quarterly investment strategy12 equities overview 13 • us 15 • europe 17 • asia ex-japan 19...

Investment OutlOOk and asset allOcatIOn Overweight Equities, Underweight Bonds, Neutral on Commodities

GlObal equIty strateGyImproved macro stability and reduced event risks are more supportive of risk assets

GlObal FIxed IncOme strateGyRecord low yields and improved risk appetite indicate that the rally may be slowing

cOmmOdItIesThe structural story, now that China is maturing, has softened

FIRST QuaRTeR

2013

QUARTERLY

INVESTMENT STRATEGY

Asset allocation with a bias towards risk assets

As one of the thought leaders in asset management, UOBAM regularly produces topical investment research articles and publications to help our clients stay on top of financial market developments.

Webcast – asset allocation strategy for q1 2013

In our quarterly webcast, Mr Tony Raza, Head of Multi Asset Strategy Unit, will share our asset allocation strategy, as well as discuss key issues driving developments in global markets.

View the webcast on the homepage of our website at uobam.com.sg.

2

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cOntents2 CIO MESSAGE

4 SUMMARY

5 ASSET ALLOCATION

6 FIRST QUARTER INVESTMENT THEMES

11 GLOBAL EQUITY STRATEGY

12 Equities Overview

13 • US

15 • Europe

17 • Asia ex-Japan

19 • Japan

21 • Canada

22 • Australia

23 • LatinAmerica

24 • China

26 • ASEAN

27 • Singapore

28 GLOBAL FIXED INCOME STRATEGY

29 FixedIncomeOverview

30 • G-10

36 • EmergingMarkets

38 • Asia

40 • Singapore

41 CURRENCIES

43 COMMODITIES

44 CommoditiesOverview

012 QUARTERLY INVESTMENT STRATEGYFirst Quarter 2013

Please refer to the last page for important notice & disclaimer. UOB Asset Management

uobam.com.sg

CIO MESSAGE

Economicvolatility,punctuatedbypoliticalhighdrama,turned2012 into awild ride for investors.Geopolitical tensiononlyaddedtothealreadyformidablechallengesfacedbytheglobaleconomywiththenearexitofGreecefromtheEurozone,anouster of Bo Xilai inChina, a territorial spat betweenChinaand Japan (et al.), civil strife in Syria, and potential threatsemanating from IranandNorthKorea -bothofwhichhavenuclearambitions.

While recentdatasuggest that theglobaleconomicoutlookhasstabilised,wecautionthat therearestillmajorstructuralheadwindsahead.Thefirst isthemassivepublicdebt levelswhichmayinhibiteconomicgrowth,assuggestedinastudyby economists Reinhart and Rogoff. In our view, monetarypolicyaloneisnotthepanaceatotheworld’sproblems,and“kickingthecandowntheroad”cannotaddresstheproblemofexcessivedebt.Onlypoliticalcouragewill.

IntheUnitedStates,whileattentionhasshiftedtothe“FiscalCliff”,itisessentialforpolicymakerstoaddressthreecriticalissues:(1)Toputinplaceacredibledebtreductionplan;(2)toimplementpublicsector(entitlement)reform;and,(3)toclarifytax policy. Only with these changes will financial repressionunleash the private sector’s animal spirits. Policy clarity willbe essential to compensate for the multi-year headwindsassociatedwithfiscaladjustment.

In the Eurozone, especially for the “ClubMed” countries, itis imperative that growth is restored. The challenge is thatreformismovingataslowerpacethanthebuild-upofdebt.Alastingsolutionrequiresthecoreeconomiestoprovidedebtforgiveness.However,eventhecoreofEuropeisnowtippingintorecession.Thepiecemealapproachheretoforeadoptedisonlyprolongingtheproblem,andwedonotexpectclarityuntilaftertheGermanelectionsin2013.

InChina,theneedtoimplementpainfulfactormarketreformcoincides with the country’s political transition. Even aheadof the formal transitionofpower,observerssuggest that thecommitmenttoeconomicreformiswaning.Intheshadowofarampantfixedassetbuildout,andwithcapacityutilisationreportedlyinthe60s,thisisalongtermconcern.

In our view, financial repression will likely continue. And forinvestors toearnpositive real returns, theywill have to takesome risk. Given this backdrop, High Yield Debt, Equitiesand real estate investment trusts (REITs) will likely grow inimportance as sources of return. Investors who sit on thesidelineswillbehurtbyinflation.Riskassetsremainattractivelypriced.Butinaneraof“belowtrend”growth,pickingtherightriskasset(company)willremainacriticalsuccessfactor.

Equity valuations are sufficiently low to warrant investors’ -withsufficienttimehorizonsandriskcapacity-attentiontoday.Forthosewhoremainmoreriskadverse,adoptingastrategyofdynamicassetallocationmaymakesense tocapture theupside, and limit downside. Our multi-asset risk-managedapproachisdesignedtoachievejustthis.

In the following pages, we share our perspective on the market environment, and where we see opportunities andchallenges.These ideasare the resultofour top-downandbottom-up analysis, aswell as discussionwith peers in theindustry.Wehopeourinvestorswillbenefitfromouranalysisintheyearahead.

02QUARTERLY INVESTMENT STRATEGYFirst Quarter 2013


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SUMMARY

Over the past quarter, the outlook in the united states (us) has stabilized. EconomicactivityintheUShasimproved, and we believe there are strong reasons why we shouldposition for positive developments in relation to the USfiscal cliff.While therewill be a difficult and confrontationalnegotiatingphase,thereisastrongcasethatthefinaloutcomewill avoid excessive near term austerity, but neverthelessprovideaclearerpathtoabettermulti-yearfiscaloutlook.

europe is back from the brink.Forexample,theEuropeanCentralBank(ECB)haslaunchedanewbondbuyingprogram“Outright Monetary Transactions” – a form of quantitativeeasing which lowers the funding costs of the troubledEuropeansovereigns.Another factor thathashelped is thesofteningofGermany’spreviouslyhardlinestanceduetotheupcomingelection in2013.Webelieve thatAngelaMerkelhopestosecurepeaceontheEuropeanCrisisfront,assheseesthisascrucialtoherre-electionprospects.

china shows signs of bottoming out. Most broadmeasures for economic growth indicated that theChineseeconomic slowdown may have bottomed in September2012. For example, the headline purchasing managers’index (PMI) rose0.4percentagepoints inOctober to50.2– thefirst time ithasbroken the50-marksinceJuly2012.Furthermore,thekeysub-componentssuchasnewexportordersandnewordersindicesalsopostedsimilargains.Ontheexportsfront,growthstartedtopickup,reaching9%inSeptember–upfrom1%twomonthsago.Abottoming ineconomicgrowthwouldprovidesomerelieftothefearsthatChinamightbeapproachinga“hard landing’,whichwouldhavebeenverynegativeformarkets.

the near four-year rally in government bonds may be ending. Government bond yields have largely beendrivenbelow 1% and there are signs of investors becoming lesscautious. There are signs of investors gradually takingon equity risk by investing in high dividend yield counterssuchasrealestate investment trusts (REITs).Anotherclear pattern is that investors have moved down the creditqualitycurve.Since2008, thecapitalflowhasshifted fromgovernment bonds to investment grade credits, and thenintoemergingmarketsbonds,highyieldbondsandnowtodividendyieldcounters.Giventhestabilisation intheglobalmacroenvironment,webelievethatthenextstageofcapitalflowislikelytobeinequitymarkets.

Financial stress level benign, while yield gap at historical high. Ourquantitativemeasuresof tracking riskregimes,suchasfinancialstress,correlationandvolatility,areallpointingtoalowriskregime.Typically,Asianstockstendtorallywhenstressisfalling,andselloffwhenstressisrisingatafasterpace.Onthisnote,weobservethattheyieldgap isnowat7.43%–ahighbyhistoricalstandards.Although lowvaluationsarehardlyacatalystforshort-termperformance(unlesstheyareatextremelevels),thefactthatinvestorriskappetiteisgraduallyrecoveringmeansthatre-ratinginstocksmaynotbefaroff.

Overall, we see a better mix of factors and therefore, recommend an overweight in risk assets. Weseebettermacroeconomic data, with attractive equity valuations andpotential policy support. Within equities, we still preferemerging Asia over developed markets, and favour highqualitycountersthataretradingatattractivevaluations.Withinfixed income,weprefer emergingmarkets over developedmarkets,andfavourinvestmentgradecreditsoverhighyieldcredits.Wefavourgoldamongthecommodities.



uobam.com.sg

Theimprovedmacrobackdropandrecoveryinriskappetitemake the current environment a more conducive one forinvestors.

While we recognize the structural headwinds in severalregions, it is alsoclear that there isgreater stabilityon themacrofront.Forexample,fearofaEurozonebreak-uphaseased,whileUSpoliticalcampsarenotthatfarfromafiscaldeal.Inaddition,Chinanowshowssignsofcyclicalrecovery.

Furthermore, we note investors’ risk appetite is slowlyrecovering, judging from the inflows into riskier emergingmarketslocalcurrencyissuesandhighyieldbonds.

Therefore, themore stablemacro backdrop suggests thatanassetallocationstrategywithabiastoward“riskassets”(suchasequitiesandcorporatecredits)maybewarranted.Forthisreason,wemakethefollowingrecommendations:

aSSeT aLLOCaTION

Policy uObam weight (%)

benchmark weight (%)

change from 4q 2012

equities Overweight 65.0 55.0 ↑bonds Underweight 29.0 38.0 ↓commodities Neutral 5.0 5.0 =

cash Underweight 1.0 2.0 ↓

equities – raise to OverweightImprovedmacrostability and reducedevent risksaremoresupportiveofriskassets.

Fixed Income – reduce to underweightThe record low yields and improved risk appetite indicate that the multi-year fixed income rally maybe slowing. We overweight corporate credits butunderweightgovernmentbondsaswe still see somepotentialforspreadcompression.

commodities – maintain neutralWhilethemacrobackdrophasimproved,wenotethatthe structural story for commoditiesnow thatChina ismaturing,hassoftenedsomewhat.Forthisreason,westayneutral.



uobam.com.sg

FIRST QUARTERINVESTMENT THEMES

Lastquarter,wewroteaboutamixedbagofmacrofactors thatweighedonAsia.Since then,wehaveseen better global economic and political stability– a development that we believe should continue into2013.

However,theinvestmentfundflowshavenotshifted,as investors continue to pour their capital intocorporatecredits.Accordingly,yieldshavefallenandspreads continue to compress. We think that the nextphaseofinvestmentallocationwillstarttofocusonacombinationofcorporatecreditsandequitiesasthe factors for sustainablemarket performance arenowinplace.

Inthefollowingsections,wewillexplainthereasonsunderpinning our views and investment ideas for thequarter.



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1. Dodging the uS Fiscal Cliff Wethink there isahighprobability that thechiefoverhang to markets in 4Q 2012 will be addressed favourably by1Q2013.To recap, thesocalled “fiscalcliff”concerns theautomaticendof2011’stemporarypayroll taxcuts,endofcertaintaxbreaksforbusinesses,andspendingcutsagreed as part of the debt ceiling deal of 2011. The fear is that politickingwillpreventbothparties fromreachingadeal, in which case, we could be looking at a United States (US)recessioninthehorizon.

Our benign view on the fiscal cliff risks are based on theobservations that there already appears to be agreementon not extending certain benefits such as the payroll tax reduction and extended unemployment benefits. Themainpointofcontentionof raisingtaxesonhighnetworthindividualsbacktoClinton-eralevelshasverybroadsupportfromevenRepublicanvoters.Republicancongressmenwillhave to be seen to fight the tax hikes on thewealthy, butlogically,theirpoliticallossesinthelastelectionwerealreadysignificantandtheyarenot likelytofightthe issuefor long. We suspect markets are using the bad debt ceilingnegotiations of 2011 as a basis to be overly concerned about thefiscalceiling,while in fact, thepoliticaldynamics aresignificantlydifferent,andlessrisky.

