ubs weekly guide 6 13 11

This report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimer and disclosures at the end of the document.

Wealth Management Research 13 June 2011

UBS Weekly Guide

More turbulence ahead

We see the potential for additional near term choppiness amid another heavy economic release calendar, appearances by several senior Fed officials including Chairman Bernanke and the ongoing stalemate over funding for another bailout for Greece.

However, with sentiment toward risk assets having turned decidedly negative and bonds outperforming stocks over the past month and a half, equity markets appear oversold. In the absence of materially weaker than expected economic data releases and/or additional fallout from the Eurozone, equity markets appear poised for something of a modest relief rally this week.

Any sustained recovery in equity markets will still require confirmation that: (1) the economic recovery remains on track; (2) the earnings impact from the soft patch will be both modest and transitory; and (3) the policy mix is still supportive of growth and risk taking.

Choppy and sloppy The S&P 500 fell another 2.2% for the week ending June 10th, marking the sixth consecutive weekly decline in equity prices –the longest such losing streak in nearly a decade (see figure 1). The principal catalysts behind the most recent drop in equitymarkets included: another round of weaker than expectedeconomic release data; a less than rosy assessment of cyclicalgrowth prospects from Fed officials; growing concerns overfiscal, monetary and regulatory policy risks in the US; andlingering fears of both a deepening and broadening of theEurozone debt crisis. We see the potential for additionalchoppiness in the week ahead amid another heavy economicrelease calendar, appearances by several senior Fed officialsincluding Chairman Bernanke and the ongoing stalemate overfunding for another bailout for Greece. Concerns over thepending conclusion of QE2, the rapidly approaching deadlinefor extending the debt ceiling and the economic fallout fromthe implementation of financial regulatory reform (i.e., DoddFrank) only serve to add to the market’s current jittery state. But following the steady stream of bad news over the past

Mike Ryan, CFA, Chief Investment Strategist [email protected]

Contents Page

Feature article 1

Buy the “favorite five” currencies on dollar rallies

5

Our Best Ideas at a Glance 6

Review/Preview of the Financial Markets 7

Earnings Calendar 8

Key Economic Indicators 9

Strategy and Performance 10

Reports of Note Published in the Last Week 11

Fig. 1: Stocks have fallen for six consecutive weeks, still remain up 1% for the year S&P 500 year to date

1200

1250

1300

1350

1400

Jan Feb Mar Apr May Jun Jul

S&P 500

Source:Bloomberg, UBS WMR, as of 10 June 2011

UBS Weekly Guide

Wealth Management Research 13 June 2011 2

several weeks, markets are now better positioned to weatherboth softer economic data and persistent policy uncertainties.As our chief equity strategist, Jeremy Zirin, points out, theequity risk premium (stocks earnings yield less the real bondyield) stands near levels not seen since the middle of lastsummer – the last time an economic soft patch unnerved financial markets (see figure 2). While the size of the equity riskpremium alone should not be used as a market timing tool, itdoes offer insight into both the relative return prospects acrossasset classes as well as potentially oversold market conditions.With sentiment toward risk assets having turned decidedly sour,and bonds sharply outperforming stocks over the past monthand a half, equity markets are overdue for a rebound. So in theabsence of materially weaker than expected economic data releases and/or additional fallout from the Eurozone, equitymarkets appear poised for something of a modest relief rallythis week. Proof points Still, any sustained recovery in equity markets (and risk assets ingeneral) will hinge upon more than just the absence of badnews. Market participants will require confirmation or “proofpoints” that: (1) the economic recovery remains on track; (2)the earnings impact from the soft patch will be both modestand transitory; and (3) the policy mix is still supportive of growth and risk taking. But this will likely take some time. Theeffects of the earthquake and associated tsunami in Japan onthe global supply chain will continue to negatively impact theeconomic data for some weeks. Our economics team recently reduced growth estimates for the second quarter to reflect thefallout from Japan. Although oil prices have pulled back fromtheir recent cyclical highs, it will take a while before this beginsto ease pressures upon the consumer. Keep in mind also that the tightening of monetary policy by emerging market centralbankers has begun to impact economic activity more tangibly.While we view this as a healthy transition towards a moresustainable pace of growth, signs of a slowdown in thedeveloping world are likely to be greeted cautiously in the nearterm when coupled with the structural challenges confrontingdeveloped nations. The most important factor for equity markets remains the outlook for corporate profits. Keep in mind that earnings havebeen the one consistent bright spot in what has been anotherwise sluggish and uneven recovery process. Through acombination of aggressive cost cutting and moderate revenuegrowth, companies have been able to consistently beat analystestimates for each of the past eight quarters (see figure 3). But the prospects for continued above consensus profits are morelimited with analysts having recently ratcheted up earningsestimates. Although we remain confident in our forecast for$100 in earnings for the S&P 500 for 2011 and $108 for 2012, the risks are have become increasingly symmetrical. In the lullbetween Q1 and Q2 earnings seasons, there may well be anumber of cuts in analyst estimates as companies offer moreconservative guidance. This will likely keep markets volatile until Q2 earnings season actually gets underway and corporate CFOs

