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    Ubs Weekly Guide 6 13 11 Ubs Weekly Guide 6 13 11 Document Transcript

    •  Wealth Management Research 13 June 2011UBS Weekly GuideMore turbulence ahead  We see the potential for additional near term choppiness Mike Ryan, CFA, Chief Investment Strategist amid another heavy economic release calendar, mike.ryan@ubs.com appearances by several senior Fed officials including Chairman Bernanke and the ongoing stalemate over funding for another bailout for Greece. Contents Page  However, with sentiment toward risk assets having Feature article 1 turned decidedly negative and bonds outperforming Buy the “favorite five” currencies on dollar 5 stocks over the past month and a half, equity markets rallies appear oversold. In the absence of materially weaker Our Best Ideas at a Glance 6 than expected economic data releases and/or additional fallout from the Eurozone, equity markets appear poised Review/Preview of the Financial Markets 7 for something of a modest relief rally this week. Earnings Calendar 8  Any sustained recovery in equity markets will still require Key Economic Indicators 9 confirmation that: (1) the economic recovery remains on Strategy and Performance 10 track; (2) the earnings impact from the soft patch will be both modest and transitory; and (3) the policy mix is still Reports of Note Published in the Last Week 11 supportive of growth and risk taking.Choppy and sloppyThe S&P 500 fell another 2.2% for the week ending June 10th, Fig. 1: Stocks have fallen for six consecutivemarking the sixth consecutive weekly decline in equity prices – weeks, still remain up 1% for the yearthe longest such losing streak in nearly a decade (see figure 1). S&P 500 year to dateThe principal catalysts behind the most recent drop in equity 1400markets included: another round of weaker than expectedeconomic release data; a less than rosy assessment of cyclical 1350growth prospects from Fed officials; growing concerns overfiscal, monetary and regulatory policy risks in the US; and 1300lingering fears of both a deepening and broadening of theEurozone debt crisis. We see the potential for additional 1250choppiness in the week ahead amid another heavy economicrelease calendar, appearances by several senior Fed officials 1200including Chairman Bernanke and the ongoing stalemate over Jan Feb Mar Apr May Jun Julfunding for another bailout for Greece. Concerns over the S&P 500pending conclusion of QE2, the rapidly approaching deadlinefor extending the debt ceiling and the economic fallout from Source:Bloomberg, UBS WMR, as of 10 June 2011the implementation of financial regulatory reform (i.e., DoddFrank) only serve to add to the market’s current jittery state.But following the steady stream of bad news over the pastThis report has been prepared by UBS Financial Services Inc. (UBS FS).Please see important disclaimer and disclosures at the end of the document.
    • UBS Weekly Guideseveral weeks, markets are now better positioned to weatherboth softer economic data and persistent policy uncertainties.As our chief equity strategist, Jeremy Zirin, points out, theequity risk premium (stocks earnings yield less the real bondyield) stands near levels not seen since the middle of last Fig. 2: The equity risk premium stands at itssummer – the last time an economic soft patch unnerved highest level since last summer Equity risk premium — earnings yield less the real bond yieldfinancial markets (see figure 2). While the size of the equity riskpremium alone should not be used as a market timing tool, it 10%does offer insight into both the relative return prospects across 8%asset classes as well as potentially oversold market conditions.With sentiment toward risk assets having turned decidedly sour, 6%and bonds sharply outperforming stocks over the past month 4%and a half, equity markets are overdue for a rebound. So in theabsence of materially weaker than expected economic data 2%releases and/or additional fallout from the Eurozone, equity 0%markets appear poised for something of a modest relief rally 1985 1990 1995 200 200 2010this week. ERP - earnings yield less real bond yieldProof points Source:Bloomberg, UBS WMR, as of 10 June 2011Still, any sustained recovery in equity markets (and risk