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UBS investor’s guideWealth Management Research 3 April 2009 United States

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FocusThe post-crisis paradigm emerges

EquitiesBargain hunting: Ten under 10x

EconomicsAn update on the financial crisis thermometers

Portfolio principlesThe financial aspects of selling a business

UBS research focus:

The financial crisis

and its aftermath

Ask your financial advisor

Just out!

UBS investor’s guide 3 April 2009 3

Contents Editorial

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 36

UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of UBS in the UnitedStates can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customerscan access this independent research at www.ubs.com/independentresearch or may call +1 877-208-5700 to request a copy of this research.

UBSFS accepts responsibility for the contents of this report. U.S. persons who receivethis report and wish to effect any transactions in any security discussed in this reportshould do so with UBSFS and not UBS AG.

This report has been prepared by UBS AGand UBS Financial Services Inc.

Buying mania is over – in the finan-cial markets, andnow in shoppingmalls too. More diretimes lie ahead forthe economy, and

investors need to adapt to the new conditions. Our Focus article on page 6 ventures a look into thepost-crisis era.Photo: Lise Aserud/Keystone/scanpix

3 April 2009

Editorial 3Investment outlook 4Key forecasts 5Focus 6Financial crisis thermometers 10Economy: USA 12Economy: Japan and Europe 13Economy: Calendar 14Economy: Forecasts 15Reader’s corner 16Equity market: USD 17Equities: Strategy 18Equity market: Eurozone 20Equity market: Asia-Pacific 21Bond market: USD 22Closed-end funds 23Obamanomics 24Socially responsible investments 26Foreign exchange 28Foreign exchange strategy 30Portfolio view 31Emerging markets 32Technical analysis 34Appendix 36

Andreas HoefertHead, WMR Swiss Bank

Dear readers,

Until last year, the word “trillion” was notpart of my usual vocabulary. The ongoingfinancial crisis has definitively changed this.From the trillions of dollars in writedownsin the financial sector, to the more than tril-lion dollar budget deficit, the trillions of dol-lar increases on central banks’ balancesheets and the trillion dollars granted to theInternational Monetary Fund and the WorldBank at the G20 meeting, this number haslost some of its luster and myth. “Trillion isthe new billion” is a bon mot often heardlately. At least with respect to words, infla-tion is on the rise.

While it is still not certain at this juncturethat the financial crisis has been definitivelyvanquished, the extent of governments’efforts to achieve this goal is really mind-boggling. The Fed announced two weeksago that it intends to increase its balancesheet by more than one trillion US dollarsto buy mortgage-backed securities, agencybonds, and for the first time since the1960s, Treasury bonds. When completed,those measures will have more than tripledthe US monetary base from its September2008 level. This is an experiment that hasnever been tried in developed countries, atleast in modern times.

Meanwhile PPIP, meaning “Public-PrivateInvestment Program,” is the latest acronymin a long series of plans aimed at reducingtoxic assets on financial intermediaries’ bal-ance sheets. Its success will depend on theswiftness with which it can be imple-mented. In the recent past, several pro-grams didn’t have the hoped-for effectbecause it took too long between decisionand action, allowing market participants todoubt and second-guess them.

With the still intense news flow relating tothe financial crisis and the economic down-turn, it is rather difficult to take a step backand analyze the long-term implications ofthe crisis and the government interventions.This was our intent in the new UBS researchfocus: “The financial crisis and its after-math.”

Financial markets, once priced for per-fection, continue to reflect a pessimism thatis, in fact, far darker than the new eco-nomic realities indicate. Surely, the after-math of the crisis will seem austere given itsbubbling prelude, but it will also offerinvestors opportunities. We think this turn-ing point demands a clear-eyed review notonly of assets and portfolios, but also of themethods used to evaluate them. KurtReiman, senior editor and Walter Edel-mann, also an author of our new study,present its main results in the focus article.

4 UBS investor’s guide 3 April 2009 UBS investor’s guide 3 April 2009 5

Investment Outlook Key Forecasts

Asset Allocation Regional Equity Strategy

US Equity Sector Strategy

US Equity Size and Style

US Fixed Income Strategy

Scale for Investment Strategy charts

Symbol Description/ Symbol Description/Definition Definition

+ moderate – moderateoverweight vs. underweight vs.

benchmark benchmark

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

+++ strong – – – strongoverweight vs. underweight vs.

benchmark benchmark

n neutral, i.e.,on benchmark

Source: UBS WMR

The overweight and underweight recommendations represent tactical deviations that can be applied to any appropriate bench-mark portfolio allocation. They reflect WMR’s short- to medium-term assessment of market opportunities and risks in the respec-tive asset classes and market segments. The benchmark allocation is not specified here. It should be chosen in line with the riskprofile of the investor. Note that the Regional Equity Strategy is provided on an unhedged basis (i.e., it is assumed that investors carry the underlying cur-rency risk of such investments). Thus, the deviations from the benchmark reflect our views of the underlying equity in combinationwith our assessment of the associated currencies.

For more information, please read the most recent US Investment Strategy Guide.

-0.03 -0.02 -0.01 0 0.01 0.02 0.03

Equity

Ficed income

underweight neutral overweight

Commodities

- - - - - - n + ++ +++

Cash

-0.03 -0.02 -0.01 0 0.01 0.02 0.03underweight neutral overweight

- - - - - - n + ++ +++Japan

US

Other developed

Emerging Markets

UK

Eurozone


- - - - - - n + ++ +++Utilities

Materials

Consumer staples

Health Care

Financials

Telecom

Energy

Consumer Discr.

TechnologyIndustrials


- - - - - - n + ++ +++

Inv. Grade Corporates

High Yield Corporates

TIPS

Mortgages

Agencies

Preferred Securities

Emerging Markets

Treasuries


- - - - - - n + ++ +++

Small-Cap

Mid-Cap

Large Cap Growth

Large Cap Value

Exchange rates

PPP1 2008 2 1.4.09 3 M 3 6 M 3 12 M 3

vs USDEURUSD 1.24 1.39 1.32 1.37 1.45 1.50

USDJPY 97 91 99 103 105 110

GBPUSD 1.72 1.46 1.44 1.48 1.54 1.60

USDCHF 1.22 1.07 1.14 1.13 1.07 1.05

AUDUSD 0.64 0.71 0.69 0.68 0.75 0.80

USDCAD 1.15 1.21 1.26 1.23 1.17 1.15

USDMXN 6.82 13.64 14.15 6.80 6.75 6.65

USDBRL 2.13 2.31 2.31 2.47 2.61 2.551 Purchasing Power Parity 2 end of year 3 UBS WMR ForecastSources: Reuters, UBS WMR

in % 2004 2005 2006 2007 2008F 2009F

Real GDP (y/y) 3.6 2.9 2.8 2.0 1.1 –2.2

CPI (y/y) 2.7 3.4 3.2 2.9 3.8 –1.0

Core CPI (y/y) 1.8 2.2 2.5 2.3 2.3 1.3

Unemployment rate 5.5 5.1 4.6 4.6 5.8 9.2

10-year yield* 4.24 4.39 4.7 4.0 2.4 3.2

Fed funds rate* 2.25 4.25 5.25 4.25 0.25 0.25* year-end level Sources: Thomson Financial, UBS WMR

US Economic forecasts

Technical Levels

S&P 500 DJIA NASDAQ 10-Yr. Treasury

Support 766–770 7350–7450 1450–1464 2.46%

730–750 7000–7200 1405 2.04%–2.16%

Resistance 833–838 8000–8100 1600–1666 3.05%–3.30%

860–875 8300–8400 1700–1786 3.55%–3.80% Source: UBS WMR

Commodity Price Forecasts

2005 2006 2007 2008 9–12months

view

WTI Crude Oil $/bbl 58.0 66.2 72.4 100.0 70.0

Gold $/oz 443 604 697 872 980

Silver $/oz 7.20 11.60 13.40 15.00 11.50

Copper $/mt* 3577 6725 7139 6961 3700

Aluminum $/mt* 1875 2480 2641 2573 1600

Zinc $/mt* 1350 3275 3257 1885 1450Note: All prices are yearly averages*mt = metric ton Sources: Datastream, UBS WMR


Focus Focus

A new post-crisis policy paradigm

After decades of burgeoning free-marketinternationalism, governments will extendtheir reach as they struggle to revive theireconomies. So far, governments and theircentral banks have intervened on twofronts: stabilizing and in some cases nation-alizing their crippled financial sectors, andusing fiscal and monetary policy tools tocounter a deep global recession.

In our view, these measures are crucial toturn the tide of falling demand, risingunemployment and looming deflation. Hadgovernments not undertaken strong meas-ures during the second half of 2008 torepair dysfunctional financial markets, mostforms of global commerce, which werealready under severe stress, would havelikely ground to a halt.

Public sector debt imbalances to growmore acuteAs credit markets seized, households andcorporations began reducing balance sheetleverage rapidly. This, in turn, has acceler-ated the contraction in overall economicactivity in the countries that were hit hard-est by the financial crisis. But as one set ofimbalances begins to fade, another is likelyto grow, this time on the balance sheets ofgovernments.

With central banks having cut short-terminterest rates to historic lows, attention nowshifts to government spending plans andnon-traditional monetary policy tools. Thespending measures mostly target boostingshort-term demand, not returning the

economy to a sustainable long-term growthpath. At best, these fiscal measures will suc-ceed in dampening the impact of the reces-sion while allowing the private-sectorimbalances in the economy to adjust.Indeed, our analysis suggests that the initialpositive effects of the spending measureson growth are likely to be reversed in sub-sequent years.

