHF
SEK
NOK
CAD
NZD
AUD
new old
Source: UBS CIO WM Global Investment Office
overweight
30
For further information please contact CIO asset class specialist Thomas Flury, thomas.flury@ubs.com
Please see important disclaimer and disclosures at the end of the document.
G10 currencies
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
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
after the strong rebound of economic data in 3Q 2012 which we expect to persist into 2013.
•The CAD remains supported by better growth dynamics. However in the short term, around the US
elections and fiscal cliff debate, a setback cannot be ruled out. We also remain underweight in the AUD.
• The SNB has shown that it can defend the CHF floor. With EUR tail risk reduced the CHF likely recovers
together with the EUR against most other currencies. Thus we close the CHF underweight.
• We expect stronger policy intervention in Japan to weaken the JPY over the coming months.
� Positive scenario FX targets: EURUSD >1.35 / EURJPY 115
• The announcement of unlimited QE in the US, as well as a stronger-than-expected acceleration of global
growth or further European integration would be EURUSD positive. 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.
What we're watching Why it matters
Chinese growth
European sovereign
crisis, ECB policy
US growth and Fed
policy response
Note: Scenarios refer to global economic scenarios (see slide 7)
We expect China 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.
The main focus lies on the Spanish application for ESM/ECB support, which would
be EUR positive; a rate cut (not expected) would hurt the EUR. Key date: Nov 8,
ECB meeting
What will the Fed do once Operation Twist ends at year end? How will the
presidential elections change political power in Washington? Key dates: Nov 6,
US presidential elections; Dec 12, FOMC meeting
Recommendations
Tactical (6 months)
• We continue to have a preference for the
GBP and keep the short in the JPY.
Strategic (1 to 2 years)
• 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 CIO FX forecasts
24-10-12 3M 6M 12M PPP
EURUSD 1.294 1.30 1.32 1.34 1.30
USDJPY 79.75 80 82 86 79
USDCAD 0.991 0.94 0.94 0.92 0.98
AUDUSD 1.0322 0.97 1.00 1.05 0.74
GBPUSD 1.6018 1.65 1.68 1.70 1.69
NZDUSD 0.8138 0.78 0.80 0.83 0.60
USDCHF 0.9346 0.93 0.92 0.92 1.03
EURCHF 1.2097 1.21 1.21 1.23 1.33
GBPCHF 1.4974 1.54 1.54 1.56 1.73
EURJPY 103.27 104 108 115 102
EURGBP 0.8079 0.79 0.79 0.79 0.77
EURSEK 8.6577 8.20 8.00 8.00 8.86
EURNOK 7.4373 7.30 7.20 7.20 8.53
Source: Thomson Reuters, UBS, as of 15 October 2012
Note: Past performance is not an indication of future returns.
31
For further information please contact CIO asset class specialist Thomas Flury, thomas.flury@ubs.com
Please see important disclaimer and disclosures at the end of the document.
Emerging market currencies
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
UBS View
See table for current exchange rates and CIO forecasts
• We continue to like emerging market (EM) currencies over a medium term horizon. We think monetary
policies of major central banks will remain loose for longer whereas the easing cycle in several emerging
markets is over. This should support EM currencies relative to major currencies (USD, EUR, and JPY). Long
term investors should therefore diversify into EM currencies using surplus exposure to these currencies.
• In Europe, both the Polish zloty (PLN) and the Turkish lira (TRY) have supportive fundamentals in the
long-term and could benefit from inflows into their fixed-income market which offers attractive yield
relative to G4 currencies. Due to structural reasons we remain cautious on the Hungarian forint (HUF).
• The South African rand (ZAR) is currently attractively valued, but Investors should be willing and able to
tolerate bouts of volatility due to the current strikes and a cyclical slowdown of the economy.
• In Asia, we like the Korean won (KRW), the Singaporean dollar (SGD) and the Malaysian ringgit (MYR) as
all three countries have a strong economy and should benefit from increasing liquidity and a recovering
Chinese economy.
• In Latin America, the Mexican peso (MXN) remains attractively valued, despite its recent rally.