assets ingeneral) will hinge upon more than just the absence of badnews. Market participants will require confirmation or “proofpoints” that: (1) the economic recovery remains on track; (2)the earnings impact from the soft patch will be both modestand transitory; and (3) the policy mix is still supportive ofgrowth and risk taking. But this will likely take some time. Theeffects of the earthquake and associated tsunami in Japan onthe global supply chain will continue to negatively impact the Fig. 3: Companies have been able to consistentlyeconomic data for some weeks. Our economics team recently beat consensus forecasts over the last two yearsreduced growth estimates for the second quarter to reflect the Percentage of S&P 500 companies beating consensus earningsfallout from Japan. Although oil prices have pulled back from estimatestheir recent cyclical highs, it will take a while before this begins 12%to ease pressures upon the consumer. Keep in mind also thatthe tightening of monetary policy by emerging market central 10%bankers has begun to impact economic activity more tangibly. 8%While we view this as a healthy transition towards a moresustainable pace of growth, signs of a slowdown in the 6%developing world are likely to be greeted cautiously in the nearterm when coupled with the structural challenges confronting 4%developed nations. 2%The most important factor for equity markets remains the 0%outlook for corporate profits. Keep in mind that earnings have 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11been the one consistent bright spot in what has been an Source:Factset, UBS WMR, as of 10 June 2011otherwise sluggish and uneven recovery process. Through acombination of aggressive cost cutting and moderate revenuegrowth, companies have been able to consistently beat analystestimates for each of the past eight quarters (see figure 3). Butthe prospects for continued above consensus profits are morelimited with analysts having recently ratcheted up earningsestimates. Although we remain confident in our forecast for$100 in earnings for the S&P 500 for 2011 and $108 for 2012,the risks are have become increasingly symmetrical. In the lullbetween Q1 and Q2 earnings seasons, there may well be anumber of cuts in analyst estimates as companies offer moreconservative guidance. This will likely keep markets volatile untilQ2 earnings season actually gets underway and corporate CFOs Wealth Management Research 13 June 2011 2
    • UBS Weekly Guideoffer validation that the supportive profit picture remains intact.No stick, no carrotTurning our attention finally to the monetary policy outlook, Fig. 4: Tactical deviations across asset classesmany view the Fed as being caught “between a rock and a hard Deviations from benchmark (9-12 month time horizon)place.” Because while additional stimulus could well provoke afurther acceleration in price pressures globally, a premature Equitytightening of policy would almost certainly weigh more heavilyupon a domestic economy already working its way through a Fixed Incomepretty rough soft patch. But after reflecting a bit upon FedChairman Bernanke recent appearance at the International CashMonetary Conference in Atlanta, Georgia and the release of the CommoditiesBeige Book, it struck us that the Fed’s current policy dilemmahas less to do with “rocks and hard places” and more to do ––– –– – n + ++ +++with “sticks and carrots.” Underweight Overweight Source:UBS WMR, as of 12 June 2011The Fed must try to move toward a more normalized policy Note: Deviation from Benchmark Labels: + = moderatestance over time – but will have to do so without adding to the overweight, ++ = overweight, +++ = strong over-weight, n =already stiff economic headwinds. This means that while there neutral, - = moderate underweight, -- = underweight, --- = strongis unlikely to be a “QE3” in the offing, Fed officials will still underweight, n.a. = not applicable.need to take a decidedly deliberate and pragmatic approach to For the interpretation of the suggested tactical deviations fromboth shrinking a bloated balance sheet and raising interest benchmark, please see the most recent Investment Strategy Guide.rates. This offers something of a “mixed bag” for risk assetsand reinforces the notion that the recent bout of