Fig. 2: The equity risk premium stands at its highest level since last summer Equity risk premium — earnings yield less the real bond yield

0%

2%

4%

6%

8%

10%

1985 1990 1995 200 200 2010

ERP - earnings yield less real bond yield

Source:Bloomberg, UBS WMR, as of 10 June 2011 Fig. 3: Companies have been able to consistently beat consensus forecasts over the last two years Percentage of S&P 500 companies beating consensus earnings estimates

0%

2%

4%

6%

8%

10%

12%

2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11

Source:Factset, UBS WMR, as of 10 June 2011

UBS Weekly Guide


offer validation that the supportive profit picture remains intact. No stick, no carrot Turning our attention finally to the monetary policy outlook,many view the Fed as being caught “between a rock and a hardplace.” Because while additional stimulus could well provoke afurther acceleration in price pressures globally, a prematuretightening of policy would almost certainly weigh more heavilyupon a domestic economy already working its way through apretty rough soft patch. But after reflecting a bit upon FedChairman Bernanke recent appearance at the InternationalMonetary Conference in Atlanta, Georgia and the release of the Beige Book, it struck us that the Fed’s current policy dilemma has less to do with “rocks and hard places” and more to dowith “sticks and carrots.” The Fed must try to move toward a more normalized policystance over time – but will have to do so without adding to thealready stiff economic headwinds. This means that while thereis unlikely to be a “QE3” in the offing, Fed officials will stillneed to take a decidedly deliberate and pragmatic approach toboth shrinking a bloated balance sheet and raising interestrates. This offers something of a “mixed bag” for risk assetsand reinforces the notion that the recent bout of choppymarket conditions will persist for the near term. We still have apreference for both equity and credit (see figure 4). However, periods of underperformance are to be expected in the near term as the economy negotiates through the current soft patch. Comfort level In his prepared remarks in Atlanta, Chairman Bernanke onceagain expressed his frustration with the pace of the economicrecovery. While the Chairman cited the severe supply chain disruptions associated with the earthquake in Japan as theprimary catalyst behind the most recent slowing of growth, hecontinued to focus upon the sluggish pace of job creation asthe biggest intermediate challenge to the economy. Theseconcerns have certainly been validated by both the increase inweekly unemployment claims and the disappointing payrollreport for May (see figure 5). Although the recent increase ininflation has also been something of a concern forpolicymakers, there is little evidence that price pressures arebecoming more broadly-based and/or deeply entrenched. Sincemuch of the increase in inflation is linked to higher food andenergy prices, recent signs of a moderation in commodity pricessuggest that inflationary risks will ease. This is where the “stick” part comes in. With employmentgrowth running well below what is typically seen at this part ofthe business cycle, the Fed has little incentive to go out andraise interest rates anytime soon. Bernanke emphasized that until and unless job creation strengthens materially, the Fed willneed to retain an accommodative policy approach. At the sametime, fears that the Fed may be feeding into a globalinflationary trend should begin to abate. Bernanke went togreat lengths in his formal remarks to dismiss the notion thatFed policy is behind the inflation surge in emerging markets,citing instead the demand-driven surge in commodity prices. Soas overall price pressures begin to moderate along with food