� Positive scenario > 5% 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 major currencies (USD, EUR, and JPY).
� 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.
What we're watching
Inflation dynamics
in EM
European sovereign crisis
Growth
Why it matters
Note: Scenarios refer to global economic scenarios (see slide 7)
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: 11 Nov,
Indonesia; Nov 20, Turkey; Nov 22, South Africa; Nov 30, Mexico
Setbacks in sentiment will likely lead to bouts of EM currency depreciation,
providing attractive entry points for longer term investors.
Growth in the US, Europe, and China is key for risk sentiment, growth
prospects in EM. Key date: Dec 6, European Central Bank meeting
Recommendations
Tactical (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, MYR,
MXN, TRY, PLN, ZAR), using the JPY, USD,
and EUR for funding.
Strategic (1 to 2 years)
• We recommend EM currencies backed by
stable fundamentals as a strategy to
diversify currency exposure.
• Our favorites include the Chilean peso,
Mexican peso, Czech koruna, Polish zloty,
Chinese renminbi, Korean won, Malaysian
ringgit, and Singapore dollar.
UBS CIO EM FX forecasts
24.10.2012 3-month 6-month 12-month
Americas
USDBRL 2.02 1.95 1.90 1.85
USDMXN 12.9 12.7 12.5 12.3
Asia
USDCNY 6.25 6.30 6.30 6.20
USDINR 53.6 53.0 54.0 55.0
USDIDR 9,615 9,400 9,400 9,400
USDKRW 1,103 1,100 1,080 1,050
USDSGD 1.22 1.21 1.20 1.19
EMEA
EURPLN 4.12 4.30 4.15 3.90
EURHUF 280 290 300 300
EURCZK 24.9 26.0 25.0 24.3
USDTRY 1.80 1.75 1.75 1.72
USDZAR 8.66 8.20 7.90 7.80
USDRUB 31.1 33.0 32.0 31.0
Source: Bloomberg, UBS, as of 15 October 2012
Note: Past performance is not an indication of future returns.
32
For further information please contact CIO's asset class specialists Michael Bolliger, michael.bolliger@ubs.com or Teck Leng Tan, teck-leng.tan@ubs.com
Please see important disclaimer and disclosures at the end of the document.
Section 2.D
Asset class views
NTAC: Commodities, Listed real estate, Hedge funds and
Private equity
Commodities overview
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Commodities – Key points
• The impact of new quantitative easing (QE) measures on commodity prices is losing strength, as broadly
diversified commodity indices have not been advancing anymore on a month-on-month basis. Investors
have started to reflect on the underlying economic challenges that motivated the easing decisions by
key central banks. With global economic growth barely accelerating, the asset class will struggle to
appreciate firmly over the coming months. We therefore advise investors to have only low single digit
return expectations for commodities warranting a neutral stance.
• Gold is less depending on economic growth, however the metal could be a beneficiary of ample
liquidity provided by central banks. But ebbing QE news flow at a later stage (6-12 months) might
challenge the necessary investment demand inflows to balance the market. Hence, we stay neutral
on precious metals.
• The return outlook of the energy sector remains not compelling in 4Q12 and we stay neutral. Global
crude oil supply should expand firmly and surpass incremental demand in 4Q12. We think this will bring
Brent crude oil prices temporarily towards USD 95/bbl while WTI should slide towards USD 78/bbl in
4Q12. However, a weaker USD due to QE3, ongoing social turmoil in the Middle East and North Africa
and the risk that Iranian tensions have the potential to heat up after the US presidential elections are
likely to keep the oil price at around USD 105-110/bbl in 6 months. In addition, demand growth from
EM countries in 1Q13 could start to gather pace.
• Base metal prices should hold their ground, with China's growth deceleration coming to an end. So
we keep our neutral stance. That said, it is too early to call for a strong extension of the liquidity
driven price rally seen until now, despite the RMB 1 trillion in infrastructure approvals by the NDRC
(National Development and Resource Commission) in rail, highways, ports and other infrastructure
projects. Many of the announced projects are already part of the 12th 5-year plan. The incremental
demand impact of speeding up investments should therefore be rather muted this time compared with
previous stimulus packages. Besides that, China's steel intensity for one unit of RMB of investment (FAI)
has halved over the last 5 years.