choppymarket conditions will persist for the near term. We still have apreference for both equity and credit (see figure 4). However,periods of underperformance are to be expected in the nearterm as the economy negotiates through the current soft patch.Comfort levelIn his prepared remarks in Atlanta, Chairman Bernanke onceagain expressed his frustration with the pace of the economicrecovery. While the Chairman cited the severe supply chaindisruptions associated with the earthquake in Japan as theprimary catalyst behind the most recent slowing of growth, hecontinued to focus upon the sluggish pace of job creation as Fig. 5: May’s employment report wasthe biggest intermediate challenge to the economy. These disappointingconcerns have certainly been validated by both the increase in US non-farm payrollsweekly unemployment claims and the disappointing payrollreport for May (see figure 5). Although the recent increase in 600inflation has also been something of a concern for 400policymakers, there is little evidence that price pressures are 200 0becoming more broadly-based and/or deeply entrenched. Since (200)much of the increase in inflation is linked to higher food and (400)energy prices, recent signs of a moderation in commodity prices (600)suggest that inflationary risks will ease. (800) (1000)This is where the “stick” part comes in. With employment 2000 2002 2004 2006 2008 2010 2012growth running well below what is typically seen at this part of US non-farm payrollsthe business cycle, the Fed has little incentive to go out andraise interest rates anytime soon. Bernanke emphasized that Source: Bloomberg, UBS WMR, as of 10 June 2011until and unless job creation strengthens materially, the Fed willneed to retain an accommodative policy approach. At the sametime, fears that the Fed may be feeding into a globalinflationary trend should begin to abate. Bernanke went togreat lengths in his formal remarks to dismiss the notion thatFed policy is behind the inflation surge in emerging markets,citing instead the demand-driven surge in commodity prices. Soas overall price pressures begin to moderate along with food Wealth Management Research 13 June 2011 3
    • UBS Weekly Guideand energy costs – partly as a result of the economic soft patch– any pressure on the Fed to “reign in” policy will ease as well.This offers policymakers a great deal of latitude to maintain thecurrent easy policy conditions for an extended period of time.While our economics team is still calling for an initial rate hikeduring the first quarter of 2012, it well may be that the Fedremains sidelined even longer.But what Chairman Bernanke didn’t say in Atlanta may be everybit as important as what he did say. With QE2 drawing to aclose at the end of this month, there has been a fair amount ofspeculation over whether or not the Fed will initiate some newpurchase program to help both bolster the economy andsupport risk assets. Evidence that the economy has deceleratedduring the current quarter – coupled with the recent pullback inequity markets – has only served to reinforce this view in somequarters. While Bernanke noted that the Fed would continue itsexisting policy of reinvesting principal payments from maturingsecurities to maintain the Fed’s balance sheet at current levels,he offered no indication that a new phase of monetary stimuluswas anywhere in the works. He pointed out that monetarypolicy cannot be a “panacea” – suggesting that QE3 isn’t onthe table given the current set of macro, market and liquidityconditions. In short, market participants will need to find acomfort level that the current policy mix will be adequate topromote a gradual improvement in cyclical conditions andadequate support for risk assets because there don’t appear tobe any more carrots in the offing either. Wealth Management Research 13 June 2011 4