Fig. 4: Tactical deviations across asset classes

Deviations from benchmark (9-12 month time horizon)

Equity

Fixed Income

Cash

Commodities

+ ++ +++–– –– – – nUnderweight Overweight

Source:UBS WMR, as of 12 June 2011 Note: Deviation from Benchmark Labels: + = moderate overweight, ++ = overweight, +++ = strong over-weight, n = neutral, - = moderate underweight, -- = underweight, --- = strong underweight, n.a. = not applicable. For the interpretation of the suggested tactical deviations from benchmark, please see the most recent Investment Strategy Guide.

Fig. 5: May’s employment report was disappointing US non-farm payrolls

(1000)

(800) (600)

(400)

(200)

0200

400

600

2000 2002 2004 2006 2008 2010 2012

US non-farm payrolls

Source: Bloomberg, UBS WMR, as of 10 June 2011

UBS Weekly Guide


and energy costs – partly as a result of the economic soft patch– any pressure on the Fed to “reign in” policy will ease as well.This offers policymakers a great deal of latitude to maintain thecurrent easy policy conditions for an extended period of time.While our economics team is still calling for an initial rate hikeduring the first quarter of 2012, it well may be that the Fedremains sidelined even longer. But what Chairman Bernanke didn’t say in Atlanta may be everybit as important as what he did say. With QE2 drawing to aclose at the end of this month, there has been a fair amount ofspeculation over whether or not the Fed will initiate some newpurchase program to help both bolster the economy andsupport risk assets. Evidence that the economy has decelerated during the current quarter – coupled with the recent pullback inequity markets – has only served to reinforce this view in somequarters. While Bernanke noted that the Fed would continue itsexisting policy of reinvesting principal payments from maturing securities to maintain the Fed’s balance sheet at current levels,he offered no indication that a new phase of monetary stimuluswas anywhere in the works. He pointed out that monetary policy cannot be a “panacea” – suggesting that QE3 isn’t onthe table given the current set of macro, market and liquidityconditions. In short, market participants will need to find acomfort level that the current policy mix will be adequate topromote a gradual improvement in cyclical conditions andadequate support for risk assets because there don’t appear tobe any more carrots in the offing either.

UBS Weekly Guide


Buy the “favorite five” currencies on dollar rallies

Fig. 1: Favorite five very strong versus four big curencies

USD, EUR, GBP, JPY vs. CHF, NOK, SEK, AUD, CAD real exchange rates

Real effective exchange rate

80

85

90

95

100

105

110

115

120

125

130

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

AVG G4 AVG F5

Source: Thomson Reuters, UBS WMR, as of 1 June 2011

Fig. 2: Favorite five seeing faster growth recovery

USD, EUR, GBP, JPY vs. CHF, NOK, SEK, AUD, CAD GDP growth

GDP growth

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11AVG G4 AVG Fav 5

Source: Thomson Reuters, UBS WMR, as of 1 June 2011

While our forecasts project that the US dollar will again rally against many of the major currencies, we think the Greenback will likely lose purchasing power over the long term. In the short term an end to the Federal Reserve’s additional quantitative easing, decent US GDP growth in the second half of 2011 and persistent concern about the structural integrity of the Eurozone could help the dollar. However, the long term fiscal burdens and continued problems in real estate market are among some of the major challenges to the US. The other main currencies – the euro, Japanese yen and British pound all also face troubles with government debt and low growth. We think short term rallies in the US dollar should be used to diversify dollar-based portfolios. The dollar is currently weak, making these and many other currencies expensive for US investors. We do, however, suggest adding fundamentally sound international investments as opportunities arise. We think it is

