UBS Investors Guide

Until Sir Edmund Hillary reached the summit of Everest, he would not rest. Nor would Tenzing Norgay.
(The Himalayas, 1953.)
UBSinvestors guide
Wealth Management Research 29 October 2010
This document is a sample only. Opinions expressed within may no longer reflect the current view of Wealth Management Research. This document is for distribution only under such circumstances as may be permitted by applicable law.
SAMPLE
Switzerland
Until we all understand the true value of relationships.

Whatever happened to listening? Its the bedrock of relationships. But somewhere along the line, it dropped off the radar. The world was on send. But we have two ears. And one mouth. Why? To listen more. And speak less. At UBS, were listening harder than ever before. To the words. To the silences. So until we really hear you
The art of currency war A dangerous conflict

Interview Why governments threaten to devalue their currencies Market outlook Between growth and inflation
We will not rest
ab
ubs.com/wewillnotrest-uk
Names and/or references to third parties in this print advertisement are used with permission. UBS 2010. All rights reserved.
Asset Allocation How to invest

> See more on page 14
Key investment ideas
Asset allocation Central banks are starting to re-apply stimulus to spur the recovery but the economic outlook remains muted, with inflation risks lurking. We favor equities and corporate bonds over cash and government bonds. We like high dividend yielding bonds and stocks.
Underweighted Liquidity Bonds Equities Listed Real Estate Commodities
Neutral
Overweighted
STILL OPEN
Equities Germanys strong exports and domestic demand Germany is the growth engine of Europe. Its exporters are highly competitive and well positioned to profit from worldwide growth. German firms also benefit from robust domestic demand, and their valuation is attractive, both compared to global equities and on an historical basis. See page 16
Equities Equities offer attractive long-term potential and should be a natural hedge against inflation. Emerging markets appeal, as does Germany, with solid fundamentals and international competitiveness.
Index: Seite 2_Asset-Alloc._1043 US EMU UK Switzerland Japan Emerging Markets
STILL OPEN
Equities Emerging market equities are growing faster Over the next few years, we expect emerging markets to grow faster, on average, than developed economies. Emerging market government debt levels and budget deficits are less burdensome than in the developed world. Accordingly, we view emerging markets as attractive for equity investors with medium-term investment horizons. See page 18
Bonds Quantitative easing may keep rates low, but government bonds are unattractive. High debt and, eventually, inflation risks may well spark a selloff. Corporate and high-yield bonds and emerging market debt are attractive.
Index: Seite 2_Equity_1043
STILL OPEN
Government Corporate High Yield Emerging Market
Equities Profit from equity market volatility Valuation ratios of equity markets are attractive. In view of a slower economic growth rate ahead, equities remain vulnerable to earnings disappointments. In this environment, investors may wish to consider investment products that can profit from volatility and optimize returns when markets are tending sideways.
Currencies With their stronger fiscal positions and better growth outlook, we prefer the currencies of commodity producers (CAD, AUD, NZD, NOK) and emerging market currencies over the EUR, USD, GBP and JPY.
Index: Seite 2.3_Bond_1043
STILL OPEN
USD EUR JPY GBP CHF AUD, CAD, SEK
Bonds Avoid long-term government bonds We expect long-term government bonds to suffer over the next 12-24 months and recommend not committing new funds to them. Instead, we favor high-yield corporate and emerging market bonds. Better profit prospects, stronger debt-to-equity ratios and simpler access to sources of financing all speak in favor of high-yield bonds.
Index: Seite 2_Asset-Alloc._1043
Commodities We recommend avoiding broad-based commodity exposure as we expect prices to move sideways. Central bank demand and government debt concerns should support gold, but the price could ease somewhat in the short term.
STILL OPEN
Commodities Real Estate Hedge Fonds Private Equity
Hedge Funds Find opportunities and manage risk Hedge funds recovered in 2009 and navigated the volatile markets in 2010 rather well. As the macroeconomic environment clears, we expect opportunities to arise. Overall, hedge funds have a stabilizing effect on a portfolio. Investors should, however, be aware of the additional risks and the illiquidity of some hedge fund classes.
The above charts reflect which asset classes and markets are considered attractive or not attractive, respectively. They reflect the view of UBS Wealth Management & Swiss Banks Global Investment Committee (GIC) and are not subject to all legal provisions governing the independence of financial research.They may not fully reflect the views of UBS Wealth Management Research.
Index: Seite 2.5_Trad-Asset-Classes_1043
Editorial
Contents
Dear readers, Roughly a month ago, Brazilian Finance Minister Guido Mantega warned that the global economy had entered into an international currency war. Last weekends G20 summit lowered temperatures somewhat, but depending on its size, the Feds second round of quantitative easing (QE2), expected at its 3 November meeting, could reheat matters. This is why we put the currency war at the center of this issue of UBS investors guide.
Focus themes Focus News in brief Interview Fault lines Readers corner
14 15 16 19 20 21 22
Sun Tzu
Long-time readers of UBS investors guide will note that we have refreshed our look and added a number of informative features. Our goal remains the same: to give investors timely insights into financial markets and economic affairs.
Andreas Hfert Chief Economist
Explanations, appendix, disclosures, publication data
49 51
You will find a comprehensive glossary of technical terms on the internet site www.ubs.com/glossaire If you require further information on the instruments or issuers mentioned in this publication, or you require general information on UBS Wealth Management Research including research policies and statistics regarding past recommendations, please contact either your Client Advisor or the mailbox <UBS-research@ubs.com> giving your country of residence. Please see important disclaimer and disclosures in the Important Disclosures section (page 5051). UBS Financial Services Inc. analysts did not provide any content relating to equity or debt securities, or issuers of equity or debt securities, contained in this report. This report has been prepared by UBS AG and UBS Financial Services Inc. UBS Financial Services Inc. is a subsidiary of UBS AG. UBS investors guide, a UBS Wealth Management Research publi cation for private clients, is published monthly, on Fridays, in German, French, Italian and English. The publication is available by e-mail and in some instances as a printed edition. If you wish to subscribe, please contact your UBS client advisor. Details regarding the information contained in this publication, restrictions on distribution and other legal considerations are given on pages 50 and 51. In all cases we advise anyone interested in selling or buying a product or financial market instrument mentioned in this publication to consult their client advisor first. Price information for more than 600,000 financial market instruments is available at www. ubs.com/quotes. Past performance is no indication of future performance. The market prices provided are closing prices on the respective principle exchange. This applies to all performance charts and tables in this publication.
UBS investor's guide 29 October 2010
Financial markets overview
Michael Bolliger and Teck Leng Tan then broaden our analysis, examining the reactions of emerging markets to QE2. The various views presented in these articles on QE2 and the prospect of a currency war share one conclusion. It is the view expressed by the celebrated Chinese general and strategist of war, the legendary Sun Tzu: There is no instance of a nation benefiting from prolonged warfare.
Financial markets overview Overview Economy Equities Bonds Currencies Commodities Real Estate Non-traditional asset classes Technical analysis
23 24 27 28 34 35 39 40 41 42 43 44 45 46 47 48
There is no instance of a nation benefiting from prolonged warfare.
In the Focus article we explain what a currency war is and we lay out the positions of the various combatants. It is also the topic of our Interview with Simon Evenett, Professor for International Trade at the University of St. Gallen in Switzerland. In the Education section, we update an article written a year-and-a-half ago that looks at currency war tactics and at one possible Chinese response to QE2.
Key investment ideas Market outlook Investment ideas Overview key investment ideas Asset allocation
Focus themes
04 07 08 09 10 11 12 13
Focus
Focus
The era of international cooperation that followed the global financial crisis is over. Today, national interests dominate policymaking. Indeed, a currency war looms as governments threaten to devalue their currencies to boost exports. We look at the key protagonists in this conflict, assess the potential damage, and identify some currencies that should profit by staying above the fray.
Andreas Hoefert, Chief economist, UBS AG
At a first glance it seems an obvious choice. If a country wants to boost its exports and help its domestic firms compete with foreign imports on the home market, it only needs to weaken its currency. The simplest way to do this is to print money and then buy with it foreign currency that it holds in its reserves. In theory, a central bank can always weaken its currency since it has an unlimited supply via the printing press. In our modern, unbacked currency system, central bank money can be created with a mere click of a computer mouse. However, a central bank can run out of ammunition that is, deplete its foreign exchange reserves, when it comes to strengthen its currency. An increased amount of money in circulation can lead to higher inflation. This happens first through higher prices on imported finished goods, and then through higher prices on commodities and intermediate goods, pushing up the prices of domestically produced goods. Another long-term effect is more subtle. Shielded from international competition, domestic producers can easily grow lazy and less competitive. They tend to produce less efficiently, with higher costs and lower quality than their international competitors. And they may skimp on investments in R&D and production upgrades. Successful exporting nations with long track records, like Switzerland, Germany and Japan, have prospered and kept their industrial
UBS investors guide 29 October 2010
4
Focus themes
The art of currency war
bases intact not by devaluating their currencies but by letting them appreciate. Their strong currencies have had the effect of systematically challenging their industries to innovate and excel. The US, the UK, France and Italy, on the other hand, have seen their industrial sectors shrivel at almost the same pace as their currencies depreciated. So far, we have focused on unilateral measures by one country to weaken its currency. We also need to look into the reaction of other countries, since a war implies at least two belligerents. If one country wants to prevent another country from weakening its currency, it must launch a counterattack weakening its own, through the same means: printing money. If every country prints more money, then the status quo is maintained. However, such a dramatic global increase in liquidity would likely produce both asset bubbles and, ultimately, high inflation, making it an option of mutually assured destruction, in our view. While exporters might prosper in the short run, consumers would definitively be worse off as prices of imported goods increase. In this respect, currency wars have consequences that are similar to those of protectionism. Nonetheless, countries around the globe are currently evaluating this option.
Bold gestures from the US The US argues that to rebalance its economy after the financial crisis and to ensure a recovery that creates jobs, it will need to export more. While not explicitly stated, one of the goals of the second phase of quantitative easing (QE2) will be to reduce the value of the dollar and thus boost exports. In fact, we think QE2, whose details are likely to be announced at the next Federal Open Market Committee on 3 November, could be the first shot fired in a currency war. The Fed is expected to buy US government debt on a grand scale. All the hints, chatter and innuendo about QE2 over the past couple of weeks has already been enough to significantly weaken the US dollar on a trade-weighted basis. But, as we have seen, for QE2 to really push the dollar lower, all the other countries must refrain from similar measures. And this is far from certain. China, for example, could use the Feds purchases of US Treasuries as the occasion to sell some US government bonds, since its foreign exchange reserves are overly exposed to these securities. In fact, a scenario where each Treasury bond bought by the Fed would see one sold by China is not all that farfetched. In such tit-for-tat volley of T-bill grenades, the US goal of lowering interest rates and the value of the US dollar would be difficult to achieve.
Focus
Focus
Successful exporting nations with long track records, like Switzerland, Germany and Japan, have prospered and kept their industrial bases intact not by devaluating their currencies but by letting them a ppreciate.
Moreover, even if the US dollar weakens, it is not even certain that US exporters will really benefit from it. The US has not experienced exportled growth for half a century and any boost in exports to China presupposes that the US can produce things that China actually wants to buy. Chinas measured response China pegged its currency to the US dollar in the aftermath of the Asian currency crisis in 1997. It lifted this peg in July 2005 but unofficially reapplied it in July 2008, after letting the yuan appreciate by roughly 20% in three years. Today, China argues that letting the yuan further appreciate could damage the countrys export industry and undermine growth. And it is worth noting that at least half the world Southeast Asia, the commodity exporters and some European countries, like Germany, Switzerland and the Scandinavians has been profiting from Chinas breakneck growth. Pulling the plug on that dynamo would have broad, unpleasant consequences. Instead of crudely hacking at its currency, China argues that it can boost domestic demand by more subtle measures, like carefully tuned inflation. It asserts it can achieve a real appreciation of the yuan and benefit exporters to China. China is also trying to deflect some of the US pressure by diversifying its currency reserves, now at a truly mind-bending USD 2.6 trillion in 6
Japans debt-limited options Some things never change: Japan is once again on the verge of recession, with very low growth and persistent deflationary pressures. This has been the case for the past 20 years. Despite this dismal economic environment, the Japanese yen has recently appreciated quite dramatically, reaching a double-decade peak against the US dollar. Japan has been quite adamant about not letting the Chinese buy Japanese government bonds because they see this as a means to manipulate the yen. Sensitivities about currency interventions are running especially high these days. But with a debt-to-GDP ratio approaching a staggering 250%, merely servicing that debt, which increasingly burdens the governments budget, will soon require that the printing presses are set in motion. There is little alternative that we can see. Hence, Japan, too, might soon become a rather active currency warrior. Europes fuzzy wobble For the time being, the European Monetary Union seems unwilling to participate actively in a currency war. However, this could change. If the euro starts to appreciate even further against the dollar, calls to action will grow louder. At 1.40, the euro has had little impact on German exporters, but those countries in Europes soft southern underbelly, and France, will protest loudly if the euro strengthens further. At the same time, a stronger euro could exacerbate the imbalances of the two-tiered recovery in Europe, with Germany and northern Europe generally thriving while the rest of the currency union flounders. Heightened tensions among Eurozone members could even set off a fractious mini war on the Continent. No wonder EU policy makers are keeping their heads down on the currency issue.
Gimme shelter Given its limited prospects for success, we consider a currency war a rather dubious, even perilous, endeavor. We would expect such a conflict to dramatically increase volatility on the foreign exchange markets and in other asset classes. Moreover, global inflation fears could quickly displace todays deflationary sentiment. We have some doubts that the US Federal Reserve will succeed in lowering interest rates on the long end of the yield curve for as long as it wants to. At some stage, market participants will question the efficacy of quantitative easing and adapt their inflation expectations accordingly. This moment of truth could abruptly lift interest rates and depress bond prices. Hence, we recommend staying at the short end of the yield curve. And we look to mitigate interest rate risk in a portfolio by increasing credit risk. Depending on the individual portfolio, this may mean replacing some supposedly safe government bonds with selected corporate bonds, emerging-market sovereign debt and even high-yielding paper.
Implications for investors