• A 15% increase in grain prices remains our base case for 4Q12, with room for prices to top out in
1Q13. Demand rationing in case of corn and soybeans is still needed to limit the damage done to global
inventories by lower supply. The quarterly stock and the monthly WASDE report by the USDA are
reiterating the critical conditions of US grain inventories. The softs, on the other hand, should remain
under pressure due to ample South American production and export activity. That said, the sub-sector
already weakened quite a bit, which will limit the downside in the short run and we remain neutral.
Preferences (6 months)
Commodities
total
Precious
Metals
Energy
Base Metals
Agricultural
underweight
new
neutral
Source: UBS CIO WM Global Investment Office
old
overweight
34
For further information please contact CIO's asset class specialists Dominic Schnider, dominic.schnider@ubs.com or Giovanni Staunovo, giovanni.staunovo@ubs.com
Please see important disclaimer and disclosures at the end of the document.
Precious metals
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Preference: neutral
Gold (24 Oct): USD 1,702oz (last month: USD 1,764/oz)
UBS View (gold)
Gold 6-month target: USD 1,875/oz
• So far we saw inflows into gold of around 4 million ounces via physically backed ETFs since Bernanke's
speech at Jackson Hole. We expect this trend to continue and to lead to an undersupplied market, with
financial demand also finding its way into gold futures and physical gold bars and coins.
• Additional demand support comes from central banks, which are likely to further increase their foreign
reserve allocation to the yellow metal. At the same time the drag from India's jewelry demand is set to fade
with an already lower base in 2H11 and a stabilizing Indian rupee.
• 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.
� 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 a key drag on the yellow metal. The latter would have the strongest impact.
Recommendations
Tactical (up to 6 months)
• Although it is possible for gold to test its
all-time high 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.
Strategic (1 to 2 years)
• 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.
What we're watching
Physical demand/supply
Investment flow
Monetary policy
Why it matters
In the months ahead, with the festive season in India starting and monsoon
activity having improved considerably, supporting rural incomes, Indian
physical demand is likely to pick up. Key dates: World Gold Council mid-
November release.
Mining activity in South Africa is unlikely to return to normal in the coming
months. Hence, we are closely tracking mining news from South Africa,
including the aggregated PGM IP numbers to assess the overall situation.
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: 2 Nov US payrolls; 8 Nov ECB meeting, 12 Dec Fed meeting
Money created per hour
(in mn USD)
60
50
40
30
20
10
-
USD created (via QE3 only)
Per hour….
Value of new gold mined (Valued at USD
1,770/oz)
Source: WGC, Bloomberg, UBS, as of Oct. 2012
Note: Past performance is not an indication of future returns.
35
For further information please contact CIO's asset class specialists Dominic Schnider, dominic.schnider@ubs.com or Giovanni Staunovo, giovanni.staunovo@ubs.com
Please see important disclaimer and disclosures at the end of the document.
Energy
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Preference: neutral
Brent (24 Oct): USD 109/bbl (last month: USD 111/bbl)
UBS View (crude oil)
Brent 6-month target: USD 105-110/bbl
• Growing fear over an escalation of the Syrian civil war, involving Turkey, allowed crude oil prices to move
higher again. While Syria's crude oil exports already dropped to near zero due to international sanctions,
the oil market's concerns relate to the Kirkuk–Ceyhan oil pipeline (Iraq-Turkey – capacity of 0.4mbpd) and
the crude exports from the Turkish port of Ceyhan, around 70km from the Syrian border.
• Though we believe that Syria and Turkey are not interested in a military confrontation, a stop of crude oil
flows from Iraq via Turkey would curb global incremental crude oil supply in 4Q12 by more than 50%. It
would also tighten up the market balance in early 2013 and put additional pressure on the structurally low
spare capacity in the crude oil market.
• In the absence of a further escalation, which remains our base case, ebbing news related to Syria-Turkey is
likely to ease supply concerns. This should keep the market focus on weak demand growth and strong
crude oil output from North America, allowing the Brent price to temporarily reach USD 95/bbl.