worth looking beyond the traditional main currencies, yet for many investors emerging markets can be too volatile or have too few investment opportunities to justify a major portfolio allocation. We believe the Canadian dollar, Australian dollar, Swedish krona, Norwegian krone and the Swiss franc are attractive from a long-term economic perspective. The NOK and CAD show a strong correlation to oil prices coupled with strong domestic economies, while the AUD is linked to demand from China, coal and base metals. The franc (CHF) does well in times of financial and economic stress, and Switzerland offers a strong domestic economy. Sweden (SEK) has resource constraints so is quick to see inflation and higher interest rates; additionally, the currency is linked to a healthy domestic stock market. All of these countries have strong public balance sheets and export bases. Australia offers the highest interest rates, which has been one reason for its especially sharp appreciation over the past year.

Katherine Klingensmith, Strategist Constantin Vayenas, Analyst

UBS Weekly Guide


Our Best Ideas at a Glance The following list represents investment strategy recommendations that we believe will provide attractive opportunities over the next 9-12 months. Asset Classes

Preference for Equities over Bonds

Currencies

Preference for British Pound (GBP) and minor currencies, in particular the Swedish Krona (SEK), the Norwegian Krona (NOK), the Canadian dollar (CAD), as well as selected Asian emerging market currencies.

Equities

International markets Select Emerging Market equities, especially China, Brazil and Taiwan

UK equities

Within US equities Information Technology: in particular hardware and equipment, semis Consumer Staples: in particular companies with emerging markets exposure, especially

within household products, personal care and beverages Healthcare: in particular drug distributors Within Financials: insurers Within Industrials: mid/late cycle end market capital goods companies Within Materials: chemicals and industrial gas Within Energy: oilfield services Within Consumer Discretionary: auto suppliers, restaurants, lodging Within Telecom: wireless towers & data centers

Preference for Growth over Value stocks

Fixed Income

Within US dollar Fixed Income High Yield Corporate bonds Investment Grade BBB-rated Corporate bonds

Commodities

We see upside potential for crude oil, gold, platinum, selected base metals and agricultural commodities.

UBS Weekly Guide


Review/Preview of the Financial Markets

Review 6 June – 10 June

Preview 13 June – 17 June

In the past week, the US trade balance for April grabbed a lot of attention, as it narrowed significantly from revised USD 46.8 billion (bn) to USD 43.7bn. While export growth remained solid at 1.3% month-over-month (m/m), imports fell by 0.4% m/m due to Japan-related supply disruptions. At face value, the narrowing implies a boost to 2Q11 real Gross Domestic Product (GDP) growth of about 2 percetange points at an annual rate. However, slower imports imply less inventory accumulation as well as weaker consumption. Additionally, import growth will likely pick up again by June, as supply disruptions are already fading. We, therefore, keep our current real GDP growth forecast of 2.5%

quarter-over-quarter annualized for the second quarter of 2011, but highlight the upside risk to that forecast. Other US economic data releases were generally dismissive of a deeper or more prolonged growth soft patch. The Beige Book, with information from Federal Reserve business contacts compiled through 27 May, showed a less pronounced deceleration in real activity than the May Institute for Supply Management (ISM) surveys and labor market report suggested. The reported stated that “economic activity generally continued to expand since the last report, though a few districts indicated some deceleration.” This was only a marginally weaker tone than the prior Beige Book.

Non-mortgage consumer credit continued to rise in April, although it was still driven by government-led student loans. This notwithstanding, the apparent stabilization bodes well for a less fragile consumer sector. Consumer sentiment indicators continued to send mixed signals, with the IBD/TIPP economic optimism index rising in early June week versus early May. However, the daily Rasmussen index and monthly Conference Board have not rebounded yet from their drops in March/April. Thomas Berner, CFA, Economist

The week ahead should offer some relief in the data regarding price pressures from the past surge in the price of oil. Producer and consumer prices were likely depressed by falling energy prices in May. We expect the Producer Price Index (PPI) for finished goods to rise a moderate 0.1% m/m, with core PPI a stronger but still moderate 0.2%. In similar fashion, the Consumer Price Index (CPI) will likely flat, but core CPI up 0.2% m/m in May. In both cases, the moderation in monthly increases should not suffice to reverse earlier upward trends in y/y rates. That said, we expect these uptrends to be moderate due to still ample resource slack in the economy.