Nevertheless,itisfairtoassumethattherewillbefiscalausteritytothelevelof1.5%ofGDPin2013.Mostoftheimpactwillbe felt in the firstquarterof2013and themarket reactionto the likely slower environment is not clearly predictable.After a weaker first quarter, subsequent quarters and fullyeargrowtharelikelytobemaintainedatsimilarlevelstothe lastcoupleof years.Webelieve thatcontinuedgrowthwith greater confidence in the fiscal outlook would likelyincreaseinvestors’riskappetitesinthefirstquarterof2013.

Onthispoint,weobservethat theUShousingmarketandconsumer confidence are rebounding. Note that these areimportantdevelopments,astheUSnationalincomeis70%,andhousingisasignificantchunkofhouseholdinvestments.Therefore,astrongMichiganconfidencereadingcombinedwiththepickupinnewhomesaleswilllendaboosttooveralleconomicactivity.

Our estimate is that without the “cliff”, the US economy should grow at a normalised rate of 3%, and the effectsof the“cliff”amount to1percentagepointofGDPgrowth.Therefore, we expect the US to come throughwith a 2%growth,evenwiththefiscalcliff.

Against this backdrop,we seegood reasons for improvedinvestorsentimentgoingintothefirsthalfof2013.Andwhenthathappens,are-ratinginequitiescannotberuledout.

2. europe back from the brink In recent months, the continent has bounced back fromits “break-up” option, as the leaders have shown greaterwillingness to help troubled member states and keep theunion together.Forexample, theEurozonehas launchedanewbondbuyingprogram“OutrightMonetaryTransactions”– a form of quantitative easing which lowers the funding costs of the troubled European sovereigns. Furthermore,plans formore fiscal integrationhavegatheredmomentumastheauthoritiesrecognisethatamonetaryunionwithoutafiscalunion,orevenpolitical integration, isnotviable inthelongrun.

However,whathashelpedtoeasetheriskofabreak-upisthemarginalimprovementineconomicactivity.Forexample,Germany’sPurchasingManagers’Index(PMI)hasreboundedfrom the low of 43 in July to reach 46,while theGermanIFO–BusinessClimate(awidelyobservedearlyindicatorforeconomic development in Germany) ticked up from 100.0in October to 101.4 in November. This is against marketconsensusofadrop to99.5.Meanwhile, IFOexpectationsgrewto95.2from93.2,withexpectationsremainingat93.2andabove.



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Another factor that has helped soften Germany’s hardlinestance is the upcoming election in 2013. We believe thatChancellor Angela Merkel hopes to secure peace on theEuropean crisis front, as she sees this as crucial to herre-election prospects. The economic chaos that wouldcomewithaEurobreak-up isnot likely tobeaconduciveenvironmentforre-elections.

Theclearestofsignsisherwhole-heartedsupportofMarioDraghi, thepresidentof theEuropeanCentralBank (ECB).Merkel is supporting Draghi’s new policy initiative to do“whatever it takes” to save the euro by buying unlimitedquantitiesofItalianandSpanishgovernmentbonds,subjectto those countries having IMF-style economic adjustmentprograms.Andsheisdoingsodespitevociferousoppositionfrom Jens Weidmann, her hand-picked president of theGermanBundesbank,whostronglybelievesthattheECBisintheprocessofleadingEuropedownaninflationarypath.

Yetanothersign thatMerkel iskeen tokeep theEuropeancrisisundercontrolintherun-uptotheGermanelectionsisthemarkedsofteningofherattitudetowardGreece.Earlierin theyear,she took thehard-lineposition that theGreeksneededtofullyliveuptotheircommitmentsundertheIMF-EUbailoutprogramanditwasuptotheGreekswhetherornottheywishedtoremainintheEurozone.

Germany

Source:Bloomberg,November2012

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85

90

95

100

105

110

115

120

30

35

40

45

50

55

60

65

Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

Germany PMIGermany IPO

China shows signs of turning around


70.00%

20.00%

-30.00%

65

60

55

50

45

40

35

Feb-

05

Jun-

05

Oct

-05

Feb-

06

Jun-

06

Oct

-06

Feb-

07

Jun-

07

Oct

-07

Feb-

08

Jun-

08

Oct

-08

Feb-

09

Jun-

09

Oct

-09

Feb-

10

Jun-

10

Oct

-10

Feb-

11

Jun-

11

Oct

-11

Feb-

12

Jun-

12

Oct

-12

China PMIExports growth (Ihs)

Inthatvein,sheruledoutanynotionofGreecebeinggivenmore timetomeet itsbudgetdeficit targetsanddismissedoutofhandanyideaofGermanybeingaskedtoparticipatein a third bailout package for that country. More recently,however, Merkel has vigorously backpedalled on both ofthoseissuesandhasevencalledonAthenstounderlineherchangeofhearttowardskeepingGreeceintheEurozone.

3. China turns around Judgingfromthelatestslateofeconomicnumbers,China’seconomic cycle seems to have turned more positive - asurprisingreversalfrommonthsago.

For example, theheadlinePMI rose0.4percentagepointsinOctoberto50.2–thefirsttimeithasbrokenthe50-marksince July 2012. Furthermore, the key sub-components such as new export orders and new orders indices alsopostedsimilargains.

On the exports front, growth started to pick up to 9% inSeptember – up from 1% two months ago. That growthshould pick up so soon certainly took many by surprise,butit isalsoreflectiveofthegovernment’sreopeningofthetap on liquidity conditions.What is comforting is also thatChina’s economy is still responsive to official intervention,whichmeansthatgovernmentpoliciesstillmatteralotinthiserstwhilecommandeconomy.



uobam.com.sg

Investor demand since 2008


Rally in government bonds

Investment gradecredit rises on riskaversion

Gradual recovery drivesdemand for EM credit

Equities rally?

High yield credit gains popularity

Investors turn todividend yield counters

2008 2008.5 2009 2009.5 2010 2010.5 2011 2011.5 2012 2012.5 2013

However,weseetailrisksbeingmitigatedin2013andthusexpectsomeappetiteforglobalinvestorstostarttoshiftfromgovernmentbonds to takeonmoreequity risk in in2013.Firstofall, themulti-yearfixed incomerallymaybenearingitsend,asinvestorsaregraduallysubstitutingcreditforhighdividendyieldcounterssuchasrealestateinvestmenttrusts.This isnotsurprising too,given that thecreditspreadsarenow trading at record lows. Therefore, the upside in fixedincome-typeinstrumentsappearslimited.

Anotherclearpatternisthatinvestorshavemoveddownthecreditqualitycurve,aswecanseefromthetimelineabove.Since 2008, the capital flow has shifted from governmentbondsto investmentgradecredits,andthen intoemergingmarkets bonds, high yield bonds and now to dividendyield counters. Given the stabilisation in the global macroenvironment,webelievethatthenextstageofcapitalflowislikelytobeintoequitymarkets.

5. equity valuations still attractive while risk is low Besidestheimprovedmacroenvironment,wenotethatAsianstockvaluationsareattractiveonacomparativebasis.Oneofthemeasuresthatwelookatisthegapbetweenequityyieldandbondyield.Ifthegapiswide,itmaytriggerasubstitutionoutofsafehavenbondsintohigherriskstocks.Theconverseisalsotrue.

Onthepolicyfront,wedonotexpectanysignificantchangesineconomicpolicyintheshortterm.Theslowdownin2012hasnotledtomassivejoblosses–animportantconsiderationin policy making, and therefore, there should not be newsurprises. Although China has completed its handover attherecentCongressMeeting, it takessixmonthsor longerforthenewleadershiptoeffectivelytakeoverandcontrolallthegovernmentbodies,andmoretimeisneededtorolloutimportantnewmeasures.

Longer term, we are still optimistic on China’s economicprospects,butalsoseevariouschallenges for thecountry.Some of these include the need for greater productivitygains,andtherisingtaxburdensontheworkingclassasthepopulationages.OtherissuesinvolvetheliberalisationoftheservicessectorsandtherebalancingoftheChineseeconomy– issuesthatwillhavetobeworkedout if thecountry istomaketheleapintothedevelopedranks.

4. upside in government bonds appears limited Since2010,thecreditmarketshavehadagoodrun.Today,Asiancreditspreadsarehoveringatrecordlows,butthishasnotdeterredmanyinvestorsfromsnappingupnewemergingmarketscreditissues(sometimesevenunratedones).Tous,thetremendousappetiteforfixedincomeinstrumentsreflectshighriskaversionprevalentamonginvestors.

This is so given that equities are now trading at a recordriskpremiumofmorethan6%–signaling“buy”ifhistoryisanyguide.However, tail risks in theworldhavekeptmanyinvestorscautiousandcentralbankpolicieshavelettosub2%yieldsinmostgovernmentandhighgradeinstruments.



uobam.com.sg

Meanwhile,wenotethattheglobalfinancialstresslevelisstillsupportiveofa risk-onstance.Ourfinancialstress index is still in negative territory, suggesting that risk is still on thedecline.Theindex–acompositeofEuribor(EuroInterbankOffered Rate), LIBOR-OIS (overnight indexed swap rate)and VIX (a measure of the implied volatility of S&P 500 indexoptions) amongother things, gives a scorebetweenminusoneandone.Ifthescoreisnegative,itsuggeststhatstress is falling, while a score above zero means that thefinancialstresslevelisrising.

Onthisnote,weobservethattheyieldgapisnowat7.43%–ahighbyhistoricalstandards.Althoughlowvaluationsarehardly a catalyst for short-term performance (unless theyareatextreme levels), the fact that investor riskappetite isgraduallyrecoveringmeansthatare-ratinginstocksmaynotbefaroff.

Equity yield gap at historical high


Global financial stress level still benign


Dec-95

-1

-0.5

0

0.5

1Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11

700

600

500

400

300

200

100

MSCI AxJStress Index

Jun-

96

Jun-

97

Jun-

98

Jun-

99

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Jun-

01

Jun-

02

Jun-

03

Jun-

04

Jun-

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Jun-

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09

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0

4

8

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16 12

8

4

0

-4

Equity Yield Bond YieldGap

Typically,Asianstockstendtorallywhenstressisfalling,andselloffwhenstressisrisingatafasterpace.Giventherecentnegative scores, it appears that the likelihood of amarketblow-upislowifhistoryisanyguide.

6. assessmentIn summary, the global economic backdrop has stabilised,asthesituationintheUSandEuropeimprove.Forexample,we believe theUSwill address its fiscal cliff issue at leastbyJanuary,while theECBstands ready“todowhatever ittakes”tosupporttheeurocurrency.TheChineseeconomyalso appears to have turned the corner as exports andmanufacturingordersrecover.

Inaddition,governmentbondyieldshavehitextremely lowlevelsand theupsideappearsvery limited fromhere.Also,the credit rally has already driven spreads to record lows,andthepotentialoffurtherupsideislimitedatthisstage.Thetight credit spreads have coincidedwith a high equity riskpremium,whichmakesastrongcaseforreallocatingcapitaltowardsequitiesinstead.

Against this backdrop, we recommend an overweight in equities, on increased stability on the global macro front.Meanwhile, valuations appear attractive, and this presents an attractive risk-reward proposition for equity investors.Within equities, we prefer US, Asia and Latin America.Countries that we are cautious on include Europe, Japan,AustraliaandCanada.

Within fixed income, we favour corporate credits overgovernment bonds. Emerging markets credits are stillpreferredoverdevelopedmarketbonds.

Amongthecommodities,westill likegoldforreasonssuchas negative interest rate and continued fears on the US fiscal cliff situation. We are also neutral on base metals andenergy.



uobam.com.sg

GLOBALEQUITYSTRATEGY

10

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Weraiseourequitiespositiontoanoverweight.

Theglobalmacroclimatehasstabilised.FearsoftheUnitedStates(US)goingoverthefiscalcliffhavereceded,andthere is hope that both political camps in the US are making progresstowardsadeal.TheRepublicansareawarethattheUSelectorateisnotinfavourofapoliticalshowdownovertheUSfiscalsituation.

Meanwhile, there is greater stability in Europe, asGermanChancellor AngelaMerkel softened her stance onGreece,while theEuropeanCentralBank (ECB)hassteppedup tosupport the bond markets. Elsewhere, there are signs of green shoots in China, and fears over its hard landingappeared to be overdone. Therefore, the overall macrobackdrophasturnedmorepositive.