If a full-fledged currency war were to ignite, we think the minor currencies, those that can resist the call to arms, would be the most attractive. We think the US dollar, the Japanese yen and the British pound are likely belligerents and also likely to suffer. While the euro may avoid the hostilities, the common currency has its own structural problems. Eventually, as markets adapt, we could see interest rates rise and bond prices fall, which favors the short end of the yield curve and, selectively, increasing credit risk. Some corporates should fare better than supposedly safe government bonds, as should some emerging-market sovereign debt. We also think gold will continue to appreciate. When the printing presses start to run hot, the dynamic between the paper currencies and the yellow metal will only work against the printers, in our view.
Focus themes
value, into other currencies, like the euro. This is how Chinas recent purchases of Greek sovereign bonds should be interpreted, in our view.
The problem with Swiss neutrality Even though neutrality is one of its cornerstones, we think Switzerland will be unable to avoid choosing sides if a currency war really flares up. If the euro began to weaken, either due to a new euro crisis or to the ECBs possible interventions in the currency war, then Switzerland would have to show its colors. In fact, the Swiss National Bank (SNB) fought some early currency skirmishes last spring, during the European sovereign debt crisis, when it tried, with only limited success, to counter a massive Swiss franc appreciation. The SNB or its surrogates bought roughly EUR 250 billion but the franc is still close to its all-time high against the euro, and below parity against the US dollar. In a currency war, the SNB could resume its purchases of francs even at the risk of undercutting its goal of price stability, albeit, we think, to a manageable extent.
If a currency war flares, we would rather watch than join battle.Clearly, the tactics of a currency war are complex and, as in real war, collateral damage is inevitable. When the principals have slugged it out, there will be time to pick winners.
News in brief
News in brief
3 November Fed decides on QE We expect the Fed to announce a new quantitative easing program to support growth, with a range of potential consequences that are discussed in this issue. 4 November European Central Bank announces interest rates We expect the ECB to stay on hold and to resist implementing any QE measures at this time. 4 November Bank of England announces interest rates Given the stronger than expected Q3 GDP of 0.8% qoq in the UK, we do not expect the BoE to vote for additional QE stimulus at its November meeting. We believe monetary policy is at the appropriate level for current economic conditions and expect an unchanged interest rate decision. 1112 November G20 summit in Seoul The global financial system and the world economy will continue to dominate G20 discussions. The implementation of the recent IMF reforms giving emerging markets more voting rights will be an interesting subplot.
The earnings season in the US has supported equity markets with strong third-quarter company results so far. Roughly a third of the S&P 500 companies have reported at the time of writing, with four-fifths of them delivering better profits than analysts expected at the start of the reporting season. In addition, half of companies reported higher sales than forecast. Companies in sectors sensitive to the business cycle such as Consumer Discretion-
On October 20, the Chancellor announced details on next years spending cuts. The coalitions strategy is to return the UK to a zero structural budget deficit within its parliamentary term. In fact, we estimate that the spending cuts (0.8% per year in real terms Term of the month
Germany
In the fast lane
Quantitative Easing (QE)
?
Germanys export-driven outperformance this year has won it high praise, and also a few jeers. But no one can deny its shown real
QE is sometimes called printing money, but that is not quite the case, since the central bank acquires assets that it hopes to sell at some point without taking a loss. That is one of several substantial risks inherent to QE: inflation can rise sharply, purchased assets can yield losses, which taxpayers will have to cover eventually, and currency values can be eroded.
You will find a comprehensive glossary of technical terms on the internet site www.ubgs.com/glossaire
strength while much of the developed world staggers in search of a recovery. Once labeled the sick man of Europe, Germany has spent much of the current decade correcting its post-reunification excesses. The cure has worked: The economy is highly competitive and unemployment is falling rapidly. Excessively low interest rates give Germany an additional boost. While long-term structural problems stemming from the countrys shrinking and aging population should not be overlooked, we believe Germany stands to outperform most of its peers in the coming years. Germany undoubtedly has one of the most successful export economies in the world. The countrys export strength is based on its ability to penetrate high growth markets, especially in the
Central and Eastern Europe (CEE) region and in Asia, and on its superior competitiveness gained through corporate restructuring and wage moderation. Thus, Germanys advantages in foreign trade are of a lasting nature and they allow Germany to benefit more during global cyclical upswings than most of its peers. If you would like to receive the full UBS research focus,Germany in the fast lane, please contact your UBS client advisor or visit UBS Quotes, our online finance portal.
8
Focus themes
Agenda
UK spending
A question of balance
over each of the next four years) will actually reduce GDP by 0.5% annually. Whether this is the right policy largely depends on your view of plausible Gilt rises for less controlled budgets. Clearly the coalition has chosen to rank financial risk ahead of growth risk, although the wider picture includes driving government spending as a percentage of GDP down to around 40% before the next election. The coalition has passed the baton for growth unambiguously to the private sector and the Bank of England.
US-equities Strong earnings results
ary, Industrials and IT produced solid results. Strong demand out of Asia and enterprise spending on IT and capital investments boosted results. Overall, earnings for the S&P 500 companies are likely to grow a good 25% compared to a year ago, remaining flat relative to the second quarter of 2010. In Europe, the earnings season is at an earlier stage, but the pattern looks very similar to that in the US. Results have been rather strong to this point, especially in cyclical sectors benefiting from strong emerging market demand.
Interview
Interview
Simon J. Evenett, professor of international trade and economic development at the University of St. Gallen, sees currency war as a dangerous spectacle caused by a reluctance to undertake serious national reforms. Countries that manipulate their currencies risk triggering protectionist counteractive measures to the disadvantage of all.
Interview by Simone Hofer Frei, Editor, UBS Wealth Management Research
Simon J. Evenett is Professor of International Trade and Economic Development, University of St. Gallen, Switzerland. Professor Evenett is an expert in the commercial policy and strategies of the USA, EU, and the rising economic powers, such as China. Previously he has taught at Oxford University and at the Brookings Institution, Washington DC. He was also Director of Economic Research, World Trade Institute, and has twice served as a World Bank official.
exchange rate rules. When the Americans set up the IMF and the World Bank after World War II, they set up very few rules for surplus countries because they were expecting to be one of them forever. Now that theyre a deficit country, theyve changed their view. Do we need rules for surplus countries? We need a system which encourages surplus countries such as China and Germany to come back into balance. But it will be very hard to define rules. It would have to be a rather informal commitment to expand domestic demand over exports, not a strict rule in the sense of a law. Its very hard to see how to fix a surplus: Surplus countries are not borrowing money from the IMF or the World Bank, so there is no leverage over them. They dont need any help which is normally the point when you can apply conditions.
Could such a response be an effective tool to bolster the US economy? No, the American economy will still have fundamental problems. American consumers will still be paying down their debt, the American infrastructure will still be poor quality, American schools will still be low quality. In essence, China is the contemporary scapegoat for many US problems, just like Japan was in earlier years.
Trade is good, protectionism is bad: this has traditionally been one of the most fundamental assumptions of economics. Now, even Nobel laureate Paul Krugman is calling for tariffs if China doesnt agree to revalue its currency. Has even this basic rule been proven wrong? The rule is not wrong. Americans should worry less about the weak renminbi, and focus more on getting the supply side of their economy in shape and their debt level down. The US have much bigger policy priorities than the Chinese exchange rate.
Do you see a way to rebalance the world economy? Rebalancing the global economy will require fundamental reforms in many countries. In deficit countries like the US and the UK, growth needs to shift from private consumption to more export-led growth. In the emerging markets, and particularly in China, there needs to be much Does the Chinese currency regime actually more private consumption and less dependence on export growth. These reforms require a major violate WTO rules? No. We can be quite clear about that because adjustment in policy mindset, and thats a big the WTO has always shied away from explicit reason why nothing has changed so far. 10
Whats the potential impact of the up coming US mid-term elections? The mid-term elections will play an important role in determining how strong president Obama actually is. A weakened Obama and a strong Republican candidate in the US presidential primaries could lead to a tougher line against China and even more protectionism. If those conditions come together, the next two years could Would an appreciation of the renminbi become very tough. create jobs in the US? It would not create enough jobs to offset the What impact can we expect for Switzerland recession. The Americans lost 8.3 million jobs and Europe? during the last recession. Currency manipulation If we do end up with more currency tension, issues are estimated to be responsible for no then the CHF and EUR will appreciate and put more than one fifth of total job losses in the US; European exporters under substantial pressure. the Americans have to fix the other 80 percent European exporters are used to currency fluctuations, but this is going to be a tougher few on their own. years for them, independent of the threat of Many US products contain parts that protectionism. were produced in China. What role does currency valuation play when it comes to outsourcing? Chinese valuation impacts American jobs less than it used to, but it could make production outsourcing less profitable which might even lead to job losses in American export industries, because they are so dependent on low-cost Chinese components. Thats why some people are saying the Americans had better be careful what they wish for.
11
Focus themes
The Americans had better be careful what they wish for
It seems like Japan, China, the US and the UK are setting their monetary policies to strengthen their own competitiveness, rather than working together to rebalance the world economy. What are the risks here? Currency wars are very dangerous because you end up with currency manipulation triggering trade protectionism that is the main risk. If a countrys quantitative easing or expansionary monetary policy leads to the devaluation of its currency, trading partners will likely respond with their own trade policy measures.
How realistic is the threat of a trade war? A currency crisis need not become a trade war. There needs to be some trigger, which in this case would probably come from US politics. Were in for a very unstable time: Apart from the US-Sino currency conflict, other emerging markets could also implement capital and trade controls. I think we will see some very strong rhetoric in the run-up to the G20 summit. From there, much depends on whether President Obama feels he needs some distraction from domestic weakness. Investors should look for the trigger in US politics, but we havent had it yet and lets hope we dont.
Fault lines
Readers corner
If China started to sell its US Treasury bills on a large scale, their prices would tumble, triggering a sharp increase in US interest rates.
by Andreas Hfert, Chief Economist, UBS AG
In 2004, calling it a kind of balance of financial terror, Lawrence Summers, President Obamas former Director of the National Economic Council, noted that The incentive for Japan or China to dump Treasury bills is not very strong given the consequences it could have for their own economies. Back then, Chinas foreign reserves were roughly USD 600 billion; now they stand at USD 2,600 trillion. A large portion of Chinas reserves is in US government bonds. If these bonds were sold on a large scale, their prices would tumble, triggering a sharp increase in US interest rates. Thus Chinas vast currency hoard looms large as a threat to the US economy. But Summers spoke of a balance of financial terror, and there was indeed a counter-threat. By selling its reserves, China would lose money twice: the sale would weaken the US dollar, thus undercutting the proceeds of the China is hoarding foreign reserves sale; and with higher US interest rates, Chinas Chinas foreign reserves in bn USD 2500 bond portfolio itself would lose value. Today, with the Fed talking up QE2 to keep 2000 interest rates low, the balance of financial ter1500 ror could tilt in favor of China. In buying Treasuries, the Fed presents China an interesting op- 1000 portunity: since the Fed aims to keep interest 500 rates low, Chinas portfolio would not be hurt 0 by lower bond prices. The dollars from the sale would have no effect on Chinas currency, and, 1978 1983 1988 1993 1998 2003 not least, China could rebalance its rather poorSource: Bloomberg, UBS WMR ly diversified foreign reserve portfolio. 12
Of course, this dollar windfall would need to be reinvested somewhere. And this recalls another image of 20th century warfare, the Maginot Line, Frances supposedly impenetrable defensive cordon along its border with Germany prior to World War II. It was, of course, anything but secure. The German army simply went around it, invading neighboring Belgium on its way to Paris. So who, or what, might play the role of Belgium to Americas financial Maginot Line? The euro is one obvious candidate. The European Central Bank is far more reluctant to enter a currency war than the Fed. By buying euro-denominated assets with its US dollars, China would drive up the euro and keep Eurozone interest rates low. Commodities are another route to avoid self-inflicted damage from a weakened dollar. Building up inventories might appeal to Chinas economic planners and voracious industrial base.
We always hear about the competitive advantages of low-cost labor in emerging markets. Is that a bottomless well, or might China, for example, some day run out of cheap labor?
Kilian Reber, Analyst, UBS AG
A client from Toronto, Canada
2008
Dear Sir, For now, there is still plenty of cheap labor in most of the emerging markets, including China, India, or Vietnam. Unemployment rates for unskilled workers are still much higher than those of skilled workers, indicating ample reserves. In these countries, a substantial share of the population on average 35% lives in the countryside. In China the portion of the population living in rural areas is as high as 57%. In economic terms, these rural populations constitute a reserve supply of workers that can continue to supply urbanized centers with cheap labor. If policy makers ease migration laws and ease moving from rural to urban areas, shortages of cheap labor should not become an issue in the medium-term for emerging markets. Over the longer term, cheap labor will become more expensive and ultimately scarcer in the emerging markets. This is a natural process as these markets slowly grow wealthier, further reinforced by slowing rates of population growth and diminishing rural reserves. Another factor comes into play: as todays emerging markets increase their ability to move up the value chain and produce higher-quality products, the demand for cheap labor will decrease, while the need for skilled labor will increase. For example, one of the key goals of Chinas new five-year plan is to raise wages across the board. Even though this might appear to weaken
the export-oriented growth model, we think this shift will likely prove successful. It should enable China to grow stronger from within, based on domestic consumption, while, at the same time, raising living standards. But even if China slowly cedes its cheap-labor leadership, from a global perspective, we are unlikely to run out of this vital resource any time soon. Less developed countries, those that we call frontier markets, for example, Bangladesh and Sri Lanka, will still offer plenty of lowcost labor in the foreseeable future. They both have ample rural reserves and fast-growing populations. We expect to see a gradual shift of cheap-labor jobs from todays emerging markets to the frontier markets a process that has already started to a certain extent.
Whats on your mind?

> Ask the expert at: ask-ig@ubs.com
13
Focus Focus themes themes
Outflanking the Feds Maginot line
Cheap labor
Market outlook
Market outlook
Liquidity floods favor equities

Central banks seem ready to reopen their arsenal of stimulus measures to support a flagging economic outlook. We expect this to keep a floor under asset prices, but it also raises the spectre of inflation. In this environment, we prefer attractively valued equities.
Mark Andersen, Strategist, UBS AG
Following a mixed summer, the economic outlook for the second half of 2010 has begun to stabilize and even show some signs of improvement. These developments have been supported in a large part by the apparent readiness of some central banks to provide further stimulus. The economic recovery nevertheless remains comparatively moderate and bumpy, with inflation risks lurking on the horizon. Between growth and inflation The financial crisis has sent developed economies central banks into uncharted territory as they try to support asset prices through massive balance sheet expansion. While some argue
that such steps are necessary to avoid a renewed recession, raising the amount of mon ey in circulation is also associated with inflation risks thus putting central banks in a difficult situation as they try to maintain growth without creating excessive inflation. We advise investors to maintain a balanced portfolio that includes a large allocation to socalled real assets, which are affected by inflation only to a limited degree. Traditional government bonds, for example, cannot be considered risk-free in the current environment as they normally pay out a nominal value at maturity, independent of any price changes. Increased inflation thus lowers their real value.
Performance of the main asset classes Total return, in %

Listed Real Estate Emerging Market Bonds High Yield Bonds Emerging Market Equities Corporate Bonds (IG) Ination Linked Bonds Government Bonds Global Equities Commodities Hedge Funds Cash 0% Last 3 months 2% YTD 4% 6% 8% 10% 12% 14%
Data as of 25. October 2010
Equities offer better inflation protection Central bankers commitment to growth supports equities, which we think offer attractive long-term upside potential. Government bonds have historically offered attractive potential yields, but in the current environment we see a better outlook for equities (see box). Equities should also offer a partial hedge against inflation as earnings tend to increase with broader price levels. Our equity investment themes have had a strong run in recent months, especially in emerging markets. Looking ahead, we prefer bonds and stocks with high dividend yields and structural growth themes. Many of them can be found in emerging markets, but investors should also keep in mind that investing in the right developed-market companies can provide less risky, indirect exposure to emerging market growth. This is particularly relevant now that some emerging market economies have started to use taxes and volume caps to slow investment inflows and currency appreciation. We think longer-term investors are likely to look back on 2010 as a good time for equity investment, but markets could still take a quick breather before continuing their upward trend. Expectations of further quantitative easing and increasing worries about currency wars could both lead to temporary bouts of increased market volatility. We believe that these corrective moves will provide buying opportunities, not a motive to sell, for investors looking to increase their overall equity allocation.
Equities offer a more attractive yield than government bonds

Investments in 10-year US government bonds return 2.5% if held to maturity. In 2011, global equities are expected to return 8 cents of earnings on every dollar invested. We expect these numbers to grow over the coming 10 years and to keep up with inflation. This should translate into attractive dividend and capital gains for equity investors. All things considered, we think investors looking for long-term wealth management have clear reasons to prefer equities over government bonds. Favor equities over government bonds in %
12 10 8 6 4 2 2000 2002 2004 2006 2008
Earnings yield of equities Government bond yield Source: I/B/E/S, Thomson Financial, UBS WMR
Index: p15_asset allocation box
16%
18%
20%
Source: Bloomberg, BoA Merrill Lynch, Thomson Reuters, UBS WMR
14
15
Investment idea
German equities: Strong exports, domestic demand

Investment idea: Robust German exporters, solid domestic demand and good valuations make German equities an attractive investment.
Markus Irngartinger, Stategist, UBS AG, Andr Schtz, Analyst, UBS AG
Investment funds Fidelity Funds Germany Fund A Euro Swiss securities no. 207537 The fund seeks to invest in a diversified portfolio of German companies, and offers investors the opportunity to profit from the Fidelity global research platform. Global reach and a deep analytical process are essential when analyzing many of the multinational companies based in Germany.
Investment solutions
Despite concerns about the health of the European financial system and the global economy, long-term investors should not completely lose sight of the fundamental economic backdrop for German equities. Despite some deceleration of economic growth in Asia, demand for goods Made in Germany remains solid. Coupled with prudent cost management, company profits should advance further albeit at a lower pace than witnessed in the first half of the year. However, the Ifo Business Climate index, one of the most important economic indicators in Germany, tells us that the German economy remains in good shape.
Europes economic growth engine Within Europe, Germany is currently the economic growth engine. The labor market is recovering and consumer sentiment picked up continuously. This should provide support for consumption going forward and help companies that have a strong exposure to domestic demand. Despite its recent strength, the euro continues to trade below its level at the beginning of the year. Thus, German companies become even more competitive on international goods markets. Relative to their European peers they already have a competitive advantage, as their
unit labor costs rose less strongly over the past decade. Thus, earnings of internationally geared companies seem well supported currently despite a slowdown in sales growth. In addition, from a valuation perspective, the German market trades below 11 times next years earnings, which is significantly below its long-term average.
Investment funds UBS (D) Aktienfonds Special I Deutschland Swiss securities no. 347637 An actively managed equity portfolio investing in German companies. Most holdings are German blue chips, with the addition of some attractive small and midcaps (up to 15%). Stock selection is based on company fundamentals, management quality and growth prospects.
Strong recovery of Germanys industry Industrial production Germany vs. Eurozone