Whether the inflation moderation will be an important driver for a rebound in consumer sentiment remains to be seen. We expect it to be and forecast further improvement in the University of Michigan consumer sentiment index from 74.3 in May to preliminary 75 in June. In our view, and improvement in consumer and/or business sentiment will be crucial to support our view of a temporary growth soft patch in the first half of 2011. The timely Empire State and the Philly Fed manufacturing climate indexes will likely show little change in June. We forecast 11 for the Empire index, after 11.9 in May. At this level it is roughly consistent

with the growth message of the national ISM index. The Philly Fed prints a bit weaker at 3.9 in May. However, also here we don’t expect much change and forecast a level of 4 in June. While we think that the Japan-related supply disruptions will be transitory, June manufacturing climate data will possibly not reflect that yet. The Conference Board index of leading indicators will likely rise 0.5% m/m in May. Given the current debate sourrounding the depth and length of the current growth slowdown, the leading indicators will likely get more attention than usual. Thomas Berner, CFA, Economist

UBS Weekly Guide


Earnings Calendar The Earnings Calendar provides publicly announced reporting dates and times of companies covered by Wealth Management Research Americas. Reporting dates and times are subject to change by the reporting companies.

Date Ticker Company Reporting Period Time (EST) WMR-A Covering Analyst

Analyst Contact Information

14-JUN-2011 DRI Darden Restaurants, Inc.

Q4 2011 Earnings Release (Projected)

Unspecified Alexandra Mahoney

212-713-2825

14-JUN-2011 BBY Best Buy Co., Inc. Q1 2012 Earnings Release 8:00am Alexandra

Mahoney 212-713-2825

14-JUN-2011 ARG Amerigo Resources Ltd.

Q1 2011 Earnings Release Before Market Andrew Sutphin 212-713-

3646

15-JUN-2011 PGR Progressive Corp May 2011 Sales and Revenue Release

After Market Michael Dion 212-713-3825

16-JUN-2011 CCL Carnival Corp. Q2 2011 Earnings Release (Projected)

Unspecified Alexandra Mahoney

212-713-2825

18-JUN-2011 KR Kroger Q1 2011 Earnings Release 10:00 am Sally Dessloch 212-713-

9667

UBS Weekly Guide


Key Economic Indicators

Date Indicator Time (EST) Unit Consensus UBS Est. Previous

14-Jun-11 Retail Sales (May) 8:30 AM m/m -0.4% -0.8% 0.5%

14-Jun-11 Retail Sales excluding Autos (May) 8:30 AM m/m 0.3% -0.2% 0.2%

14-Jun-11 Producer Price Index (PPI, May) 8:30 AM m/m 0.0% 0.1% 0.8%

14-Jun-11 Core PPI excl. Food & Energy (May) 8:30 AM m/m 0.2% 0.2% 0.3%

14-Jun-11 Business Inventories (Apr) 10:00 AM m/m 1.0% 0.8% 1.1%

15-Jun-11 Consumer Price Index (CPI, May) 8:30 AM m/m 0.1% 0.0% 0.4%

15-Jun-11 Core CPI (May) 8:30 AM m/m 0.2% 0.2% 0.2%

15-Jun-11 Empire State (Jun) 8:30 AM index 13.0 11.0 11.9

15-Jun-11 Industrial Production (May) 9:15 AM m/m 0.3% 0.0% 0.0%

15-Jun-11 Capacity Utilization (May) 9:15 P AM 77.0% 76.8% 76.9%

15-Jun-11 Housing Market Index (Jun) 10:00 AM index 16 16 16

16-Jun-11 Jobless Claims (Jun 4) 8:30 AM level 419 k 420 k 427 k

16-Jun-11 Housing Starts (May) 8:30 AM level 540 k 570 k 523 k

16-Jun-11 Current Account Balance (Q1) 8:30 AM level -$126.0 bil -$125.5 bil -$113.3 bil