    • UBS Weekly GuideBuy the “favorite five” currencies on dollar ralliesWhile our forecasts project that the worth looking beyond theUS dollar will again rally against traditional main currencies, yet formany of the major currencies, we many investors emerging marketsthink the Greenback will likely lose can be too volatile or have too fewpurchasing power over the long investment opportunities to justifyterm. In the short term an end to a major portfolio allocation. Wethe Federal Reserve’s additional believe the Canadian dollar,quantitative easing, decent US GDP Australian dollar, Swedish krona,growth in the second half of 2011 Norwegian krone and the Swissand persistent concern about the franc are attractive from a long-structural integrity of the Eurozone term economic perspective. Thecould help the dollar. However, the NOK and CAD show a stronglong term fiscal burdens and correlation to oil prices coupled Katherine Klingensmith,continued problems in real estate with strong domestic economies, Strategistmarket are among some of the while the AUD is linked to demand Constantin Vayenas,major challenges to the US. The from China, coal and base metals. Analystother main currencies – the euro, The franc (CHF) does well in timesJapanese yen and British pound all of financial and economic stress,also face troubles with government and Switzerland offers a strongdebt and low growth. domestic economy. Sweden (SEK) has resource constraints so is quickWe think short term rallies in the to see inflation and higher interestUS dollar should be used to rates; additionally, the currency isdiversify dollar-based portfolios. linked to a healthy domestic stockThe dollar is currently weak, market. All of these countries havemaking these and many other strong public balance sheets andcurrencies expensive for US export bases. Australia offers theinvestors. We do, however, highest interest rates, which hassuggest adding fundamentally been one reason for its especiallysound international investments as sharp appreciation over the pastopportunities arise. We think it is year.Fig. 1: Favorite five very strong versus four big curencies Fig. 2: Favorite five seeing faster growth recoveryUSD, EUR, GBP, JPY vs. CHF, NOK, SEK, AUD, CAD real exchange rates USD, EUR, GBP, JPY vs. CHF, NOK, SEK, AUD, CAD GDP growth130 Real effective exchange rate GDP growth 6%125120 4%115 2%110105 0%100 -2% 95 90 -4% 85 -6% 80 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 -8% Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 AVG G4 AVG F5 AVG G4 AVG Fav 5Source: Thomson Reuters, UBS WMR, as of 1 June 2011 Source: Thomson Reuters, UBS WMR, as of 1 June 2011 Wealth Management Research 13 June 2011 5
    • UBS Weekly GuideOur Best Ideas at a GlanceThe following list represents investment strategy recommendations that we believe will provide attractiveopportunities over the next 9-12 months.Asset Classes Preference for Equities over BondsCurrencies Preference for British Pound (GBP) and minor currencies, in particular the Swedish Krona (SEK), the Norwegian Krona (NOK), the Canadian dollar (CAD), as well as selected Asian emerging market currencies.Equities International markets  Select Emerging Market equities, especially China, Brazil and Taiwan  UK equities Within US equities  Information Technology: in particular hardware and equipment, semis  Consumer Staples: in particular companies with emerging markets exposure, especially within household products, personal care and beverages  Healthcare: in particular drug distributors  Within Financials: insurers  Within Industrials: mid/late cycle end market capital goods companies  Within Materials: chemicals and industrial gas  Within Energy: oilfield services  Within Consumer Discretionary: auto suppliers, restaurants, lodging  Within Telecom: wireless towers & data centers  Preference for Growth over Value stocksFixed Income Within US dollar Fixed Income  High Yield Corporate bonds  Investment Grade BBB-rated Corporate bondsCommodities We see upside potential for crude oil, gold, platinum, selected base metals and agricultural commodities. Wealth Management Research 13 June 2011 6
