UBS investor’s guide Wealth Management Research 29 October 2010 Switzerland The

UBS investor’s guide Wealth Management Research 29 October 2010 Switzerland The art of currency war A dangerous conflict Interview Why governments threaten to devalue their currencies Market outlook Between growth and inflation Until Sir Edmund Hillary reached the summit of Everest, he would not rest. Nor would Tenzing Norgay. (The Himalayas, 1953.) Until we all understand the true value of relationships. Whatever happened to listening? It’s the bedrock of relationships. But somewhere along the line, it dropped off the radar. The world was on “send”. But we have two ears. And one mouth. Why? To listen more. And speak less. At UBS, we’re listening harder than ever before. To the words. To the silences. So until we really hear you … ab We will not rest ubs.com/wewillnotrest-uk Names and/or references to third parties in this print advertisement are used with permission. © UBS 2010. All rights reserved. SAMPLE This document is a sample only. Opinions expressed within may no longer reflect the current view of Wealth Management Research. This document is for distribution only under such circumstances as may be permitted by applicable law. Key investment ideas Asset Allocation – How to invest > See more on page 14 Underweighted Neutral Overweighted Index: Seite 2_Asset-Alloc._1043 Commodities Listed Real Estate Equities Bonds Liquidity Index: Seite 2_Equity_1043 Emerging Markets Japan Switzerland UK EMU US Index: Seite 2.3_Bond_1043 Emerging Market High Yield Corporate Government Index: Seite 2_Asset-Alloc._1043 AUD, CAD, SEK CHF GBP JPY EUR USD Index: Seite 2.5_Trad-Asset-Classes_1043 Private Equity Hedge Fonds Real Estate Commodities The above charts reflect which asset classes and markets are considered attractive or not attractive, respectively. They reflect the view of UBS Wealth Management & Swiss Bank’s Global Investment Committee (GIC) and are not subject to all legal provisions governing the independence of financial research.They may not fully reflect the views of UBS Wealth Management Research.  STILL OPEN Bonds Avoid long-term government bonds We expect long-term government bonds to suffer over the next 12-24 months and recommend not committing new funds to them. Instead, we favor high-yield corpo- rate and emerging market bonds. Better profit prospects, stronger debt-to-equity ratios and simpler access to sources of financing all speak in favor of high-yield bonds. Equities Germany’s strong exports and domestic demand Germany is the growth engine of Europe. Its exporters are highly competitive and well positioned to profit from worldwide growth. German firms also benefit from robust domestic demand, and their valuation is attractive, both compared to global equities and on an historical basis. See page 16 Equities Emerging market equities are growing faster Over the next few years, we expect emerging markets to grow faster, on average, than developed economies. Emerging market government debt levels and budget deficits are less burdensome than in the developed world. Accordingly, we view emerging markets as attractive for equity investors with medium-term investment horizons. See page 18 Equities Profit from equity market volatility Valuation ratios of equity markets are attractive. In view of a slower economic growth rate ahead, equities remain vulnerable to earnings disappointments. In this environ- ment, investors may wish to consider investment products that can profit from vola- tility and optimize returns when markets are tending sideways. Hedge Funds Find opportunities and manage risk Hedge funds recovered in 2009 and navigated the volatile markets in 2010 rather well. As the macroeconomic environment clears, we expect opportunities to arise. Overall, hedge funds have a stabilizing effect on a portfolio. Investors should, how- ever, be aware of the additional risks and the illiquidity of some hedge fund classes.  STILL OPEN  STILL OPEN  STILL OPEN  STILL OPEN Asset allocation Central banks are starting to re-apply stimulus to spur the recovery but the economic outlook re- mains muted, with inflation risks lurking. We fa- vor equities and corporate bonds over cash and government bonds. We like high dividend yielding bonds and stocks. Equities Equities offer attractive long-term potential and should be a natural hedge against inflation. Emerging markets appeal, as does Germany, with solid fundamentals and international ­ competitiveness. Bonds Quantitative easing may keep rates low, but gov- ernment bonds are unattractive. High debt and, eventually, inflation risks may well spark a selloff. Corporate and high-yield bonds and emerging market debt are attractive. Currencies With their stronger fiscal positions and better growth outlook, we prefer the currencies of com- modity producers (CAD, AUD, NZD, NOK) and emerging market currencies