120 115 110 105 100 95 90 85 80
Teutonic tiger or predatory trading partner? At a glance

Germany is the growth engine of Europe. German exporters are highly competitive and in a good position to profit from worldwide growth. Companies benefit from robust domestic demand as well, which is not as burdened by austerity measures as Southern Europe. Valuation is attractive compared to global equities and on a historical basis. Germanys export-driven outperformance this year has won it high praise, and also a few jeers. But no one can deny its shown real strength while much of the developed world staggers in search of a recovery. In our new UBS Research Focus Germany in the fast lane, we take an in-depth look at Germanys robust economy. We find a few clouds, plenty of reasons to cheer, and we uncover some perhaps surprising investment opportunities in the heart of Old Europe. If you would like to receive the full report, please contact your UBS client advisor or visit our online finance portal UBS Quotes.
2000 Germany
2002
2004 Eurozone
2006
2008
2010
Source: Reuters EcoWin, UBS WMR
These investment product recommendations originate in full from units outside Wealth Management Research. These units are not subject to all legal provisions governing the independence of financial research. The Directives on the Independence of Financial Research, issued by the Board of Directors of the Swiss Bankers Association (SBA) do not apply.
16
17
Investment ideas
Thema Tue modiamet inis erilla consecte feuisim.
Emerging markets equities look attractive
Investment funds UBS (Lux) Equity Fund Emerging Markets (USD) P-acc Swiss securities no. 1660412 The equity portfolio invests in emerging market companies and is diversified across sectors and countries. The active selection of suitable equities is based on a disciplined investment philosophy and globally integrated, state-of-the-art fundamental research.
Investment idea: Many emerging market economies are growing faster than the developed countries. This should support their equity markets.
Costa Vayenas, Analyst, UBS AG
Investment solutions
Over the past three decades, emerging markets have had their fair share of booms and busts, leading to severe economic, financial and banking crises. But the last time around, most of them managed to ride out the global crisis. There are two key reasons for this. First, many of the governments learned from previous crises that the state needs to live within its means. This caused many emerging market governments to be cautious about taking on new debt. The second lesson is that in times of need cash is king. This caused them to follow a strategy of putting money aside during good times in anticipation of rainy days. Accordingly, quite a few countries built up large foreign exchange
reserves. And so, when the stormy weather ar rived following the sub-prime crisis, many emerging countries found that their own economic houses were built on stronger foundations than during previous global downturns. As a result, not only do many emerging market governments today have debt levels that are low compared to their own histories, but that are lower than those of countries in the European Union and the United States. This comparatively favorable financial backdrop is helping support higher average eco nomic growth in many emerging markets, which should be good news for business. To be clear, emerging market equities remain an asset class
that is more sensitive to changes in risk sentiment and which usually underperforms during global market corrections. However, we believe emerging markets which enjoy strong growth, still-reasonable valuations on average, and lower fiscal pressures than many developed countries currently remain one of the most attractive equity markets to invest in. How to invest Unless an investor is prepared to closely follow developments in each and every market, we recommend investing in a broadly diversified emerging market basket rather than taking concentrated exposure to just a few countries.
Investment funds UBS (Lux) Equity Fund Asian Consumption (USD) P-acc Swiss securities no. 1041161 The fund aims to achieve long-term capital growth. To do so, it mainly invests in Asian equities (ex Japan) in the following sectors: consumer staples, consumer discretionary and healthcare. In particular, the fund invests in companies that provide goods and services to Asian consumers. Its focus is on companies that benefit the most from Asian consumption growth. This may also include equities in the mobile communications and financial services sectors. The fund is actively managed. The active selection of suitable equities is based on a disciplined investment philosophy and globally integrated, state-of-the-art fundamental research.
Outperforming emerging market equities Total return in USD, Jan 2005 = 100
300 250 200 150 100 0 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09
At a glance
Over the next few years, we expect emerging markets to grow faster, on average, than developed economies. Emerging markets withstood the global financial crisis relatively well, and emerging market government debt levels and budget deficits remain in better shape than those of the developed world. Accordingly, we currently view emerging markets as attractive for equity investors with medium-term investment horizons.
Emerging markets World Source: Thompson Reuters, UBS WMR
These investment product recommendations originate in full from units outside Wealth Management Research. These units are not subject to all legal provisions governing the independence of financial research. The Directives on the Independence of Financial Research, issued by the Board of Directors of the Swiss Bankers Association (SBA) do not apply.
18
19
Key investment ideas Overview

This page contains investment recommendations which originate in full from units outside Wealth Management Research. These units are not subject to all legal provisions governing the independence of financial research. The Directives on the Independence of Financial Research, issued by the Board of Directors of the Swiss Bankers Association (SBA) do not apply.
Asset allocation
Instruments classified by asset classes
Valor
NAV 1
Performance (%) 2 1 year 3 years 5 years
Volat. (%) 3 3 years
Recommended asset allocation: CHF

Conservative without equities Objective: Real capital protection Regular interest income Minimal price fluctuations No equities Conservative Objective: Long-term, real asset protection Regular interest income, supplemented by dividends and capital gains Minor price fluctuations Small equity share (1030%)
10% 80% 10% Money market Bonds Equities Global Switzerland Hedge funds Bonds CHF EUR Emerging markets USD 7% 50% 23% 13% 10% 20%
Bonds: Avoid long-term government bonds We expect longer-term government bonds to suffer over the next 12-24 months and recommend not to commit new funds to longer-term bonds but to favor corporate and emerging market bonds with short and medium maturities. UBS (Lux) Medium Term Bond Fund CHF P-acc UBS (Lux) Medium Term Bond Fund CHF P-dist UBS (Lux) Medium Term Bond Fund EUR P-acc UBS (Lux) Medium Term Bond Fund USD P-acc UBS (Lux) Medium Term Bond Fund GBP P-acc UBS (Lux) Bond SICAV Short Term EUR Corp. P-acc UBS (Lux) Bond SICAV Short Term USD Corp. P-acc CHF CHF EUR USD GBP EUR USD 359 536 359 535 359 539 359 540 585 271 1 457 360 1 455 256 144.98 105.48 187.20 209.50 194.07 112.86 126.57 2.54 2.54 2.62 3.82 3.93 2.97 4.12 12.22 12.22 15.62 17.52 18.91 2.98 11.45 11.48 11.48 17.48 27.09 25.23 6.51 20.96 3.70 3.70 2.10 3.26 2.53
High yield corporate bonds Better profit prospects, stronger debt-to-equity ratios and simpler access to sources of financing all speak in favor of high yield bonds. AXA IM FIIS US Short Duration High Yield CHF Hedged Fidelity Funds European High Yield A Distr UBS (Lux) Bond Fund Euro High Yield P-acc CHF EUR EUR 11 501 394 1 097 929 883 660 104.11 9.43 132.72 18.86 22.72 25.23 34.60 35.45 45.10 18.41 18.71
Equities: The next frontier Frontier markets are for investors looking for tomorrows growth regions at the end of the risk spectrum. Templeton Frontier Markets Fund A USD 4 613 685 16.48 8.93 Emerging markets equities Many emerging market economies are growing faster than the developed countries. This should support their equity markets. JPMorgan Funds JPM Emer. Mark. Eq. A (dist) USD UBS (Lux) Equity Fund Emerg. Markets (USD) P-acc UBS (Lux) Eq. Fund Em. Mark. Infrastr. (USD) P-acc USD USD USD 358 448 1 660 412 3 393 490 33.00 29.54 73.27 21.87 18.29 18.41 4.57 11.67 77.80 59.67 33.07 35.64
Bonds CHF EUR Emerging markets USD
56% 13% 8% 3%
33% 7% 7% 3%
German equities: Strong exports and domestic demand Robust German exporters, solid domestic demand and good valuations make German equities an attractive investment. UBS (D) Aktienfonds Special I Deutschland Fidelity Funds Germany Fund A Euro EUR EUR 347 637 207 537 401.53 26.31 9.00 15.52 21.85 22.70 18.80 12.15 24.31 25.12
Moderate Objective: Long-term real asset growth Steady interest and dividend yields and capital gains Moderate price fluctuations Balanced allocation between equities and bonds (equity share 3060%)
Money market Bonds CHF EUR Emerging markets USD Equities Hedge funds Equities Global Switzerland 5% 25% 10% 6% 6% 3% 50% 20%
Aggressive Objective: Long-term, large real asset growth Capital gains, interest and dividend yields Strong price fluctuations Investment with a focus on equities (4585%)
Gold: An undersupplied market Strong financial demand and a recovery in jewelry consumption should lead, with constrained supply, to higher gold prices. UBS-IS Gold (CHF) hedged ETF A UBS-IS Gold (EUR) hedged ETF A UBS-IS Gold ETF (USD) A CHF EUR USD 10 602 712 10 602 714 10 602 718 137.75 93.50 133.03
Emerging market sovereign bonds USD- and EUR-denominated emerging market sovereign bonds still offer attractive opportunities at current levels despite the recent rally. Goldman Sachs Glob. Em. Mark. Debt Portf. EUR hed. Goldman Sachs Glob. Em. Mark. Debt Portfolio USD UBS (Lux) Em. Econ. Fund Glob. Bonds (CHF) P-dist UBS (Lux) Em. Econ. Fund Global Bonds (USD) P-acc Source: UBS WM&SB 1 as of 22 October 2010 (or latest available)
2
Money market Bonds CHF EUR USD Equities Hedge funds Equities Global Switzerland
2% 10% 4% 3% 3% 73% 15%
EUR USD CHF USD
2 642 346 2 346 278 11 238 697 849 534

3
12.41 15.28 1672.36
18.70 18.74 16.06
28.67 25.65
48.23
18.22 18.51
30% 20%
43% 30%
as of 30 September 2010
as of 30 September 2010, annualized

The above chart shows the highlights of UBSs investment policy at a glance. These standard profiles are not the result of independent financial analysis, as they come from units outside Wealth Management Research. Specific allocations within a portfolio, however, should be based on the individuals investment profile, the particular needs of the investor and other aspects such as market liquidity. In general, asset classes and markets that are considered attractive are weighted higher than the normal long-term portfolio weight (benchmark); those considered unattractive are weighted lower. The standard portfolios are only applicable at the time of publication and may change over time. Please contact your client advisor to obtain the latest standard portfolios.
20
21
Money market Bonds (no equities) Hedge funds
Asset allocation
Market update
Economy
Selected UBS investment solutions

Multi Assets UBS (Lux) Strategy Xtra SICAV Fixed Inc. (CHF) P-acc UBS (Lux) Strategy Xtra SICAV Yield (CHF) P-acc UBS (Lux) Strategy Xtra SICAV Yield (EUR) P-acc UBS (Lux) Strategy Xtra SICAV Yield (USD) P-dist UBS (Lux) Strategy Xtra SICAV Balanced (CHF) P-acc UBS (Lux) Strategy Xtra SICAV Balanced (EUR) P-acc UBS (Lux) Strategy Xtra SICAV Balanced (USD) P-acc UBS (Lux) Strategy Xtra SICAV Growth (EUR) P-acc UBS (Lux) Key Sel. Sicav Global Alloc. (CHF) P-acc UBS (Lux) Key Sel. Sicav Global Alloc. (EUR) P-acc UBS (Lux) Key Sel. Sicav Global Alloc. (USD) P-acc UBS (Lux) Key Sel. Sic. Global Allocation Focus Europe (CHF hedged) P-acc UBS (Lux) Key Sel. Sic. Global Allocation Focus Europe (EUR) P-acc UBS (Lux) Key Sel. Sic. Global Allocation Focus Europe (USD) P-acc
1
Valor
NAV 1
Performance (%) 2 1 year 3 years 5 years
Volat. (%) 3 3 years
CHF CHF EUR USD CHF EUR USD EUR CHF EUR USD CHF EUR USD
3 637 327 1 796 535 1 796 499 2 320 197 1 796 537 1 796 517 1 939 581 1 796 526 1 910 945 1 910 942 1 910 935 2 622 499 2 622 496 2 622 500
10.32 10.53 11.45 10.78 10.24 11.15 11.35 10.86 9.86 10.49 11.86 9.12 9.38 9.49
1.69 2.56 5.30 5.52 1.82 5.88 5.20 5.77 5.90 5.53 7.12 5.18 5.39 6.06
5.96 0.18 0.61 16.57 11.01 9.67 21.76 21.41 19.59 15.23 13.72 12.48 10.68
2.16 5.70 8.20 0.54 7.13 7.56 12.78 8.20 2.84
7.90 6.33 10.34 11.08 10.88 11.21 15.49 19.38 19.59 21.32 18.73 19.01 18.65
Global Switzerland, Eurozone, US, UK Emerging markets Brazil, Russia, India, China Equities Global outlook Emerging markets Switzerland Europe US Asia Pacific Equity fund recommendations Bonds Government bonds and interest rates Corporate bonds Bond recommendations Emerging market bonds Bond fund recommendations Currencies Currencies Currency pairs (USDCHF, EURCHF, EURUSD, GPBUSD) Commodities Commodities Oil, gold, silver, copper Real estate Real estate Switzerland, Europe, US, Asia Hedge funds & private equity Hedge funds and private equity Fund recommendations non-traditional asset classes Technical analysis
24 25 26 27
28 29 30 31 32 33 34
Source: UBS WM&SB as of 22 October 2010 (or latest available)
35 36 37 38 39
as of 30 September 2010
as of 30 September 2010, annualized
42 43
44 45
46 47 48
Units and/or shares of UBS Exchange Traded Funds are bought and sold on a securities exchange. Dow Jones, STOXX and Dow Jones EURO STOXX 50 are trademarks and/or service marks of Dow Jones & Company, Inc. and/or STOXX Limited. UBS-ETF DJ EURO STOXX 50 based on Dow Jones EURO STOXX 50 is not sponsored, endorsed, sold or promoted by Dow Jones or STOXX, and neither Dow Jones nor STOXX makes any representation regarding the advisability of trading in the product. UBS AG has been licensed by FTSE International Limited to use the name FTSE 100. The MSCI indexes are the exclusive property of Morgan Stanley Capital International Inc. (MSCI). MSCI and the MSCI index names are service mark(s) of MSCI or its affiliates and have been licensed for use for certain purposes by UBS AG (UBS). The products referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such product. This product is not sponsored, endorsed, sold or promoted by SIX Swiss Exchange and SIX Swiss Exchange makes no representation regarding the advisability of investing in the product. The SMI is a registered trademark of SIX Swiss Exchange, and any use thereof requires a license. Please refer to UBS Quotes or ask your client advisor for further information or a complete documentation of these products.
Appendix Explanations Disclosures
49 50
22
23
Market update
40 41
Economy Global
Economy Regions
Dwindling spirit of cooperation