The us economy is showing signs of improvement. Thisis especially the case for household consumption andinvestments. The US housing market is clearly improving,as seen from the builders’ confidence surveys. Also, theMichiganConfidencehashitarecordhigh inoverayear–ingredientsthatsupporttheconsumerstory.Theweaknessin the US is partly found in the corporate sector, wherecompanycapitalspendingplansareheldbackpartlyduetofearsovertheUSfiscalcliff.IfwebelievethattheUSwillnotgooverafiscalcliff,thentherecouldbesomeimprovementinthisareaaswell.

equities Overview

equities

asset allocation 1q13Policy

uObam weight (%)


change from 4q 2012

us Overweight 51.5 46.3 ↓europe Underweight 18.0 24.3 =

asia ex-Japan Overweight 11.5 9.6 ↑Japan Underweight 6.0 7.2 =

canada Underweight 3.0 4.3 =

australia Underweight 2.0 3.3 =

latin america Overweight 6.5 2.6 =

emea* Underweight 1.5 2.2 =

*EMEA-Europe,MiddleEastandAfrica

Ineurope, bond yields have stabilised, and the ECB hassteppedinwithitsownversionofquantitativeeasing.TheneteffectisthatthefearfactoronEurope’sequityandcurrencymarketshascomeoff.AkeyeventthatwillkeepthestabilitygoingforawhileistheGermanelection.MerkelclearlywantstoseepeaceontheEuropeanfrontsothatshecanbetterhandletheGermanelectorate.

In Japan, the economy is still fragile. Still, there are somepositives.Forexample,itsmanufacturingPurchasingManagers’Index(PMI)appearstobebottomingoutandthegovernmentisexpectingindustrialproductiontorecoverinDecember2012.Furthermore, the earnings revision momentum has troughed,and an LDP (Liberal Democratic Party) victory in the electioncouldmeanmorequantitativeeasingandaweakeryen.ThesefactorsarepositiveforJapanequitiesandcorporateearnings. We continue to be overweight inasia ex Japan, as theregion isexpectedtofarebetterthanthedevelopedworld.However, we note that the growth backdrop looks weak,andthecorporatemarginsarestartingtoerode.Thatsaid,valuationsaresupportive,andwestillliketheopportunitiesintheconsumersector.

Wecontinuetolikelatin americaasitslongtermstructuralgrowth story remains intact. This is partly underpinned bydomesticdemandandexpansioninhouseholdborrowings.Inaddition,thecentralbankshavecutratestocushiontheeconomyfromanyexternalslowdown.



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The US markets have stayed resilient on hopes that the fiscalcliffsituationwillbeavoided. Inaddition, themarketsalso turned less bearish on the risks of a decelerating ChinesemarketandthematerialworseningoftheEuropeansovereigncrisis.

However,theUSeconomyappearstobeatastandstillamidthis key overhang of the fiscal cliff. If history is any guide,thereisachancethatanyresolutionwillnothappenuntillateDecember2012at theearliest.Twoyearsago, thedebateover a two-year extension to the 2001/2003Bush income tax cuts was not resolved until 17 December 2010. Lastyear’sdecision toextendpayroll taxcutswasnot finaliseduntil 23 December 2011. Last year S&P 500 fell by 17%in twoweeksas theUSdebtceilingdeadlineapproached.Therefore,wecouldseearepeatof themarketvolatilityasthefiscalcliffdebatedragson.

uS

sector Positioning

sectOr 1q13 Policy

uObam Weight (%)

benchmark Weight (%)

change from 4q12 tOP PIcks

ConsumerDiscretionary Neutral 12.5 12.2 ↑ HomeDepot

ConsumerStaples Neutral 11.0 10.9 = Colgate-Palmolive

Energy Neutral 11.0 11.0 = ExxonMobil

Financials Overweight 16.5 14.9 ↑ Visa

Healthcare Overweight 12.5 12.0 = GileadSciences

Industrials Neutral 10.0 9.9 ↑ Eaton

Materials Neutral 3.5 3.5 ↓ FreeportMcMoran

Technology Underweight 18.5 19.2 ↓ Qualcomm

Telecommunication Neutral 3.0 3.1 = DirectTV

Utilities Underweight 1.5 3.3 ↓ SouthernCompany

Benchmark:MSCIUSA

Meanwhile,theuncertaintyoverthespecificsoftheoutcomehasaffectedtheoperatingenvironmentforbusinesses.GDPgrowthissluggishandbusinessspendinghasfallensharply.While consumptionwas stronger earlier in 2012, there aresignsthatthemomentumistaperingoff.Itiswellevidencedthat the only bright spot is in housing and its relatedactivities.Consequently,employment,lendingandconsumerconfidenceassociatedwithhousingissupportive.



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UnderlyinggrowthfortheS&P500companiesisalsoweak.Weexpect2013S&P500earningsofUS$107,representinga 4% earnings per share (EPS) growth over 2012. Theestimatereflectsthefairlystable2012GDPgrowthforecastsofbetween2-2.5%,increasinglyfavourablecyclicaltailwindsfrom a stabilising housing and lending market - offset byheadwinds from a financially weak Europe. Based on theEPSestimate,ourdiscountmodelestimatesaS&P500fairvalue of 1476, or a 5% upside from here. Relative to lastquarter,wehaveshavedthetwo-yearaheadgrowthbyonepercentagepointto4%andourlongertermgrowthbyhalfapercentagepointto3%.Themodelcontinuestoassume(a)a6.3%equityriskpremium,whichisslightly lessthana50%premiumtothelongtermaverageof4.5%,aswellas(b)ariskfreerateof3.9%,whichinturnisbasedona10yearaverageofthe10-yearTreasurybond.

The upside risk to our valuation target lies in the discountrate.Giventhecurrentenvironmentthatissensitivetomacroeconomicandpoliticalrisks,valuationisextremelysensitivetoacontracting riskpremium.Forexample,adecreaseofequityriskpremiumby1%increasesthefairvaluebyabout12%.Translatingthistomultiplevaluations,atargetof1476impliesa13.5x2013P/E.Barringameltdowninthefinancialmarkets, this valuation is attractive given the potential forfurther upward earnings revisions and growth aswe headintotheyearend.

Consumer confidence vs Business confidence Retails Sales vs Nondef Cap Goods (y/y %)

Source:Bloomberg,November2012 Source:Bloomberg,November2012

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Meanwhile, market volatility has presented buyingopportunities for stocks thatwe like.One of our preferredthemes concerns the growing Hispanic population. Some20yearsago, the immigration laws in theUSwererelaxedandthatbroughtawaveofHispanicsmigrationto theUS.Now the children of these immigrants, or the native-bornHispanics, are entering the workforce. Today, almost onein sixAmericans isHispanic, and this ratiowill continue toriseevenas immigrationslows.TheHispanicpopulation isexpectedtoincreaseby32%overthenext10yearsto19%ofthepopulation,upfromanestimated49.3mnand15.9%in2010.Basedonthistrend,welike“DoItYourself”-orientedretailerssuchashomeimprovementandautopartretailers(e.g. Home Depot, Lowes, Autozone) that should benefitfromtherapidgrowthofthisdemographicgroup.

The average Hispanic household income of less thanUS$40,000alsomakesthegrouppartofthenaturaltargetmarketofthe“dollar”storesorthesmallboxvalueretailstores(e.g.DollarGeneral,DollarTreeandFamilyDollarStores).AsCaliforniaaccountsfor28%ofthetotalHispanicpopulationandtheseretailersarerelativelyunderpenetratedinthisstate,thereareamplegrowthopportunitiesforthesecompanies.

Beveragecompanieswithwide innovativeofferingsrangingfrom the spirits, wine, aperitifs, and tequilas to flavoredsodas (e.g.Diageo,Campari) areknown tohavebenefitedastheyoungergenerationoftheHispanicpopulationenjoyexperimentingandareopentodifferenttastes.

CEO Business confidence: Conference boardsConference Board Consumer Confidence (rhs)

Retail Sales & Food Service y/y (%)Mfrs’ New Ords: Nondef Cap Goods y/y % (rhs)



uobam.com.sg

We keep our underweight on European stock markets.Although the authorities have made progress in reducingtheriskofaEurozonebreak-up, the improvementsaretoomarginal to indicate a significant reduction in damagingextremeevents.Forexample,thenewly-approvedEuropeanStability Mechanism (ESM) will help support a country’snew sovereign debt, and the ECB’s Outright MonetaryTransactions(OMT)programwillbuybondsinthesecondarymarket.TheESMcanalsobeusedtorefinanceaparticularcountry’sbankingsystem,potentiallybreaking thenegativelink between a country’s domestic banking system andnational debt-to-GDP levels. However, both programsrequire thatacountry formally requests forassistance,hasitsnationalfinancesevaluated,andthenagreestoimplementchangestoitsfiscalandspendingprograms.Thedangeristhattroubledcountrieswilldelaytheirapplication,until theyneed significantly larger bailouts from the ECB and otherinstitutions.

euROPe

sector Positioning

sectOr 1q13 Policy

uObam Weight (%)



ConsumerDiscretionary Neutral 9.0 9.0 = WPPGroup

ConsumerStaples Overweight 16.0 14.9 ↓ HenkelAG

Energy Overweight 11.5 10.8 ↓ TullowOil

Financials Underweight 16.0 20.2 ↑ HSBCHoldings

Healthcare Overweight 13.0 12.0 = ColoplastA/S

Industrials Neutral 11.0 11.1 ↓ AssaAbloy

Materials Neutral 9.0 9.4 = RioTinto

Technology Overweight 5.0 3.0 = DialogSemiconductor

Telecommunication Overweight 6.0 5.5 ↓ MillicomInternationalCellular

Utilities Underweight 3.5 4.1 = UnitedUtilitiesGroup

Benchmark:MSCIEurope

While progress has been made on the policy front,underlying economic data continues to disappoint inboth periphery and core countries. The PMI data hoveredat the 46 level, pointing to economic contraction. TheEurozone unemployment level of 11.7% for October 2012 marks a 17-year high. Bank lending has turned negative,with the latestsurveyofbankingofficersshowinga continued tightening of lending standards. It appearsincreasinglylikelythatthiscycleofnegativenewswillcontinueinto2013.Forexample, inearlyDecember2012, theECBforecast that Eurozone GDP would contract by 0.3% in 2013,amarkedreductionfromitsforecastof0.5%growthmadeonlythreemonthsearlier.



uobam.com.sg

Unsurprisingly, this poor macroeconomic environment hasimpacted the performance of European companies.Weakeconomicactivitycontinuestolimitrevenuegrowthandputpressure on operating margins. The downward pressureon operating margins was clearly evident in third quarterresults, with aggregate margins now approximately 200 basispoints(bps) lowerthanatthestartof2012.Overthepast quarter, sell-side analysts have steadily downgradedboth 2012 and 2013 earnings forecasts, and we expectcontinuingdowngradesof 2013earningsprospects aswemove into2013.ThismeansthatEuropeanequitymarketsare likely to remain under pressure, even assuming thatsovereigndebtmarketsarestabilised.

The challenging environment for earnings means that weare sticking with our defensive investment approach. Wewillcontinuetofocusongoodvaluecompanies(highROEs,consistentgrowth),companieswithahighdegreeofexportsales,andcompaniesthathaveahigh,sustainabledividendyield.We note that stabilisation of theEuropean sovereignbond market and banking sectors is most likely to beachievedthroughmonetarystimulusand lowinterestrates.Under such a scenario, cyclical sectors such as energy,capitalgoodsandminingshouldbenefit.

Intermsofsectorallocation,weareoverweighttheconsumerstaples,energy,healthcare,telecomsandtechnologysectors.Weareunderweight the financials andutilities sectors.Weare neutral on the consumer discretionary, basic materialsandindustrialssectors.

Ourgreatestoverweightremainsthetechnologysector.Wearepositionedforthedefensivequalitiesofnicheenterprisesoftware, and are avoiding commoditised componentsuppliers.Theconsumerstaplesandhealthcaresectorsaretraditionally defensive sectors which offer global exposureand can also provide solid dividend payments. Certaincompanieswithintheenergyandtelecomssectorsnowlookinexpensiverelativetohistoricalvaluations,andalsoprovideattractivedividendyields.