• A weaker USD, reduced economic tail risk for Europe, ongoing social turmoil in the Middle East and
North Africa and the risk that the Iranian topic heats up again after the US presidential elections are likely
to keep the Brent price around USD 105-110/oz in 6 months.
� 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 promoting 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.
What we're watching Why it matters
The biggest risk related to a potential military confrontation is an Israeli air strike
Iran tensions
on nuclear facilities in Iran. A preemptive strike could easily destabilize the region
even further and threaten global crude oil supply.
Supply
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.
Demand
Most of China's demand growth seems to be related to stock building (strategic
and by refineries). If this is true, the import should stay on the weak side y/y.
Recommendations
Tactical (6 months)
• OPEC is in a good position to balance the
oil market, which should limit the price
weakness. Along with central banks'
support and with the geopolitical risks
remaining, we believe that the potential
downside for the oil price has declined,
thereby warranting allocation.
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 longterm
crude oil exposure over the next
three to five years.
Petroleum demand in selected markets
Year-on-year change – in mbpd
1.2
0.8
0.4
0.0
-0.4
-0.8
0.3
0.4
0.2
0.2
China
Latin
America
2012E
-0.4
-0.2
-0.3
-0.1
Europe
US
0.1
-0.1
Japan
0.2
0.2
0.2
0.2
Middle
East
Other
Asia
2013E
0.7
1.0
World
Oil market reports Key date: 13 Nov, IEA Oil market report Source: UBS, as of Oct. 2012
Note: Past performance is not an indication of future returns.
36
For further information please contact CIO's asset class specialists Dominic Schnider, dominic.schnider@ubs.com or Giovanni Staunovo, giovanni.staunovo@ubs.com
Please see important disclaimer and disclosures at the end of the document.
Base metals
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Preference: neutral
Current (24 Oct) (last month): Copper USD 7,815/mt (8,271); Nickel USD 16,336/mt (18,351);
Aluminum USD 1,912/mt (2,079)
6-month target: Copper: USD 8,800/mt; Nickel: USD 19,000/mt; Aluminum: USD 2,100/mt
UBS View
• After the swift uptick in prices, base metals have been under renewed pressure. The initial price strength
– a simple catch up with Chinese prices triggered by a shift in demand expectations – is losing strength.
• In order to continue the price rally, a firm increase in final metal demand is needed. Since global
economic growth is far from seeing such a demand uptick in industrial activity during 4Q12, we think that
prices are likely to trade only sideways in the coming months before trending higher in 1Q13.
• Loose monetary policy is a good precondition for activity to pick up, but not a guarantee after so many
rounds of monetary stimulus. We therefore look east to China. Although industrial activity growth in China
is likely to bottom out, the upcoming leadership change in the country (November 2012 to March 2013),
will likely delay a bigger investment program into 1Q13. The latest stimulus program will probably prevent
Chinese IP from decelerating even further, but will not lift it meaningfully higher.
• On a single commodity level, we favor copper and nickel. For nickel, short-term supply issues due to a
slower ramp up of new and existing projects have temporarily brought the market closer to balance than
initially expected. Furthermore, we should see higher Chinese stainless steel demand with stabilizing
housing activity and a demand pick up in stainless steel related products.
• With regards to copper, we expect import activity to remain strong, as seen in the import figures for
September. Overall, the copper market should remain undersupplied, which could widen if financial
demand is finding some store of value in the metal. We think this puts structurally low LME inventories at
risk and should push the metal price towards USD 8,800/mt or higher over six months.
� 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
• To passive 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.
What we're watching
Demand
Supply
Economic data/forward
curve
Why it matters
China's growth deceleration should come to an end. But hard economic activity
indicators, especially for China, have yet to catch up with the increase in prices.
Hence, the current base metal market is already reflecting considerable growth
goodwill that is in need of a demand confirmation by China, the US or Europe.
Copper output continues to undershoot market expectations and should be
watched closely, as investment activity in mines increased sharply. For zinc,
prospects for mine closures have been delayed and should keep the market
oversupplied.