16-Jun-11 Philadelphia Fed (Jun) 10:00 AM index 7.0 4.0 3.9

17-Jun-11 U. of Michigan Sentiment (June) 9:55 AM index 74.5 76 74.3

17-Jun-11 Leading Indicators (May) 10:00 AM m/m 0.2% 0.5% -0.3%

Source: Bloomberg & UBS estimates, as of 10 June 2011. In developing the WMR quarterly forecasts, WMR economists worked in collaboration with economists employed by UBS Investment Research (INV). All remaining forecasts were developed by economists employed by INV. INV is published by UBS Investment Bank. Forecasts and estimates are current only as of the date of this publication and may change without notice. m/m = month-over-month, q/q = quarter-over-quarter, k = thousand, bn = billion, y/y = year-over-year, mn = million

UBS Weekly Guide


Total return indices in USD: Barclays Capital

Asset Class Strategy & Performance

Market Returns

Extended Asset

Allocation Strategy* MTD YTD 2010

US Equity + -4.4% 3.5% 16.9% Non-US Developed Equity

— -2.6% 3.8% 9.4%

Emerging Market Equity

+ -2.1% 0.5% 19.2%

US Fixed Income — 0.2% 3.2% 6.5% Non-US Fixed Income

— — 0.9% 6.1% 4.9%

Cash (USD) + 0.0% 0.1% 0.1% Commodities n 0.1% 2.7% 16.8% Total return indices in USD: Russell 3500, MSCI EAFE & Canada, MSCI Emerging Markets, BarCap US Aggregate, BarCap Global Aggregate ex-USD, Citigroup 3-month T-bill, DJ UBS

US Equity Sector Strategy & Performance

Market Returns Sector Strategy*

Weekly MTD YTD 2010

Cons. Discr. — -2.2% -4.7% 3.5% 27.7% Cons. Staples + + -1.0% -3.1% 7.2% 14.1% Energy — -0.4% -2.9% 10.2% 20.5% Financials n -2.6% -5.8% -6.1% 12.1% Healthcare + -0.3% -1.8% 13.1% 2.9% Industrials n -2.2% -5.0% 3.3% 26.7% IT + + + -3.2% -5.2% -0.6% 10.2% Materials n -1.3% -4.2% -0.5% 22.2% Telecom — — -2.7% -4.4% 3.7% 19.0% Utilities — — -0.7% -2.0% 7.0% 5.5% Total return indices in USD: S&P 500 sector indices

US Dollar Fixed Income Strategy & Performance

Market Returns Strategy*

MTD YTD 2010

Treasuries — 0.3% 2.9% 5.9% TIPS — 0.4% 5.5% 6.3% Agencies — 0.1% 2.1% 4.7% Inv. Grade Corporates + -0.1% 4.1% 9.5% High Yield Corporates + -0.7% 5.2% 15.1% Preferred Securities + -0.7% 4.9% 13.7% Mortgages — 0.4% 3.2% 5.7% Emerging Markets n 0.6% 4.2% 12.5% Municipals n.a. 0.5% 4.8% 2.3% Total return indices in USD: BAS / Merrill Lynch

Bond Regions Strategy & Performance


MTD YTD 2010 US + 0.2% 3.2% 6.5% EMU** n 0.9% 9.0% -4.5% UK + -0.6% 7.5% 4.6% Japan — — 1.7% 1.5% 17.5% Other + n.a. n.a. n.a.

Equity Region Strategy & Performance


MTD YTD 2010

US Equity n -4.4% 3.5% 16.9%

S&P 500 n.a. -4.1% 3.4% 15.1%

DJIA n.a. -3.5% 5.9% 14.1%

Nasdaq n.a. -5.3% 1.6% 18.0%

EMU** — -1.8% 11.2% -3.4%

UK + -2.5% 6.0% 8.8%

Japan — -1.9% -7.9% 15.6%

Other Developed — n.a. n.a. n.a.