    • UBS Weekly GuideReview/Preview of the Financial MarketsReview In the past week, the US trade quarter-over-quarter Non-mortgage consumer6 June – 10 balance for April grabbed a lot annualized for the second credit continued to rise inJune of attention, as it narrowed quarter of 2011, but highlight April, although it was still significantly from revised USD the upside risk to that forecast. driven by government-led 46.8 billion (bn) to USD student loans. This 43.7bn. While export growth Other US economic data notwithstanding, the apparent remained solid at 1.3% releases were generally stabilization bodes well for a month-over-month (m/m), dismissive of a deeper or more less fragile consumer sector. imports fell by 0.4% m/m due prolonged growth soft patch. to Japan-related supply Consumer sentiment disruptions. At face value, the The Beige Book, with indicators continued to send information from Federal narrowing implies a boost to mixed signals, with the Reserve business contacts 2Q11 real Gross Domestic compiled through 27 May, IBD/TIPP economic optimism Product (GDP) growth of showed a less pronounced index rising in early June week about 2 percetange points at deceleration in real activity versus early May. However, an annual rate. However, than the May Institute for the daily Rasmussen index and slower imports imply less Supply Management (ISM) monthly Conference Board inventory accumulation as well surveys and labor market have not rebounded yet from as weaker consumption. report suggested. The reported their drops in March/April. Additionally, import growth stated that “economic activity will likely pick up again by generally continued to expand Thomas Berner, CFA, Economist June, as supply disruptions are since the last report, though a already fading. We, therefore, few districts indicated some keep our current real GDP deceleration.” This was only a growth forecast of 2.5% marginally weaker tone than the prior Beige Book.Preview The week ahead should offer Whether the inflation with the growth message of13 June – 17 some relief in the data moderation will be an the national ISM index. TheJune regarding price pressures from important driver for a rebound Philly Fed prints a bit weaker at the past surge in the price of in consumer sentiment remains 3.9 in May. However, also here oil. Producer and consumer to be seen. We expect it to be we don’t expect much change prices were likely depressed by and forecast further and forecast a level of 4 in falling energy prices in May. improvement in the University June. While we think that the We expect the Producer Price of Michigan consumer Japan-related supply Index (PPI) for finished goods sentiment index from 74.3 in disruptions will be transitory, to rise a moderate 0.1% m/m, May to preliminary 75 in June. June manufacturing climate with core PPI a stronger but In our view, and improvement data will possibly not reflect still moderate 0.2%. In similar in consumer and/or business that yet. fashion, the Consumer Price sentiment will be crucial to Index (CPI) will likely flat, but support our view of a The Conference Board index of core CPI up 0.2% m/m in May. temporary growth soft patch in leading indicators will likely In both cases, the moderation the first half of 2011. rise 0.5% m/m in May. Given in monthly increases should the current debate not suffice to reverse earlier The timely Empire State and sourrounding the depth and upward trends in y/y rates. the Philly Fed manufacturing length of the current growth That said, we expect these climate indexes will likely show slowdown, the leading uptrends to be moderate due little change in June. We indicators will likely get more to still ample resource slack in forecast 11 for the Empire attention than usual. the economy. index, after 11.9 in May. At this level it is roughly consistent Thomas Berner, CFA, Economist Wealth Management Research 13 June 2011 7
    • UBS Weekly GuideEarnings CalendarThe Earnings Calendar provides publicly announced reporting dates and times of companies covered by WealthManagement Research Americas. Reporting dates and times are subject to change by the reporting companies. Analyst WMR-A Covering ContactDate Ticker Company Reporting Period Time (EST) Analyst Information Q4 2011 Earnings Darden Alexandra 212-713-14-JUN-2011 DRI Release Unspecified Restaurants, Inc. Mahoney 2825 (Projected) Q1 2012 Earnings Alexandra 212-713-14-JUN-2011 BBY Best Buy Co., Inc. 8:00am Release Mahoney 2825 Amerigo Q1 2011 Earnings 212-713-14-JUN-2011 ARG Before Market Andrew Sutphin Resources Ltd. Release 3646 May 2011 Sales 212-713-15-JUN-2011 PGR Progressive Corp and Revenue After Market Michael Dion 3825 Release Q2 2011 Earnings Alexandra 212-713-16-JUN-2011 CCL Carnival Corp. Release Unspecified Mahoney 2825 (Projected) Q1 2011 Earnings 212-713-18-JUN-2011 KR Kroger 10:00 am Sally Dessloch Release 9667 Wealth Management Research 13 June 2011 8