Chinese economic data – trade data, CPI, IP and loan growth by financial
institutions. Key date: 10-15 Oct
Recommendations
Tactical (6 months)
• We reiterate that 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. 50% of the 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
now, 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.
Net speculative copper position at
Comex are far from being overstretched
80
60
40
20
0
(20)
(40)
(60)
(80)
In thousand contracts
Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11
Long positions Short positions Net long position
Source: Bloomberg, UBS, as of Oct. 2012
Note: Past performance is not an indication of future returns.
37
For further information please contact CIO's asset class specialists Dominic Schnider, dominic.schnider@ubs.com or Giovanni Staunovo, giovanni.staunovo@ubs.com
Please see important disclaimer and disclosures at the end of the document.
Agriculture
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Preference: neutral
Current (24 Oct) (last month): Soybeans, USD 15.17/bu (16.12); Corn, USD 7.54/bu (7.44);
Wheat, USD 8.84/bu (8.87)
UBS View
6-month target: Soybeans: USD 17.0/bu; Corn: USD 9.0/bu; Wheat: USD 9.5/bu
• Major US supply surprises on the grains side are rather unlikely in the near term as harvesting is in full
swing. However, we think that demand is unlikely to drop as quickly as the USDA expects. According to the
latest USDA grain stocks and WASDE reports, feed demand remained surprisingly resilient in 3Q12. To
effectively ration demand, especially on the feed side, in an environment of critically low US corn and
soybean stocks, higher prices are still required. For wheat, global production estimates were further
lowered due to production losses in Australia, EU, Russia for 2012/13, which likely keeps prices supported in
the near term. We expect corn and soybean prices to appreciate by 15% in the coming months.
• On the other side, the softs are likely to remain well supplied, which should keep prices under pressure.
Improved export activity of coffee and strong stock selling from Vietnam in 4Q12 should weigh on coffee
prices in the short-term. For sugar, higher production from Brazil and other producers should continue to
burden prices in the near term, but also offer buying opportunities on a 12-month perspective.
• Aggregating the above points, the risk/reward for being long across 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 a reduced probability of 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.
Recommendations
Tactical
• 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%.
Strategic
• Our expected return outlook for grains
stands at around –10% over the next 12
months. With grain prices not far below
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.
US grains stocks continue to drop,
demand remains resilient
Values in mn tons
What we're watching
USDA WASDE report
(monthly)
US grains stock report
(quarterly)
USDA crop progress
(weekly, Monday)
COT (weekly, Friday)
Why it matters
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: 9 Nov
The latest stocks data is not correctly reflecting the demand for Jun-Aug’12 as it
contains both old and new crop stock figures. We expect stocks as of 1 Dec to
reflect the true demand picture. Key date: Jan 2013
Faster US grain harvests than usual have been exerting downward pressure on
prices in the short run, which have reversal potential at a later stage.
Investors' net long positions in grain futures are still at high levels, but stable
80
70
60
50
40
30
20
10
0
1st Sep'10 1st Sep'11 1st Sep'12
Jun-
Aug'10
Jun-
Aug'11
Stocks
Demand
Corn Wheat Soybean
Jun-
Aug'12
Source: USDA, UBS, as of Oct. 2012
Note: Past performance is not an indication of future returns.
38
For further information please contact CIO's asset class specialists Dominic Schnider, dominic.schnider@ubs.com or Giovanni Staunovo, giovanni.staunovo@ubs.com
Please see important disclaimer and disclosures at the end of the document.
Listed real estate
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Preference: neutral
UBS Global Index DTR (24 Oct): 1,490 (last month: 1,500)
UBS View UBS Global Index DTR (6-month target): 1,600
• Since July global listed real estate has again performed well. Despite the good performance the asset class
remains slightly attractive based the high dividend yield and implied property yield compared to bonds.
Asia has been the strongest performer and Europe has outperformed the US year-to-date as tail risk was
reduced by the ECB launching the OMT. QE3 is not an imminent performance driver but provides a support
for capital values going forward and helps to keep interest levels low.