While the effect of fiscal stimulus on theeconomy is highly uncertain, the conse-quences of big spending packages on gov-ernment deficits and debt are quite obvi-ous. The large fiscal packages, the cost ofbank bailouts, and the generally diminishedtax revenues have increased public-sectordebt faster than at any time since WorldWar II.

At the same time, central bank purchasesof public- and private-sector debt haveswelled their balance sheets, and hencemoney supply (see Fig. 1). In our view, the

question is not whether more central bankswill undertake so-called “quantitative eas-ing” measures – increasing the money sup-ply by debt purchases (and the printingpress) – but how they will exit this path lateron.

Lower trend growth, risk of higher inflationThe ongoing aging of the population cou-pled with both broad-based deleveragingand increased regulation are very likely tosignificantly dampen future growth indeveloped countries. Consequently, gov-ernments face ever-increasing deficits andsubdued growth with few effective optionsat their disposal. Debt-to-GDP ratios willlikely rise unless there are cuts in discre-tionary and entitlement spending or taxesare increased. And in countries mostexposed to the financial crisis, policymakersmay prefer higher inflation as an antidoteto ever-increasing debt.

For many, the inflation of the 1970s is stillfresh and it is often regarded as somethingundesirable. Yet inflation would advancethe deleveraging process. It profoundlyaffects wealth redistribution by reducingthe real value of outstanding debt. Themain problem for policymakers once thefinancial crisis has passed will be to ensurethat the massive liquidity injections fromgovernments and central banks do not leadto a surge in inflation. We think recent his-tory has shown that the focus on consumerprice stability has its practical limits. It canneither prevent “irrational exuberance,” asthe technology, real estate and credit bub-bles have shown, nor avoid the risk of defla-tion when the exuberance of market partic-ipants turns to panic.

Nominal government bonds expensiveGiven the cyclically depressed level of bondyields, we find that nominal governmentbonds offer little value at present (see Fig.2). The only supportive scenario for nomi-nal government bonds is one of intensify-ing deflation risk, which, while it cannot beruled out, is nevertheless unlikely, in ourview. On a standalone basis, we find a morecompelling risk-return tradeoff in other sec-tors of the bond market, such as moneymarket instruments, inflation-linked bondsand corporate bonds.

Earnings growth to return to a moresustainable pathThe crisis has had a profound effect on thedrivers of asset returns. In our view, a sharpearnings recovery is unlikely to materialize,and trend earnings are likely to be struc-turally weaker. Given the diversity of sectorsand companies in overall equity marketindexes, the risk to the sustainable earningstrend is much less pronounced than forindividual sectors. Overall, we think a trendgrowth rate of real earnings of about 2.5%for the US is a reasonable assumption.Although this is significantly lower than the

Measured in lost wealth, the financial crisis that erupted in 2007 and intensifiedthroughout 2008 has already achieved historic proportions. Today, we are wit-nessing the emergence of a new policy paradigm. Investors should take lowertrend growth and the risk of higher inflation into account.

Fed’s balance sheet explodes2.5

2.0

1.0

0.5

1.5

0Source: Federal Reserve

2003 2004 20062005 2007 2008 2009

Balance sheet of the Federal Reservein trillions of USD

Bond yields move with inflation18

16

10

6

2

14

12

8

4

0

–2Source: Bureau of Labor Statistics, Federal Res. Economic Data, UBS WMR

1960 1970 1980 1990 2000 2010

10-year US Treasury constant maturity bond yieldUS CPI inflation

%

Fig. 1 Fig. 2


Focus Focus

earnings growth rate during the twodecades preceding the financial crisis, it isbroadly in line with the postwar experience(see Fig. 3).

Overall, we expect that after the crisispasses, the financial sector in developedeconomies will be more heavily regulatedand will face more limited growth opportu-nities than in the past. After outpacingother industries since the 1980s, we expectlower trend earnings growth in the finan-cial sector as regulation curtails activitiesthat offer higher margins and growth,whether because of market realities, loss ofrisk appetite or regulatory constraints.

Equities appear cheapStocks have tended to deliver theirstrongest returns after periods of extremeeconomic stress and financial marketupheaval, which, not surprisingly, weretimes when stocks were at their leastexpensive levels. Despite the weak outlookfor growth in trend earnings, equities offersignificant long-term scope for gain in ascenario where the economic environmentstabilizes, as we expect.

US dollar at riskThe financial crisis had its epicenter in theUS, and the fiscal and monetary policy reac-tions there have been much more aggres-sive, and much bigger, than in the Euro-zone, for example. As soon as the US eco-nomic situation starts to stabilize, this liq-uidity overhang poses a major risk to the USdollar. Moreover, the supranational archi-tecture of the European Central Bank couldhelp to ensure stronger inflation-fightingcredentials compared to national centralbanks that would face pressure from rap-idly rising government deficits and debt.This would further support the euro relativeto the US dollar if inflation expectationswere to begin to diverge between the tworegions, as we think is increasingly likely.

Investing in trying timesAs individuals reassess their risk appetites inthe aftermath of the financial crisis, we con-tinue to stress the benefits of diversificationat all risk levels. Knowing where the “real”risks to your portfolio lie, especially forthose assets traditionally perceived as safe,is more important than ever (see Fig. 4).

Although equities have fallen sharply sincetheir peak and have posted negative realreturns during the past decade, we recom-mend taking on equity exposure in combi-nation with bond investments (see Fig. 5).This applies even for conservative investors.The traditional mix of nominal bonds andequities has appeal, especially in timeswhen extreme outcomes are probable.Nominal bonds provide shelter againstdeflation. Equities offer potentially strongreturns in the event that the economy sta-bilizes. We think even fairly defensiveinvestors can boost risk-adjusted returnsthrough corporate bond exposure.Investors with a sufficiently long time hori-zon and the ability to withstand furthermarket volatility should consider addingmore significant exposure to equities, giventhat deflation is an extreme scenario andnot our base case.

In our view, inflation-linked bonds are thepreferred long-term safe asset, and wefavor them even over cash. Investors con-cerned about soaring inflation should con-sider investing in inflation-linked bonds,which offer a safe long-term alternative anda fixed real return.Kurt ReimanWalter EdelmannStrategists, UBS AG

A break in US real earnings

Source: Shiller (2009), UBS WMR

1870 1890 19301910 1950 1970 1990 2010

100

10

1

A dreadful period: LongDepression, Great Depression,two world wars

The post-war experience

Real earnings for US equities, in log scale

Large swings in real US asset returns20

5

15

10

0

–5

–10Source: Ibottson, UBS WMR

1935 1950 1965 1980 1995 2010

Large cap equitiesLong-term government bonds

10 year rolling compound annual real return, in %

Fig. 3 Fig. 4

Valuation and scenario considerations

Impact of fundamentals in extreme scenarios 1 Value Base case 3

indications 2 Value &Supercycle Stagflation Goldilocks Deflation fundamentals

combined

Government bonds very bad very bad bad very good very expensive –

Corporate bonds good bad very good very bad very cheap +

Inflation-linked bonds 4 neutral neutral neutral good expensive neutral

Equities good bad very good very bad very cheap +

Listed real estate very good neutral good very bad cheap neutral

Commodities very good neutral good very bad not meaningful +Note: 1Growth and inflation deviate significantly from our base case. 2Assumes that fundamentals follow trends of the post-war period. 3 Takes both thefundamental outlook as well as valuation signals into consideration. A plus sign signals an expected excess return (risk premium) over cash, which wouldsufficiently compensate for asset specific risks. 4 For inflation-linked bonds, we assume they include a deflation floor on the principal amount, which at leastpartially kicks in as consumer prices fall.Source: UBS WMR

Fig. 5

UBS investor’s guide 3 April 2009 1110 UBS investor’s guide 3 April 2009

Financial crisis thermometers Financial crisis thermometers

Financial HealthIndex Normal = 100, includes CDSas of 30 March 2009

106

102

104

100

98 Source: UBS WMR

Jan 06 Jan 07 Jan 08 Jan 09

Unhealthy (too hot)

Healthy (normal)

Index level

Economic HealthIndex Normal = 100as of 13 March 2009

Source: Thomson Financial, UBS WMR

Feb 69 Feb 79 Feb 89 Feb 99 Feb 09

Unhealthy (too hot)104

99

102

96

94

95

97

98

100

101

103

Unhealthy (too cold)

Index level

Healthy (normal)

Credit HealthIndex Normal = 100as of 23 March 2009

104

101

102

103

100

99

Source: UBS WMR

Jan 73 Jan 83 Jan 93 Jan 03

Extremely unhealthy

Unhealthy

Normal

tight

loose

Index level

Financial health This thermometer is updated weekly andwas last updated 30 March 2009. It is aweighted average of four relevant compo-nents to determine the stress on the finan-cial market: liquidity (measured by the dif-ference between money market rates andcentral bank rates), credit (measured by thedifference between corporate bond ratesand government bond rates), financialintermediaries (measured by credit defaultswap spreads, for CDS, of the banking sec-tor) and equities (measured by the volatilityindex). After having peaked in October2008, the thermometer for the US, theEurozone and the UK returned to lessintense levels by the beginning of 2009.

However, since then, we have again seenan increase until very recently. Since earlyMarch, the tension has again eased some-what. One obvious reason is the Fed’s

announcement of massively expanding itsbalance sheet through purchases of agencydebt, agency mortgage-backed securities(MBS) and Treasuries, as well as financingsecurities by the Term Asset-Backed Securi-ties Loan Facility (TALF).