Coordinated action from governments and central banks has averted a meltdown in the financial system, stabilized the economy and, most recently, stregthened the security buffer for the banking system with Basel III. We think these reforms may well mark the end of internationally coordinated economic policy. Economic trends are now moving in sharply different directions around the world and the tentative recovery seen in the industrialized nations in particular is putting the recent spirit of international cooperation at risk. Various governments are now increasingly pursuing their own interests and are keen to tackle stubbornly high unemployment by protecMacroeconomic forecasts in %
2009 US Canada Japan Germany France Italy UK Eurozone Switzerland Sweden Spain Australia China Asia ex Jp/Cn/In 2.6 2.5 5.2 4.7 2.5 5.1 4.9 4.0 1.9 5.1 3.7 1.2 9.1 0.6 20101 2.7 3.1 3.1 3.3 1.7 1.1 1.6 1.7 2.7 4.0 0.1 3.4 10.0 5.3 20111 2.8 2.8 1.5 2.2 1.9 1.6 2.3 1.9 2.3 2.8 1.0 3.8 8.7 4.3 2009 0.3 0.3 1.3 0.2 0.1 0.8 2.2 0.3 0.5 0.3 0.2 1.8 0.7 1.8 20101 1.7 1.7 0.9 1.2 1.7 1.5 3.3 1.6 0.7 1.4 1.5 3.0 3.0 2.7 20111 1.6 2.4 0.3 2.0 1.5 1.9 2.7 1.8 0.9 2.3 1.6 3.1 4.0 3.2 EURUSD GBPUSD USDJPY USDCHF UBS WMR Forecasts Purchasing Power Parity Sources: Reuters EcoWin, Thomson Reuters, IMF, UBS WMR EURCHF GBPCHF Switzerland UK Japan Eurozone United States 3m 10y 3m 10y 3m 10y 3m 10y 3m 10y 2009 26.10.10 0.7 3.2 1.2 3.3 0.5 1.4 1.2 3.6 0.4 2.1 0.3 2.6 1.0 2.5 0.2 0.9 0.7 3.0 0.2 1.6 6 M1 0.3 3.0 1.0 2.8 0.2 1.2 0.8 3.5 0.5 2.0 12 M 1 0.8 3.3 1.5 3.3 0.3 1.4 1.0 3.8 1.0 2.3
Switzerland
The monetary policy assessment of the Swiss National Bank (SNB) left the benchmark rate unchanged and surprised the market by giving a relatively gloomy economic outlook; the SNB is forecasting that economic growth will slow appreciably from the second half of the year due to the strength of the Swiss franc and a weakening trend in the global economy. UBS does not share this pessimistic view. The Swiss economy is healthy and did not have excessive debt levels going into the crisis. The UBS forecast is for robust economic growth of over 2% in 2011.
Eurozone
The economic recovery in the eurozone is continuing. Despite a slight downturn, the purchasing manager indices for October still indicate expansion. However, there are significant differences between member states: while the indices in Germany and France are rising month-onmonth, in Spain and Ireland they are falling, suggesting a shrinking economy. This mixed picture within the eurozone is a monetary challenge for the European Central Bank, which unlike other large central banks appears to have no plans for a further easing at present.
tionist policies that are detrimental to foreign competitors. Firstly, we are seeing the threat of a currency devaluation spiral, either by countries using the printing press to finance purchases of their own government bonds (the US) or by directly intervening in the currency markets. S econdly, there is a danger of more trade barriers being erected to protect domestic sectors from unwanted foreign competition. We do not currently believe these trends will escalate, but they must be monitored as they could hurt the global economy in the longer term.
Daniel Kalt, Economist, UBS AG
Exchange rates
26.10.10 1.3966 1.5790 80.74 0.9711 1.3563 1.5326 3 M1 1.41 1.60 82 0.94 1.32 1.50 6 M1 1.35 1.60 85 0.96 1.30 1.54 12 M 1 1.39 1.66 89 0.96 1.33 1.59 PPP 2 1.23 1.65 89 1.20 1.48 1.97
The Fed is about to get (Q)easier: The rhetoric from Federal Open Market Committee (FOMC) members over the past few weeks implies additional quantitative easing or QE2. While the economic data continue to point to growth stabilization and some of the timeliest indicators hint at a slight pickup in growth, key FOMC members see a high output gap and below-target inflation as inconsistent with the Feds dual mandate for full employment and price stability. We expect the FOMC to announce a piecemeal QE2 program on 3 November.
Third-quarter GDP grew by a strong 0.8% q/q, which helped ease fears that the fiscal cuts in Chancellor Osbornes spending review will derail the recovery. The latest MPC minutes showed an unusual 1-7-1 spilt, with Andrew Sentance voting for a rate hike, and Adam Posen looking to extend QE. With the Fed all but certain to launch QE2 in November, attention now turns to whether the BoE will follow suit. We dont believe the Q3 data warrants more QE, but the MPC are likely to be very alert to any sign of further weakness in the coming weeks.
24
25
Economy
Real GDP growth in %
Inflation in %
Interest rates
US
UK
Emerging markets
Emerging markets
Emerging markets edging toward currency war

Attractive investment opportunities in emerging markets have not passed unnoticed globally. The resulting inflows have increased the appreciation pressure on local currencies.
Michael Bolliger, Analyst, UBS AG
Brazil
In October, Brazil twice increased its tax on foreign fixed income investments, which now stands at 6%. We think Finance Minister Guido Mantegas message is clear: Brazil will do whatever it takes to avoid further appreciation of its currency. In the shorter term, we expect increased exchange rate volatility, especially until the end of October, when Brazilians will elect a new president. However, until we see some meaningful economic improvement in the US, we do not expect the Real to trend significantly weaker against the greenback.
Russia
Russias economy had been lagging behind emerging markets in Latin America and Asia, but the latest numbers on industrial production, capacity investments and unemployment surprised markets on the upside. This confirms our view that the recovery in Russia is gaining traction and offers some interesting opportunities. The equity market is attractively valued and we like some of Russias USD-denominated sovereign bonds and various corporate sector issues. However, less transparent corporate governance and the countrys overall high dependence on oil prices remain two key risk factors investors need keep in mind.
Several countries have recently introduced some form of capital control to limit their currencies from further strengthening. Brazil increased taxes on foreign fixed income investments to 6%. In Thailand, foreign investors now have to tax 15% of their interest rate income and capital gains on government bonds. We think the potential for further capital controls is highest in Asia and Latin America. In Asia, risks are greatest in the export-oriented economies, including Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand, as well as in Indonesia, where the central bank thinks the rupiah is overvalued. In Latin America, risks are highest in Brazil and Peru. Whos afraid of currency appreciation? Currency appreciation can be contained in other ways. Delaying the tightening of monetary policies the emerging market equivalent of quantitative easing is one form. While helpful in the short run, the longer-term consequences often include rising inflation and interest rates, two major obstacles for economic growth. Our calculations show that monetary policies in Brazil, Indonesia, Peru, and Turkey should be tighter. Only a few countries have decided to tighten fiscal spending instead. This also fosters currency appreciation (though less immediately) and is unlikely to help a politicians popularity ratings. The longer-term consequences, howev26
er, are largely positive for economic development and stability. Chile is one of the few countries that has proceeded along these lines. Interventions in foreign exchange markets are another popular measure. We estimate that central bank reserves globally have increased by USD 500 billion this year. While more reserves help prepare for rainy days, history shows that interventions often do not change the underlying trend of exchange rates. Rather, they can be quite costly and can also fuel inflation. Investment implications In several emerging markets, we expect interventions on a daily basis in the months ahead. While limiting the appreciation potential of emerging market currencies, we believe that several emerging market currencies still offer attractive opportunities. For these, the yield pickup is attractive, especially compared to the US dollar, the euro, and the British pound; and although we may see bouts of weakness ahead, we expect emerging market currencies to trend higher in the medium to long term.
Watch the US dollar

In markets where risks of capital controls are highest, investors might decide to wait until tensions ease. The strength, or rather, weakness, of the US dollar is an important indicator to watch. Should the dollar continue to fade in the weeks ahead, we expect tensions to rise and risks for further capital controls to spiral upwards.
The latest data out of India has been rather disappointing. Industrial activity decelerated sharply compared to consensus estimates. This is in line with lower PMI readings for the manufacturing sector. With the wholesale price index inflation sticking at around 8.5% y/y only gradually slowing on base effects towards the end of this year and in early 2011 monetary policy is likely to have a hawkish bias. That said, the Reserve Bank of India will keep a close eye on industrial activity before tightening further. Indias overall growth story is not at risk, in our view. Demand remains firm, reflected in strong import growth.
At the National Party Congress, held from 15 to 18 October, the main item on the agenda was drafting of the 12th Five-Year Plan, which will be officially released in March 2011. The press release provides information on several targets. These include focusing more on sustainability and structural adjustments, increasing the proportion of household income in the economy, and promoting the culture industry as a core industry. The meeting also paved the way for political succession in 2012: Vice President Xi Jinping was appointed Vice Chairman of the Central Military Commission.
27
Economy
India
China
Equities Global
Equities Global
Global equity markets

German and UK equities are attractive German equities are our preferred choice in the Eurozone. Domestic demand should provide support for corporate revenue growth thanks to an improving labor market. We also expect that Asian demand will continue to fill the order books of Germanys highly competitive companies. UK equities offer attractive dividend yields in the current low interest rate environment. Moreover, large cap companies generate about twothirds of sales abroad, which provides exposure to growth regions as well as a certain degree of Emerging markets face higher volatility Measures to defend emerging market curren- immunity to domestic austerity measures. cies as recently witnessed in Brazil and ThaiMarkus Irngartinger, Strategist, UBS AG land might lead to heightened volatility on emerging equity markets, but should not compromise their long-term appeal. We keep our preference for emerging market equities as the structural arguments in their favor are still valid. Equity markets around the globe have risen on the expectation of further quantitative easing by Anglo-Saxon central banks. The pendulum of investor sentiment has recently swung away from recession worries back toward the hope of further stimulus from central banks. We continue to focus on attractively valued equity markets, with a particular emphasis on growth regions, and on companies offering solid earnings growth.
Profit from solid emerging market demand
In times of slowing economic growth, investors should look for structural themes that drive revenues, such as the strong demand from emerging markets. Many emerging market countries, particularly in Asia, are expected to grow much more strongly than Europe and the US in the coming years. Demand in these economies is driven by the need for infrastructure, which should boost earnings in the Industrials sector.
Consumer demand is also strong, as people gradually improve their standards of living. This benefits companies selling Consumer Staples and European luxury goods, where the European label makes all the difference.
Lena-Lee Andresen, Strategist, UBS AG
Equity markets & sectors

2009 US EMU UK Japan Asia Ex Japan Emerging Markets Switzerland 27.1 28.7 27.7 9.3 67.2 62.8 23.0 20.8 50.3 24.8 38.2 18.6 17.7 25.4 52.0 10.8 5.3 26.5 Equity Performance (%)1 3M Ytd 9.4 9.3 12.4 0.8 12.2 11.0 5.5 10.1 14.7 10.5 11.4 5.7 7.5 5.7 7.5 12.9 4.7 8.5 7.4 2.9 8.6 7.6 11.8 10.0 2.1 0.6 6.2 12.1 12.6 8.9 0.8 0.6 2.7 10.2 0.4 4.8 5 Y2 2.4 1.5 6.5 6.6 18.8 18.6 1.3 5.6 11.5 2.9 1.5 8.8 1.9 5.5 3.0 6.1 5.2 1.8 EPS growth 2010E 36.8 33.2 39.3 79.5 39.8 31.9 34.8 35.0 79.5 43.8 91.4 8.7 7.5 56.4 54.4 2.0 2.4 36.5
Data as of 25 October 2010 P/E 2010E 14.3 11.8 11.7 14.3 13.9 12.8 13.0 12.2 15.3 15.3 16.1 15.4 12.1 12.7 14.5 12.7 12.6 13.8 P/E 2011E 12.6 10.2 10.0 12.2 12.4 11.1 11.7 10.8 11.9 13.1 13.6 14.1 11.2 10.4 12.9 11.9 11.9 11.9 Div. yield 2010 2.0 3.5 2.0 2.2 2.2 2.9 3.0 1.8 2.1 1.7 2.9 2.7 2.7 1.1 5.3 4.7 2.5
Equities are cheap compared to the past Price-to-earnings ratio based on 12m expected earnings by analysts
35 30 25 20 15 10 0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Emerging markets UK Germany
Strong export and domestic demand supports German equities IfO Business climate and DAX-Index
110 105 100 95 90 85 8500 7500 6500 5500 4500 3500 2500
Energy Materials Industrials Consumer Discretionary Consumer Staples Health Care Financials Information Technology Telecom Services Utilities World
1996 1998 2000 2002 2004 2006 2008 2010 2012 Ifo business climate index (lhs) DAX index (rhs) Source: Thomson Reuters; UBS WMR
Source: Thomson Reuters; UBS WMR
Sources: MSCI, Thomson Reuters 1 Performance of equity markets and equity sectors in local currency excluding currency effects (hedged) 2 Annualized average performance
28
29
Equities
3.5
Equities Switzerland
Equities Europe
The missing link: investor confidence Switzerland

Despite the fact that Swiss companies are generally in good shape, investors have been hesitant for months. Most Swiss companies are reluctant to issue unequivocally positive financial forecasts in light of expectations that the economic recovery will stall, the risks associated with high sovereign debt levels and the poor visibility of incoming orders. Nevertheless, surveys have shown that many companies intend to hire additional staff, which we take to be a good sign in the medium term. Even the highly cyclical automobile and air transport industries are once again exhibiting a positive trend: the International Air Transport Association (IATA) has significantly raised its forecasts for the net profits of air transporters in 2010 and 2011. Only shareholders are holding back for now, as they seem to have too little confidence in the sustainability of the recovery. A price/earnings ratio of 12 for 2011 puts the market valuation below the historical average of about 15. We therefore expect Swiss equities to perform well and recommend that investors concentrate on quality, defensive growth and selected mid caps.
Stefan Meyer, Analyst, UBS AG
Most Preferred
Company ABB Adecco Aryzta Baloise (new) CS Group Flughafen Zrich gategroup Georg Fischer Kuoni Lonza Group Nestl Novartis Partners Group Roche GS Sulzer (new) Swiss Re Syngenta Valora Vontobel (new) Removed: Barry Callebaut Sector Industrials Industrials
Data as of 24 October 2010 ISIN CH0012221716 CH0012138605 CH0043238366 CH0012410517 CH0012138530 CH0010567961 CH0100185955 CH0001752309 CH0003504856 CH0013841017 CH0038863350 CH0012005267 CH0024608827 CH0012032048 CH0038388911 CH0012332372 CH0011037469 CH0002088976 CH0012335540
Positive outlook Europe

Eurozone equities managed to surpass the highs of May and August. The Eurostoxx 50 index broke the important 2800-2850 mark. Betterthan-expected earnings and a positive liquidity situation gave investors the ammunition necessary to break through this important barrier. The Eurostoxx 50 is likely to take aim next at the January and April highs, which were at the 30003050 level. The technical picture is constructive and would be further enhanced by a successful break above this level. Excluding minor pullbacks, we believe the backdrop for Equities remains positive. Attractive valuations, solid and growing earnings, and a low interest rate environment are clear positives when looking toward the year-end, which is normally a strong season for equities. Key medium-term targets for the Eurostoxx 50 are defined by the 50% and 61.8% Fibonacci retracements of the bear market, corresponding with 3160 and 3490. As in the broader market, it was mainly the more cyclically exposed companies, like ThyssenKrupp, Lufthansa and Groupe Eurotunnel, posting the biggest gains in our list. But some more defensive companies also did well. Munich Re benefitted from the announcement by Berkshire Hathaway. We think an attractive valuation and a 5+% dividend yield speak in favor of the stock.
Tim Gorl, Analyst, UBS AG
Most Preferred
Company ABInBev Ahold Allianz BMW BNP Paribas Carrefour Groupe Eurotunnel Inditex Linde Lufthansa LVMH Munich Re Reed Elsevier Royal Dutch Shell A Safran SAP SBM Offshore ThyssenKrupp TNT Total Vinci Removed: Country BE NL DE DE FR FR FR ES DE DE FR DE NL NL FR DE NL DE NL FR FR
Data as of 24 October 2010 Sector ISIN Cons. Staples Cons. Staples Financials Cons. Discret. Financials Cons. Staples Industrials Cons. Discret. Materials Industrials Cons. Discret. Financials Cons. Discret. Energy Industrials Inform. Techn. Energy Materials Industrials Energy Industrials BE0003793107 NL0006033250 DE0008404005 DE0005190003 FR0000131104 FR0000120172 FR0010533075 ES0148396015 DE0006483001 DE0008232125 FR0000121014 DE0008430026 NL0006144495 GB00B03MLX29 FR0000073272 DE0007164600 NL0000360618 DE0007500001 NL0000009066 FR0000120271 FR0000125486
Consumer Staples Financials Financials Industrials Industrials Industrials Cons. Discretionary Health Care Consumer Staples Health Care Financials Health Care Industrials Financials Materials Cons. Discretionary Financials
Least Preferred
Company Allreal Holding Emmi Ems Chemie (new) Geberit Lindt & Sprngli Petroplus PSP Swiss Property SGS (new) St. Galler KB Swiss Life Holding Removed: Sources: UBS WMR, Bloomberg Sector Financials
CH0008837566 CH0012829898 CH0016440353 CH0030170408 CH0010570767 CH0027752242 CH0018294154 CH0002497458 CH0011484067 CH0014852781
Consumer Staples Materials Industrials Consumer Staples Energy Financials Industrials Financials Financials
Least Preferred
Company Banco Pastor Elisa Salzgitter Removed: Sources: UBS WMR, Bloomberg Country ES FI DE
Data as of 24 October 2010 Sector ISIN Financials Telecomm. Materials ES0113770434 FI0009007884 DE0006202005
This alphabetically-ranked list is a selection of WMRs Most and Least Preferred equities for this region. A share is added to this list if WMR anticipates that it will outperform or underperform other shares in its region. Inclusion on, or removal from, this list does not necessarily imply that the respective stock rating has changed. At the end of of this publication further information about the WMRs methodology, stock rating system and EPL can be found. Please be aware that this is a selection of the EPL which could already be outdated. For actual ratings please refer to the respective EPL availabe on UBS Quotes/WMR portal or to your client advisor. EPL are not a template for the construction of investment portfolios.
30
31
Equities
Data as of 24 October 2010 ISIN
Equities US
Equities Asia & Pacific
Reduce cyclical exposure US