    • UBS Weekly GuideKey Economic IndicatorsDate Indicator Time (EST) Unit Consensus UBS Est. Previous Retail Sales (May) -0.4% -0.8% 0.5%14-Jun-11 8:30 AM m/m Retail Sales excluding Autos (May) 0.3% -0.2% 0.2%14-Jun-11 8:30 AM m/m Producer Price Index (PPI, May) 0.0% 0.1% 0.8%14-Jun-11 8:30 AM m/m Core PPI excl. Food & Energy (May) 0.2% 0.2% 0.3%14-Jun-11 8:30 AM m/m Business Inventories (Apr) 1.0% 0.8% 1.1%14-Jun-11 10:00 AM m/m Consumer Price Index (CPI, May) 0.1% 0.0% 0.4%15-Jun-11 8:30 AM m/m Core CPI (May) 0.2% 0.2% 0.2%15-Jun-11 8:30 AM m/m Empire State (Jun) 13.0 11.0 11.915-Jun-11 8:30 AM index Industrial Production (May) 0.3% 0.0% 0.0%15-Jun-11 9:15 AM m/m Capacity Utilization (May) 77.0% 76.8% 76.9%15-Jun-11 9:15 P AM Housing Market Index (Jun) 16 16 1615-Jun-11 10:00 AM index Jobless Claims (Jun 4) 419 k 420 k 427 k16-Jun-11 8:30 AM level Housing Starts (May) 540 k 570 k 523 k16-Jun-11 8:30 AM level Current Account Balance (Q1) -$126.0 bil -$125.5 bil -$113.3 bil16-Jun-11 8:30 AM level Philadelphia Fed (Jun) 7.0 4.0 3.916-Jun-11 10:00 AM index U. of Michigan Sentiment (June) 74.5 76 74.317-Jun-11 9:55 AM index Leading Indicators (May) 0.2% 0.5% -0.3%17-Jun-11 10:00 AM m/mSource: Bloomberg & UBS estimates, as of 10 June 2011.In developing the WMR quarterly forecasts, WMR economists worked in collaboration with economists employed by UBS InvestmentResearch (INV). All remaining forecasts were developed by economists employed by INV. INV is published by UBS Investment Bank. Forecastsand estimates are current only as of the date of this publication and may change without notice.m/m = month-over-month, q/q = quarter-over-quarter, k = thousand, bn = billion, y/y = year-over-year, mn = million Wealth Management Research 13 June 2011 9
    • UBS Weekly GuideAsset Class Strategy & Performance Equity Region Strategy & Performance Extended Market Returns Strategy* Market Returns Asset MTD YTD 2010 Allocation Strategy* MTD YTD 2010 US Equity n -4.4% 3.5% 16.9%US Equity + -4.4% 3.5% 16.9% S&P 500 n.a. -4.1% 3.4% 15.1%Non-US — -2.6% 3.8% 9.4% DJIA n.a. -3.5% 5.9% 14.1%Developed EquityEmerging Market Nasdaq n.a. -5.3% 1.6% 18.0% + -2.1% 0.5% 19.2%Equity EMU** — -1.8% 11.2% -3.4%US Fixed Income — 0.2% 3.2% 6.5%Non-US Fixed UK + -2.5% 6.0% 8.8% —— 0.9% 6.1% 4.9%Income Japan — -1.9% -7.9% 15.6%Cash (USD) + 0.0% 0.1% 0.1% n.a. n.a. Other Developed — n.a.Commodities n 0.1% 2.7% 16.8%Total return indices in USD: Russell 3500, MSCI EAFE & Canada, MSCI Emerging ++ -2.1% 0.5% 19.2%Emerging Markets, BarCap US Aggregate, BarCap Global Aggregate ex-USD, MarketsCitigroup 3-month T-bill, DJ UBS Total return indices in USD: S&P 500, DJIA, Russell 3500, MSCI for non-US. Price return indices in USD: NasdaqUS Equity Sector Strategy & Performance Equity Size, Style Strategy & Performance Sector Market Returns Strategy* Weekly Style Market Returns MTD YTD 2010 Strategy* MTD YTD 2010Cons. Discr. — -2.2% -4.7% 3.5% 27.7%Cons. Staples ++ -1.0% -3.1% 7.2% 14.1% Large-Cap Value — -4.2% 3.6% 15.5%Energy — -0.4% -2.9% 10.2% 20.5% Large-CapFinancials n -2.6% -5.8% -6.1% 12.1% ++ -4.2% 3.8% 16.7% GrowthHealthcare + -0.3% -1.8% 13.1% 2.9%Industrials n -2.2% -5.0% 3.3% 26.7% Mid-Cap n -5.0% 4.9% 25.5%IT +++ -3.2% -5.2% -0.6% 10.2% Small-Cap n -6.5% 1.6% 26.9%Materials n -1.3% -4.2% -0.5% 22.2% REITs — -4.8% 8.6% 27.9%Telecom —— -2.7% -4.4% 3.7% 19.0%Utilities —— -0.7% -2.0% 7.0% 5.5% Total return indices in USD: RussellTotal return indices in USD: S&P 500 sector indices Regional IndicatorsUS Dollar Fixed Income Strategy & Performance 2011 Consensus S&P 500 EPS USD 100 Strategy* Market Returns 2011 UBS WMR S&P 500 EPS USD 100 MTD YTD 2010 2012 Consensus S&P 500 EPS USD 113Treasuries — 0.3% 2.9% 5.9% 2012 UBS WMR S&P 500 EPS USD 108TIPS — 0.4% 5.5% 6.3%Agencies — 0.1% 2.1% 4.7% UBS WMR 2011 year-end S&P 500 target 1410Inv. Grade Corporates + -0.1% 4.1% 9.5% Price to earnings+ 12.4xHigh Yield Corporates + -0.7% 5.2% 15.1% Price to book value+ 2.2xPreferred Securities + -0.7% 4.9% 13.7%Mortgages — 0.4% 3.2% 5.7% +Consensus 12-month forward estimates, as of 10 June 2011.Emerging Markets n 0.6% 4.2% 12.5% Total return performance as of close of business on 9 June 2011.Municipals n.a. 0.5% 