Consequently, the liquidity componenthas improved since then, and so have creditdefault swap spreads in the US, falling fromroughly 390 basis points on 9 March to cur-rently around 330 basis points. Similar evo-lutions were also seen in the Eurozone andthe UK. Despite a mini-rally in the last twoweeks, equity market volatility indicatorsremain stubbornly high, still hovering signif-icantly above 40 in the US and the Euro-zone, and above 35 in the UK.

The announcement of the details of thePrivate-Public Investment Program (PPIP)from the Treasury did not significantly affectthe financial health thermometers, even

though it led to a substantial rally on globalequity markets. In the US, for example, theCDS spread widened during last week,while credit spreads narrowed. Equityvolatility and money market spreads werepractically unchanged.

While we have seen an improvement, weremain at critical levels.

Economic healthThis thermometer is updated monthly andwas last updated on 13 March 2009. Itgauges the stance of the US economy in asingle and timely measure. This gauge willhelp investors assess whether the US econ-omy is moving out of recession before itshows up in the GDP figures. The ther-mometer summarizes the information con-tained in the ISM Manufacturing PMI (level),the Conference Board consumer confi-dence index (level) and non-farm payrolls(monthly growth rate) in one indicator. At–4.81 it is in deep recessionary territory,with the 1970s recession being the onlyperiod recording a lower level. We wouldhave to see the thermometer rise above–2.2 (about 970 on Economic Health graph)before sounding the all clear on a growth

recovery. For more information, please seeEconomic Theme, US recession thermome-ter, 13 March 2009.

Credit health This thermometer is updated monthly andwas last updated on 23 March 2009. It is asimple average of five “standardized” indi-cators: month-over-month growth in real(inflation-adjusted) credit lending fromcommercial banks, the spread of the three-month Eurodollar deposit rate over the fedfunds rate, the spread of the Moody’s ‘Aaa’corporate yield over the 20-year Treasuryyield, the spread of the Moody’s ‘Baa’ cor-porate yield over the 20-year Treasury yield,and the willingness of banks to give install-ment loans to consumers. In this context,“standardized” means that each indicatoris adjusted to have a mean of zero and astandard deviation (volatility) of one. Theoverall index has a mean of zero and a stan-dard deviation of 0.58 using data throughFebruary 2009. The credit conditions ther-mometer has improved from a historicalhigh of 2.8 (about 1040 on Credit Healthgraph) in December 2008 to 2 (about 1030)in February. However, at that level it still sig-nals credit conditions as tight as during the1980s recessions. For more information onhow credit conditions are measured, seeEconomic Theme, “Measuring the creditimpact,” 21 Oct. 2008.Andreas Hoefert,Head, WMR Swiss BankThomas Berner, CFAEconomist, UBS Financial Services [email protected]

An update on the financial crisis thermometersIn this section, we seek to provide regular insight on the common question“where are we in the current financial crisis?” In each report, you will find “ther-mometers” measuring financial, economic and credit health along with explana-tions for each measurement.


Economy: USA Economy: Japan and Europe

Worse in Q1, better thereafter Japan EuropeTankan survey reflects severe recessionThe Bank of Japan’s quarterly Tankan sur-vey showed business conditions at largemanufacturers falling to a record low inMarch. Conditions deteriorated sharply forlarge non-manufacturers as well. However,these companies expect a modest improve-ment by June. Their investment plans andprofit forecasts for the next 12 months werenot as bad as we assumed. By contrast,small and medium-sized enterprises expectconditions to continue deteriorating, andthey are planning to cut investment spend-ing. Companies of all sizes report that theyhave excess workers, especially in the man-ufacturing sector, and no improvement isexpected by June. Rather than makingemployees redundant, most Japanese com-panies prefer to adjust their labor forcethrough attrition. This should help to pre-vent a dramatic spike in unemployment,but lower bonus and overtime paymentsmay weigh on consumer spending. Brian RoseEconomist, UBS AG

Business conditions down sharply80

0

–40

20

60

40

–20

–60Source: Bloomberg

Large manufacturersLarge non-manufacturers

Business Conditions Index

1985 1988 19941991 1997 2000 2003 2006 2009

Unemployment rate hits low point14

10

8

6

13

11

12

9

7

5Source: Reuters EcoWin, UBS WMR

1992 1994 1996 1998 2000 2002 2004 2006 2008

Unemployment rate

%

We revised our US real GDP growth forecastfrom –1.6% to –2.2% for 2009 and from+2.5% to +2% for 2010. The downwardrevision in 2009 reflects, in part, a morenegative base effect from a weaker 4Q08quarter. We continue to expect weaknessabatement in 1Q09 compared with 4Q08,but now look for real GDP growth of –5%q/q annualized in 1Q09 (previous forecast:–4%) after –6.3% in 4Q08.

We also continue to call for a moderategrowth recovery starting in 3Q09, as themonetary and fiscal policy response gainstraction. We kept our headline CPI inflationat -1% for 2009 but lowered it from +2.5%to +1.4% for 2010 as we think that the dis-inflation cycle will be more marked in 2010than we previously anticipated. This impliesthat the Fed can remain expansive forlonger and we thus push out our expecta-tion for a first rate hike from spring to fall2010.

Broadly speaking, the US economyremains torn between two negative andtwo positive forces. On the dark side, thehousing recession continues to weighdirectly and indirectly on growth. The

related deleveraging cycle exacerbated therecession in fall 2008, and through severalchannels continues to weigh heavily oneconomic activity.

On the bright side, monetary stimulus hasled to some improvement in monetary con-ditions and broad money aggregate growthhas visibly increased. Furthermore, the fis-cal stimulus package will bear its first fruitsin 2Q09, and in our view, will support theeconomy throughout 2010.

Currently, the negative forces are stilldominant in shaping economic activity.However, we reiterate our view, held sincelate last year that the economy will reach aninflection point in 1Q09 where weaknesswill abate.

We view the interplay between creditconditions and money growth as arguablythe most crucial determinant for resump-tion of growth. The Fed’s massive monetaryexpansion will not have a visible effect ongrowth if credit conditions don’t stabilize.

Our credit conditions index, which sum-marizes information on credit spreads, lend-ing standards and the actual flow of banklending, has improved since December, butcontinues to point to rather tight credit con-ditions.

While we don’t expect the index toimprove significantly until late 2009, thecombination of stable credit conditions andmassive liquidity will, in our view, lay thegroundwork for a modest growth recoveryin 3Q09 and beyond.Thomas Berner, CFAEconomist, UBS Financial Services [email protected]

Credit conditions hurt growthas of 27 March 2009

3

2

0

1

–1

10

40

60

30

20

50

70

1993 2003 20131973 1983

Source: Thomson Financial, UBS WMR

index level

index level, inverted scale

tight

loose

UBS WMR Credit Conditions Index (lhs)ISM Manufacturing PMI (rhs)

The ECB keeps ammunition in reserveThe European Central Bank (ECB) loweredits key policy rate to 1.25% from 1.5%. Themarket was overwhelmingly positioned fora cut to 1.0%, while we did warn that thebank might be reluctant to implement sucha move. President Trichet indicated that thedecision was not unanimous. Indeed, someECB council members had indicated thatbefore lowering rates further, they wouldprefer to wait to see how past rate reduc-tions affect the economy. We think thatrates will be lowered to 1.0% in May, whichmay be the trough in the interest ratescycle. Trichet also indicated that the bankmay announce some decisions regardingthe purchasing of financial assets to stimu-late the economy. We think that there is stilldebate among the council members on thisissue and at any rate we would expect onlysome targeted purchases of private debtinstead of public bonds.Dirk FaltinEconomist, UBS AG


Economy: Calendar Economy: Forecasts

Expected economic indicators

Other economic events

Growth and Inflation

Interest rates

2007 2008 01/04/09 6M1 12M

United States 3m 4.7 1.5 1.2 0.3 0.3

10y 4.0 2.1 2.7 2.7 3.2

Japan 3m 0.9 0.7 0.6 0.3 0.3

10y 1.5 1.2 1.3 1.5 1.5

Eurozone 3m 4.7 2.9 1.5 1.0 1.0

10y 4.3 1.7 3.0 2.8 3.0

UK 3m 6.0 2.3 1.6 0.9 0.9

10y 4.5 3.1 3.2 3.0 3.5

Switzerland 3m 2.8 0.3 0.4 0.3 0.3

10y 3.0 2.2 2.2 2.1 2.5

Australia 3m 7.2 4.5 3.7 2.8 2.8

10y 6.3 4.0 4.6 4.1 4.4

Canada 3m 4.6 1.6 1.0 0.7 0.7

10y 4.0 2.7 2.8 2.7 2.91 UBS WMR Forecast Sources: Reuters, UBS WMR

Date Country Indicator Unit Month Frequency Forecast 1 Consensus 2 Previous

07-Apr UK Industrial Production % yoy Feb m –11.4

07-Apr EMU Real GDP % qoq Q4 F q –1.5 –1.5

09-Apr US Trade Balance bn USD Feb m –36.5 –36.0

09-Apr IT Industrial Production % yoy Feb m –16.7

09-Apr GE HICP % yoy Mar F m 0.7 0.4

09-Apr CH Unemployment Rate s.a. level % Mar m 3.2 3.1

10-Apr FR Industrial Production % yoy Feb m –15 –13.8

10-Apr FR HICP % yoy Mar m 1 1.0

13-Apr UK RICS House Price Balance level% Mar m –76 –78.3

14-Apr US Retail Sales % yoy Mar m –8.6

14-Apr US Retail Sales Less Autos % yoy Mar m –5.0

14-Apr US PPI (finished goods) % yoy Mar m –1.3

15-Apr US Industrial Production % yoy Mar m –11.8

15-Apr US Capacity Utilisation level % Mar m 70

15-Apr US Empire State Manufacturing Survey level Apr m –38.2

15-Apr US CPI % yoy Mar m 0.2

15-Apr JP Industrial Production % yoy Mar m –38.4

16-Apr US Philly Fed Survey level Apr m –35

16-Apr US Housing Starts 1000 ann. Mar m 583

16-Apr US Building Permits 1000 ann. Mar m 564

16-Apr IT HICP % yoy Mar F m 1.0 1.0

16-Apr EMU Industrial Production % yoy Feb m –17.3

16-Apr EMU HICP % yoy Mar m 0.6 0.6

16-Apr CH Producer & Import Prices % yoy Mar m –1.8

17-Apr US Consumer Sentiment (Michigan) level Apr m 57.3

17-Apr CH Retail Sales (real) % yoy Feb m 1.21 UBS Wealth Management Research Forecast 2 Bloomberg Survey Source: UBS WMR, Bloomberg, Reuters