The main underweight remains the financials sector.European banks are still restructuring to reduce their previous over-reliance on wholesale funding. While theimprovement in the sovereign bond market has helpedbalancesheets,webelievefallingGDPforecastsstillhintat an overall deterioration in asset quality. We remain underweightintheutilitiessectorduetogenerallyhighdebtlevels and the risk that government-appointed regulators maylimitfuturetariffrates.



uobam.com.sg

EconomicindicatorsinAsiaarepointingtosomestabilisationand improvement in the outlook, with recent data out ofChinainparticularlookingencouraging.However,thegrowthoutlookinAsiacontinuestobeinfluencedbydevelopmentsin the developed markets of Europe and the US wherethere remain uncertainties. The economic environment forAsiain2013willlikelybeoneofslowergrowth.Againstthisbackdrop,ourstrategyistofocusonstructuralopportunitiesandcompaniesthatgeneratestrongcashflowsandpayoutsustainablehighdividends.

Withcurrentlowgovernmentbondyields,thedividendyieldspread of Asian equities is attractive, particularly in HongKong, Singapore and Taiwan. We focus on total returnswheredividendsplayanimportantpartinourstockselection.A structural trend we hope to capitalise on is the risingincomesintheregion,whichcontinuetodriveopportunitiesintheconsumerspace.Ourcurrentpositionistomaintainadefensive stance, andasalways,we focusonhighqualitygrowth stocks. We are overweight the defensive growthsectorsofconsumer,utilitiesandtelecomandunderweightthe cyclical materials, energy, industrials and financialssectors.

aSIa eX-JaPaN

sector Positioning

sectOr 1q13 Policy

uObam Weight (%)



ConsumerDiscretionary Overweight 13.5 9.4 = GalaxyEntertainment

ConsumerStaples Overweight 9.5 5.6 = ITC

Energy Underweight 5.0 7.1 = CNOOC

Financials Underweight 22.5 24.6 ↑ ChinaLife

Real Estate Underweight 6.0 7.4 = CheungKong

Healthcare Overweight 2.0 1.0 = Celltrion

Industrials Underweight 9.0 9.3 = HyundaiE&C

Materials Underweight 2.5 6.7 ↓ LGChemical

Technology Underweight 18.0 18.5 = AACTech

Telecommunication Overweight 7.5 6.5 = ChinaMobile

Utilities Overweight 4.5 3.8 = GailIndia

Benchmark:MSCIACAsiaex-Japan

ThestructuraloutlookinAsiaremainsfavourablewithAsianeconomies in relativelygoodshape.Externaldebt isbelow20%ofGDP,downfromahighof35%intheaftermathofthe1997Asianfinancialcrisis (AFC).Asiancorporatesarenowmoredisciplinedwith lowernetdebttoequityof25%fromabout50%adecadeago,andloantodepositratioisnowahealthy76%fromalmost100%aftertheAFC.

Valuations are attractivewith the region now trading close to one standard deviation below mean levels both on forward price-to-earnings and price-to-book measures.Historically, Asian equities have tended to trade up to at least mean levels at such valuation points. Earningsexpectations for 2013 have now moderated considerably,leavingroomforupsidesurprises.



uobam.com.sg

We see structural opportunities in the consumer sectorwhere themiddle class population growth in Asia will fuelmass market consumption. Asia ex-Japan’s population in themiddleclassissettoincreasefrom570millionin2010to 1 billion by 2015. Penetration rates are low for almost allproduct segments ranging from autos and personal careproducts to food products currently and there are plentyof opportunities for growth. The relative under-penetrationof modern trade channels such as department stores,convenience stores and supermarkets also represents ahuge investment opportunity. As economies grow moreaffluent,consumerswillvaluetheconvenienceandcomfortofferedbysuchmodernretailtradechannels.

Inthetechnologysector,weexpecttrendsinsmartphonestobethedriverofdemand.Smartphonesalesareexpectedtoremainstrongoverthenext2to3yearswiththeiradoptionsurpassing traditional featurephones in2013.Smartphoneshipment is estimated to reach 860 million units in FY13,driven by the rising popularity of low-end smartphones inemerging markets. Even as the branded Samsung andApplesmartphonesleadintermsofmarketshare,theChinawhitebox/non-brandedsectorisemergingasanewgrowtharea,drivenbymobileoperators’initiatives.



uobam.com.sg

Political change and monetary easing will be the keythemesdrivingJapan’sequitymarketin2013.Atthetimeof writing (first week of December), initial polls pointedtoastrongprobabilitythattheLiberalDemocraticParty(LDP) would win the 16 December 2012 elections, andthatthenewgovernmentwouldexertmorepressureontheBankofJapan (BoJ) to implement furthermonetaryeasing. LDP leader Abe Shinzo has discussed plansfor unlimited easing, hiking the inflation target from 1%to 2-3%, negative interest rates and even rewriting theBoJLawifnecessary.ThishasliftedsentimentandalsocausedtheyentoweakenagainsttheUSDollarrecently.Ingeneral,aweakeryenwillimprovethecompetitivenessofJapaneseexporters,andboostcorporateearnings.

JaPaN

sector Positioning

sectOr 1q13 Policy

uObam Weight (%)



ConsumerDiscretionary Overweight 21.0 19.8 ↑ Nissan

ConsumerStaples Overweight 8.5 6.6 ↓ Sundrug

Energy Neutral 1.5 1.5 ↓ Inpex

Financials Neutral 14.0 14.2 = BankofYokohama

Real Estate Neutral 4.5 4.6 = MitsubishiEstate

Healthcare Neutral 6.5 7.0 ↓ SawaiPharmaceutical

Industrials Neutral 20.5 20.4 ↑ Fanuc

Materials Underweight 5.0 6.8 ↓ JSR

Technology Neutral 11.5 11.6 = Hitachi

Telecommunication Neutral 4.5 4.6 ↓ NTTDoCoMo

Utilities Underweight 2.5 3.0 = TokyoGas

Benchmark:MSCIJapan

While we take a positive view on Abe’s commitmentto fight deflation, we think it is too early to expectradical changes. To start with, it is important that theLDP wins an absolute majority in the elections by forming an alliancewith the New Komeito government.This would determine its ability to pressure the BoJ toeffect aggressive monetary policy and to appoint newcandidatesas thenextgovernoranddeputygovernors.Thereisalsotheriskthatmonetarypoliciesalone,withoutstructuralreforms,willnotbeenoughtorevivetheJapaneconomy.

OurbasecaseassumptionisthatanLDP-NewKomeito-led coalition will be formed after the election, and thegovernment is likely to implementaccommodative fiscaland monetary policies. While it is not clear if the BoJLawwillbechanged,theBoJmayextendthepurchasematurity of Japanese government bonds (JGBs), whichcouldhelptoweakentheyentosomeextent.Aweakeryen, accompanied by any improvement in economicgrowthandearnings revisionmomentum, ispositive forJapanequities.



uobam.com.sg

Ontheeconomy,Japanhasenteredatechnicalrecessionfor twoconsecutivequarters since2Q12.However, realGDPgrowthmaybegin to turnpositive asearly as4Q,helpedbyagradualrecoveryinconsumptionandexports.Japan’s earnings revision momentum is also showingsigns of bottoming out, and may begin to improve onany sustained yen weakness. Furthermore, valuationsfor Japan equities are supportive.At the current TOPIXlevel of 790, the market’s price-to-book of 0.9 is onlymarginally higher than the low of 0.8 in March 2009duringthedepthsoftheGlobalFinancialCrisis.

Wehaveraisedourexposuretoweakyenbeneficiariesbyraisingourweightingsintheautomobilesandindustrialssectors to neutral.We think valuations for both sectorshave fallen to more attractive levels, and the earningsrevisionmomentumhas also troughed.We refrain frombeingmorebullishatthispointuntilweseeaneasingofexternalriskssuchastheUS“fiscalcliff”, theEuropeancrisis,andChina-Japantensions.

We are overweight consumer staples and consumerdiscretionary, neutral industrials, financials, tele-communication,energy,andtechnologyandunderweightmaterialsandutilities.Wewould remainhighlyselectiveand targetcompanieswithbetterearningsvisibilityandrelativelyhealthybalancesheets.



uobam.com.sg

We continue to underweight the Canadian equity marketgiven our preference for investing in a sustainable NorthAmerican economic recovery through the more broadly-basedUSequitymarket.CanadareliesontheUSeconomyfor export growth, which means that the outcome of thefiscalcliff negotiationsand theongoing recoveryof theUShousingmarket are important indirect drivers forCanadianGDPgrowth.

Improved affordability and reduced housing inventoriescurrentlypointtoasustainedrecoveryinUShousingactivityin 2013. This should boost US economic growth, due toimprovedconsumerconfidenceandincreasedemploymentinthehousingsector.Incontrast,theCanadianhousingmarketis lookingmore anemic, andCanada’s domestic economywillbechallengedbyweakerhousingactivityin2013.ThisisaleadingreasonastowhyCanadianGDPgrowthin2013isexpectedtolagtheUSforthesecondconsecutiveyear.

Offsetting relative domestic weakness, Canadian resourcecompanies could benefit from positivemomentum in boththeUSandChineseeconomies.WenotedthattheOECD’sleadingeconomic indicators (LEI) havemoved intopositiveterritory, and this typically indicates stronger global GDP

CaNaDa

sector Positioning

sectOr 1q13 Policy

uObam Weight (%)



ConsumerDiscretionary Overweight 7.0 3.6 = TimHortons

ConsumerStaples Underweight 0.0 3.3 = -

Energy Overweight 28.0 26.3 = PacificRubialesEnergy

Financials Underweight 31.5 34.4 = BankofNovaScotia

Healthcare Underweight 0.0 2.1 = -

Industrials Overweight 8.5 6.0 ↑ KansasCitySouthern

Materials Overweight 25.0 18.8 = AgnicoEagle

Technology Underweight 0.0 1.1 = -

Telecommunication Underweight 0.0 3.2 = -

Utilities Underweight 0.0 1.1 ↓ -

Benchmark:MSCICanada

growthapproximately twoquartersahead. InChina, recentPMIdatasuggeststhatthedomesticeconomyhasstartedto expand. Following a disappointing 2012, China GDPshouldreboundin2013.Commodity-relatedsectorsshouldbe supportedby the strongerChinesemomentum, even if muted European demand is likely to limit overall globalrecoveryandrestraincommoditypricegains.

Fromasectorperspective,ourglobalmacroeconomicviewmeansthatwemaintainouroverweightpositionsintheenergyand basic materials sectors, as well as our underweightposition in banks. Although the restriction of state-ownedacquisitions in the energy space may limit potential M&Apremiums, Canadian energy companies still offer goodproduction growth through domestic and internationalexploration.Thebasicmaterialsspaceoffersabroadrangeof commodity exposure, generally low production costsand a safe mining jurisdiction. Probable weakness in theCanadianhousingmarketmeansthatthefinancialsectorwillbevulnerabletonegativenews-flow,andthesectorislikelytoseelimitedearningsgrowthandvaluationexpansion.



uobam.com.sg

TheAustralianeconomyisexpectedtoseeGDPgrowthof2.5%-3%withthecompositionofgrowthshiftingawayfrommining investment and engineering construction, towardsbroader consumption and interest rate-sensitive demandsectors.

Given the likelycontraction in fiscalpolicy,monetarypolicywillberequiredtosupporteconomicgrowthover2013.TheReserveBankofAustraliaisexpectedtocontinueitseasingbias,withthenextratecutexpectedinFebruary/March2013.

Householdsentimentcouldremainweakduetojobinsecurity,decliningwealth and rising costs.We expect discretionaryconsumptionandhousingtoremainsoft.

Commodity price stabilizationwill be important tomarkinga trough inmaterials andcapital goods earnings.Strengthin the AUD will also be a key factor for the general marketearnings.