4.8% 2.3%Total return indices in USD: BAS / Merrill Lynch Please note these important color designations: Indicates +/- change in mostBond Regions Strategy & Performance + – recent update Strategy* Market Returns *Please see the scale in the Appendix and the most recent Investment MTD YTD 2010 Strategy Guide for an interpretation of the tactical deviations and anUS + 0.2% 3.2% 6.5% explanation of the corresponding benchmark allocation. **EMU = EuropeanEMU** n 0.9% 9.0% -4.5% Monetary Union and is comprised of European countries that have adoptedUK + -0.6% 7.5% 4.6% the Euro as their currency.Japan —— 1.7% 1.5% 17.5%Other + n.a. n.a. n.a. Total return indices in USD: Barclays Capital Wealth Management Research 13 June 2011 10
    • UBS Weekly GuideReports of Note Published in the Last WeekFriday, 10 June Asia Pacific economics: New Zealand dollar - patience will be rewarded Soaring global food prices and improving terms of trade have helped turn New Zealands trade balance into surplus, a structural shift which is likely to keep buoying the New Zealand dollar (NZD). Healthy fiscal conditions also offer underlying support. Any setbacks in the value of the NZD should provide buying opportunities, unless global optimism weakens drastically.Thursday, 9 June Global economy: ECB signals rate increase As we have been expecting, the European Central Bank (ECB) has left its refinancing rate unchanged. Mr. Trichet described monetary policy as accommodative and used the terms "strong vigilance," which supports our call for a rate increase on July 7.Wednesday, 8 June UK equities: Fair value or fantasy? UK revenue growth expectations barely match UK inflation; analysts are cautious and appear to follow regional macro outlooks. Likewise margins are not forecast to improve significantly over current levels - we stress test these assumptions. Ex-financials and materials UK equities remain good value. Commodity price forecasts matter more to the UK market than GDP estimates.Wednesday, 8 June Asia ex Japan currencies: High inflation drives Asian currency appreciation Inflation in Asia is likely to remain uncomfortably high. With further advances in commodity prices and narrowing spare capacity, inflation pressure in the region is set to broaden. To counter-balance mounting price pressures, we expect Asian central banks to keep up their currency appreciation. The Chinese Yuan Renminbi and Malaysian Ringgit offer defensive investors an attractive return profile, with moderate levels of volatility. For investors with greater tolerance for currency volatility, the Korean Won and Indonesian Rupiah are our best picks on a total return basis.Wednesday, 8 June UBS research focus: Inflation - The next wave takes shape In The Decade Ahead, 6 February 2011, we concluded that US inflation will likely accelerate during the decade. We build on this discussion by assessing inflation risk from a global perspective. We shed light on how inflation arises and what its associated costs and mechanisms are, as well as discuss relevant scenarios for future price developments and derive investment recommendations from these.Wednesday, 8 June US economics: Weak May data likely temporary The objective of this report is to review the technical conditions of the more established, actively traded domestic Exchange-Traded Funds (ETFs) that track an underlying index or aim to represent a particular sector or industry. We then correlate this report with our broader macro market and sector analyses. In this review, we provide updates on various technical indicators including 10-week and 30-week moving averages, intermediate-term trends and important technical support and resistance levels. We try to identify potential trading/investment opportunities and downside risks in various key domestic markets. The following are technical commentaries, and not necessarily Buy or Sell recommendations. Note: All last sale prices are as of 03 June 2011.Tuesday, 7 June Emerging Market Economics: Egypt’s Deteriorating Finances Even though spreads on Egypt’s sovereign bonds have widened markedly, we would advise investors to avoid buying them at this point. We expect the Egyptian pound to come under depreciation pressure, and would avoid investing in Egyptian money market instruments. We expect the valuation discount of Egyptian equities to widen and the market to trade at a substantial discount to the MSCI Emerging Markets index over a prolonged period of time. Wealth Management Research 13 June 2011 11