Date Country Event

08-Apr US Fed releases Minutes from March 17–18 FOMC Meeting.09-Apr UK BoE announces its target rate. We expect rate to remain unchanged at 0.50.10-Apr JN BOJ to publish Minutes of March 16–17 Board Meeting.15-Apr US Fed releases Beige Book Economic Report.17-Apr US Bernanke speaks at Fed Conference in Washington.Source: Bloomberg

GDP Real GDP growth (%) Consumer Price Inflation (%)Weight1 2005 2006 2007 2008F2 2009F 2 2010F 2 2005 2006 2007 2008 2009F 2 2010F 2

USA 20.3 2.9 2.8 2.0 1.1 –2.2 2.0 3.4 3.2 2.9 3.8 –1.0 1.4

Canada 1.7 2.9 3.1 2.7 0.7 –1.5 2.2 2.2 2.0 2.4 2.4 0.5 2.1

Japan 6.5 1.9 2.0 2.4 –0.7 –5.0 1.5 –0.3 0.2 0.0 1.4 –0.8 0.5

Germany 4.0 0.8 3.0 2.5 1.3 –4.5 –0.1 2.0 1.7 2.0 2.6 0.5 1.5

France 3.0 1.9 2.4 2.1 0.7 –2.9 –0.2 1.7 1.7 1.4 2.8 0.6 1.5

Italy 2.7 0.7 1.9 1.4 –0.9 –3.4 –0.1 2.0 2.1 1.9 3.3 1.0 1.8

UK 3.2 2.1 2.8 3.0 0.7 –3.4 –0.2 2.1 2.3 2.4 3.6 0.7 1.4

Eurozone 14.8 1.8 3.0 2.6 0.7 –3.5 –0.2 2.2 2.2 1.9 3.3 0.5 1.3

Switzerland 0.4 2.5 3.4 3.3 1.6 –2.8 –0.4 1.2 1.1 0.7 2.4 –0.4 0.6

Sweden 0.5 3.3 4.6 2.7 –0.5 –4.5 0.0 0.5 1.4 2.2 3.5 –0.5 0.8

Spain 1.9 3.6 3.9 3.7 1.0 –2.8 –0.5 3.4 3.5 2.5 4.1 0.8 2.0

Australia 1.1 2.8 2.9 4.0 2.5 0.0 1.0 2.7 3.5 2.3 4.4 2.0 2.0

China 14.1 10.4 11.6 11.9 9.0 7.8 8.5 1.8 1.5 4.8 6.1 –1.2 1.6

Asia ex Jp/Cn/In 5.4 5.0 5.5 5.7 3.0 –2.6 3.1 3.8 3.8 2.8 5.7 1.7 2.71 Weight in world GDP, based on World Bank purchasing power calculations 2 UBS WMR Forecasts Source: UBS WMR, Thomson Financial


Reader’s corner Equity market: USD

The observation is right that specific coun-try equity indices are highly correlated withthe MSCI World index, which is a globalindex. This has been especially the caselately as the ongoing financial crisis wastaking its toll on the equity markets with-out differentiating between countries. Bearin mind here that the US, plus the UK andcontinental Europe make up the over-whelming portion of the MSCI World. Allthose countries and regions got hit equallyhard by the banking crisis and subsequentcredit crunch in September/October 2008.

Moreover, many companies in the coun-try-specific indices are large and operate inthe global market. Therefore, even if thebusiness cycles among countries were notas correlated as they are right now, leadingto the current global downturn, we wouldstill see a high correlation between a coun-try-specific index and the global equityindex. Its degree would depend on theextent of international exposure of the con-stituting companies.

However, one should also be aware thatthere are periods when the decorrelationbetween national or regional indices andthe world index are much more pro-nounced because various countries willhave different sector exposures; some willbe more defensive, and some more cyclical.Specific countries, especially the smaller

ones, will never be able to fully match thesector weight of the global index, whichmight not be the optimal weight depend-ing on where you are in the business cycle.

For a specific investor there is one morecaveat, if one would just invest in the broadMSCI World: currency exposure. Given thatthe index contains 50% of US stocks, onewould be exposed to at least 50% of USdollars (likely even more). This might not bean optimal currency allocation for a non-USdollar investor (actually for a US dollarinvestor it might not be an optimal currencyallocation either). Of course, one couldhedge such a currency risk and we wouldcertainly recommend doing so. But hedgingalso costs if interest rates between differentcountries start to diverge again. A less costlyequity allocation would be to build anequity portfolio more adapted for the indi-vidual investor taking into account both thehome bias and the currency exposure.Andreas HoefertHead, WMR Swiss Bank

Does country analysis still make sense on equitymarkets?

Dear Andreas, When looking at the equity charts in the UBS investor’s guide that compare the equitymarket of a specific country with the MSCI World, one can conclude that there’s no needto look at a specific region since the country evolution completely mimics the world index.Am I right?

A client from Germany

In March, the S&P 500 managed to gain8.5%, the strongest monthly gain sinceOctober 2002.The index fell 8% in the firstnine days of March as fears of broad-basedbank nationalization gripped investors.Over the ensuing two-and-half weeks,stocks staged an impressive 23% rallydriven by positive data related to two of themarket’s most visible “open wounds” –housing and the banking sector. Both exist-ing home sales and new housing startsshowed some stability in February andfalling mortgage rates have significantlyimproved housing affordability. Banks havebenefited recently from low costs of fundsdespite pressure on the credit quality oftheir balance sheets.

With the S&P down 50% from its Octo-ber 2007 peak, we believe that much of theweak macroeconomic environment is

already priced into depressed equity valua-tions. As the pace of economic deteriora-tion decelerates, stock prices should stabi-lize and begin to recover. Mending the mar-ket’s “open wounds” will be required forany market rebound to be sustained.

With this in mind, we reduced our long-standing sector overweight positions in twoof the most defensive economic sectors,Consumer Staples and Health Care, in favorof Consumer Discretionary and Commod-ity-based cyclicals. At this mature stage ofthe current bear market we believe thatinvestors should begin positioning for amoderate economic recovery with a morebalanced sector allocation.Michael J. ConstantinouStrategist, UBS Financial Services [email protected]

Time to reduce defensive bias

UBS WMR U.S. Top 25 Stock List

Company Ticker Sector Price ($)(03/31)

Darden Restaurants DRI Consumer Cyclical $34.26Home Depot HD Consumer Cyclical $23.56CVS Caremark CVS Consumer Staples $27.49Coca-Cola KO Consumer Staples $43.95Wal-Mart Stores WMT Consumer Staples $52.10Colgate-Palmolive CL Consumer Staples $58.98Apache + APA Energy $64.09Total TOT Energy $49.06Exxon Mobil XOM Energy $68.10Goldman Sachs GS Financials $106.02Travelers TRV Financials $40.64New York Comm. Banc NYB Financials $11.17Aetna AET Health Care $24.33For more information, please read the most recent U.S. Top 25 Stock List

Company Ticker Sector Price ($)(03/31)

Teva Pharma + TEVA Health Care $45.05Thermo Fisher + TMO Health Care $35.67Genzyme GENZ Health Care $59.393M MMM Industrials $49.72Union Pacific UNP Industrials $41.11Air Products APD Materials $56.25Cognizant Technology CTSH Technology $20.79Google GOOG Technology $348.06Taiwan Semiconductor TSM Technology $8.95AT&T T Telecom Services $25.20China Mobile CHL Telecom Services $43.52Wisconsin Energy WEC Utilities $41.17

Source: Bloomberg and UBS WMR

Stocks which are only covered by UBS Investment Research are annotated as such with a ‘‘+” sign. These stocks have a 12-month rated Buy or Neutral recommendation. UBS Investment Research is part of UBS Investment Bank (the UBS business group that includes, among others, UBS Securities LLC).

What’s on your mind? Ask the expert at:

[email protected]


Equities: Strategy Equities: Strategy

Bargain hunting: Ten under 10xDespite the recent 20% two-week rally inequities, many high-quality companies stilltrade at very undemanding valuations froma longer-term perspective. We compiled alist of high-quality stocks–one from each ofthe ten S&P 500 sectors–that are now trad-ing under 10 times forward consensusearnings estimates. While many of thesecompanies clearly face near-term chal-lenges, we believe that each represents anattractive opportunity for longer-term “buyand hold” investors.