We recommend investors position themselves defensively in a US context and reduce their cyclical exposure. We are more positive on the defensive Healthcare sector, for example. We think that commodity-sensitive sectors, particularly Materials, are the most vulnerable to waning global growth and thus continue to avoid them. We also recommend being overweight in US Consumer Staples, given the sector's defensive characteristics and historically attractive returns. We remain positive on Technology as earnings reports confirm strong end-market demand. The sector should benefit from a rebound in enterprise technology spending. Stay focused on yields In this low interest rate environment, we believe equity investors should look to companies with compelling dividend yields. Besides attractive yields, we think most higher-yielding equities will meet or exceed consensus earnings estimates over the next year; we have a more cautious outlook for the overall market.
Stefanie Scholtysik, Analyst, UBS AG
Most Preferred
Company 3M Co. Anadarko Petroleum Apache Carnival Corp (new) Cisco Systems Citigroup (new) Coca-Cola Co Colgate-Palmolive Cooper Industries PLC CSX (new) Dow Chemical Du Pont Freeport-McMoran Gilead Sciences Goldman Sachs Google Hess Corp Hewlett Packard Merck & Co. Microsoft Navistar Internatl. (new) Rockwell Collins Travelers YUM! Brands Inc. Sector Industrials Energy Energy
Data as of 24 October 2010 ISIN US88579Y1010 US0325111070 US0374111054 PA1436583006 US17275R1023 US1729671016 US1912161007 US1941621039 IE00B40K9117 US1264081035 US2473617023 US2605431038 US2635341090 US35671D8570 US3755581036 US38141G1040 US38259P5089 US42809H1077 US4282361033 US58933Y1055 US5949181045 US63934E1082 US7743411016 US89417E1091 US9130171096 US9884981013
Cons. Discret. Inform. Techn. Financials Consumer Staples Consumer Staples Industrials Industrials Materials Materials Materials Health Care Financials Inform. Techn. Energy Inform. Techn. Health Care Inform. Techn. Industrials Industrials Financials Cons. Discret.
Currencies call the tune Asia Pacific

The strength of Asias currencies has been a big factor in the solid performance of Asian equities this year Asia ex-Japan equities traditionally have had a rather strong inverse correlation with the USD (0.76x), measured by the US Dollar index. In recent months, speculation over a new round of quantitative easing by the Federal Reserve has weakened the USD sharply against Asian currencies. Since 26 August, when Fed chairman Ben Bernanke first hinted at further possible QE, MSCI Asia ex-Japan has gained almost 16%. This dynamic has been especially evident in Southeast Asian equity markets, where currency appreciation versus the USD has been sharpest. Needless to say, if the USD were to stage a dramatic rebound, these markets would also probably be the most vulnerable. On top of that, with the exception of Thailand, the Southeast Asian markets are now rather stretched in terms of valuations. Although the fundamentals and earnings outlook for Southeast Asian markets still look strong, the volatility in FX markets is clouding the near-term view. Any further currency appreciation in these markets could trigger some form of capital controls, as the Philippines and Malaysian governments have recently mentioned, and Thailand has indeed implemented. Therefore, we advise investors to switch to China, Hong Kong and India. We think these markets are less likely to be influenced by the current sharp fluctuations in the foreign exchange market.
Kelvyn Tay, Analyst, UBS AG
Most Preferred
Company Acer* China Cosco DBS Group Holdings New Oriental Educat. PetroChina 'H' Samsung Electronics Semen Gresik Synnex Tech Intl* Tata Steel (new) Japan Furukawa Electric Honda Komatsu Mitsub UFJ FG Mitsubishi Corp Nidec Nippon Yusen NTT Docomo Orix Takeda (new) JP JP JP JP JP JP JP JP JP JP Country TW CN SG HK CN KR ID TW IN
Data as of 24 October 2010 Sector ISIN Inform. Techn. Industrials Financials Cons. Discret. Energy Inform. Techn. Materials Inform. Techn. Materials Industrials Cons. Discret. Industrials Financials Industrials Inform. Techn. Industrials Telecomm. Financials Health Care TW0002353000 CNE1000002J7 SG1L01001701 US6475811070 CNE1000003W8 KR7005930003 ID1000106800 TW0002347002 INE081A01012 JP3827200001 JP3854600008 JP3304200003 JP3902900004 JP3898400001 JP3734800000 JP3753000003 JP3165650007 JP3200450009 JP3463000004
Delta Air Lines Inc. (new) Industrials
Removed: Grasim Industries, Yanzhou Coal, Fujitsu
Least Preferred
Company Country Taiwan Semico.* (new) TW Sources: UBS WMR, Bloomberg
United Technologies (new) Industrials
Data as of 24 October 2010 Sector ISIN Inform. Techn. TW0002330008
Removed: Fast Retailing, Sharp
Least Preferred
Company Alcoa ConocoPhillips Heartland Express (new) IBM Nucor Corp Sector Materials Energy Industrials
Data as of 24 October 2010 ISIN US0138171014 US20825C1045 US4223471040 US4592001014 US6703461052 US8447411088 US92343V1044
Inform. Techn. Materials
Southw. Airlines Co. (new) Industrials Verizon Communications Telecomm. Sources: UBS WMR, Bloomberg
* Taiwan maintains capital controls, which restrict stock market access for foreign investors. Please contact your client advisor for further information. This alphabetically-ranked list is a selection of WMRs Most and Least Preferred equities for this region. A share is added to this list if WMR anticipates that it will outperform or underperform other shares in its region. Inclusion on, or removal from, this list does not necessarily imply that the respective stock rating has changed. At the end of of this publication further information about the WMRs methodology, stock rating system and EPL can be found. Please be aware that this is a selection of the EPL which could already be outdated. For actual ratings please refer to the respective EPL availabe on UBS Quotes/WMR portal or to your client advisor. EPL are not a template for the construction of investment portfolios.
32
33
Equities
Equity fund recommendations

Fixed income
Selected equity funds

Valor Equity funds Switzerland UBS 100 Index-Fund Switzerland UBS-ETF SMI EMU & Europe UBS (Lux) Equity Fund Europ. Opport. (EUR) P-acc UBS-ETF DJ EURO STOXX 50 A US UBS (Lux) Key Sel. Sicav US Equities (USD) P-acc UBS-ETF MSCI USA A UK UBS (Lux) Equity Fund Great Britain (GBP) P-acc UBS-ETF FTSE 100 A Asia/Japan UBS (Lux) Key Sel. Sicav Asian Equities (USD) P-acc UBS-ETF MSCI Japan A UBS (Lux) Equity Fund Greater China (USD) P-acc Emerging markets UBS (CH) Equity Emerging Markets UBS (Lux) Equity Sicav Russia (USD) P-acc UBS (Lux) Equity Sicav Brazil (USD) P-acc UBS (Lux) Equity Fund Greater China (USD) P-acc Source: UBS WM&SB 1 as of 22 October 2010 (or latest available) 2 as of 30 September 2010 3 as of 30 September 2010, annualized USD USD USD USD 107 194 2 468 721 2 909 491 547 581 2816.41 139.97 117.11 234.07 17.27 23.23 17.72 21.41 USD JPY USD 2 340 620 1 272 995 547'581 143.54 2579.00 234.07 18.53 7.07 21.41 GBP GBP 828 778 1 272 999 106.59 55.64 8.16 11.22 USD USD 1 489 085 1 272 983 13.54 113.07 4.25 9.26 EUR EUR 595 736 1 272 980 463.53 28.80 12.59 1.28 CHF CHF 278 880 1 714 271 4465.09 65.41 1.83 2.17 NAV1
Data as of 25 October 2010 Performance (%)2 Volat. (%)3 1 year 3 years 5 years 3 years 24.23 23.50 24.56 30.62 27.50 5.37 4.94 9.80 12.24 10.58 17.53 7.38 12.24 2.86 2.34 3.81 6.92 12.10 12.70 18.20 151.87 64.23 151.87 17.22 16.89 21.08 23.54 25.10 20.47 19.91 34.15 36.60 35.04 50.10 42.56 36.60
Quantitative easing a mixed bag for bond investors

More quantitative easing in the US would support short- and medium-term bonds, but make longer bonds riskier. Most investors have come to expect that the Fed will announce a second round of quantitative easing (QE2) on 3 November, following its Federal Open Market Committee meeting. This market view has sent five-year Treasury bond yields lower, while yields of very long bonds (i.e. 30-year) have gone up. The 10-year rate has remained relatively unchanged so far. These yield developments reflect the expectation that QE2 will keep money market rates lower for longer, which supports investment in short- and medium-term bonds. Yields on these bonds are more likely to remain low for some time. If QE2 does help the economy to recover more quickly and/or increases inflation risk, longer-term yields should trend higher just as they did in 2009 and 2010 during the first round of quantitative easing. We also expect higher long-term interest rates because they are too low for the economic outlook, and bonds do not compensate for the higher credit risk resulting from rising public debt. We think inflation may well overshoot current market expectations and that central banks will retreat from their ultra-loose monetary policy during the next 12 months, earlier than the market expects. In the past, bond yields have made their biggest advances about six months ahead of rate hikes. We thus recommend focusing on bonds with short and medium maturities, in general, as their prices are likely to drop less if yields rise.
Achim Peijan, Analyst, UBS AG
Bond yields expected to trend higher Development of 10-year bond yields and WMR forecasts
6 5 4 3
Upward move expected to start next year Development of 3-month money market rates
7 6 5 4 3 2 1 0 Forecast
Forecast
2 1 0 2005 2006 2007 2008 GBP 10y CHF 10y 2009 2010
2005
2006
2007
2008 GBP 3m CHF 3m
2009
2010
USD 10y EUR (DE) 10y Source: Bloomberg, UBS WMR
USD 3m EUR (DE) 3m Source: Bloomberg, UBS WMR
34
35
Bonds
Corporate bonds
Bond recommendations
A question of alternatives
No issuers are currently immune from risks, not Additional yield for corporate bonds over even governments. We believe potential prob- government bonds lems and the yields being offered still argue Basis points strongly in favor of corporate bonds and against 700 government bonds.
600 500
Bond selection
Valor CHF Bonds 2 126 450 10 541 269 11 545 766 11 172 144 11 149 097 11 676 745 11 392 757 11 712 417 11 364 381 EUR Bonds 3 187 325 11 461 139 11 761 158 11 472 745 11 922 283 11 681 661 11 736 058 11 896 754 11 752 724 USD Bonds 11 153 501 11 756 768 11 862 108 11 086 194 11 761 184 11 743 595 11 716 382 11 742 274 SHELL INTERNATIONAL FIN GENERAL ELEC CAP CORP CAISSE DAMORT DETTE SOC NESTLE HOLDINGS INC AUST & NZ BANKING GROUP RABOBANK NEDERLAND NEDER WATERSCHAPSBANK TOTAL CAPITAL SA 1.875 1.875 0.875 2.125 2.125 1.875 2.000 2.300 25.03.13 16.09.13 15.10.13 12.03.14 19.09.14 15.12.14 09.09.15 15.03.16 Aa1 Aa2 Aaa Aa1 Aa1 Aaa Aaa Aa1 10 907 002 XSTRATA FINANCE CANADA VOLKSWAGEN BANK GMBH ING BANK NV EUROHYPO AG GE CAPITAL EURO FUNDING SKANDINAVISKA ENSKILDA GE CAPITAL EURO FUNDING RCI BANQUE SA SOCIETE GENERALE ANHEUSER-BUSCH INBEV WOR 4.875 2.375 2.250 2.000 2.875 2.500 2.875 4.000 3.125 3.000 14.06.12 28.06.13 23.09.13 30.06.14 28.10.14 01.09.15 17.09.15 25.01.16 21.09.17 15.10.12 Baa2 A2 Aa3 Aaa Aa2e A1e Aa2 Baa2 Aa2 Baa2 UNICRED BANK IRELAND PLC ROYAL BK SCOTLND GRP PLC BMW AUSTRALIA FINANCE SOCIETE GENERALE GENERAL ELEC CAP CORP LLOYDS TSB BANK PLC BMW (UK) CAPITAL PLC ROYAL BK OF SCOTLAND PLC MCDONALDS CORP 2.125 2.250 1.000 1.875 2.000 2.500 2.125 2.750 1.875 18.05.12 09.10.12 16.09.13 20.10.14 15.01.15 23.03.15 29.06.15 08.10.15 23.06.16 Aa3 Aa3 A3 Aa2e Aa2 Aa3 A3 Aa3e A3 Title Coupon (%) Maturity Moodys Rating
Data as of 26 October 2010, 9:00 (Zurich) S&P Price Yield DuraMin. Rating 26.10.10 (%) tion Piece* A A+ A A+ A+ A A+ A BBB A A+e AAA AA+e Ae AA+ BBB e A+e BBB+ AA AA+ AAAe AA AAe AAA AAA AA 100.8 101.2 99.4 101.5 101.3 99.5 101.7 99.3 101.6 104.2 100.7 99.9 100.2 100.1 98.4 99.4 99.9 98.9 103.9 102.6 100.9 100.2 103.8 100.9 100.7 101.1 100.8 1.6 1.6 1.2 1.5 1.7 2.6 1.7 2.9 1.6 2.2 2.1 2.3 2.0 2.8 2.9 3.0 4.0 3.3 1.0 0.8 1.5 0.8 1.0 1.9 1.7 1.8 2.1 1.5 1.9 2.9 3.9 4.0 4.2 4.5 4.7 5.4 1.6 2.6 2.8 3.6 3.8 4.6 4.6 4.8 6.3 1.9 2.4 2.8 2.9 3.2 3.8 4.0 4.7 5.1 5+5 5+5 5+5 5+5 5+5 5+5 5+5 5+5 5+5 50+1 1+1 50+1 1+1 1+1 50+1 1+1 1+1 50+50 2+1 1+1 1+1 1+1 2+2 2+2 1+1 1+1 1+1
Modest yields despite higher risk Over the last decade, low-risk five-year euro bonds 400 yielded around 4% on average, US dollar bonds 300 4.5% and Swiss franc bonds 2.5%. To achieve 200 these yields today, a significantly higher level of 100 default risk must be factored in, such as is typical 03 04 05 06 07 08 09 10 for issuers with BBB or BB ratings. However, inFinancials vestors who protect their portfolio from the conNon-Financials sequences of individual credit defaults through careful issuer selection and broad diversification Source: UBS WMR, Iboxx indices are very well compensated in all three currencies More stability from companies compared to high-quality bonds. Bank bonds offer much higher yields than cor_corporates_g1_1043 porates with a similar rating. However, the fiSell government bonds A major reason why we continue to favor cor- nancial sector also holds greater risks and govporate bonds is their stable credit outlook. Com- ernments and regulators are looking for ways of panies have reacted to the crisis by strengthen- getting creditors to participate in rescue packing their balance sheets. However, many ages in the future. We believe well diversified governments are now far from risk-free and are investments in globally active companies will accumulating increasing amounts of debt. The bring more stability to a portfolio in the long run combination of low interest rates and increasing and justify foregoing some yields. risks even prompts us to recommend selling Thomas Wacker, Analyst, UBS AG long-term government bonds.
Yields of 5-year bonds
5-year bonds Government bonds Agencies, Covered Bonds Corporate Bonds Investment Grade High Yield bonds Emerging Markets EUR 1.5%1.8% 1.7%2.9% 2.4%3.7% 6.90% 3.90% USD 1.08% 1.2%2.4% 1.3%3.4% 8.70% 3.90% GBP 1.52% 1.8%2.2% 2.6%3.2% n.a. n.a. CHF 0.85% 0.9%1.2% 1.2%2.8% n.a. n.a.
Source: UBS WM&SB These bonds are a selection from the WMR Bond Top List which is available from your client advisor with daily updated pricing data. *Minimum face value plus increment, e.g. 50 +1 means min. 50 000, but 51000 possible. e: The letter e after the rating means, that the rating is expected, but the rating agency has not yet confirmed it for this bond. This selection of recommended bonds from our daily updated Bond Top List is based on the relative attractiveness of a bond compared to others with similar characteristics. Besides the bonds credit risk and its remaining life, the selection also takes into account sufficient secondary market liquidity, a price near 100% or less and low accrued interest. Investors should always obtain current price indications before submitting an order to buy a bond.
Source: UBS WMR, ranges based on bonds recommended on WMRs top lists.
36
37
Bonds
Emerging market bonds
Bond funds
Emerging market bonds are here to stay