Valuations for the core Australian market (ex resourcesand banks) are not particularly cheap, with forward PERtradingaroundhistoricalaverageofabout15X.Includingtheresourcesandfinancialssectors,themarkettradesinexcessof13XforwardPER,whichisapremiumtohistoricalaverageandregionalpeers.

auSTRaLIa

sector Positioning

sectOr 1q13 Policy

uObam Weight (%)



ConsumerDiscretionary Underweight - 1.6 = -

ConsumerStaples Overweight 11.5 9.1 = Woolworths

Energy Overweight 9.0 6.1 ↑ Oilsearch

Financials Underweight 44.0 48.4 ↓ ANZ

Healthcare Overweight 7.5 4.0 ↑ CSL

Industrials Underweight - 4.6 ↓ -

Materials Neutral 22.5 22.5 ↑ BHPBilliton

Telecommunication Overweight 5.5 2.4 ↓ Telstra

Utilities Underweight - 1.4 = -

Benchmark:MSCIAustralia

Nevertheless,giventhatAustraliancompaniesgenerallyofferamong thehighestyields inkeysectors, thechase foryieldamong global investors should lend support to share priceperformance.

Overall,wepreferdefensiveyieldexposure,suchasenergyand healthcare.We remain cautious on domestic cyclicalsas households continue to deleverage, unemployment isexpected to riseandconfidence remains low.At thesametime, we attempt to leverage on yield compression playsthroughhighqualitybanks,REITsandconsumerstaples,onexpectationoffurtherratecuts.

On thewhole,wemaintainour cautious stancebut intendtoaddmodestcyclicalbiasopportunistically.Thematerialssector remains captive to uncertainty surrounding China,andanyshifttopro-stimuluspolicieswilldefinitelyboostthesector.There is some renewedoptimism inChinawith themost recent November PMI rising above the 50 thresholdexpansionlevel,suggestingthattheChineseeconomymayhavebottomed,atleastinthenearterm.

We are overweight consumer staples, healthcare, energyandtelecommunicationsectors,andunderweightconsumerdiscretionary,financials,industrialsandutilities.



uobam.com.sg

WeremainpositiveontheLatinAmerica(Latam)marketsasweviewtheseculargrowthstorytobeintactandcorporateearnings to remain resilient. Our strategy is to adopt adefensivepositioningwithindomesticplays.

The2013GDPforecastforLatamisabout4.0%,marginallylowerthanpreviousexpectations.WhilegrowthinBrazilandColumbiaisexpectedtodecline,MexicoandChilecontinueto show strength within the region. Inflationary pressuresaremoderatingacrossmostoftheLatammarkets,withtheexceptionofBrazil.Employmentcontinuestobeverystrongwith low unemployment rates and the increasing workingpopulation,givingrisetostrongrealwageandincomegrowthintheregion.Thisbodeswellforthedomesticconsumptionstory.Thecentralbankshaveindicatedthattherate-cutcycleiscompleteandwewouldexpecttheeconomiestorespondaccordinglyinthecomingmonths.

LaTIN aMeRICa

sector Positioning

sectOr 1q13 Policy

uObam Weight (%)



ConsumerDiscretionary Overweight 12.0 5.0 = CiaHering

ConsumerStaples Underweight 13.0 17.6 = Ambev

Energy Underweight 8.0 12.8 = PacificRubiales

Financials Overweight 25.5 23.3 = Itau

Healthcare Underweight 0.0 0.6 = -

Industrials Overweight 9.0 4.7 ↓ MarcoPolo

Materials Underweight 16.5 20.4 = SQM‘B’

Technology Underweight 0.0 1.3 = -

Telecommunication Overweight 9.0 8.3 ↑ AmericaMovil

Utilities Overweight 7.0 6.1 ↑ AGUAS 'A'

Benchmark:MSCILatinAmerica

Latam equities are currently fairly valued in our view, withthe market trading at 11.6x consensus forward price-to-earnings, a14%premiumagainst thehistorical averageof10.2x. Earnings remain resilient, though there have beensomedownwardrevisionsinthelastquarterof2012.

The key risks are inflation, political instability and a globaleconomic downturn. Recent data has shown inflationarypressurespickingup inBrazil, thoughstillwayoff fromtheprevious peaks. We continue to expect the tight labourmarketandwageinflationtobeanissue.

We view that the long term structural growth story of theLatameconomiesremainsintact,underpinnedbythestrongdomestic demand and underleveraged population. Ourstrategy is to add on dips with a preference for domesticcyclicalsectors.Weareoverweightthefinancials,industrialsand consumer discretionary sectors and underweight theconsumerstaples,energyandmaterialssectors.



uobam.com.sg

ThegrowthoutlookinChinahasimprovedfollowingapick-up inactivitydatastarting fromSeptember2012.PreviousfearsofahardlandinginChinahaveeasedandfullyear2012growth is likely to come in above the government’s targetof7.5%.Infrastructurespendinghasseenare-acceleration,while property sales have picked up since 2012’sChineseNew Year. This has finally filtered through to a pick-up in realestateinvestment,constructionactivityandretailsales.Theeconomicrecoveryislikelytocarrythroughin2013asseen from lead indicatorsandthe improvingmomentumofcurrent indicators.Weexpectmoderatefiscalstimulus,butmonetarypolicywilllikelybekeptonhold.

TheChina economy still facesmany structural headwinds.There is plenty of overcapacity - in the steel industry, landsupplyinthirdtiercities,andwastedbuildingspace.Labourinput and material costs have also been rising and staystickydespiteweakerend-marketdemand,especially fromoverseas.Thishas led tomorevolatilecorporateearnings,

CHINa

sector Positioning

sectOr 1q13 Policy

uObam Weight (%)



ConsumerDiscretionary Overweight 8.0 5.4 = HaierElectronics

ConsumerStaples Underweight 5.0 5.6 ↓ HenganInternational

Energy Underweight 15.5 17.5 ↑ ChinaOilfieldServices

Financials Underweight 25.0 31.8 = ChinaLifeInsurance

Real Estate Underweight 5.5 6.3 ↓ ChinaResourcesLand

Healthcare Overweight 1.5 0.9 ↑ Sinopharm

Industrials Overweight 8.0 6.3 ↑ CSRCorp

Materials Neutral 5.0 4.5 ↑ ZhaojinMining

Technology Overweight 9.0 6.3 = AACTechnologies

Telecommunication Neutral 12.5 12.6 ↓ ChinaMobile

Utilities Overweight 5.0 2.8 ↓ KunlunEnergy

Benchmark:MSCIChina

andcorporateprofitmarginshavebeenonadecliningtrend.Theoverhangofthegovernmentstimulusspendingspreeinresponse to theglobalfinancialcrisishas left theeconomyand financial system more vulnerable. For example, localgovernments are highly indebted and banks’ official non-performingloansarelikelytorisesignificantlyiftheeconomyslowsdown.

China’s leadership transition has proceeded smoothly withthe successful completion of the 18th Party Congressin November 2012. In view of China’s various structuralchallenges, thegovernmenthas topursuereformsthatwillimprove the structure and competiveness of the economyand the corporate sector. These include improving incomedistributionandsocialwelfare, and thehotbutton issueofstate-owned enterprise (SOE) reform, and developing theprivatesector.Webelievethekeyforasustainablere-ratingof the China market is the new leaders’ willingness andsuccessinimplementingsuchreforms.

SPeCIaLIST eQuITY STRaTeGY



uobam.com.sg

ValuationsinChinaarestillattractive,closetoonestandarddeviationbelowits12-yearmeanonprice-to-earnings,andinthecaseofprice-to-book,closetolevelsduringtheGlobalFinancial crisis.After havingunderperformed the region forseveral years, we believe there is a good chance for themarket to reratenow,as twomajoroverhangs-economichardlandingandleadershiptransitionconcerns-subside.

Against a backdrop of slower growth, we will focus onstructural opportunities and companies that have solidbalance sheets and generate strong cash flows. Risingincomes intheregioncontinuetodriveopportunities intheconsumerspace.WithinChina,areboundinselectedareasof infrastructurespendingwillgiveaboost to the industrialandmaterialssectors.Wealsotargetinvestmentsincertainstrategic sectors that are the focus of China’s strategic12th five-year plan, such as environment protection, cleanenergyandhighendmanufacturing.Hence,welikethegasutilities and railway equipment manufacturers. We remainunderweight the banks which face continued net interestmarginpressure,capitalconstraintsand lingeringstructuralissues of non performing loans. We are also underweightexpensivedefensivessuchasconsumerstaplesandenergygivenstructuralheadwindsincoal,preferringtheupstreamoilandoilservicessectorsinstead.

In the long term,Chinacontinues tobesupportedbyhighsavingsandwagegains,whichprovideanattractivebackdropfor consumption growth. Rising purchasing power of themiddle and lower income population is a very supportivebackdropforinvestors.WhenChinagetsthroughthecurrentnecessary painful transition and rebalances its economytowards a more sustainable growth path, these positivefundamentalsshouldreassert themselvesandreward long-terminvestors.



uobam.com.sg

WecontinuetomaintainourfavourableviewontheASEANmarketsin1Q13giventheirrobustdomesticdemandoutlook.

The Thailand market remains our key overweight as weare confident of the country’s continued robust economicrecoveryfollowingthelate2011floods.Inparticular,wefavourthestrategyof investingupcountrywhere theNortheasternand Northern provinces of Thailand have populations thatare increasingly affluent. Beneficiaries of this trend includethebanksaswellasrealestatedevelopers.WealsofavourthehealthcaresectorgivenitsexposuretothefastgrowingLVMC(Laos,Vietnam,MyanmarandCambodia)region.

aSeaN

sector Positioning

sectOr 1q13 Policy

uObam Weight (%)



ConsumerDiscretionary Underweight 6.0 9.0 ↓ MajorCineplexGroup

ConsumerStaples Overweight 10.5 9.2 = GudangGaram

Energy Underweight 3.5 5.6 = PTBA

Financials Neutral 32.5 32.4 ↑ KasikornBank

Real Estate Overweight 10.5 7.7 ↓ AsianProperty

Healthcare Overweight 1.5 1.0 ↑ BangkokDusit

Industrials Overweight 17.5 14.9 ↓ KeppelCorp

Materials Underweight 2.0 4.5 = SemenGresik

Telecommunication Overweight 12.0 11.5 ↑ Axiata

Utilities Neutral 4.0 4.2 ↓ PerusahaanGas

Benchmark:MSCISouthEastAsia

WekeepouroverweightpositioninSingaporeandwefavourthe real estate investment trusts (REITs) for their attractiveandstabledividendyields.Indonesiaremainsanoverweightcurrently, although we remain vigilant on the near termmacroheadwindsfacingtheeconomy,suchasinflation,the currentaccountdeficitandtheweakeningrupiah.Therecenthikes in the minimum wage – while potentially inflationaryinnature–benefittheconsumerstaples,whichshouldseeincreaseddemand.

WeareunderweightMalaysiaandthePhilippines.

Atasectorallevel,weareoverweighttheconsumerstaples,realestate(primarilyREITs),industrialsandhealthcaresectors.Weareunderweightthematerialsandenergysectors.



uobam.com.sg

We expect the Singapore market to continue to appealto investors in sectors such as REITs and Offshore andMarine. Singapore REITs offer attractive dividend yieldswhile the Offshore and Marine sector continues to be boostedbyneworderwinsandtheoutlookremainspositiveas capital expenditure in oil exploration is expected to remainbuoyant.

OurviewisthattheSingaporemarketwillstayrange-boundintheshort-termasacombinationofsub-pargrowthoutlookin 2013 with high inflation risk should temper valuationexpectations. Despite recent market strength, we remainselectiveowingtopotentialconsensusearningsdowngradesafter the recent lacklustre 3Q12 results. With the smoothleadership transition in China and a pick-up in economicactivity in the Chinese economy, we are increasing ourpositionsinpotentialbeneficiarieswithChinaexposure.

Ourmarketstrategyistocontinuetofocusonacombinationofstockswithhighdividendyieldsandtobuyselectivelyonmarketdips,particularlystockstradingatattractivevaluationsandthosewithvisibleearnings.