Consumer Discretionary: Disney (DIS)Despite Disney’s near-term challenges, thecompany still boasts one of the strongestmedia franchises and a brand that is recog-nized around the world. Once the economyrecovers, we believe Disney’s earnings willeventually surpass the cyclical peakreported in fiscal 2008.

Consumer Staples: Altria (MO) The strong pricing power of its leadingbrand portfolio, the ongoing expansion intoother tobacco segments and integration ofrecently acquired smokeless tobacco man-ufacturer UST should result in an average8.7% growth EBIT growth in 2008-2011.Free cash flow generation remains strongand we view the dividend as safe.

Energy: Marathon Oil (MRO)Following a restructuring of the upstreamportfolio, Marathon’s program is beginningto bear fruit. We project above-averageproduction growth through 2011 and com-pleting its refinery expansion and upgrad-ing facilities should enhance its position asone of the most competitive refiners in theUS.

Financials: MetLife (MET)The long-term outlook for MetLife is bright.The company had USD 38 billion in cash atyear-end 2008 and excess capital of USD 5billion that should enable it to ride out thecurrent storm better than its peers. MetLifeshares are trading below book value and thestock should outperform if equity marketsstabilize and/or the recent rally continues.

Health Care: Medtronic (MDT)Medtronic is the largest US medical equip-ment maker and its business is supportedby the powerful demographic shift of agingbaby-boomers, which underpins healthcaredemand. Investments from the mid- to late-1990s have paid off, offering new revenuestreams and reducing pressure on heartproducts.

Industrials: General Dynamics (GD)General Dynamics maintains market-lead-ing positions in oligopoly markets with rel-atively high barriers to entry. With its strongproduct offering and increased overseasbusiness, the company is well-placed tobenefit from the next cyclical upturn. Whiledefense funding will decline, they stand tobenefit from necessary repair and replace-ment of war-damaged equipment.

Information Technologies: Microsoft(MSFT)Microsoft’s large installed corporate basemaintains costly, older operating systemsforcing them to upgrade to Windows 7,due out this fall. Also, Microsoft’s serverand tools unit should continue performingwell due to high performance and compet-itive products, and because of its highlyprofitable recurring licenses sales.

Materials: ArcelorMittal (MT)The steel industry has witnessed clientdestocking in recent months. Given thatinventory levels are now relatively low inWestern markets despite demand weak-ness, we view this as an encouraging indi-cation of a much improved supply disci-pline; we expect this to be the basis for apricing recovery medium-term.

Telecom: Vodafone (VOD)Vodafone is the world’s leading mobiletelecommunications company servicingmore than 289 million customers. The com-pany’s revised strategy focuses on opera-tional performance, capital discipline andcost efficiency. We also are attracted to itshigh dividend yield of almost 7%.

Utilities: Entergy (ETR)Most of the weakness in power prices is afunction of the weak economy and thatprices will rebound as natural gas andpower demand increases as the economyimproves. Entergy also stands to benefitfrom potential new energy policies thatfavor existing low carbon emitting powergenerators and investments in renewablepower.

Although markets are hyper-volatile, webelieve investment philosophies shouldn’tbe. The average absolute S&P 500 dailyprice change so far in 2009 is 2.04%; nearlytriple the historical average of 0.76%.Uncertainties remain around the health ofthe financial sector, the depth of householddeleveraging, and the long-term impact ofballooning government spending. Butwhile markets fluctuate, one’s investmentphilosophy should not. We advocate thatbuying strong, industry-leading franchisesat undemanding, or in some casesdepressed valuations, should lead to above-average investment returns.

For more information, please see Invest-ment Theme: “Ten under 10x,” 24 March2009.Michael J. ConstantinouStrategist, UBS Financial Services [email protected]

Regional indicators

US Consensus estimates

P/E (x)* 11.8

P/B (x)* 1.8

2009 Consensus S&P 500 EPS USD 60

2009 UBS WMR S&P 500 EPS USD 45*Note: Consensus 12 month forward estimatesSource: Bloomberg, FactSet & Thomson Financial

MSCI USA vs. MSCI World200

160

100

120

180

140

80

602003 20052004 2006 2007 2008 2009

MSCI USAMSCI World

Source: Thomson Financial


Equity market: Eurozone

Regional indicators

MSCI Europe vs. MSCI World

Equity market: Asia-Pacific

MSCI Asia ex Japan vs. MSCI World

Regional indicators

Waiting for the breakout Ex Japan Asian markets relatively more attractivethan other regions

380

340

140

180

220

260

300

100

602003 20052004 2006 2007 2008 2009

MSCI Asia ex JapanMSCI World


220

200

140

100

160

180

120

80

602003 20052004 2006 2007 2008 2009

MSCI EuropeMSCI World


Two weeks ago, we supposed that theDJ STOXX 600 index was most likely totrade up to its 180 resistance level whiletrading above the support of 162 (the 2003low). During four days, the index indeedtraded near this 180 level, but never man-aged to close above it. On Monday, 30March, it gave up and dropped almost 4%,quickly followed by a recovery of 3.5% to176.5. This is encouraging. A couple ofmonths ago, strong signs of market weak-ness would typically be followed by evenmore weakness. The recent more positivereaction confirms for us that the market isindeed slowly bottoming out. The mainquestion is, of course, whether the low seton 9 March (a close of 158) is really thecyclical low. We cannot be sure, but therecent market behavior increases the likeli-hood and decreases the probability that wewill see the “ultimate” low at 145. How-ever, before putting new money to work wewould wait for a breakout above 180 as abuy signal, since this would break a down-trend and target the 200 level.

Another sign that the equity markets aregood value over a longer time-frame is theemergence of leadership in industries andsectors of a more cyclical character, for

instance, consumer discretionary. Bankshave also recovered significantly, althoughwe are more skeptical about their longer-term potential. Nevertheless, the usualinter-market behavior is for credit to recoverfirst, followed by equities and then com-modities. We see some signs that creditmay indeed have set a bottom, and there-fore credit spreads will come down. Withinequity markets, early-cyclical industriesshould recover first, which is what we areseeing right now. The commodity-relatedmaterials sector did tumble last in the equitybear market, and should logically also belast to recover. Our strategists are neutral onthe sector. From a technical chart perspec-tive, we note that the basic resources indus-try, part of the materials sector, is on a verylong-term uptrend, having posted a bullishmonthly reversal signal.Hans SandersAnalyst, UBS AG

With global growth indicators continuing todeteriorate and the problems in the finan-cial sector far from being resolved, the envi-ronment for Asian equity markets will likelyremain difficult for the rest of the year.However, these challenges are hardlyunique to that region, and in many ways webelieve the prospects for Asian markets lookbrighter than those for other parts of theworld. As we have mentioned in earlierreports, the issues for Asia are mostly cycli-cal and the need for structural readjustmentis lower. Moreover, Asia seems to beadvanced in the cycle, especially when com-pared with other emerging regions such asLatin America or Eastern Europe. Indeed,we expect either 4Q08 or 1Q09 to mark thebottom for most Asian countries in terms ofsequential economic growth. Valuations inAsian markets remain reasonably attractivein absolute terms and also when comparedwith other markets. Yet as the economicenvironment is likely to stay difficult, weexpect to see weak earnings numbers in themonths ahead. However, the limited size ofstructural problems, combined with reason-able valuations and the relatively resilient

domestic growth in the large economies ofChina and India, places Asia ex-Japan in afavorable position compared with othermarkets, in our view.

Hence we recommend that investorsoverweight Asia ex-Japan markets versusglobal equities. In terms of individual coun-tries, we continue to focus on marketswhose economies should fare well com-pared with other markets, such as Chinaand India, and on markets where cyclicalconcerns have driven valuations to overlydepressed levels, such as in Hong Kong andSingapore. At the same time, we find mar-kets less attractive where cyclical weaknessis not fully reflected in the stock prices, forexample in Korea, Malaysia, and the Philip-pines.Yves BogniStrategist, UBS AG

Asia Ex Japan Estimates

PE 2010 (x) 10.0

PB 2009 (x) 1.2

ROE 2009 (%) 14.5

EPS Growth 2009 (%) –11.0Sources: MSCI, IBES

Eurozone Estimates

PE 2010 (x) 7.8

PB 2009 (x) 1.0

ROE 2009 (%) 14.8

EPS Growth 2009 (%) –8.2Sources: MSCI, IBES


Bond market: USD Closed-end funds

Pulling out all stops Update on Senior Loan Funds: PFN an outlier in 2009

Name Ticker Rating Price NAV Premium Annual Yield(Discount) Dividend

BlackRock Floating Rate Income Trust BGT Hold $9.11 $9.62 –5.3% $1.20 13.2%LMP Corporate Loan Fund TLI Hold $6.60 $8.11 –18.6% $0.48 7.3%Eaton Vance Senior Income Trust EVF Hold $3.55 $4.08 –13.0% $0.35 9.8%Eaton Vance Senior Floating Rate Trust EFR Hold $8.35 $8.87 –5.9% $0.74 8.9%Eaton Vance Floating Rate Income Trust EFT Hold $8.26 $9.13 –9.5% $0.74 9.0%First Trust/Four Corners Senior Floating Rate Fund II FCT Hold $8.05 $9.74 –17.4% $0.57 7.1%ING Prime Rate Trust PPR Hold $3.47 $3.82 –9.2% $0.29 8.3%Nuveen Senior Income Fund NSL Hold $3.21 $3.69 –13.0% $0.40 12.5%Nuveen Floating Rate Income Fund JFR Hold $5.87 $6.60 –11.1% $0.49 8.4%Pimco Floating Rate Strategy PFN Sell $4.67 $5.08 –8.1% $1.06 22.8%Van Kampen Senior Income Trust VVR Hold $2.38 $2.78 –14.4% $0.30 12.7%As of March 31, 2009 Sources: UBS WMR