Emerging Markets

+ + -2.1% 0.5% 19.2%

Total return indices in USD: S&P 500, DJIA, Russell 3500, MSCI for non-US. Price return indices in USD: Nasdaq

Equity Size, Style Strategy & Performance

Market Returns Style Strategy* MTD YTD 2010

Large-Cap Value — -4.2% 3.6% 15.5%

Large-Cap Growth

+ + -4.2% 3.8% 16.7%

Mid-Cap n -5.0% 4.9% 25.5%

Small-Cap n -6.5% 1.6% 26.9%

REITs — -4.8% 8.6% 27.9%

Total return indices in USD: Russell

Regional Indicators

2011 Consensus S&P 500 EPS USD 100

2011 UBS WMR S&P 500 EPS USD 100

2012 Consensus S&P 500 EPS USD 113

2012 UBS WMR S&P 500 EPS USD 108

UBS WMR 2011 year-end S&P 500 target 1410

Price to earnings+ 12.4x

Price to book value+ 2.2x

+Consensus 12-month forward estimates, as of 10 June 2011.

Total return performance as of close of business on 9 June 2011.

*Please see the scale in the Appendix and the most recent Investment Strategy Guide for an interpretation of the tactical deviations and an explanation of the corresponding benchmark allocation. **EMU = European Monetary Union and is comprised of European countries that have adopted the Euro as their currency.

Please note these important color designations:

+ – Indicates +/- change in most

recent update

UBS Weekly Guide


Reports of Note Published in the Last Week

Friday, 10 June Asia Pacific economics: New Zealand dollar - patience will be rewarded Soaring global food prices and improving terms of trade have helped turn New Zealand's trade balance into surplus, a structural shift which is likely to keep buoying the New Zealand dollar (NZD). Healthy fiscal conditions also offer underlying support. Any setbacks in the value of the NZD should provide buying opportunities, unless global optimism weakens drastically.

Thursday, 9 June Global economy: ECB signals rate increase As we have been expecting, the European Central Bank (ECB) has left its refinancing rate unchanged. Mr. Trichet described monetary policy as accommodative and used the terms "strong vigilance," which supports our call for a rate increase on July 7.

Wednesday, 8 June UK equities: Fair value or fantasy? UK revenue growth expectations barely match UK inflation; analysts are cautious and appear to follow regional macro outlooks. Likewise margins are not forecast to improve significantly over current levels - we stress test these assumptions. Ex-financials and materials UK equities remain good value. Commodity price forecasts matter more to the UK market than GDP estimates.

Wednesday, 8 June Asia ex Japan currencies: High inflation drives Asian currency appreciation Inflation in Asia is likely to remain uncomfortably high. With further advances in commodity prices and narrowing spare capacity, inflation pressure in the region is set to broaden. To counter-balance mounting price pressures, we expect Asian central banks to keep up their currency appreciation. The Chinese Yuan Renminbi and Malaysian Ringgit offer defensive investors an attractive return profile, with moderate levels of volatility. For investors with greater tolerance for currency volatility, the Korean Won and Indonesian Rupiah are our best picks on a total return basis.

Wednesday, 8 June UBS research focus: Inflation - The next wave takes shape In The Decade Ahead, 6 February 2011, we concluded that US inflation will likely accelerate during the decade. We build on this discussion by assessing inflation risk from a global perspective. We shed light on how inflation arises and what its associated costs and mechanisms are, as well as discuss relevant scenarios for future price developments and derive investment recommendations from these.