• Due to the current search for yields, listed real estate companies are able to refinance their investments at
lower yields with longer maturities. The implied property yields to bonds and earnings yields over five-year
swap rates are even more attractive due to low interest rates offering good opportunities within the global
real estate space.
• Low to decent supply of commercial surfaces helps to push vacancy rates down which in turn increases
the rent. We further see capital appreciation as possible in the light of overall stable fundamentals.
• Asia remain the positive performance generators in our view as this is the more cyclical market, whereas
Australia is supported by high dividend yields. Overall Europe remains comparatively weak, while the UK
and the US have already priced in some market improvements.
� Positive scenario UBS Global Index DTR (6-month target): 1,650
• Improving fundamentals maintain listed real estate in fairly valued territory, despite stronger
performance as occupancy rates grow faster than expected and rental income accelerate. Ongoing
reflationary monetary policies across the world help to maintain favorable spreads between rental yields
and bonds, maintaining real estate as a comparatively attractive asset class. 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. Furthermore, a more severe recession in Europe triggers
a tightening of credit standards and cuts real estate companies from the capital market, making listed real
estate more dependent than ever on bank financing. Real estate underperforms global equities.
What we're watching
Corporate bond yields
Rental yield and capital
appreciation
Credit markets and
financing costs
Note: Scenarios refer to global economic scenarios (see slide 7)
Why it matters
This is one of the best indicators for listed real estate as a low yield helps reduce
financing costs. A steep yield curve is furthermore a signal that the overall
economic environment is improving. Both are currently supportive.
The rental yield is usually inflation linked, as the upcoming supply is currently low
this pushes up the occupancy rates and thus increasing the rents. Capital
appreciation is expected to be stable to positive. Overall are both supportive.
Lending conditions are still challenging for developers and private investors.
Public companies by contrast have very good access to credit and capital.
Recommendations
Tactical (6 months)
• We continue to be neutral global listed
real estate recommending to have
exposure to the Hong Kong, Singapore
and Australia markets. The asset class is
overall slightly attractive on relative
valuation and the current low interest
rate is supportive, but the uncertain
environment warrants a neutral stance.
Strategic (1 to 2 years)
• Real estate is supported by several factors
in the long term. We anticipate a gradual
increase in payout ratios coupled with
portfolio optimizations and ongoing costcutting.
A weak economy limits strong
rental growth, but low supply supports
high occupancy rates keeping rents up.
Preference (6 months)
Our market preferences for listed real estate*
North America
Cont'l Europe
UK
Japan
Hong Kong
Singapore
Australia
-- - neutral + ++
Old
New
* 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
Source: UBS, as of 16 October 2012
Note: Past performance is not an indication of future returns.
39
For further information please contact CIO's asset class specialist Thomas Veraguth, thomas.veraguth@ubs.com
Please see important disclaimer and disclosures at the end of the document.
Hedge funds
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
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, we favor relative-value (RV ) and event-driven (ED) strategies.
• 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.
� 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 reversals, 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).
Recommendations
Strategic (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.
What we're
watching
Global equity direction/
economic cycle
Correlation
Leverage
Volatility
Liquidity
Regulation
Why it matters
The outlook for global equities is an important HF performance driver. The
economic cycle impacts the strategies differently.
Correlation is an important performance/alpha driver for equity long/short, the
largest HF strategy by assets under management.
Gross and net leverage are key to monitoring risk.
The direction influences certain HF strategies (e.g. convertible arbitrage).
Important in particular for large, less nimble HFs, it enables them to enter and
exit their strategies.
Volcker rule, USCITS III/IV
Performance, year-to-date
Relative value
Event driven
Trading
Equity hedge
Hedge Funds
-2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5%
Source: HFRI, UBS, as of 31 Sep 2012
Note: Past performance is not an indication of future returns.
40
For further information please contact CIO's asset class specialist Cesare Valeggia, cesare.valeggia@ubs.com
Please see important disclaimer and disclosures at the end of the document.