Coverage universe of Senior loan funds

Issuer Name Coupon Maturity CUSIP WMR WMR WMR Interdealer Yield to Dura-% Rating Trend Recom. price* Mat. (YTM)* tion

AAT&T INC 5.10 15.09.14 78387GAP8 Mid A Stable OP 101.3 4.8% 4.8

COMCAST CABLE 8.38 15.03.13 00209TAA3 High BBB Stable OP 107.9 6.1% 3.5

DAIMLER FINANCE NA LLC 8.00 15.06.10 233835AK3 Low A Deterior. OP 100.7 7.4% 1.1

GENERAL ELECTRIC CO 5.00 01.02.13 369604AY9 Mid AA Deterior. OP 101.2 4.7% 3.5

HOME DEPOT INC 5.25 16.12.13 437076AR3 High BBB Stable OP 97.5 5.9% 4.2

HOME DEPOT INC 5.40 01.03.16 437076AP7 High BBB Stable OP 90.1 7.2% 5.8

NATIONAL RURAL UTIL. 4.75 01.03.14 637432DC6 Mid A Stable OP 100 4.7% 4.4

UNITEDHEALTH GROUP 5.25 15.03.11 91324PAP7 Mid A Stable OP 100 5.2% 1.9

VERIZON COMMUNICATIO 4.38 01.06.13 92344GAV8 Mid A Deterior. OP 101.1 4.1% 3.8 Note: *The interdealer price and the Yield to Maturity (YTM) listed herein represent an indicative price and yield on the date of publication and does notconsider transaction costs. An investor should not expect to be able to execute at this price nor receive this yield.Source: UBS WMR, as of 31 March 2009

USD Bonds

In the past month, government agencieshave rolled out a number of additional pro-grams designed to patch the damage invarious arms of the still-ailing financial sec-tor.

The Fed surprised the market at the 18March Federal Open Market Committeemeeting by instituting a program to pur-chase up to USD 300 billion in Treasurynotes, with the goal of lowering borrowingrates. The Fed also expanded purchases ofagency debentures and mortgage-backedsecurities to encourage more lending in themortgage market.

The Term Asset-Backed Securities LoanFacility (TALF) program has been expanded,and the Temporary Liquidity Guarantee Pro-gram (TLGP) program has been extended toOctober 2009. Treasury also announced thedetails of the new Public-Private InvestmentProgram (PPIP) to provide financing for

troubled assets. The message is clear – gov-ernment officials are pulling out all thestops.

We view the PPIP as a well-intentionedprogram that could add liquidity to the toxicassets that remain on financial institutionbalance sheets. However, it does not fullyanswer the question that has vexed themarket: Will banks be willing to sell loansat a substantial loss, resulting in an imme-diate, substantial hit to their capital base?There are many indications that the holdersof these securities believe that at currentlevels they are meaningfully undervaluedand therefore may be disinclined to partic-ipate. Michael Tagliaferro, CFAAnalyst, UBS Financial Services [email protected]

The group overall is up 7% on a marketbasis and the NAVs are up 15%, excludingPimco Floating Rate Strategy Fund (PFN),which is an outlier and is down more than20% on a market and NAV basis. Yet, acloser look at the asset breakdown providessome insight into the underperformance.The fund is heavily invested in financials.

PFN’s allocation to senior loans appears tohave gone down since the 31 July 2008annual report that showed 75% of the port-folio invested in senior loans and 19% incorporate bonds. This compares with 63%in high yield and corporate bonds combinedas of 28 February 2009, according to AllianzFunds. We do not know the exact break-down of senior loans as of 28 February2009.

We reiterate our Sell rating on PFN. Aspreviously stated, the fund has significantlyunderperformed its peer group. This fundhas also postponed the dividend paymenttwice in the last five months. PFN so far hashad to deleverage in the worst of the mar-

ket conditions and sell securities at very lowprices after falling below the 200% assetcoverage ratio. The other funds in our cov-erage universe have also had to deleverportfolios, but have done so proactively. Asa result of the deleveraging and floating ratenature of the loans, most funds have had toreduce their dividends.

The risk to this class of funds would be adecline in NAV that would force furtherdeleveraging and result in more dividendcuts. Year-to-date, the net asset values ofthese funds, on average, have risen about12% (except PFN). The group is still notattractive because of the valuation (average10% discount) and yields it provides (aver-age 10%). Generally, floating rate fundsperform better in a rising interest rate envi-ronment. WMR Americas forecasts the Fedfund rate to stay at 0.25%, at least throughFebruary 2010.Sangeeta Marfatia, CPAAnalyst, UBS Financial Services [email protected]

The selection of recommended bonds is based on the relative appeal of the bond with respect to others with similar characteris-tics including UBS WMR credit rating and duration. In addition, the selection attempts to identify bonds with sufficient marketliquidity. In our view, the bonds included within the list are the most attractive within their respective rating categories, both inreference to their yield to maturity as well as in light of the change which we forecast for the credit profile of their issuer.


Obamanomics Obamanomics

Costs of cap and trade-gasoline pricesAverage US retail price per gallon ofgasoline, as of 25 March 2009

2.5

2.0

1.0

1.5

0.5

0CO2 at USD 11/ton No CO2 costs CO2 at USD 25/ton

Current priceCO2 costs

Source: US Dep. of Energy, USEPA, UBS WMR estimates

USD

The Obama administration’s energy policy isjust beginning to come into focus. We be-lieve any energy legislation will likely en-compass one or more of the following: 1)carbon emissions cap and trade; 2) renew-able energy mandates for utilities; 3) re-newable fuel standards for transportation.

The administration’s overarching goal isto reduce the carbon intensity of the USeconomy and encourage investment indomestic “cleantech” companies (whichshould create jobs), enhance energy secu-rity and reduce greenhouse gas emissions.This will not be easy economically or politi-cally. Because low carbon emitting energysources are generally more expensive thanfossil fuels, US energy consumers will beara higher cost if these policies are employed.We estimate an average energy costincrease of 7%-33% by 2020, with a cumu-

lative price increase of roughly 60%-80%by 2050 based on the administration’s goalsof an 80% reduction in greenhouse gasemissions by this date.

Carbon cap and trade debate will becontentiousBecause of the costs related to this policy,the Obama administration will face resist-ance to many of these proposals, especiallyfrom Congressional representatives (bothRepublican and Democratic) who representstates that depend on coal production andconsumption (coal combustion emits moreCO2 per unit of energy than does naturalgas or petroleum-based products). Theadministration will therefore likely have tocompromise with Congress to pass legisla-tion.

We believe the odds of a carbon emissionrestriction bill becoming law this year are nobetter than 50/50, but we think the oddsincrease in 2010 as the economy improves.For most companies, carbon restrictionsmay impact profits marginally, but will notlikely be the primary investment driver forthe shares. For instance, while higher fossilfuels prices may lead to reduced demandfor petroleum, large integrated oil and gascompanies will likely reduce investments inenergy exploration, thereby matching sup-ply to potentially lower demand.

We believe large regulated utilities willalso be unaffected given that they will likelygain regulatory approval to pass throughany compliance costs to their customers.

Unregulated power generators with a largecarbon footprint, and some petroleumrefiners could be negatively affected, whileunregulated power generators with a smallcarbon footprint could benefit. But otherfactors, such as changes in power pricesand energy commodity prices will likely out-weigh the impact from carbon restrictionsfor most companies.

In terms of renewable energy mandates,President Obama has called for a doublingof non-hydro renewable electricity genera-tion by 2012. Today, non-hydro renewablegeneration is less than 3% of total US gen-eration, of which about half is from wind.Solar is growing quickly, but barely registersas part of the US generation mix given itsrelatively high cost.

These potential federal mandates wouldsupplement state initiatives that are cur-rently in place in more than half of the US.Roughly USD 100 billion of investmentthrough 2012 will be required to meetthese energy standards. We believe thisproposal has a relatively good chance ofbecoming law this year. Regulated utilitiescould benefit from this policy initiative tothe extent that regulators allow them toinvest in renewable generation to meet themandates. The impact on unregulatedpower generators is more mixed given thatadditional generation supply will likelydepress power prices. However, some ofthese companies may build and own therenewables needed to meet the mandate.

At this time, we do not expect legislationmandating higher renewable transporta-tion fuel standards. The oil and gas sector,however, could face higher taxes and feeson US oil and gas production. These feeswill be relatively modest in aggregate butcould disproportionately harm some of thesmaller US-oriented exploration and pro-

duction companies that are more exposedto fossil fuel production that could beaffected by this policy.

”Cleantech” companies best positionedbut investable universe is small.

While each of these policies creates itsown winners and losers, the combination ofthese initiatives can create confusing crosscurrents. For example, a company mightbenefit from one proposal and be hinderedby another.

However, the most compelling invest-ment conclusion we draw is that companiesthat enhance energy efficiency, or are partof the renewable energy supply chain (suchas solar and wind power component man-ufacturers or advanced biofuels producers)are best positioned as a result of these poli-cies. But, given the weak state of the econ-omy and the likelihood that technologicalchange will be rapid, we suggest thatinvestors monitor this space rather than buyaggressively today.