Wednesday, 8 June US economics: Weak May data likely temporary The objective of this report is to review the technical conditions of the more established, actively traded domestic Exchange-Traded Funds (ETFs) that track an underlying index or aim to represent a particular sector or industry. We then correlate this report with our broader macro market and sector analyses. In this review, we provide updates on various technical indicators including 10-week and 30-week moving averages, intermediate-term trends and important technical support and resistance levels. We try to identify potential trading/investment opportunities and downside risks in various key domestic markets. The following are technical commentaries, and not necessarily Buy or Sell recommendations. Note: All last sale prices are as of 03 June 2011.

Tuesday, 7 June Emerging Market Economics: Egypt’s Deteriorating Finances Even though spreads on Egypt’s sovereign bonds have widened markedly, we would advise investors to avoid buying them at this point. We expect the Egyptian pound to come under depreciation pressure, and would avoid investing in Egyptian money market instruments. We expect the valuation discount of Egyptian equities to widen and the market to trade at a substantial discount to the MSCI Emerging Markets index over a prolonged period of time.

UBS Weekly Guide


Tuesday, 7 June Valuation Report: Mind the gap Corporate bonds generated positive total returns in May as the strong rally in Treasuries bolstered performance of both investment grade and high yield bonds. As we have discussed in the past, we believe that at current low yields, the directionality of credit spreads is largely a function of interest rates, with credit spreads unlikely to tighten further until there is a backup in rates. Accordingly, credit spreads widened a touch in recent weeks – a move that we see driven by exceedingly low yields, rather than any deterioration in fundamentals.

Monday, 6 June US Equities Utilities: Monthly – Macro Rotation Utilities have powered higher, outperforming the S&P 500 by almost 300 basis points in the last month driven by falling treasury yields and a rotation into defensive sectors. The good returns have been driven by better sentiment, not higher earnings expectations. However, going forward, we believe this outperformance is unsustainable as the economic recovery proves durable and bond yields reverse their decline. We increasingly see better value in the unregulated power generators.

Monday, 6 June Dividend Ruler Stock List: June Update The 10-year treasury bond yield has rapidly declined to under 3.00% from 3.75% in early February. Lower bond yields increase the relative attractiveness of dividend paying stocks. With the S&P 500 dividend yield at 2.0%, the current 1.06% yield differential between bonds and stocks is lower than 97% of monthly observations over the past 30 years. Our recent US sector strategy changes—increasing allocations to Consumer Staples and Healthcare—enhances the attractiveness of our dividend ruler stocks list. Consumer Staples and Health Care represent over one-third of our list due to their healthy combination of current dividend yield and historical dividend growth and consistency.

Monday, 6 June Arab countries in transition: The demographics of MENA One of the fundamental drivers of change in societies – demographics – will continue to make its impact felt in North Africa and the Middle East (MENA) for years to come. A process towards greater political pluralism is under way, but will take time, and a wide range of outcomes is likely. The prospect of reform and growth should attract investment in the medium term, but the region faces hurdles, including structural weaknesses and skills shortages.

To access these reports please contact your Financial Advisor or access the reports via online services.

UBS Weekly Guide


Appendix

Scale for tactical deviation charts – Performance and Strategy tables

Symbol Description/Definition

+ moderate overweight vs. benchmark

– moderate underweight vs. benchmark

n Neutral, i.e. on benchmark

++ overweight vs. benchmark – – underweight vs. benchmark n/a not applicable

+++ strong overweight vs. benchmark – – – strong underweight vs. benchmark

The overweight and underweight recommendations represent tactical deviations that can be applied to any appropriate benchmark portfolio allocation. They reflect WMR’s short- to medium-term assessment of market opportunities and risks in the respective asset classes and market segments. The benchmark allocation is not specified here. Please see the most recent Investment Strategy Guide for definitions/explanations of benchmark allocation. They should be chosen in line with the risk profile of the investor. Note that the Regional Equity and Bond Strategy is provided on an unhedged basis (i.e., it is assumed that investors carry the underlying currency risk of such investments). Thus, the deviations from the benchmark reflect our views of the underlying equity and bond markets in combination with our assessment of the associated currencies.

Source: UBS WMR, All market performance data is from Bloomberg data as of date listed on top of this document, using representative indices and is provided for information only.

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