In addition to refreshing the layout of UBS investors guide, we have also added new content, for example, this page on emerging market bonds. We think this asset class is here to stay and deserves regular coverage. While there will be times when emerging market bonds are less attractive than other fixed-income instruments when they are too expensive or are underperforming we note that overall fundamentals in emerging markets are improving. We think that this trend has further to go. In our view, most investors should consider building up exposure in this asset class. In the table on page 39, we present our preferred emerging market bonds. The list includes both sovereign and corporate bonds. Most of these bonds are denominated in US dollars or euros, but we will try to add bonds in other currencies whenever we see suitable opportunities. We base our selection on our assessment of the issuers credit quality, the bonds valuation and the expected changes in underlying interest rates. Our recommendations are geared towards better-rated issuers within the emerging market context and are generally deemed appropriate for investors with longer time horizons.
Michael Bolliger, Analyst, UBS AG
Selected bond funds

Valor Inflation-linked Bond UBS (Lux) Bond Sicav Inflationlinked EUR Pacc UBS (Lux) Bond Sicav Infl.-linked EUR (CHF hed.) P-acc Emerging Market Bonds UBS (Lux) Emerg. Ec. Fund Global Bonds (USD) P-acc UBS (Lux) Emerg. Ec. Fund Lat. Am. Bonds (USD) P-acc Corporate Bonds UBS (Lux) Bond Sicav EUR Corporates P-acc UBS (Lux) Bond Sicav USD Corporates P-acc High Yield Bonds UBS (Lux) Bond Sicav USD High Yield P-acc UBS (Lux) Bond Fund Euro High Yield P-acc Convertible Bonds UBS (Lux) Bond Fund - Convert Europe B UBS (Lux) Bond SICAV - Convert Global (CHF hedged) P-acc UBS (CH) Bond Fund - Convert Asia P
1
Data as of 25 October 2010 NAV1 Performance (%) 2 Volat. (%) 3 1 year 3 years 5 years 3 years 3.67 3.82 16.06 22.88 9.12 12.86 17.62 22.72 8.90 11.30 25.65 28.81 9.89 21.99 15.16 34.60 2.08 19.30 48.23 56.15 7.87 27.83 27.49 45.10 20.51 52.91 18.51 18.33 10.30 11.13 15.91 18.71 17.56 12.54
EUR CHF USD USD EUR USD USD EUR EUR CHF USD
4 731 894 4 731 914 849 534 345 232 1 575 795 1 640 534 512 729 883 660 1 062 349 11 162 023 279 158
103.44 102.79 1 672.36 5 683.16 12.36 13.95 197.51 132.72 130.73 103.38 203.52
Emerging market bond recommendations

ISIN Issuer Curr. Coupon Maturity Moodys (in %) Rating S&P Rating Price 2 Yield 2 (in %) Dura- Min. piece/ tion increment 3 (in yrs) 2.0 4.3 3.3 4.1 4.0 7.4 1/1 1/1 5/5 100 / 100 100 / 1 100 / 1 100 / 1 100 / 1 3.5 4.1 3.2 3.8 4.7 2.7 100 / 1 100 / 1 2/1 100 / 1 50 / 1 5/5
Source: UBS WM&SB as of 22.10.2010 (or latest available) 2 as of 30.09.2010 3 as of 30.09.2010, annualized
Sovereign Bonds1 XS0145624432 US731011AS13 CH0110741136 XS0504954180 Corporate Bonds1 USG01198AC73 USY1391CAJ00 USG2585XAA75 USP47773AK54 USY70902AA21 XS0524435715 USC83912AC67 XS0491998133 XS0244105283 CH0115305457 Agile Property Bank of China Hong Kong CSN Globo PT Adaro Indonesia Sberbank Sino Forest VTB VTB VTB USD USD USD USD USD USD USD USD EUR CHF 10.000 5.550 7.000 6.250 7.625 5.499 10.250 6.465 4.250 4.000 14.11.16 11.02.20 Perpetual Perpetual 22.10.19 07.07.15 28.07.14 04.03.15 15.02.16 16.08.13 Ba3 A1 Ba1 Baa3 Ba1 A3 Ba2 Baa1 Baa1 Baa1 BB BBB+ BBB BBB NA NA BB BBB BBB BBB 107.3 105.4 101.0 103.3 111.5 103.5 114.8 104.5 100.3 102.6 8.4 4.8 6.9 8.1 6.0 4.6 5.8 5.3 4.2 3.1 Republic of Bulgaria Republic of Poland Republic of Poland Russian Federation EUR USD CHF USD 7.500 3.875 2.125 3.625 15.01.13 16.07.15 31.03.14 29.04.15 Baa3 A2 A2 Baa1 BBB A A BBB 107.1 106.3 100.7 102.5 3.6 2.4 1.9 3.0
Source: Bloomberg, UBS WMR, as of 25 Oct 2010 1 In alphabetical order. 2 Data as of 25 October 2010. 3 Minimal investment amount plus increment, in bond denomination currency (thousands).
Units and/or shares of UBS Exchange Traded Funds are bought and sold on a securities exchange. Dow Jones, STOXX and Dow Jones EURO STOXX 50 are trademarks and/or service marks of Dow Jones & Company, Inc. and/or STOXX Limited. UBS-ETF DJ EURO STOXX 50 based on Dow Jones EURO STOXX 50 is not sponsored, endorsed, sold or promoted by Dow Jones or STOXX, and neither Dow Jones nor STOXX makes any representation regarding the advisability of trading in the product. UBS AG has been licensed by FTSE International Limited to use the name FTSE 100. The MSCI indexes are the exclusive property of Morgan Stanley Capital International Inc. (MSCI). MSCI and the MSCI index names are service mark(s) of MSCI or its affiliates and have been licensed for use for certain purposes by UBS AG (UBS). The products referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such product. This product is not sponsored, endorsed, sold or promoted by SWX Swiss Exchange and SWX Swiss Exchange makes no representation regarding the advisability of investing in the product. The SMI is a registered trademark of SWX Swiss Exchange, and any use thereof requires a license. Please refer to UBS Quotes or to your client advisor for further information or a complete documentation of these products.
38
39
Bonds
Currencies
Currency pairs
Brutal FX moves in turbulent times

Recent weeks have seen brutal movements in currency markets. Policy makers are far from setting a common course, leaving FX markets to their own devices. The current USD sell-off developed more quickly than we had anticipated, driven by market expectations that the Federal Reserve would return to quantitative easing (QE). EURUSD rose from 1.30 to 1.42 within a single month, and other major currencies also reached historical highs against the dollar. We revised our threemonth forecasts to reflect our conviction that the dollar will stay under pressure. The Swiss franc, Swedish krona and commodity-producing currencies are likely to hit new highs against the US dollar. The British pound will not yet benefit from the austerity measures, in our view, and may even suffer from market expectations that the Bank of England (BoE) will become more expansionary, although not our base case scenario. We expect currencies with solid fundamentals, attractive interest rates and only minor exchange rate complaints from officials to continue appreciating in the short term. Nevertheless, as policy makers grow increasingly concerned about the strength of their currencies especially in export-oriented emerging markets the threat of currency or trade wars will likely unsettle foreign exchange markets. New EURUSD highs possible despite Eurozone problems The Eurozone has the same structural problems it had six months ago, but concerns have largely subsided. In fact, investors now expect the European Central Bank to be the only major central bank not to implement additional QE. The Bank of Japan has already begun printing more money, and the market expects the Fed and the BoE to follow suit. Hence, investors prefer to buy the euro at the expense of the dollar, the pound and the yen. The focus has now shifted to problems in the US. EURUSD could reach 1.45, but technical indicators signal a consolidation. We stick to the opinion that the problems in peripheral Europe limit the euros appreciation potential. In our view, EURUSD is likely to swing between 1.30 and 1.45 in the next 12 months, dropping below 1.40 if Eurozone economic data weakens. The rate will not stabilize above 1.40 unless the Fed takes bolder action than what is currently under discussion.
Giovanni Staunovo, Strategist, UBS AG
USDCHF
We expect the scale of the US Feds quantitative easing program to drive USDCHF. It has held quite nicely below parity, and Swiss policy makers are unlikely to do much to help USDCHF climb back above that key level. We would buy CHF close to 1.00 and sell it again around 0.95.
EURCHF
The general euro rebound has also lifted EURCHF. Although it is not overtly hawkish, the European Central Bank is allowing money market rates to rise when others are thinking about quantitative easing. Swiss exporters are increasingly voicing complaints about the francs persistent strength.
1.55 Volatility Range 1.50 1.45 1.40 1.35 Forecast Volatility Range 1.30 1.25 1.20 Source: Thomson Reuters, UBS WMR Feb 10 Jun 10 Oct 10 Feb 11 Jun 11 Oct 11 Feb 12 Forward Forecast Volatility Range Volatility Range
1.20 1.10 1.00 0.90 Source: Thomson Reuters, UBS WMR Oct 09 Feb 10 Jun 10 Oct 10 Feb 11 Jun 11 Oct 11 Feb 12 Forward
Oct 09
File Code: FX_USDCHF_g1_1043
File Code: FX_EURCHF_g1_1043
USD under pressure USD against AUD, CHF and JPY

3.5 3.0 2.5 2.0 1.5 1.0 0.5 1980 1984 1988 1992 1996 2000 2004 2008 2012 AUDUSD (lhs) USDCHF (lhs) Source: Bloomberg USDJPY (rhs) 300 250 200 150 100 50
We think EURUSD is caught in a range between roughly 1.24 and 1.42. Spot rates are currently at the top end of the range, and markets are extremely short USD and long euro. There is a good chance the USD will experience a short-term rebound as soon as investors have more detail on US quantitative easing.
1.65 1.55 1.45 1.35 1.25 Oct 09 Feb 10 Jun 10 Oct 10 Feb 11 Jun 11 Source: Thomson Reuters, UBS WMR Volatility Range Forward Forecast Volatility Range Oct 11 Feb 12
USDJPY has set new 15-year lows below 81, and the markets expectation that the US Fed will announce quantitative easing measures continues to exert downward pressure. We see an increasing risk of FX intervention as USDJPY nears its historic low of 79.7, and expect USDJPY to trade between 80 to 90 over the next six months.
105 95 85 75 Source: Thomson Reuters, UBS WMR Oct 09 Feb 10 Jun 10 Oct 10 Feb 11 Jun 11 Oct 11 Feb 12 Forward Volatility Range
Volatility Range Forecast
File Code: FX_EURUSD_g1_1038
File Code: FX_USDJPY_g1_1043
40
41
Currencies
EURUSD
USDJPY
Commodities
Commodities
QE price bump short-lived

Commodity indexes, which had all recovered from their lows in June, have accelerated in recent weeks. For example, the Dow Jones UBS Composite Index is up around 15% from its trough this year. While this is good news for USDbased commodity investors, those with other reference currencies had little to cheer about. In EUR, CHF or AUD terms, broadly diversified commodity indices have hardly moved at all. There has been much debate about what drove commodities higher in recent weeks. We think it was largely a USD story rather than any strong demand surge. The USD weakened as the Fed sent signals it was ready to launch another round quantitative easing (QE). This prospect sent many USD-based investors in search of wealth preservation. As an asset class, commodities can offer protection against inflation risks and USD weakness. We think these characteristics should persist if the USD weakened further or inflation expectations were to move higher. But are these sufficient grounds to pile money into commodities right now? We think not, and we advise investors to wait. The goal of more QE is to revive the anemic US economy, and the success of these measures is far from certain. Adding the yearly investment costs (roll yields) of more than 5%, we doubt that commodities will deliver an attractive reward in the short run. But this doesnt mean prices will fall off a cliff. The deceleration in Chinas growth has likely halted, partially reflected in Septembers firm commodity imports. But just because a soft patch in Chinas growth may have passed, this is not enough, in our view. The Peoples Bank of Chinas latest interest rate hike should signal to commodity investors that the government is unwilling to let growth accelerate meaningfully from current levels. Thus, we need more evidence before advising investors to take on broad-based long exposure in commodities, especially those who want to be compensated beyond USD weakness. We think this opportunity will arise when, as we expect, growth in Asia ex China bottoms out in the fourth quarter. For the time being, we remain very selective and favor gold and corn; we are also looking for yield enhancement strategies in crude oil and platinum. From a structural perspective, we like copper, but would avoid all other base metals.
Dominic Schnider, Analyst, UBS AG
Oil
USD weakness and global growth moderation have pulled crude oil prices in different directions in recent weeks. Heading into 2011, we believe prices will trend sideways, around USD 80/bbl. Ample OECD inventories and spare OPEC capacity can meet higher demand in the next few quarters. Thus, price dips towards USD 70/bbl are still feasible, but should be used to build up long positions. Our base scenario for crude in the coming years still has prices being driven above USD 90/bbl on stronger emerging market demand.
Gold
The gold price rally in recent weeks was largely a USD story and not based on gold strength. Gold remains the reserve asset of choice for hedging inflation and currency risks. US announcements of further quantitative easing have thus pushed USDdenominated gold to new highs, while EUR and CHF prices have remained stable. We still expect prices around USD 1,500/oz. within the next 12 months. In the current, slightly overbought situation, new positions should be built up on price setbacks toward USD 1,250/oz.
25.10.2010
Forecast
USD 80/bbl
3 months
Forecast
912 months
25.10.2010
Forecast
USD 1,500/oz.
3 months
Forecast
912 months
Commodities
Silver
Silver has launched an exceptional rally, soaring 36% in just two months. Silver is usually driven by industrial demand and its correlation to gold, but industrial demand is still lackluster and economic activity looks likely to decelerate. We think that financial demand is moving prices to unsustainable highs given silvers small market size and inelastic scrap supply. With a turn in the technical picture, it may soon be time to sell. We expect prices to fall below USD 20/ oz. again in the coming months.
Copper
The metal delivered an excellent performance and stands close to its all-time high, thanks in part to supply constraints. We do not expect mine supply to grow beyond 2.5% any time soon, and further quantitative easing would likely keep inventories under pressure from stronger demand. USD weakness added to performance. In other currencies, the copper price hardly moved. Price levels close to USD 7,000/mt should be used to build up long positions. The metal belongs in every commodity portfolio from a strategic perspective.
Commodity valuation in different currency denominations DJ UBS composite index on broad commodity market
20 15 10 5 0 5 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10
DJUBS in USD DJUBS in EUR Source: Bloomberg, UBS WMR
DJUBS in CHF DJUBS in JPY
25.10.2010
Forecast
USD 20.5/oz.
3 months
Forecast
912 months
25.10.2010
Forecast
USD 8,200/mt
3 months
Forecast
912 months
42
43
Real estate
Real estate markets
Fundamentals still supportive