Private equity
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
Prefer small-/mid-cap buyouts in US/emerging markets;
UBS View
distressed debt in Europe
• Global M&A volume has continued its downward trend since Q4 2010, falling by -20% quarter-by-quarter
in Q3 2012, with a drastic decline in Europe of -46%, the third lowest quarter since 2001. However, private
equity withstood the negative M&A environment as global activity grew by +13% in Q3, and the US posted
its strongest quarter since Q3 2007. The importance of private equity in emerging markets continues to
grow, now accounting for 13% of global activity, strongly driven by Asia, but increasingly also by Africa.
• 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. Distressed
strategies which focus on acquiring complex/illiquid loan positions from banks in Europe are also attractive.
� 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 even more attractive
opportunities within distressed strategies and lower entry prices for long-term private equity investors.
What we're watching
Credit markets
Exit activity
Sector activity
Note: Scenarios refer to global economic scenarios (see slide 7)
Why it matters
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, raising over EUR 153bn of leveraged debt, while
Europe achieved only EUR 16bn in 1H 12 at less attractive conditions.
Exit activity is an important indicator for the health of the PE market and a key
return driver for investors. Despite the difficult macro environment,
distributions from portfolio sales (USD 69bn) have held up, and grew 20% yoy.
Transactions in consumer discretionary and in energy & utilities remain the
most preferred sectors for private equity investors in 2012.
Recommendations
Strategic (1 to 2 years)
• In Europe, the ongoing deleveraging has
led to attractive opportunities for special
situations. We thus recommend pursuing
less liquid investment strategies with a
preference for debt to benefit from the
macroeconomic adjustment process and
selling pressure for many European banks.
• 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 are
supported by liquid debt markets.
• We advise investors make an ongoing
allocation to private equity in emerging
markets, which offer an attractive way to
capture superior long-term growth and
gain access to small-/mid-cap companies
unavailable on the stock market.
The US has seen its strongest quarter since
Q3 2007, while sentiment in Europe remains
weak
USD billions
50
40
30
20
10
0
Q1
2010
Q2
2010
Q3
2010
Q4 Q1 Q2 Q3
2010 2011 2011 2011
US Europe RoW
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Source: S&P, UBS CIO, as of October 2012
Note: Past performance is not an indication of future returns.
For further information please contact CIO's asset class specialist Stefan Brägger, stefan.braegger@ubs.com
Please see important disclaimer and disclosures at the end of the document.
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).
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Contact list
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
UBS WM Global Chief Investment Officer
Alexander Friedman
alexander.friedman@ubs.com
UBS WM Head of Investment
Mark Haefele
mark.haefele@ubs.com
UBS WM Global Investment Office
Themes / UHNW
Simon Smiles
simon.smiles@ubs.com
Asset Allocation Advisory
Mark Andersen
mark.andersen@ubs.com
Asset Allocation Discretionary
Mads Pedersen
mads.pedersen@ubs.com
Alternative Investments
Andrew Lee
andrew.lee@ubs.com
Kiran Ganesh
kiran.ganesh@ubs.com
Karsten Bagger
karsten.bagger@ubs.com
Christophe de Montrichard
christophe.de-montrichard@ubs.com
James Purcell
james.purcell@ubs.com
Achim Peijan
achim.peijan@ubs.com
Walter Edelmann
walter.edelmann@ubs.com
Christopher Wright
christopher-zb.wright@ubs.com
Philipp Schöttler
philipp.schoettler@ubs.com
Markus Irngartinger, CFA
markus.irngartinger@ubs.com
Oliver Malitius
oliver.malitius@ubs.com
Matthias Uhl
matthias-w.uhl@ubs.com
UBS WM Regional Chief Investment Officers (CIO)
Regional CIO Europe
Andreas Höfert
andreas.hoefert@ubs.com
Regional CIO Asia-Pacific
Yonghao Pu
yonghao.pu@ubs.com
Regional CIO Asia-Pacific
(South)
Kelvin Tay
kelvin.tay@ubs.com
Regional CIO Emerging Markets
Jorge Mariscal
jorge.mariscal@ubs.com
Regional CIO Switzerland
Daniel Kalt
daniel.kalt@ubs.com
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Disclaimer
C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot
UBS 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
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Version 10/2012.
� UBS 2012. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.
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