For complete information, see Invest-ment Theme Equity, Obamanomics Part IX:Energy Policy “Coming into focus” 25March 2009, which you can obtain fromyour financial advisor.David Lefkowitz, CFAAnalyst, UBS Financial Services [email protected]

Obamanomics IX: Energy policy

We believe new US energy legislation is probable. In general, regulated utilitiesand large integrated oil and gas companies will be unaffected. But, there will bewinners and losers in the unregulated power space. Green infrastructure and al-ternative energy players could benefit.


Socially responsible investmentsSocially responsible investments

Darkness before dawn

In a 24-hour period, enough solar energyhits the earth to meet the energy needs ofthe planet’s 6.8 billion inhabitants for 27years. The energy from the sun is free, asthe technology to capture it is already inplace. The tricky part is doing so at reason-able costs. Today, solar energy is the mostexpensive form of large-scale electricity pro-duction (see Figure 1), about 2.5 timesmore expensive than the US retail electric-ity price.

Solar energy boost ahead in the USThe solar energy industry remains depend-ent on government subsidies around theworld. Germany and Spain accounted forabout 70% of all solar panel installations in2008. The United States is small in compar-ison, representing 5% of worldwide solarsystem installations. This will change in ourview, though, as both the new US adminis-

tration’s fiscal stimulus package as well asan expected federal policy later this yearmay give solar energy an additional boost.

Over the long term, we expect the solarindustry to benefit from several trends,including concerns about climate change,rising energy demand, energy security, andjob creation. We expect the global solarenergy industry to double in size, to USD 95billion in sales, within the next five years.Before this brighter day will dawn, however,we expect gloomier times. In 2009, reducedaccess to credit will limit the expansion ofsolar energy generating capacity and in thewake of the global recession, governmentsubsidies like those in Spain may shrink. Asa result of these constraints, we expect anoversupply of solar panels that may sendindustry revenues down.

A photovoltaic solar panel is a piece ofsemiconducting material that produceselectricity when the sun shines on it. Thereare two main technologies used to producesolar panels: one uses a thin film of semi-conducting material deposited on a cheapsubstrate such as glass, the other a waferof crystalline silicon (c-Si) as a base. The lat-ter is the incumbent technology, while thinfilm is the up-and-coming rival. Generally, athin film panel needs to be about twice aslarge as a c-Si panel to yield the same elec-tric output. The economics for thin filmwork despite this disadvantage, becausethey are much cheaper and faster to pro-duce.

Costs matterBy its nature, there are limited ways to dif-ferentiate a solar panel, in our view. Wetherefore believe share price outperfor-mance will be achieved by companies thatproduce panels capable of generating elec-tricity at the lowest cost (see Figure 2). Inour Investment Theme, published on 5March 2009 and available from your Finan-cial Advisor, we argued that First Solar(“Hold/Marketperform”; estimated fairvalue range (EFVR): USD 108–162) is best-positioned in that regard. For First Solar tolose its competitive advantage, crystalline-silicon competitors would have to drasti-cally cut their prices, or the price of siliconwould have to fall to less than half oftoday’s levels. We think neither of theseprospects is likely to materialize in 2009.The stock is trading near our EFVR midpointof USD 135. On share pull back, we wouldprefer First Solar to SunPower.

SunPower (“Hold/Marketperform”; EFVR:USD 23–35) is the leader in terms of solarcell conversion efficiency and enjoys astrong brand name. Our analysis shows,however, that SunPower lacks a sustainable

cost advantage. We do think that Sun-Power has an advantage in larger ground-mounted installations due to its trackingsystem that increases the electricity outputper panel. As we expect polysilicon prices todecline dramatically in 2009, we believecrystalline silicon competitors will benefitmore than SunPower, given its long-termpolysilicon contracts. Without a convincingcompetitive advantage and given the weakend-demand likely in the near term, weexpect SunPower’s shares to trade range-bound. We would become more positive onSunPower if we saw signs of improveddemand or more aggressive US policies onsolar generation. Tony AnderssonAnalyst, UBS Financial Services [email protected]

Solar energy may get a boost by both environmental and economic stimulationpolicies. With limited ways to differentiate, companies that produce panels gen-erating electricity at the lowest cost face bright prospects.

Solar: the most expensive energyas of 5 March 2009

Source: UBS WMR

0 105 15 20 25 30 35 40 45

Minimum costMaximum cost

Cost USD per kWh

Solar

Geothermal

Nuclear

Hydroelectric

Wind

Coal

Natural gas

Figure 1

First Solar has a cost advantageas of 5 March 20090.35

0.20

0.10

0.25

0.30

0.15

0.05

0

Source: UBS WMR

SunPower Suntech First Solar Evergreen Solar

Cost in USD per kWh

Figure 2


Foreign exchange

AUDUSD

AUDUSD

GBPUSD

GBPUSD

EURUSD USDJPY

EURUSD USDJPY

Foreign exchange

Source: Reuters, UBS WMR

Forward

Volatility Range

Volatility Range

Forecast

2.2

2.0

1.6

1.8

1.4

1.2

1.0

Jul 09 Nov 09 Mar 10 Jul 10 Jul 08Mar 08 Nov 08 Mar 09


Volatility Range

Volatility Range

Forward

Forecast

0.90

1.00

0.80

0.70

0.60

0.50



Volatility Range

Forecast

Forward

Volatility Range


1.60

1.50

1.40

1.30

1.20

1.10

115

105

95

85

75


Volatility Range

Volatility Range

Forward

Forecast

Jul 09 Nov 09 Mar 10 Jul10 Jul 08Mar 08 Nov 08 Mar 09

Gone with quantitative easingThe Bank of Japan increased purchases ofgovernment bonds substantially in itsMarch monetary policy meeting. Althoughthe central bank reiterated that the movewas neither aimed at monetizing a loomingfiscal stimulus package nor at curbing therise in long-term yields, the increased yensupply is, in our view, detrimental to theJapanese currency. Nonetheless, the inter-mittent episodes of yen strength seenrecently reflect still elevated risk aversion inthe financial markets. On balance, we reit-erate our call for further yen weaknessagainst the US dollar because of the surpris-ing introduction of quantitative easing.However, we expect further yen weaknessto stay rather muted, and hence see upsidepotential in USDJPY as limited.Andy JiAnalyst, UBS AG

Unsustainable risk sentiment in thenear termSince the Reserve Bank of Australia left thekey policy rates unchanged, news flowfrom the economic front has turned morenegative. The unexpected contraction in 4QGDP and a sharp deterioration in theemployment statistics signaled that theAustralian domestic economy is understress, despite aggressive policy measures.Nevertheless, the Aussie strengthened androse on the Fed’s surprising move to quan-titative easing. We think the improvementin the risk sentiment is on shaky ground andtemporary. With the global economy stillstumbling and deleveraging in the privatesector continuing, we expect further down-side to AUDUSD in the absence of a sustain-able improvement in risk sentiment.Andy JiAnalyst, UBS AG

Quantitative easing hurts US dollar We roll over our EURUSD forecast from 1.27in three and six months and 1.45 in twelvemonths to 1.37 in three, 1.45 in six and1.50 in twelve months. While the world isastonished by the amounts of money beingprinted in the US and the many otherunconventional measures being taken tostabilize the world financial markets, wenote that some processes stay the same.The response of EURUSD on rallying equitymarkets is unchanged. Moreover, the differ-ence between 10-year rates of the euro ver-sus the greenback remains highly correlatedwith the EURUSD exchange rate. Thus, theFed's buying US Treasuries and distressedcredit, which lowered US 10-year rates andsupported equity markets, put the US dol-lar under pressure. Here, we have a perfectexample for the view that supporting USgrowth does not necessarily help the USdollar. We therefore roll over our EURUSDforecast to show more immediate US dollarweakness.Thomas FluryAnalyst, UBS AG

This crisis has not intensified furtherWe change our GBPUSD forecast from 1.45in three and six months and 1.65 in twelvemonths to 1.48 in three months, 1.54 in sixmonths and 1.60 in twelve months. Bothcurrencies are hit strongly by their centralbanks' introduction of quantitative easing(QE), intense political discussion about howmuch fiscal stimulus is needed, and thelong-term consequences of spendingmoney to help the economy. It is interest-ing to note that the GBP fell against theUSD first just because the UK introducedthe QE policy first. Over the next one or twomonths we expect a volatile period, but notyet a clear trend higher. The economic out-look remains uncertain and is therefore notvery helpful to correct the large valuationgap, leaving the GBP in what we considerstrongly undervalued territory. Data is stillmixed, however, and there are some brightspots in the economic data here and there.We see little risk of GBPUSD droppingbelow 1.40 again.Thomas FluryAnalyst, UBS AG


Portfolio viewForeign exchange: Strategy

Portfolio behavior during crises0

–20

–10

–40

–30

–60

–50

Source: QIS, UBS WMR

1st Gulf War7/90 – 9/90

Recession5/02 – 9/02

Sub PrimeCrisis10/07–1/08

80% in sold businessNo stake in sold business

Tech Bubble8/00 – 3/01

Credit Crunch5/08 – 2/09

In this third installment of our short serieson how to plan for liquidity events, we lookat the financial problems that entrepreneursneed to tackle.

Next to the professional and psychologi-cal challenges of selling a business, entre-preneurs often find that during these hec-tic times, they also have to face compli-cated questions about wealth manage-ment. This is because business ownersoften start thinking about the structure oftheir wealth long after they have sold theirbusiness. However, certain wealth struc-tures, such as trusts, may best be estab-lished well in advance of the sale of a busi-ness. In some cases, the worst time to sella business – for example, during an eco-nomic downturn like the one we are cur-rently witnessing – may be the best time tostructure ownership and wealth.