Good monetary conditions and easing lending standards should support listed real estate around the world. We expect listed real estate worldwide to receive further support from the favorable macroeconomic environment, as US, UK and European monetary policies will likely remain accommodative. Recent private market transactions show that the prevailing low interest rates support real estate values. New equity is being raised not only to replace debt, but also to finance acquisitions and development projects. Lending standards have also begun to ease in these countries. in. We expect commercial real estate and European real estate securities to perform better than previously expected. Real estate equities with above-average dividend yields continue to look attractive as a way for private and institutional investors to compensate for low interest rates. Listed real estate remains reasonably valued globally.
Switzerland
Swiss listed real estate equities have performed impressively since the beginning of this year: This years performance of some 25% is up to four times higher than the average annual performance. This reflects the high quality of Swiss listed real estate, but also the growing perception of Swiss real estate as a safe-haven investment. As this outperformance is based in part on temporary market perception, we regard it as somewhat unsustainable. Hence, we do not recommend accumulating Swiss listed real estate at this stage. However, longterm investors can maintain their holdings.
Europe
The listed real estate market in Europe has fared well despite the gap between core and peripheral countries, with a number of stocks reaching new highs. Europe seems fairly valued. The poor outlook for some peripheral economies is likely to constrain local rental and property capital growth. We thus favor Germany, Sweden and France. We think the UK commercial real estate market has bottomed out, although the markets attractive valuation reflects the risky road to recovery. The UK residential market is supported by low interest rates and a lack of supply, but housing still looks expensive by most affordability measures.
Strong gains for global listed real estate Total return in % (local currencies)
240 200 160 120 80 2005 Americas Asia 2006 2007 2008 Europe Oceania 2009 2010
US real estate equities recorded their best performance since early this year. Fears of a double-dip recession supported the sector, which is seen as a safe haven. The new round of quantitative easing expected from the Fed has also fueled the market by putting pressure on long-term interest rates. Recent economic data has been supportive, and capital-raising activity has picked up, with real estate investment trusts offering equity. The US housing market remains in the doldrums despite supportive fundamentals, as funding costs are at multi-decade lows. The commercial real estate market is in significantly better shape.
In Hong Kong, Singapore and China, ongoing discussions about policy tightening aimed at preventing residential markets from overheating have put markets under pressure and negatively affected transaction volumes. In Hong Kong, we prefer offices to residential properties as supply is constrained and demand is recovering on strong employment conditions. The condominium market in Japan is staging a strong recovery, but we see enduring weakness for the office market. We maintain our preference in Singapore for office property versus residential exposure. The office market there is in the early stages of an up cycle.
Source: Bloomberg, GPR, UBS WMR, 22.10.2010
44
45
Real estate
Currency volatility distorts performance The ongoing weakness of the US dollar and central bank interventions have had a somewhat distorting influence on the performance of global real estate. The outperformance of the US market owes much to a weak US dollar, while the relative underperformance of the Australian Challenges and opportunities Difficulties may loom, however, as we think fur- market (in local currency terms) can be traced to ther improvements in value now depend on a strong Australian dollar. Quantitative easing rental growth. Cooling measures in Asia will may present an upside risk. continue to affect the residential market, alThomas Veraguth, Economist, UBS AG though Chinese equities have already priced this
US
Asia
Hedge Funds & Private Equity
Fund recommendations Non-traditional asset classes

Hedge Funds: money never sleeps

Event-driven investing seeks to exploit pricing inefficiencies that can occur before or after corporate events, such as bankruptcies, mergers, acquisitions or spinoffs. Event-driven hedge fund managers implement strategies to take advantage of every phase in the economic cycle. In todays lessthan-vibrant expansionary environment, for example, we can be optimistic about merger arbitrage. Given rising corporate cash balances and improving financial markets, companies are looking to offset anemic growth prospects by making targeted acquisitions. Banks are already showing a willingness to lend, while companies are borrowing capital at favorable rates. most importantly, they also did not have to repay principal at that point. The key question now is whether the large LBO and corporate issuers will be able to find the liquidity they need to refinance these maturities.
Selected UBS investment solutions

Valor Hedge Funds UBS (CH) Global Alpha Strategies (CHF hedged) A UBS (Lux) Global Alpha Opport. (CHF hedged) Pacc UBS A&Q Alt. Solution Index Cert. B UBS A&Q Alt. Solution Index Cert. B UBS A&Q Alt. Solution Index Cert. B Real Estate UBS (CH) Property Fund Lman Residential Foncipars UBS (CH) Property Fund Swiss Commercial Swissreal UBS (CH) Property Fund Swiss Mixed Sima UBS (CH) Property Fund Swiss Residential Anfos Commodities UBS (CH) Commodity Fund CHF P UBS (CH) Commodity Fund EUR P UBS (CH) Commodity Fund USD P UBS (Lux) Str. Sicav Rogers Int. Comm. Index (CHF) P-acc UBS (Lux) Str. Sicav Rogers Int. Comm. Index (EUR) P-acc UBS (Lux) Str. Sicav Rogers Int. Comm. Index (GBP) P-dist UBS (Lux) Str. Sicav Rogers Int. Comm. Index (USD) P-acc Source: UBS WM&SB as of 22 October 2010 (or latest available) 2 as of 30 September 2010 3 as of 30 September 2010, annualized
1
Data as of 25 October 2010 NAV1 Performance (%)2 Volat. (%)3 1 year 3 years 5 years 3 years 6.08 10.96 15.11 10.28 10.91 7.13 7.10 8.35 10.27 10.43 10.69 11.36 1.62 17.14 20.69 21.03 29.11 25.11 24.13 20.54 25.19 23.82 23.47 22.80 12.75 20.01 20.59 24.44 31.16 26.24 22.82 15.24 8.29 10.78 11.20 8.03 9.92 32.95 34.65 24.12 35.12 37.25 37.41 28.19
CHF CHF CHF USD EUR CHF CHF CHF CHF CHF EUR USD CHF EUR GBP USD
1 878 471 11 202 132 3 947 994 3 947 948 3 947 714 1 442 085 1 442 088 1 442 087 1 442 082 2 104 688 2 104 689 2 104 691 2 384 321 2 384 323 2 589 721 2 384 315
1188.73 100.59 1028.09 1128.24 1072.94 74.45 69.25 91.30 62.00 87.80 85.60 92.43 85.51 89.48 85.20 93.21
More defaults as growth slows The size of a distressed opportunity depends on the strength of the economic recovery, which is hard to predict. But most mature regions are likely to see a slowdown in GDP growth as governments cut spending and raise taxes to reduce deficits. This is an unpleasant prospect for most companies: We expect default rates to increase in the long term, as these fiscal interventions and austerity measures begin to take their toll on the economy. The past and future of distressed debt As this unfolds, we expect event-driven In 2009, distressed debt investors found themselves facing a unique situation where investors to become more active. they were able to benefit from declining deCesare Valeggia, Analyst, UBS AG fault rates and significant spread tightening. Soon the focus will likely shift toward dislocations across debt and equity, with managers looking to invest in situations that offer good risk/reward profiles. This strategy, also known as capital structure arbitrage, allows manag- Below investment grade redemptions ers to profit from anomalies in a firms capital In USD bn structure: for instance, by buying a high yield 180 bond and shorting the equity of the same 160 company, thereby hedging equity risk. 140 Looking further down the road toward 120 the end of 2011, we expect a new wave of 100 80 opportunities for distressed debt. Much of 60 the debt that financed the leveraged buyout 40 (LBO) boom from 2004 to 2007 is set to ma20 ture in the next few years, beginning in 2012. 0 2011 2012 2013 2014 2015 2016 Many issuers made it through the adverse economic conditions of 2009 largely because Redemptions nancial sector Redemptions non-nancial sector they had no covenants to meet and were still able to pay interest to bondholders. Perhaps Source: Thomson Reuters
46
Index:Hedge-funds_g1_1043
47
Non-traditional asset classes
Technical analysis
Appendix Explanations
Stock recommendation system
European DJ STOXX 600

The pan-European DJ STOXX 600 index hit 267.6 on 21 October, close to its April high of 272 (see Figure). Should this resistance level be broken, not much would prevent the index from marching up to our target of 300. In a worst-case scenario, the fourth corrective Elliott wave we have seen since the April high could go as low as 215, after which the fifth and final wave should carry the index up to our target. Such lows seem unlikely now that the index has crossed the 262 resistance level and negated a bearish death cross signal, and we see that the fourth wave probably hit its lowest point at the end of May at 232. This will be confirmed if the index goes above its April high. A shorter-term daily chart shows a staircaselike uptrend, with fairly regular peaks and troughs since the May low, and suggests the index might return to its April high in early November.
HSCEI index
The HSCEI index of Chinese stocks listed in Hong Kong, which stood at 13495 on 22 October, has been a leading indicator for other equity markets. We previously identified a bearish death cross that occurred in mid-March, an event with a good track record of predicting weak markets. The index posted a low at the end of May, after which it traded sideways until taking off at the end of August. We foresaw a bullish long-term chart despite near-term worries, and expected the index to reach at least 14500 again. This level is now about 7% away, which is not much given the relatively high volatility of this index. We consider it highly likely that the index will reach this level, but also expect it to consolidate afterwards, given its overbought character. This consolidation could bring the index back to about 12500, a 38.2% Fibonacci retracement since the May low, before it looks to cross 14500 again.
Analysts provide three ratings (Most Preferred, Least Preferred or Neutral View). Stocks relevant for UBS WM clients but not selected as either Most Preferred or Least Preferred are implicitly defined as Neutral View. Most Preferred We expect the stock to both outperform the relevant benchmark and appreciate in absolute terms. Least Preferred We expect the stock to both underperform the relevant benchmark and depreciate in absolute terms. Neutral View We expect the stock neither to out- or underperform the relevant benchmark nor significantly appreciate or depreciate in absolute terms. Under review Upon special events that require further analysis, the stock rating may be flagged as Under review by the analyst. Suspended If data is not valid anymore, the stock rating may be flagged as Suspended by the analyst. Restricted Issuing of research on a company by WMR can be restricted due to legal, regulatory, contractual or best business-practice obligations which are normally caused by UBS Investment Banks involvement in an investment banking transaction in regard to the concerned company. Current WMR Global Rating Distribution (as of last month-end) Most Preferred 63% (47%)* Least Preferred 20% (40%)* Neutral View 16% (66%)* * Percentage of companies within this rating for which investment banking services were provided by UBS AG or UBS Securities LLC or its affiliates within the past 12 months. Source: UBS WMR, as of 1 October 2010
Definitions of Moodys/S&P credit ratings