SINGaPORe

sector Positioning

sectOr 1q13 Policy

uObam Weight (%)


change from 4q12* tOP PIcks

ConsumerDiscretionary Underweight 6.3 8.0 NM SPH

ConsumerStaples Overweight 7.1 5.5 NM BumitamaAgri

Financials Underweight 32.3 33.3 NM DBS

Real Estate Overweight 18.5 17.1 NM GLP

Industrials Overweight 24.8 24.2 NM KeppelCorp

Telecommunication Underweight 11.0 11.8 NM SingaporeTelecom

Benchmark:MSCISingapore(changedfromFSSTIwitheffectfrom1Jan2013)*Notmeaningfulduetobenchmarkchange



uobam.com.sg

GLOBALFIXED INCOMESTRATEGY

28

uobam.com.sg

Fixed Income Overview

Fixed income


uObam weight (%)


change from 4q 2012

developed Underweight 30.0 70.0 =

Government Underweight 40.0 71.0 =

High Grade Overweight 55.0 21.0 =

High yield Underweight 5.0 8.0 =

emerging Overweight 70.0 30.0 =

asia Overweight 32.0 30.0 =

latin america Neutral 33.0 33.0 =

cIs/ee** Underweight 24.0 27.0 =

middle east/africa Overweight 11.0 10.0 =

**CIS–CommonwealthofIndependentStates,EE–EasternEurope

Wereduceourfixedincomepositiontoanunderweight.Therecordlowyieldsandimprovedriskappetiteindicatethatthemulti-yearfixedincomerallymaybeslowing.

In the developed markets, we remain underweight inGovernment debts specifically in the Eurozone area. Wemaintain overweight in investment grade corporate creditson the back of positive corporate fundamentals whileunderweighting high yield corporate credits due to credit

deterioration. Duration will be kept neutral/short to thebenchmark.

In emerging markets, wemaintain theoveralloverweightrelativetotheDevelopedRegions.WeareoverweightinAsiaandCIS, neutral in Latin America,Middle East and Africa;andunderweightinEasternEurope.WearecautiousonHighYieldEMcreditsduetocreditdeterioration.



uobam.com.sg

Ranked by Singapore dollar adjusted returns

Source:YieldBook,asof30November2012

Bond Market Returns

Local currency returnsSingapore dollar adjusted returns

-20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

Japan

United States

Denmark

Switzerland

Germany

Sweden

Spain

Netherlands

Canada

Finland

UK

Australia

France

Austria

Belgium

Italy

Ireland

Portugal

G7

-10.3%

-3.6%

-3.5%

-3.0%

-2.2%

-1.6%

-1.5%

-1.2%

-1.0%

0.1%

0.2%

1.2%

3.0%

3.8%

8.6%

13.3%

21.8% 41.5%

-4.2%

2.1%

2.4%

2.7%

2.1%

3.7%

1.6%

4.7%

4.5%

2.7%

6.1%

3.3%

5.7%

9.2%

10.1%

15.2%

20.2%

29.1%

50.1%

4.1%

TheG7governmentbond indexreturned-4.2%inSingaporedollarterms,primarilyduetoastrongerSingaporedollar(SGD)againstmostlocalcurrencies.Inlocalcurrencyterms,allbondmarketshaveperformedwellin2012asconcernstowardstheEuropean crisiswere eased aftermarkets sawpolicymakers’responses in the right direction. Hence, Eurozone countrieswerethebestperformersin2012asofearlyDecember.Risingconcernstowardsthefiscalcliff inthethirdquarterhavekeptUnited States (US) Treasury yields low, which have returned2.4%in2012inUSdollarterms.

GLOBaL FIXeD INCOMe



uobam.com.sg

uSUSdata continued to surprise on the upside. The pickup inconsumerspending,withhousingtakingaleadingrole,providedthemuch needed growth in theGDP.However, deceleratingexportsduetoglobalslowdownandsharpslowdownincapitalspending growth by businesses have kept the overall paceof growthbelowpar. Theuncertainty around the fiscal cliff isalsodelayingbusinessesinvestmentdecisionstillthereismoreclarityaroundtaxstructuresgoingforward.Onthepositiveside,privatesectorhiringhaskeptthelabourmarketimprovinginthefourth quarter of 2012. The unemployment rate has fallen to7.7%inNovember2012,butwagegainshavebeensoftandproductivitygrowthmuted.Inspiteofthis,spendingiskeepingpaceduetorealincomegainsthroughrisinghousepricesanddeclining debt burdens. Inflation also remained tame, whichalongwithhighunemploymentandlingeringriskstogrowth,willkeeptheUSFederalReserve(Fed)inaccommodativemode.

InSeptember,theFedintroducedanopen-endedquantitativeeasing(QE),andindicatedthatitwouldkeepthisinplacelongaftertherecoverystrengthens.Inotherwords,theFederalOpenMarket Committee (FOMC) does not expect an increase in funds rateuntilat leastmid-2015.Thishasessentiallykeptacap on the short-term rates andwill likely continue for quitesometime.Inthefirstquarterof2013,weexpecttheratestokeep lowand continuebe range-boundwith a bias towardssteepening.Wethinkthatthe10-yearratescouldgouphigherandtradebetweenthe1.7%and2.2%rangeoncethemarketsreceive someclarity on the fiscal cliff debate.Weexpect the cliff to shrink aggregate spendingof aboutUS$300billion oraround1.8%ofGDP.Currently,themarketsarealsopricinginasimilarimpact,henceoncetheuncertaintyisoutofway,thecurveshouldbearsteepenfromthecurrentlevel.Hence,wearebothneutralinourUSallocationanddurationwhileoverweightintheUSdollar.

euThe third quarter of 2012 has seen policy responses to thesovereigndebtcrisiswhichsignificantlyimprovedtheperipheraloutlookfor2013.Thefiscalconsolidationburdenislowerin2013comparedwith2012,producinglesseconomicdrag.AlsotheEuropeanCentralBank(ECB)’sOutrightMonetaryTransactions(OMT)willimplicitlycapperipheralyieldsandpartiallyreversethecapitalflight, improvinglong-rundebtdynamics.Thepotentialdirect European Stability Mechanism (ESM) bank recap andliquidity support (EFSF/ESM/SMP/OMT) to reduce relianceonbanks’purchasesarealsostepsintherightdirection.ThebankingsectoraidwouldsignificantlyeasethesovereigndebtburdeninSpain,IrelandandCyprus,butaswearestillalongwayfromformationoftheBankingSupervisorybody,thetruecircuit-breakerstillfacesimplementationrisks.

Source:Bloomberg,30November2012

US Treasury 10-Year

1.30

1.50

1.70

1.90

2.10

2.30

2.50

12/1

/201

1

1/1/

2012

2/1/

2012

3/1/

2012

4/1/

2012

5/1/

2012

6/1/

2012

7/1/

2012

8/1/

2012

9/1/

2012

10/1

/201

2

11/1

/201

2

US Treasury 10-yr



uobam.com.sg

Currently,theEurozoneisinthemidstofamildrecession,giventhestructuralweaknessesintheperipheralsanditsspill-overtocorecountries.AlthoughGermanyhasshownweaknessinitsrecentgrowthandmanufacturing/industrialproductionnumbersasaresultofthelowerglobaldemand,westillexpectitsgrowthto bottom out in the first quarter of 2013, led by improvingexports as well as domestic demand. Germany will retainits competitivenesson theglobalmap,maintaininga resilientlabourmarketandbusinessconditions.

Also, we expect limited progress on EU structural reforms(common budget, banking union, etc.) given the upcomingGerman elections. The elections will prompt risk-aversepolicymakingandmarketstabilisationwilltaketoppriority.WeexpectBundyieldstostaylowwithaslightbiastowardsbearsteepeningasperipheralsstabiliseanddemandforsafehavendiminishes.HencewemaintainourunderweightinBunds,shortposition on duration and underweight in the Euro. We alsomaintainourunderweighttowardsFrancewithshortondurationasthecurrent levels lookexpensivegivenFrance’sdebt load,budget and structural growth challenges. The fundamentalmissessuchas itsanti-businessplatform (top tax rate75%),25% youth unemployment, together with its budget deficittargetof5.6%for2012,thatisunlikelytobemet,reflectthatthebondmarketsaretoocomplacentwithFrance.


German & French yields

-

0.50

1/2/

2012

2/2/

2012

3/2/

2012

4/2/

2012

5/2/

2012

6/2/

2012

7/2/

2012

8/2/

2012

9/2/

2012

10/2

/201

2

11/2

/201

2

1.00

1.50

2.00

2.50

3.00

3.50

4.00 Germany 10-yrFrance 10-yr


Italian & Spanish yields

4.00

1/2/

2012

2/2/

2012

3/2/

2012

4/2/

2012

5/2/

2012

6/2/

2012

7/2/

2012

8/2/

2012

9/2/

2012

10/2

/201

2

11/2

/201

2

4.50

5.00

5.50

6.00

6.50

7.00

7.50

8.00Italian Bonds 10-yrSpanish Bonds 10-yr

WehaveseenasignificantstabilisationinSpanishyieldsposttheannouncementoftheOMTbytheECBinSeptember2012.However, the fundamental risks still remain for Spain. Theseinclude1) execution risk around fiscal consolidationplans, 2)fundingrisksgivenhighborrowingneeds,3)riskofdowngradetobelowinvestmentgrade,and4)riskthatcapitalneedsoftheSpanishbankingsectorwillbehigherthantherecentstresstest.

Giventheserisks,weexpectSpaintorequestanESMcreditline in the firstquarterof2013activating theOMT,drivenbypoliticalpressureand/orhigheryields.Spainhas€115billionofgrossbondsupply,andasdomesticbanksarelikelysaturatedwith government bonds, international investors will demanda higher yield. Italy, on the other hand, faces a politically uncertainscenarioasMarioMontiwillstepdownasthePrimeMinisterdue toSilvioBerlusconi’sparty’swithdrawal fromhistechnocraticgovernment.Monti’scredibilityhasearnedmarketconfidence as he moved towards resolving Italy’s structuralweaknesses through various reforms. Any reversal in thisdirection,withananti-austerityleadershipinthecountry,couldswiftlychangetheyield’sdirection,shifting themarket’s focusbacktoItaly.WemaintainourneutralcallonItalianbondsanddurationwhilekeepingacloseeyeonitspoliticaldevelopments.



uobam.com.sg

Source:OECD,30November2012

*Measurestheproceduresandcostsinvolvedindismissingindividualsorgroupsofworkersandtheproceduresinvolvedinhiringworkersonfixed-termortemporaryworkagencycontracts.Asof2008;dataarefor2009forFranceandPortugal

The Irish Labour Market is a model of flexibility

3

Amongst thebest in class

Poor students

2

U.S.

CANA

DA

IREL

AND

JAPA

N

SWIT

ZERL

AND

DENM

ARK

SWED

EN

NETH

ERLA

NDS

FINL

AND

AUST

RIA

BELG

IUM

ITAL

Y

GERM

ANY

NORW

AY

PORT

UGAL

GREE

CE

FRAN

CE

SPAI

N

1

OECD Labour Market Rigidity Index

After a weak year, we expect a gradual recovery in the UK economy, ledbyapredominantly improvingglobalbackdrop.As with other small open economies, the UK’s economicperformanceisverymuchafunctionoftheglobalenvironment.We expect private sector demand to pick up globally, ascorporates remain healthy, US spending improves and theEurozone exits recession. As inflation is likely to remain wellabovethe2%target,wethinkthattheBankofEngland(BoE)will put a hold on itsQE program,while retaining its currentmonetarypolicy.However, ifeconomicconditionsdeteriorate,thepossibilityofasmall-scaleextensionofQE isnotunlikely.MarkCarney,BankofCanadagovernor,whohadmaintainedsuccessful dovish policies in Canada, was named BoE’sgovernor commencing June 2013. We expect the yield toremainrangeboundbetween1.70%and1.90%level.WeareneutralontheGBPasweexpectittobenefitfromendQE.