over the EUR, USD, GBP and JPY. Commodities We recommend avoiding broad-based commodity exposure as we expect prices to move sideways. Central bank demand and government debt con- cerns should support gold, but the price could ease somewhat in the short term. Focus themes Focus 04 – 07 News in brief 08 – 09 Interview 10 – 11 Fault lines 12 Reader’s corner 13 Key investment ideas Market outlook 14 – 15 Investment ideas 16 – 19 Overview key investment ideas 20 Asset allocation 21 – 22 Financial markets overview Overview 23 Economy 24 – 27 Equities 28 – 34 Bonds 35 – 39 Currencies 40 – 41 Commodities 42 – 43 Real Estate 44 – 45 Non-traditional asset classes 46 – 47 Technical analysis 48 Contents Focus themes Key investment ideas Financial markets overview Explanations, appendix, disclosures, publication data 49 – 51 UBS investor's guide 29 October 2010 3 You will find a comprehensive glossary of technical terms on the internet site www.ubs.com/glossaire If you require further information on the instruments or issuers mentioned in this publication, or you require general information on UBS Wealth Management Research including research policies and statistics regarding past recommendations, please contact either your Client Advisor or the mailbox <UBS-research@ubs.com> giving your country of residence. Please see important disclaimer and disclosures in the “Important Disclosures” section (page 50 – 51). UBS Financial Services Inc. analysts did not provide any content relating to equity or debt securities, or issuers of equity or debt securities, contained in this report. This report has been prepared by UBS AG and UBS Financial Services Inc. UBS Financial Services Inc. is a subsidiary of UBS AG. ∙ “UBS investor’s guide”, a UBS Wealth Management Research publi­ cation for private clients, is published monthly, on Fridays, in German, French, Italian and English. ∙ The publication is available by e-mail and in some instances as a printed edition. If you wish to subscribe, please ­ contact your UBS client advisor. ∙ Details regarding the information contained in this publication, restrictions on distribution and other legal considerations are given on pages 50 and 51. ∙ In all cases we advise anyone interested in selling or buying a product or financial market instrument mentioned in this publication to consult their client advisor first. ∙ Price information for more than 600,000 financial market instruments is available at www. ubs.com/quotes. ∙ Past performance is no indication of future performance. The market prices provided are closing prices on the respective principle exchange. This applies to all performance charts and tables in this publication. “There is no instance of a nation benefiting from prolonged warfare.” – Sun Tzu Editorial Dear readers, Roughly a month ago, Brazilian Finance Minister Guido Mantega warned that the global economy had entered into an “international currency war.” Last weekend’s G20 summit lowered temperatures somewhat, but depending on its size, the Fed’s second round of quantitative easing (QE2), expected at its 3 November meeting, could reheat matters. This is why we put the currency war at the center of this issue of UBS investor’s guide. In the Focus article we explain what a currency war is and we lay out the positions of the various combatants. It is also the topic of our Interview with Simon Evenett, Professor for International Trade at the University of St. Gallen in Switzerland. In the Education section, we update an article written a year-and-a-half ago that looks at currency war tactics and at one possible Chinese response to QE2. Michael Bolliger and Teck Leng Tan then broaden our analysis, examining the reactions of emerging markets to QE2. The various views presented in these articles on QE2 and the prospect of a currency war share one con- clusion. It is the view expressed by the celebrated Chinese general and strategist of war, the legendary Sun Tzu: “There is no instance of a nation benefiting from prolonged warfare.” Long-time readers of UBS investor’s guide will note that we have refreshed our look and added a number of informative features. Our goal remains the same: to give investors timely insights into financial markets and economic affairs. Andreas Höfert Chief Economist 4  UBS investor’s guide 29 October 2010 UBS investor’s guide 29 October 2010 5 Focus themes Focus Focus The era of international cooperation that followed the global financial crisis is over. Today, national interests dominate policy- making. Indeed, a currency war looms as governments threaten to devalue their currencies to boost exports. We look at the key protagonists in this conflict, assess the potential damage, and identify some currencies that should profit by staying above the fray. Andreas Hoefert, uploads/Geographie/ ubs-investors-guide.pdf

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