Moodys Aaa Aa1 / Aa2 / Aa3 A1 / A2 / A3 Baa1 / Baa2 / Baa3 S&P AAA AA+ / AA / AA A+ / A / A BBB+ / BBB / BBB Definition Issuer / Bonds have exceptionally strong credit quality. AAA is the best credit quality. Issuer / Bonds have very strong credit quality. Issuer / Bonds have high credit quality. Issuer / Bonds have adequate credit quality. This is the lowest Investment Grade category.
Source: Bloomberg, UBS WMR
Source: Bloomberg, UBS WMR
Equity Preferences Lists This alphabetical list is a selection of WMRs Most and Least Preferred equities for this region. A share is added to this list if WMR anticipates that it will outperform or underperform other shares in its region. A share is removed from this list if WMR does not expect the stock to out- or underperform. Inclusion on, or removal from, this list does not necessarily imply that the respective stock rating has changed. Instead, it means that WMRs view on the respective stock, relative to this region, has changed. Please be aware that this is a selection of the EPLS which could already be outdated. For actual ratings, further details about WMRs equity recommendations and the analyst(s) responsible for the selection(s), please refer to the respective EPLS available on UBS Quotes/WMR portal or ask your client advisor. EPLS are not a template for the construction of investment portfolios. Investors should always discuss investment decisions with their UBS client advisors.
48
UBS investors guide 25. October 2010
49
Appendix Disclosures
Appendix Publication data & disclaimer
Enterprises
3M Co 1, 2, 3, 4, 5, 6, 7. ABB Ltd 3, 4, 8, 9, 10. Acer Inc 4. Adecco SA 3, 4, 8, 9. Adidas AG 3, 4, 6, 7, 8. Agile Property Holdings Ltd 11. Alcatel-Lucent/France 2, 3, 4, 6, 7. Allianz SE 3, 4, 8, 9, 10, 12, 13, 14. Alstom SA 3, 10. Anadarko Petroleum Corp 1, 2, 3, 4, 5, 6, 7, 10, 13, 15. Anheuser-Busch InBev NV 2, 4, 14. Apache Corp 2, 4, 6, 7, 10, 13. ArcelorMittal 2, 3, 4. Aryzta AG 3, 10, 15. Australia & New Zealand Banking Group Ltd 4, 8, 10, 13, 15, 16. BAE Systems PLC 3, 4, 10, 17. Baloise Holding AG 3, 9, 10, 15, 18. Bank Nederlandse Gemeenten 3, 10, 15. Barclays PLC 3, 4, 6, 7, 10, 13, 14, 15. Barry Callebaut AG 3, 9. Bayer AG 4, 8, 9, 10, 17. Bayerische Motoren Werke AG 3, 4, 6, 7, 9, 10, 14, 15, 19. BHP Billiton PLC 3, 4, 10, 14. BNP Paribas 4, 6, 7, 10, 14, 15. BOC Hong Kong Holdings Ltd 4, 10, 13, 14, 15, 20. Bouygues SA 4. BP PLC 3, 4, 10, 13, 14, 15, 17. British American Tobacco PLC 3, 4, 10, 14, 17, 21. Caisse dAmortissement de la Dette Sociale 3, 10, 15. Cap Gemini SA 3, 4. Carnival Corp 2, 4, 5, 17. Carrefour SA 3, 4, 10, 14. Centrica PLC 3, 4, 10, 14, 17. China COSCO Holdings Co Ltd 4, 20, 22. Cia Siderurgica Nacional SA 3, 4. Cie Generale des Etablissements Michelin 4, 8. Cisco Systems Inc 1, 2, 4, 5, 6, 7, 8, 10, 13, 15. Citigroup Inc 1, 2, 3, 4, 5, 6, 7, 10, 13, 14, 15. CNP Assurances 14. Coca-Cola Co/The 1, 2, 4, 5, 6, 7. Colgate-Palmolive Co 4, 6, 7. Commerzbank AG 3, 4, 6, 7, 10, 14, 15, 17. Commonwealth Bank of Australia 4, 10, 15, 16. Cooper Industries PLC 2, 3, 4. Credit Agricole SA 3, 4, 10, 14, 15. Credit Suisse Group AG 3, 4, 6, 7, 8, 9, 14. CSX Corp 3, 4, 6, 7, 10, 13, 15. DBS Group Holdings Ltd 4, 23, 24. Deere & Co 1, 4, 5, 6, 7, 8. Delta Air Lines Inc 3, 4, 8, 10, 13. Deutsche Bank AG 3, 4, 6, 7, 8, 9, 10, 13, 14, 15. Deutsche Lufthansa AG 4, 8, 9, 10. Deutsche Post AG 4, 14. Dow Chemical Co/The 1, 2, 3, 4, 5, 6, 7, 8, 10. EDF SA 3, 4, 10, 14. EI du Pont de Nemours & Co 1, 2, 3, 4, 5, 6, 7, 10, 13, 15. European Aeronautic Defence and Space Co NV 3, 4, 14. Flughafen Zuerich AG 3. Freeport-McMoRan Copper & Gold Inc 4, 8. Fujitsu Ltd 3, 4, 10, 15. Gategroup Holding AG 3, 8, 25. GEA Group AG 4. General Electric Capital Corp 4, 10, 14, 15. General Electric Co 1, 2, 3, 4, 5, 6, 7, 10, 13, 14, 26. Georg Fischer AG 3, 8, 9. Gilead Sciences Inc 4. GlaxoSmithKline PLC 3, 4, 10, 17. Goldman Sachs Group Inc/The 1, 2, 3, 4, 5, 6, 7, 8, 10, 15. Google Inc 1, 2, 3, 4, 5, 6, 7. Groupe Eurotunnel SA 3. HeidelbergCement AG 8. Hess Corp 4, 8. Hewlett-Packard Co 1, 3, 4, 5, 6, 7, 10, 13, 15. Honda Motor Co Ltd 4, 6, 7. HSBC Holdings PLC 3, 4, 6, 7, 10, 13, 14, 15, 20. Kingfisher PLC 3, 4, 17. Kloeckner & Co SE 27. Komatsu Ltd 4. Koninklijke Ahold NV 4, 14. Kreditanstalt fuer Wiederaufbau 3, 10, 15. Kuoni Reisen Holding AG 3, 9, 10. Linde AG 4, 14. Lloyds Banking Group PLC 3, 4, 6, 7, 10, 13, 14, 15, 17, 28. Lonza Group AG 3, 4, 9, 10, 15. LVMH Moet Hennessy Louis Vuitton SA 4. McDonalds Corp 1, 4, 5, 6, 7. Merck & Co Inc 1, 2, 4, 5, 6, 7, 10, 13, 24. Microsoft Corp 1, 2, 4, 5, 6, 7, 10, 13, 14, 15. Mitsubishi Corp 4, 6, 7, 10, 17. Mitsubishi UFJ Financial Group Inc 3, 4, 10, 15. Muenchener Rueckversicherungs AG 3, 4, 9, 10, 14. Navistar International Corp 4, 10, 13. Nederlandse Waterschapsbank NV 3, 10, 15. Nestle SA 3, 4, 6, 7, 9, 10, 15. New Oriental Education & Technology Group 4. Nidec Corp 4. Nippon Yusen KK 4. Novartis AG 3, 4, 8, 9, 10, 13, 15. NTT DoCoMo Inc 4, 10, 14, 17. ORIX Corp 3, 4, 6, 7, 10, 13, 15. Partners Group Holding AG 3, 10. PetroChina Co Ltd 3, 4, 10, 11, 20, 29. Peugeot SA 4, 14. Rabobank Nederland NV 3, 10, 15. Reed Elsevier NV 4, 14. Reed Elsevier PLC 3, 4, 10, 14, 17. Renault SA 3. Republic of Poland 10, 15. Rio Tinto PLC 4. Roche Holding AG 3, 4, 8, 9, 14. Rockwell Collins Inc 1, 2, 3, 4, 5, 6, 7, 10, 13. Royal Bank of Scotland Group PLC 3, 4, 10, 13, 14, 15, 17, 30, 31, 32, 33. Royal Dutch Shell PLC 3, 4, 9, 10. RSA Insurance Group PLC 3. SABMiller PLC 4. Safran SA 3, 4, 10. Salzgitter AG 3. Samsung Electronics Co Ltd 4, 14, 34, 35, 36, 37. Sanofi-Aventis SA 3, 4. SAP AG 3, 4, 6, 7, 9. Sberbank of Russia 3, 4, 38. SBM Offshore NV 4. SCOR SE 3, 4, 6, 7, 39. Shire PLC 4. Skandinaviska Enskilda Banken AB 3, 10, 15. Societe Generale 3, 4, 6, 7, 10, 15. Sulzer AG 3, 8, 9. Swiss Reinsurance Co Ltd 3, 4, 8, 9, 10, 15, 40. Syngenta AG 3, 4, 6, 7, 8, 9, 10, 41. Takeda Pharmaceutical Co Ltd 4. Tata Steel Ltd 10. Tesco PLC 3, 4, 6, 7, 14. ThyssenKrupp AG 9, 14. TNT NV 4, 6, 7, 14. Total SA 3, 4, 10, 13, 15, 28. Travelers Cos Inc/The 1, 4, 5, 6, 7, 10, 13. UniCredit SpA 3, 10, 14, 15. Unilever PLC 3, 4, 10, 14, 17, 28, 42. United Technologies Corp 4, 6, 7, 10, 13. Valeo SA 3, 4, 14. Valora Holding AG 3, 9, 11. Vinci SA 3, 4, 6, 7, 14, 28. Vodafone Group PLC 3, 4, 9, 10, 15, 28. Volkswagen AG 3, 3, 4, 4, 9, 9, 10, 10, 14, 14, 17, 17, 43, 43. Vontobel Holding AG 3, 9. VTB Bank OJSC 3. Whitbread PLC 4. Xstrata PLC 3, 4. Yanzhou Coal Mining Co Ltd 4, 10, 11, 20. Yum! Brands Inc 4.
Publisher UBS AG, Wealth Management Research, P.O. Box, CH-8098 Zurich Editorial team Andreas Hfert, Editor-in-Chief; Simone Hofer Frei, Deputy Editor-in-Chief; Roy Greenspan, Pierre Weill, Anna Marie Foc Product management Christian Burger Translations CLS Communication AG, Basel Design concept Yesway AG, Zurich Desktop publishing Werner Kuonen, Rolf Mller, Margrit Oppliger, Linda Sutter Printing Neidhart+Schn AG, Zurich Contact UBS-Research@ubs.com Editorial deadline Thursday prior to publication, 3 p.m. (CET)
Footnotes
1. his company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided. 2. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided. 3. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 4. UBS Securities LLC makes a market in the securities and/or ADRs of this company. 5. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity. 6. This company/entity is, or within the past 12 months has been, a client of UBS Financial Services Inc, and non-investment banking securities-related services are being, or have been, provided. 7. Within the past 12 months, UBS Financial Services Inc has received compensation for products and services other than investment banking services from this company. 8. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity securities as of last month`s end (or the prior month`s end if this report is dated less than 10 days after the most recent month`s end). 9. UBS AG, its affiliates or subsidiaries has issued a warrant the value of which is based on one or more of the financial instruments of this company. 10. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. 11. UBS AG, its affiliates or subsidiaries beneficially owned more than 3% of the total issued share capital of this company. 12. UBS Limited is acting as financial adviser to Allianz on the divestment of Alba and Phenix to Helvetia. 13. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided. 14. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end). 15. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months. 16. UBS AG, Australia Branch or an affiliate expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 17. UBS Limited acts as broker to this company. 18. UBS AG is acting as agent on Baloises announced share buy-back programme. 19. Within the past 12 months, UBS Securities Canada Inc or an affiliate has received compensation for investment banking services from this company/entity. 20. UBS Securities (Hong Kong) Limited is a market maker in the HK-listed securities of this company. 21. UBS South Africa (Pty) Limited acts as JSE sponsor to this company. 22. UBS AG, its affiliates or subsidiaries beneficially owned more than 5% of the total issued share capital of this company. 23. The equity analyst covering this company, a member of his or her team, or one of their household members is an officer, director, or advisory board member of this company. 24. The equity analyst covering this company, a member of his or her team, or one of their household members has a long common stock position in this company. 25. UBS AG, its affiliates or subsidiaries beneficially owned more than 3% of the total issued shares of this company. 26. UBS Securities LLC is acting as advisor to Comcast on its announced agreement to acquire a 51% stake in NBC Universal from General Electric 27. In Germany, UBS Limited has entered into a contractual arrangement to act as the manager of orders (Designated Sponsor) in the financial instruments of this company. 28. Directors or employees of UBS AG, its affiliates or subsidiaries are directors of this company. 29. UBS Securities Co. Limited is acting as manager/co-manager, underwriter, placement or sales agent in regard to an offering of securities of this company/entity or one of its affiliates. 30. UBS Limited is acting as advisor to Royal Bank of Scotland Group on the sale of part of its UK banking business comprising certain branches, SME customers and supporting infrastructure 31. UBS Limited is acting as advisor to Royal Bank of Scotland on the sale of its Global Merchant Services (GMS) division. 32. UBS Securities LLC is acting as advisor to Royal Bank of Scotland on its announced agreement to sell its corporate and commercial banking operations in Chile to The Bank of Nova Scotia 33. UBS Securities LLC is acting as advisor to Royal Bank of Scotland on its announced agreement to sell its Argentina wholesale banking operation to Banco Comafi SA. 34. UBS Securities Pte. Ltd., Seoul Branch is a liquidity provider for the equity-linked warrants of this company and beneficially owned 3,254,630 units of HANADAETOOSECURITIES ELW 0416 (Samsung Electronics call warrants) as of 26 Oct 2010. 35. UBS Securities Pte. Ltd., Seoul Branch is a liquidity provider for the equity-linked warrants of this company and beneficially owned 3,400,000 units of HANWHASECURITIES ELW 0065 (Samsung Electronics call warrants) as of 26 Oct 2010. 36. UBS Securities Pte. Ltd., Seoul Branch is a liquidity provider for the equity-linked warrants of this company and beneficially owned 3,510,170 units of DAISHINSECURITIES ELW 0C17 (Samsung Electronics call warrants) as of 26 Oct 2010. 37. UBS Securities Pte. Ltd., Seoul Branch is a liquidity provider for the equity-linked warrants of this company and beneficially owned 3,599,550 units of HANADAETOOSECURITIES ELW 0415 (Samsung Electronics call warrants) as of 26 Oct 2010. 38. UBS Limited is acting as manager/co-manager, underwriter, placement or sales agent in regard to an offering of securities of this company/entity or one of its affiliates. 39. UBS Limited signed a natural catastrophe financial coverage facility in the form of a contingent capital equity line with Scor. 40. The UBS Wealth Management strategist, a member of his or her team, or one of their household members has a long common stock position in this company. 41. UBS AG is acting as agent on Syngenta`s announced share buy-back programme. 42. UBS Limited is acting for Unilever Plc on its acquisition of Alberto Culver Inc 43. UBS Deutschland AG is acting as advisor to Volkswagen in relation to Porsche Some of the companies disclosed in this list might not be cited in this publication. They are referring to other local editions of the UBS investors guide, which is published in Switzerland, Germany, France, Italy, the UK and Asia.
Wealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affiliate thereof. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS AG, its subsidiaries and affiliates). All information and opinions as well as any prices indicated are currentl as of the date of this report, and are subject to change without notice. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. Opinions expressed herein may differ or be contrary to those expressed by other business areas or divisions of UBS, its subsidiaries and affiliates, as a result of using different assumptions and/or criteria. At any time UBS and other companies in the UBS group (or its employees) may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to the issuer of relevant securities or to a company connected with an issuer. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is considered risky. Past performance of an investment is no guarantee for its future performance. Additional information will be made available upon request. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in foreign exchange rates may have an adverse effect on the price, value or income of an investment. The compensation of the analyst(s) who prepared this report is determined exclusively by research management and senior management (not including investment banking). Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues of UBS Wealth Management & Swiss Bank as a whole, which includes investment banking, sales and trading services. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of our individual clients and we would recommend that you take financial and/or tax advice as to the implications (including tax) of investing in any of the products mentioned herein. For structured financial instruments and funds the sales prospectus is legally binding. If you are interested you may attain a copy via UBS or a subsidiary of UBS. This document may not be reproduced or copies circulated without prior authority of UBS or a subsidiary of UBS. UBS expressly prohibits the distribution and transfer of this document to third parties for any reason. UBS will not be liable for any claims or lawsuits from any third parties arising from the use or distribution of this document. This report is for distribution only under such circumstances as may be permitted by applicable law. Australia: Distributed by UBS Wealth Management Australia Ltd (Holder of Australian Financial Services Licence No. 231127), Chifley Tower, 2 Chifley Square, Sydney, New South Wales, NSW 2000. Austria: This publication is not intended to constitute a public offer or a comparable solicitation under Austrian law and will only be used under circumstances which will not be equivalent to a public offering of securities in Austria. The document may only be used by the direct recipient of this information and may under no circumstances be passed on to any other investor. Bahamas: This publication is distributed to private clients of UBS (Bahamas) Ltd and is not intended for distribution to persons designated as a Bahamian citizen or resident under the Bahamas Exchange Control Regulations. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. Under no circumstances is the information contained herein to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada or, alternatively, pursuant to a dealer registration exemption. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed upon these materials, the information contained herein or the merits of the securities described herein and any representation to the contrary is an offence. Amendments regarding the taxation of investments in foreign investment entities (FIEs) have been proposed by the Minister of Finance (Canada) to apply to taxation years commencing after 2006 (the Proposed Amendments). In the Federal Budget tabled on January 27, 2009, it was stated that the government will review the Proposed Amendments, in light of submissions made by various parties, before proceeding with such measures. In general, as currently released, the Proposed Amendments may require an investor that has acquired a participating interest other than an exempt interest (as defined in the Proposed Amendments) in a FIE, to include in income for income tax purposes each year (i) an amount equal to a prescribed percentage of the designated cost of its participating interest in the FIE; (ii) in limited circumstances, its gain on its participating interest in FIEs, on a mark-to-market basis whether or not such gain has been realized; or (iii) in limited circumstances, its proportionate share of the FIEs income (or loss) calculated using Canadian tax rules. Accordingly, if the Proposed Amendments apply to an investor, the investor may be required to include in taxable income amounts that the investor has not earned or received. The foregoing summary provides a general description of Proposed Amendments, and should not be construed as advice to any particular investor regarding the implications of the Proposed Amendments in the investors particular circumstances. Investors are urged to consult their own tax advisors regarding the application and impact of the Proposed Amendments in their particular circumstances. A Canadian investor in the Fund must promptly notify UBS if that investor acquires or holds more than 10% of any class of shares of a particular Fund. In Canada, this publication is distributed to clients of UBS Wealth Management Canada by UBS Investment Management Canada Inc. Dubai: Research is issued by UBS AG Dubai Branch within the DIFC, is intended for professional clients only and is not for onward distribution within the United Arab Emirates. France: This publication is distributed by UBS (France) S.A., French socit anonyme with share capital of 125.726.944, 69, boulevard Haussmann F-75008 Paris, R.C.S. Paris B 421 255 670, to its clients and prospects. UBS (France) S.A. is a provider of investment services duly authorized according to the terms of the Code Montaire et Financier, regulated by French banking and financial authorities as the Banque de France and the Autorit des Marchs Financiers. Germany: The issuer under German Law is UBS Deutschland AG, Bockenheimer Landstrasse 24, 60306 Frankfurt am Main. UBS Deutschland AG is authorized and regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht. Hong Kong: This publication is distributed to clients of UBS AG Hong Kong Branch by UBS AG Hong Kong Branch, a licensed bank under the Hong Kong Banking Ordinance and a registered institution under the Securities and Futures Ordinance. Indonesia: This research or publication is not intended and not prepared for purposes of public offering of securities under the Indonesian Capital Market Law and its implementing regulations. Securities mentioned in this material have not been, and will not be, registered under the Indonesian Capital Market Law and regulations. Italy: This publication is distributed to the clients of UBS (Italia) S.p.A., via del vecchio politecnico 3, Milano, an Italian bank duly authorized by Bank of Italy to the provision of financial services and supervised by Consob and Bank of Italy. Jersey: UBS AG, Jersey Branch, is regulated and authorized by the Jersey Financial Services Commission for the conduct of banking, funds and investment business. Luxembourg: This publication is not intended to constitute a public offer under Luxembourg law, but might be made available for information purposes to clients of UBS (Luxembourg) S.A., a regulated bank under the supervision of the Commission de Surveillance du Secteur Financier (CSSF), to which this publication has not been submitted for approval. Singapore: Please contact UBS AG Singapore branch, an exempt financial adviser under the Singapore Financial Advisers Act (Cap. 110) and a wholesale bank licensed under the Singapore Banking Act (Cap. 19) regulated by the Monetary Authority of Singapore, in respect of any matters arising from, or in connection with, the analysis or report. Spain: This publication is distributed to clients of UBS Bank, S.A. by UBS Bank, S.A., a bank registered with the Bank of Spain. UAE: This research report is not intended to constitute an offer, sale or delivery of shares or other securities under the laws of the United Arab Emirates (UAE). The contents of this report have not been and will not be approved by any authority in the United Arab Emirates including the UAE Central Bank or Dubai Financial Authorities, the Emirates Securities and Commodities Authority, the Dubai Financial Market, the Abu Dhabi Securities market or any other UAE exchange. UK: Approved by UBS AG, authorized and regulated in the UK by the Financial Services Authority. A member of the London Stock Exchange. This publication is distributed to private clients of UBS London in the UK. Where products or services are provided from outside the UK, they will not be covered by the UK regulatory regime or the Financial Services Compensation Scheme. USA: This document is not intended for distribution into the US and/or to US persons. UBS Securities LLC is a subsidiary of UBS AG and an affiliate of UBS Financial Services Inc., UBS Financial Services Inc. is a subsidiary of UBS AG. Version as per January 2010. UBS 2010. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.
50

UBS Investors Guide

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

UBS Investors Guide

Caricato da

Copyright:

Formati disponibili

Until Sir Edmund Hillary reached the summit of Everest, he would not rest. Nor would Tenzing Norgay.

(The Himalayas, 1953.)

Until we all understand the true value of relationships.

The art of currency war A dangerous conflict

We will not rest

Asset Allocation How to invest

Key investment ideas

Underweighted Liquidity Bonds Equities Listed Real Estate Commodities

Index: Seite 2_Asset-Alloc._1043 US EMU UK Switzerland Japan Emerging Markets

Index: Seite 2_Equity_1043

Index: Seite 2.3_Bond_1043

Index: Seite 2_Asset-Alloc._1043

Index: Seite 2.5_Trad-Asset-Classes_1043

Andreas Hfert Chief Economist

Explanations, appendix, disclosures, publication data