    • UBS Weekly GuideTuesday, 7 June Valuation Report: Mind the gap Corporate bonds generated positive total returns in May as the strong rally in Treasuries bolstered performance of both investment grade and high yield bonds. As we have discussed in the past, we believe that at current low yields, the directionality of credit spreads is largely a function of interest rates, with credit spreads unlikely to tighten further until there is a backup in rates. Accordingly, credit spreads widened a touch in recent weeks – a move that we see driven by exceedingly low yields, rather than any deterioration in fundamentals.Monday, 6 June US Equities Utilities: Monthly – Macro Rotation Utilities have powered higher, outperforming the S&P 500 by almost 300 basis points in the last month driven by falling treasury yields and a rotation into defensive sectors. The good returns have been driven by better sentiment, not higher earnings expectations. However, going forward, we believe this outperformance is unsustainable as the economic recovery proves durable and bond yields reverse their decline. We increasingly see better value in the unregulated power generators.Monday, 6 June Dividend Ruler Stock List: June Update The 10-year treasury bond yield has rapidly declined to under 3.00% from 3.75% in early February. Lower bond yields increase the relative attractiveness of dividend paying stocks. With the S&P 500 dividend yield at 2.0%, the current 1.06% yield differential between bonds and stocks is lower than 97% of monthly observations over the past 30 years. Our recent US sector strategy changes—increasing allocations to Consumer Staples and Healthcare—enhances the attractiveness of our dividend ruler stocks list. Consumer Staples and Health Care represent over one-third of our list due to their healthy combination of current dividend yield and historical dividend growth and consistency.Monday, 6 June Arab countries in transition: The demographics of MENA One of the fundamental drivers of change in societies – demographics – will continue to make its impact felt in North Africa and the Middle East (MENA) for years to come. A process towards greater political pluralism is under way, but will take time, and a wide range of outcomes is likely. The prospect of reform and growth should attract investment in the medium term, but the region faces hurdles, including structural weaknesses and skills shortages.To access these reports please contact your Financial Advisor or access the reports via online services. Wealth Management Research 13 June 2011 12
    • UBS Weekly GuideAppendixScale for tactical deviation charts – Performance and Strategy tablesSymbol Description/Definition moderate overweight vs. moderate underweight vs. Neutral, i.e. on + – n benchmark benchmark benchmark ++ overweight vs. benchmark –– underweight vs. benchmark n/a not applicable strong underweight vs. +++ strong overweight vs. benchmark ––– benchmarkThe overweight and underweight recommendations represent tactical deviations that can be applied to any appropriate benchmarkportfolio allocation. They reflect WMR’s short- to medium-term assessment of market opportunities and risks in the respective assetclasses and market segments. The benchmark allocation is not specified here. Please see the most recent Investment Strategy Guide fordefinitions/explanations of benchmark allocation. They should be chosen in line with the risk profile of the investor. Note that theRegional Equity and Bond Strategy is provided on an unhedged basis (i.e., it is assumed that investors carry the underlying currency riskof such investments). Thus, the deviations from the benchmark reflect our views of the underlying equity and bond markets incombination with our assessment of the associated currencies.Source: UBS WMR, All market performance data is from Bloomberg data as of date listed on top of this document, using representativeindices and is provided for information only. Wealth Management Research 13 June 2011 13
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