Greece, inourview,willcontinuetobeapartofEurozone inthenearterm,andwillmuddlethroughin2013.Greekofficialshaveenactedalargeamountoffiscaltighteningmeasures,butwith little success in changing the debt/GDP ratio dynamic, even after the debt restructuring. Most recently, there havebeenstepsfromEurozoneofficialstowardsdebtsustainabilityreducinganestimated144%debttoGDPto124%by2020though lowering the loan rateby100basispoints,extendingmaturityby15yearsand foregoingprofitsonGreekdebtbyECB. Greece has also launched its debt buy back scheme,offering a swap to Greek bonds for price between 32.2%-40.1% of face value (depending onmaturity) with sixmonthEFSFnotes.Postthedeal,Greecewillreceiveitsnexttrancheofbailout funds,whichhavebeendue sinceJune2012.Ontheotherhand,Irelandmaintaineditssuccessstoryduringthe fourth quarter of 2012. Ireland’s competitive tax system andflexible labour market helped provide Ireland with its exportboom(withdownwardreductioninwagesandprices)offsetting much of its fiscal drag. We expect Ireland to regain marketaccessin2013withtheECB’sOMT.Portugalmayrequireatop-upbailoutpackage,butshouldregainpartialmarketaccess.



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Given the challenges we have outlined and potential policychanges, we are underweight Japanese government bondsandyen.

australiaAustralia’stermsoftradehavedeclinedfromthepeakreachedin2011.Theweakerconditionsintheminingindustryandrisingcostpressurehavepromptedreassessmentof investmentsinminingprojectsand resourcesectorphysical investmentswillprobably decline from 2013. Capacity built over the last fewyearsiscontributingtosupply.Thereispriceuncertaintyastowhen the capacity will come onstream as resource demandstillhingesonthepaceoftheglobaleconomicrecovery.Withthe developed economies’ growth expected to be modest,emerging economies are now relying on more domesticallydriven growth, thereby dampening demand for commodities.Hitoncorporateprofitsfromlowertermsoftradeinturnlowersbudgetforcapitalexpenditureandlabour.

Whilethehousingsectorhasbeenweak,itcouldbeapotentialcontributortogrowthgoingforward.Thelevelofinterestratesissupportive,higherrentalyieldsandrisingbuildingapprovalsprovidetentativesignsofrecoveryinconstructionactivities.

ThepublicsectorisnotexpectedtobeameaningfulcontributortoGDPgrowthasthegovernmentseeksfiscalprudence.Theofficial forecast for GDP growth was lowered reflecting thechangetotheprofileformininginvestments.Thesofteroutlookis expected to be reflected in the labourmarket and benignunderlyinginflation.

Despitedeclining termsof tradeandeasingmonetarypolicy,theAustraliandollarhadbeenholdingupbetterthanexpectedagainst theUSdollar. Thecurrencyhas thesupportof flowsfromforeignreservediversificationsandin lateNovember,theIMFmentionedaboutexpandingtheofficialreservecurrenciesfrom thecurrent five to includealso theAustraliandollar andCanadiandollar from2013.This is a statistical recognitionofthereality.

JapanThethirdquarter2012GDPforJapanwasweakandreflectedthe softness of external demand and the tensions withChina.Quarter-on-quarter,GDP contracted 0.9% in the thirdquarterandonanannualisedbasis, theeconomycontracted3.5%. Exports, private investments and consumption were weaker.Publicinvestmentsaddedtogrowthspurredbypost-earthquakereconstructiondemand.Thenear-termoutlookforthe economy does not look optimistic. Latest survey resultspointtodeclinesinbothmanufacturingandnon-manufacturingsentiment. The exports sector continues to suffer from a sluggish global economy, a strong yen, the China-Japanterritorial dispute and slipping competitiveness. Having saidthat,whileexportshavealargeimpactontheoveralleconomy,it may be increasingly inappropriate to measure Japan’s external incomebasedonexports.LocalsalesintheUSandChina have been rising versus direct exports from Japan.Japancouldbelookingatincreasingforeigndirectinvestmentstoboostnational income,consideringthechallengesfacedathomesuchasageingpopulationandenergyconstraints.

In March and April 2013, the term of the current Bank of Japan (BoJ) deputy governors and governor end and theappointment of new board members could shift BoJ policydepending onwhethermore dovishmembers are appointed bythenewgovernment.

The Prime Minister Yoshihiko Noda decided to dissolve theLowerHouseon16November2012andtoholdanelectioninmid-December. The oppositionmightwin, considering thehigherapprovalratecomparedtothatoftherulingpartyDPJ.LDPleaderShinzoAbe,whowasprimeministerin2006-2007,is vocal about a number of policy changes on top of moreaggressivefiscal stimulus.These includean inflation targetof2%to3%fromthecurrentgoalof1%andpushingBoJtoamoreaggressivemonetarypolicytospurtheeconomyshouldhewintheelection.TheintendedpolicyactionsarenegativefortheJapaneseyen.Yenweaknesswillbegetfurtherweaknessifthemarketviewontheyensteeredtowardsweakeningdrivesunwindingofexistingcurrencyhedgesonforeigninvestments.



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The Reserve Bank of Australia cut policy rate by 25 basispointsto3%intheDecember2012meeting,takingtheviewthateasingwasappropriategiventhatthefulleffectsofearliermeasuresareyettobeobserved.Thecentralbankmentionedthattherearesignsofeasiermonetarypolicystartingtohavesome of the expected effects, though the exchange rate remainshigherthanexpectedgivendeclineinexportpricesandweakerglobaloutlook.

In view of the above discussed, we are underweight on theAustraliangovernmentbondsandAustraliandollar.

CanadaThe breakdown of Canada’s export destinations shows that themajorityofitsexportsistoslow-growingeconomies.Inthenearterm,obstaclestoCanada’sgrowthfromexternaldemandincludetheimpactofHurricaneSandyandthefiscalclifftotheUS-animportantexportmarketforCanada.

Domestically,capacityutilisationhasheldupandtheCanadianeconomyoperateswithasmallamountofexcesssupply.Thereis the prospect for investment spending and based on the BankofCanadaBusinessOutlooksurvey,thenetpercentageof firmsplanning to raise investmentover thenext12monthremainsinpositiveterritory.

Thecentralbankhasbeenmaintainingitspolicyrateandthere is little impetus to start the hiking cycle now. The strong demand for Canadian housing underpinned by low interest ratesandastable jobmarkethavebeenmetwithmeasuresfromthegovernmenttotightenlendingrequirements,includinglowering loan-to-value ratios and loan tenor. The global anddomestic economic backdrop does not warrant tighteningmonetary policy to slow the housing market. Administrativemeasurestakensofartoaddressthehighhouseholddebttoincomes arising largely from housing is having an impact ondampeninghouseprices.

We are underweight on Canadian government bonds andneutralonCanadiandollar.



uobam.com.sg

eMeRGING MaRkeT FIXeD INCOMe

EmergingMarket (EM)bondsareheaded fora recordyearofinflowsandhighsingledigitreturns(inSGD)for2012.Inaworldoftepidgrowth,subduedinflationandexcessliquidity,EMbondshavebeenanetbenefactor.Developedmarkets(DM) have contributed indirectly to this. As they slowly de-lever and grapplewith new austeritymeasures, excessliquidityhasfoundanewhomeinEMbonds.AslewofcreditratingdowngradesinEurope–France,Spain,Italy,Portugal,Ireland–havevalidated thismove. Italy, IrelandandSpain,onceAAAratedcountries,arenowinthesamecreditratingcategory as EM countries such as Russia, Mexico, Brazil,PeruandIndonesia.Certainly,thegrowthoutlookandhealthof the balance sheets of these EM countries are certainlybetterthanthatoftheirDMcounterparts.

Source:JPMorganEMOS,November2012

Number of upgrades and downgrades

2007 2008 2009 2010 2011 2012

60

50

40

30

20

10

0

Emerging UpDeveloped Up Developed Down

Emerging Down

Asweenter2013,weseemoreofacontinuationofthisstory,atleastinthefirsthalfoftheyear.WebelievethetheoryofEMasthenew‘safehaven’isintactatthispoint.However,thisisnotaone-waystreet;carefulcountryandcreditselectionwillbekey.Thereareafewpotholesalongtheway.However,wethinkthatthenumberofcreditratingupgradeswilloutweighthoseofthecreditratingdowngrades.

In termsof growth,webelieve that EMgrowthwill remaintepid.TheEurozoneeconomiesarelikelytocontractfurther in2013andwillcontinuetobeadragtoglobalgrowth.TheUSeconomyseemstobeshowingsignsoflife,inparticularthehousingsector;Chinaontheotherhand,canbeexpectedtogrowataslowerpace.EMexportshaveslowedandwethink some recoverycanbeexpected.However,withoutasharprecovery inDMmarkets,wedonot foreseeastrongrecoveryforEMexports.Infact,thismaybegoodforbonds.Asubduedinflationaryenvironmentisalsopositive.

Bond yields arenowat historical lows.Withglobal growthrecovering slowly, we think bond yields are still somewayofffromrising,whilebondspreadsshouldcontinuetogrindtighter.EMbondsarestillapproximately75basispoints(bp)wideofhistoricaltightsforsovereignbondsand175bpswideofhistorical tights forcorporatebonds.Hence, there isstillsomeupside in termsofperformance thatwecanexpect.Theriskhere isadramaticrecovery inglobalgrowth,suchthatbondyieldssuddenlyrise,andquickly.Butthisisnotourbasecase.



uobam.com.sg

Source:JPMorganEMOS,November2012

EM Bonds Yield and Spread14

12

10

8

6

4

2

0

Aug

-06

Dec

-06

Ap

r-07

Aug

-07

Dec

-07

Ap

r-08

Aug

-08

Dec

-08

Ap

r-09

Aug

-09

Dec

-09

Ap

r-10

Aug

-10

Dec

-10

Ap

r-11

Aug

-11

Dec

-11

Ap

r-12

Aug

-12

With global liquidity still plenty, money will want to find ahome.WethinkfundflowswillstillfavourEMbonds,butmaystartmovingdownthecreditspectrum–tocorporatebonds,highyieldsbondsandalsolocalcurrencybonds.

We are currently neutral high yield (versus an underweightpreviously) against high grade bonds. In terms of countryselection, we continue to favour Mexico, Colombia, Peru,Brazil, Russia, Turkey, Peru andChina and are overweightcorporatebondsinthesecountries.WearealsooverweightVenezuela and Dubai. We are underweight in Argentina,Belarus,SouthAfrica,Ukraine,Hungary,andEasternEuropeingeneral.Wehavebeenfairlyneutraloncurrenciesbutthinkthatwemayseeoutperformanceoflocalcurrencybondsin2013.WehaveaddedMexicanPesoandChineseReminbiexposuretopositionforthisview.

Sovereign SpreadCorporate Spread

Sovereign YieldCorporate Yield

asset class (30 november 2012) yield (%)

USHYCorp JPMHY 7.10

EMLocalSov GBI-EMGlobalDiv 5.52

EMCorps CEMBIBroad 4.78

EMSov EMBIG 4.57

USIGCorp JULI 3.45

EMCurrencies GELMI+ 2.60

EurozoneIG EMU IG 2.59

EuroCredit Maggie 2.43

US Equities S&P500 2.02

EM Equities EM Free 1.95

DM Treas GBIGlobal 1.72

US Treas USTreasury 1.53

Source:JPMorgan,EMBIMonitorDec2012



uobam.com.sg

aSIa FIXeD INCOMe

The confluence of strong action from all themajor centralbanks led to strong performance in risk assets. The USFederal Reserve’s commitment to quantitative easing, theECB’sOMT and the BoJ’s announcement of further assetpurchasesaremajorshorttermboostersofliquidityandriskassets.Formuchof2012,investorshavefrettedoverthreequestions:1) WilltheEurozonebreakup?Ifso,when?2) WillChinaexperienceahardlanding?3) Canpolicymakerspreventtheimpending“fiscalcliff”from

derailingtheeconomicrecoveryintheUS?

PolicymakersinEuropehavemadesubstantialstepstowardspreventing(oratleastdelaying)abreak-up.Recenteconomicdata fromChinapoint towardsabottomingof theChineseeconomy.Assuch, thefirst two risksdelineatedabovearenowlow.

TheUSfiscalcliff,ontheotherhand,hasyettoberesolved.

President Obama’s re-election resulted in a short sell-off in risky assets as investors fretted about impendingtax increases and a continuation of ineffective economicpolicies.Given that bothPresidential candidates had beenreticentabouttheirplansfortheeconomy,businessleadershad been holding back from July 2012 (see chart below).However,capitalexpenditurecannotbeindefinitelydeferred–themostrecentdatareleaseinNovember2012showsasmallresurgenceincapitalexpenditure.

While it is difficult to predict whether policy mistakes willnot bemade, commentsmade by theRepublican leadersshortlyaftertheelectionssuggestedagreaterwillingnesstocompromise. However, recent statements have been lesspositive,with someDemocrats suggesting that temporarilygoing over the fiscal cliff may not be too detrimental. Thepolitical calculus behind these statements are particularlyinsightful on how dysfunctional things are – polls suggest that the public will blame Republicans if a compromise cannotbereached.

Furthermore, the hurdle towards a “successful” resolutionis not low–policymakershave to raise revenuesandcutexpendituresinawaythat1) doesnotderailtheeconomicrecovery2) assures investors thatasustainabledebt trajectorycan

bereached.

If a successful resolution is attained, a strong rally in riskyassetscanbeexpected.Thereasonsareasfollows:1) There is now a significant amount of deferred capital

expenditurebyUScorporations.Thiscannotbeindefinitelydeferred. When this backlog of investment is deployed,therewillasignificantboosttotheGDP.

2) Valuationsdonotappearstretchedforequities.3) Housing,aheadwindoverthepastthreetofouryears,is

nowbecomingatailwind.4) CheapenergyduetotheshalegasrevolutionintheUShas

thepotentialtoreversethehollowingoutofmanufacturingintheUS.

Capital goods new orders nondefense ex aircraft & parts SA


Capital Goods New Orders Nondefense Ex Aircraft & Parts SA

S&P 500

0

200

400

600

800

1000

1200

1400

1600

1800

40,000

45,000

50,000

55,000

60,000

65,000

70,000

75,000

Jan-

08

Ap

r-08

Jul-

08

Oct

-08

Jan-

09

Ap

r-09

Jul-

09

Oct

-09

Jan-

10

Ap

r-10

Jul-

10

Oct

-10

Jan-

11

Ap

r-11

Jul-

11

Oct

-11

Jan-

12

Ap

r-12

Jul-

12

Oct

-12

US

Dur

able

Go

od

New

Ord

ers

ex D

efen

se S

A (M

illio

ns)



uobam.com.sg

30

35

40

45

50

55

60

65

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Ind

ex

Exp

ansi

ona

ry

Co

ntra

ctio

nary

Purchasing Managers’ Index (PMI) numbers in the twolargest economies, US and China, improved in November2012whilethedataemergingfromtheEurozonecontinuestobedismal.Wedonotthinkthelatterwillbeasignificantdragoninvestorsentimentasthesehavebeenfactoredintoassetprices.Rather,policymistakeswillbethekeythreattostabilityinthefinancialmarkets.

Basel III standards are set to kick in in 2013 and this willresult in a furtherwithdrawal ofEuropeanbanks fromAsiaas they try to shore up their balance sheets. Asian bankswill not be able to meet the excess credit demand. As aconsequence,disintermediationwillcontinueandAsianbondmarkets should continue to see increasing issuer diversity.A diversified bond universe in Asiamakes the asset classattractive to investors. On the other hand, supply will bea drag on returns if the bondmarkets cannot absorb thesupply.Astrongreboundinrisksentimentwillgraduallybringinvestorsbackintoequities,thuscannibalisingfundflowsintofixed incomeassets.Weexpect flows into fixed income toremainfairlyhealthy,althoughtheyareunlikelytobeasrobustastheyhadbeenafterthepastyear.

Major regions’ manufacturing PMIs


United States EurozoneUnited Kingdom China

Overall, we expect risky assets to performwell in the firstquarterof2013astailriskshavebeenreduced.

InHigh Grade,weareoverweightingchina, Hong kong, singapore and australia High Grade corporates. these credits include china national Petroleum corporation, sinopec, Indonesia government, PccW, china Overseas land, swire properties, sun Hung kai Properties, beijing enterprise, china national Petroleum, andnational Wealth management, Henderson land and kerry Properties. These companies offer decent yieldpick-up over similarly rated credits and duration without acompromiseincreditquality.

InHigh yield,wecontinuetoprefergoodqualitycorporatebonds like mIe Holdings, country Gardens, kWG properties, Guangzhou r&F, shanshui and Gemdale thathavestrongbalancesheetsandsolidbusinessmodels.We also thinkbumi andberau bonds have an attractive risk-rewardtrade-offdespitehigherheadlinerisk.



uobam.com.sg

SINGaPORe FIXeD INCOMe

Fourth Quarter 2012 Review

MaCRO RevIewThe third quarter 2012 real GDP growth was revised to0.3%year-on-year(y-o-y),asignificantmoderationfromthesecondquartergrowthof2.5%y-o-y.Itwasalsolowerthanadvancedestimatesofa1.3%y-o-ygrowth.Onaquarter-on-quarter seasonally adjusted annualised basis, the thirdquartersawa5.9%contraction.

Thispointstowardsachancethatatechnicalrecessionwilloccur inthefourthquarterof2012.Withweakereconomicgrowthand theSGDNEER tradingabout2.6%above themid-band,theSGDlooksexpensive.



uobam.com.sg

CURRENCIES

40

uobam.com.sg

CuRReNCIeS

MostAsiancurrenciesstrengthenedagainsttheUSdollarinthefourthquarterof2012.Improvingsentimentcoupledwithmonetary easing in the US boosted Asian currencies. Thetwocurrencies thatdepreciatedagainst theUSdollarweretheIndonesianRupiah(IDR)andtheJapaneseYen.

PolicymistakesinIndonesiaandweakeningdemandfor itskeyexportshadbeenkeyheadwindsfortheIDR.AnecdotalevidencesuggestthatcorporationsarestilllookingtobuyUSdollars,whichmayresultinyetanotherlegdownintheIDR.

TheJapaneseYendepreciatedsharplyinthefourthquarterof 2012. Shinzo Abe, who is likely to be the next PrimeMinister after the December 2012 election, has publiclystated that he intends to have Japan conduct moreaggressive monetary easing to increase inflation in Japan.Japan’s trade competitiveness has declined substantially.Withahugedebtburden,unfavourabledemographicsanddeclining technological leadership, the Yen’s strength hadlong confounded investors. The recent depreciation in theYen, may, however be short-lived if policy makers retreat fromtheirearlierstatements(asShinzoAbeisnowappearingtodo).


currency FOrecast

currency against usd30 november 2012

Forecast end 1q 2013

JapaneseYen(JPY) 82.52 81.5

Euro(EUR) 1.3002 1.28

Singaporedollar(SGD) 1.2214 1.21

Outlook & strategy The ADXY rose 2.5% year to date and 3% since the beginning of the fourth quarter of 2012. Monetary easingfromtheUSFederalReservehasbeenadriverofUSdollarweakness. The upcoming FOMC meeting in December2012is likelytoseetotheextensionofOperationTwistviaacontinuationofTreasurypurchasesatthelongendofthe curve and a discontinuation of the sale of short datedTreasuries.TheresultingnetincreaseinTreasurypurchaseswill add to an already significant volume of monetaryeasing.Assuch,weexpectAsiancurrenciestomoderately appreciateagainsttheUSdollar.



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COMMODITIES

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Wemaintainourneutralweightincommodities.

AlthougheconomicdatahasbeenmixedsinceSeptember2012, there havebeen someencouraging signs that pointtothestartofasustainedeconomicrecovery.IntheUnitedStates, the majority of housing indicators now point toincreased construction activity and stronger house pricesacrossthecountry.InChina,wehaveseenanuptrendinthePurchasingManagers’Index(PMI),initialsignsofrestockingand improving trends in thepropertymarket. Policy actionbyvariouscentralbanksalsocontinuetobesupportive.Aspreviouslynoted, themeasures toboostmonetary liquidityhave been positive for commodity prices, particularly forpreciousmetals.

Westill recommendanoverweightposition inGold,asthepositivefactorsthatdrovethegoldpriceupinrecentyearsare still in place.Monetary policy remains supportive, withcontinuednegative interestratesoffsettinggold’straditionalweaknessofnotprovidingayield.Therehasbeencontinueddemandfromcentralbanks,institutionalinvestorsandprivateinvestors,withgrowinginterestfromdevelopingmarkets.Weare currently in themiddle of the seasonal strongdemandperiod for gold, which typically runs from September toFebruary.Potential upside risk to thegoldpricecouldalsocomefromhigher inflation,apossiblefurtherdowngrade intheUSsovereigndebtrating if there isnocrediblesolutionto the fiscal cliff issue, and a possible upgraded rating forphysicalgoldaspartofrisk-weightedbankcapital.

commodities Overview

commodities


uObam weight (%)


change from 4q 2012

Gold Overweight 30.0 25.0 =

base metals Neutral 20.0 20.0 ↑agriculture Underweight 15.0 20.0 =

energy Neutral 35.0 35.0 ↓

We have upgraded our call on base metals and bulk commodities to a neutral position. Our preferred base metal is copper, where global demand still outpacesaggregatesupply,asexistingminesmainlyproduceloweroregrades.Thedemandinglocationsofnewminesmeanthatitwillbehardforsupplytokeeppacewithdemand.Wearealso morepositiveon ironoreandcokingcoal, themain inputsfor steel production. This ismainly due to stronger growthpotential in domestic Chinese demand, particularly fromthe construction sector. Normal seasonality suggests thatdemand may weaken into year-end, but previous yearshave always seen a pick-up in end-user demand fromJanuaryonwards.However,wearenotadvocatingincreasedseasonalexposuretothermalcoal,whichnormallybenefitsfromcolderwinterweatherinthenorthernhemisphere.Theongoingdemanddisruptionscausedmeans that increasedwinterdemandisunlikelytoproduceastrongpriceresponse.



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Within the energy sector, we have moved to a neutralweight on Crude Oil and Natural Gas. While geopolitical risks continue to be the main concern for an upwardmovement in crude oil pricing, the geopolitical premiumattachedtopriceshasreducedinrecentweeksduetotherelativelyquickcessationoffightinginGazaandalullinnewsflow concerning a possible Israel-Iran conflict. Although non-OPECsupplygrowthcontinuestobe lacklustre,SaudiArabiahasmadeupfortheslackbyproducingatnear-recordlevels. Global demand growth remains weak, particularlyfrom OECD economies. US natural gas prices should besupported at current levels during the winter season, butthe medium-term price outlook is unexciting given higher USshalegasoutput.

Weremainunderweightinagriculture.USgrowingconditionshavestabilisedfollowingthedroughtconditionsexperiencedduring the summer months. The latest global harvestsforecasts published by the US Department of Agriculturehave shown relative stability both in yields for corn and other crops, and in the overall harvested areas. To date, the news from the main southern hemisphere growing areas have alsobeen stable.However,wewill continue tomonitorouragriculturalexposure,andespeciallyiftherearenegative weather-related developments in themain exportproducingcountries.



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contact details

sInGaPOreuOb asset management ltd

Address 80RafflesPlaceUOBPlaza2Level3Singapore048624Tel 18002222228(Local)•(65)62222228(International)Fax (65)65323868Email [email protected] uobam.com.sg

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tHaIlanduOb asset management (thai) company limited

Address 11thFloor,191SouthSathonRoad,Yannawa,Sathon, Bangkok10120ThailandTel (662)676-7100Fax (662)676-7880-7

bruneIuOb asset management (b) sdn bhd

Address FF03toFF05,TheCentrepointHotel,Gadong, BandarSeriBegawanBE3519,BruneiDarussalamTel (673)2424806Fax (673)2424805

taIWanuOb Investment advisor (taiwan) ltd

Address UnionEnterprisePlaza,16thFloor,109MinshengEastRoad,Section3, Taipei10544Tel (886)(2)27197005Fax (886)(2)25456591

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Address 13FSannoParkTower,2-11-1Nagatacho,Chiyoda-ku, Tokyo100-6113JapanTel (813)3500-5981Fax (813)3500-5985



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In theeventof anydiscrepancybetween theEnglish andMandarin versionsof thispublication, theEnglish version shallprevail.

ThecontentsinthisreportwerepennedinthefirsthalfofDecember2012.

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