Beware of holding on to your old firmFurthermore, after they have sold a com-pany, many entrepreneurs make the mis-take of taking on too much risk in their

investment portfolios by keeping substan-tial holdings in the stock of their formercompany. This may severely diminish wealthin times of market crisis. We have simulatedthe performance of two portfolios duringmarket crises of the past. One portfolio sim-ulates the case of a business owner in theretail sector who, after selling the business,keeps an 80% stake of his portfolio in theshares of the public firm that acquired hisbusiness. The remaining assets are investedin such a way that the risk return tradeoffis optimized (meaning to maximize returnfor every unit of risk taken). The secondportfolio simulates the outcome if the busi-ness owner does not own any shares of theacquiring company anymore but had com-pletely diversified his portfolio. As we cansee, the losses during financial crises weresignificantly lower in this case. Entrepre-neurs who have recently sold their businessshould think about optimizing their portfo-lio with this in mind.Joachim KlementAnalyst, UBS AG

The financial aspects of selling a businessQuantitative easing in the UK, Japan and USwill likely put mounting pressure on theirrespective currencies, possibly for years tocome. Moreover, we note that forces sup-porting USD strength are fading as riskunwinding is replaced by other investmentthemes. More specifically, the USD status asa global reserve currency is under increas-ing scrutiny. As a result, we recommendinvestors to continue unwinding positionsin the US dollar and the yen, and look foropportunities in the Australian dollar(Aussie), Euro, Swiss franc, and the Scandi-navian currencies. Additional pressure onthe already battered pound might notintensify much more.

Quantitative easing weakens the US dollar, Yen and British PoundWith the surprising introduction of quanti-tative easing by the Fed, the weakness inthe US dollar advanced one step further,which essentially explains the rationale ofour new EURUSD forecast of 1.37, 1.45 and1.50 in three, six and 12 months, respec-tively. When the US dollar started its sharp

appreciation last autumn on the onset ofthe crisis, we thought this was merely atemporary reprieve from its weakening tra-jectory, and deemed it a window of oppor-tunity for investors to exit the US dollar.Since then, EURUSD bottomed out at closeto its purchasing power parity of 1.24, aspreviously expected. However, with theFed’s newly announced plan to expand themoney supply by another USD 1.15 trillionin its quantitative easing move, we find thewindow of opportunity to divest from theUS dollar at those levels is closing.

Opportunities emerge in the euroMainland Europe entered the crisis withmuch stronger economic conditions thanthe US. Europe had no significant housingbubble, a higher savings rate, and is muchless indebted abroad than the US. We rec-ommend positions which would benefitfrom a further rise of the euro versus the USdollar. However, the euro’s appreciationpotential will be limited to the point wherethe European Central Bank (ECB) exchangerate puts European companies at a compet-itive disadvantage. Such ECB interventionpoints are usually lower during crises thanin normal times and we anticipate that itshould be below the all-time high of around1.60.Thomas FluryAnalyst, UBS AG

The window of opportunities is closing

Exchange Rates

Current 3M 6M 12M

EURUSD 1.33 1.37 (1.27) 1.45 (1.27) 1.5 (1.45)

USDJPY 99 103 (95) 105 110 (105)

EURJPY 131 141 (121) 152 (133) 165 (152)

AUDUSD 0.69 0.68 (0.60) 0.75 (0.65) 0.8 (0.70)

USDCAD 1.25 1.23 (1.25) 1.17 (1.25) 1.15

GBPUSD 1.43 1.48 (1.45) 1.54 (1.45) 1.6 (1.65)

USDCHF 1.14 1.13 (1.22) 1.07 (1.22) 1.05 (1.09)

EURCHF 1.52 1.55 1.55 1.58Previous forecasts in brackets Sources: Reuters, UBS WMR


Emerging markets

Investors should be aware that Emerging Market assets are subject to, amongst others, potential risks linked to currency volatility, abrupt changes in the costof capital and the economic growth outlook, as well as regulatory and socio-political risk, interest rate risk and higher credit risk. Assets can sometimes bevery illiquid and liquidity conditions can abruptly worsen. WMR generally recommends only those securities it believes have been registered under Federal U.S.registration rules (Section 12 of the Securities Exchange Act of 1934) and individual State registration rules (commonly known as “Blue Sky” laws). Prospectiveinvestors should be aware that to the extent permitted under US law, WMR may from time to time recommend bonds that are not registered under US orState securities laws. These bonds may be issued in jurisdictions where the level of required disclosures to be made by issuers is not as frequent or completeas that required by US laws.

For more background see the WMR Education Note “Investing in Emerging Markets (Part 2): EM bonds,” 20 November 2007. Clients interested in gainingexposure to emerging markets sovereign USD bonds may either buy a diversified fund of such bonds (preferably an actively managed portfolio of such bonds),or they may wish to select bonds from specific countries.

Investors interested in holding bonds for a longer period are advised to select the bonds of those sovereigns with the highest credit ratings (in the investment-grade band). Such an approach should minimize the risk that an investor could end up holding bonds on which the sovereign has defaulted. Sub-investmentgrade bonds are recommended only for clients that have a higher risk profile and who seek to hold higher yielding bonds for only shorter periods.

Emerging markets

Some silver linings emerging

Currently, 6.8 billion people live on ourplanet, most of them in the emerging mar-kets. The population is increasing by 50 mil-lion a year, which is more than the numberof people living in South Korea, SouthAfrica or Spain. Over the next forty years,this extrapolates to a net increase of 2 bil-lion people. These people need to eat, theywill need housing (another 400 milliondwellings), healthcare, education services,electricity, water, mobile phones, and quitea few new trucks, buses and cars. It is clear,therefore, that fundamental consumptionforces are going to reassert themselvessooner or later.

Longer-term drivers still relevantIt is for this reason that the GDP growth fore-cast models point up, rather than furtherdown, for 2010. Even though the modelsmay be wrong about how far aggregates

need to fall before they start improving, theyhave an inherent, longer-term upward bias.

Figure 1 compares the latest InternationalMonetary Fund’s GDP growth forecasts for2009 and 2010 for the emerging marketswith the forecasts made six months ago.While the growth outlook has deterioratedsharply, two positive points are worth high-lighting. First, emerging markets are stillexpected to grow this year. At +2% theprojected growth rate may not be high byrecent historical standards, but on a com-bined GDP of USD 20 trillion, it is notinsignificant.

Cash is kingPerhaps this should not be too surprisinggiven that the current crisis did not start inthe emerging markets. More significantly,many emerging markets entered this crisisbearing a huge war chest in the form ofrecord levels of foreign exchange reserves.This money has helped so far to cushionpart of the impact of the crisis on theireconomies.

Figure 2 shows the highest level of foreignexchange reserves recorded in selectedcountries over the past twelve months, aswell as the latest number. The changebetween the two is a potential indicator ofstress in the system. Thus, China and Thai-land have maintained their peak level ofreserves, indicating no pressure on the cen-tral bank to try and prop up the currency. Onthe other hand Russia has already lost 36percent of its foreign exchange reserves asthe central bank intervened heavily to sup-ply the market with US dollars. Yet, evenafter these interventions, Russia still has overUSD 380 billion in foreign exchange reservesleft, more than enough for the estimatedUSD 60 billion that Russia needs to serviceits foreign debt commitments this year.

Near-term challengesWhile the emerging economies entered thiscrisis in a relatively good shape, quite a fewfault lines run though countries and

regions. One of the biggest issues is thatwhile governments, overall, were prudentin the good years and paid off foreign debt,the private sector made full use of its accessto easy money to borrow extensively in for-eign currencies. Corporate defaults willlikely rise in the months ahead, placingunforeseen financial burdens on govern-ments. The recent G-20 proposals to morethan triple the IMF’s resources is an indica-tion that the fire fighters are preparing formore help calls in the months ahead.

Moreover, many emerging market centralbanks have continued to cut interest ratesvery sharply. The Fed’s announcement thatit will purchase various securities has alsohelped the emerging markets by reducingthe average yield on emerging market sov-ereign USD debt.

Combined with the underlying emergingmarket growth potential, all these fire-fighting measures will eventually put outthe flames. We expect many emergingeconomies to show some good year-on-year growth numbers in 4Q 2009 and 1Q2010.Costa VayenasStrategist, UBS AG

The latest industrial production and export data from a range of emerging mar-ket countries suggests that the first quarter of 2009 will deliver some deeply neg-ative GDP numbers. Yet on average, we still expect emerging economies to out-perform the advanced economies this year and next.

There is still some growth10

6

2

–2

8

4

0

–4Source: IMF, March 2009

1998 2001 2002 2004 2006 2008 2009

Emerging and developing economies (March 2009)Advanced economies (March 2009)Emerging and developing economies (Oct. 2008)Advanced economies (Oct. 2008)

Cash is king

Peak* Latest % change

Foreign exchange reserves, USD billionsChina 1946 1946 0

Thailand 108 108 0

South Africa 31 30 –3

Brazil 209 202 –3

Czech Republic 38 36 –5

Mexico 87 81 –7

Turkey 78 67 –14

Indonesia 61 51 –16

India 306 243 –21

Malaysia 125 90 –28

Poland 82 59 –28

Russia 598 385 –36*In the last 12 months Source: Bloomberg, 30 March 2009

Figure 1

Figure 2


Technical analysisTechnical analysis

Investing in US markets with Exchange TradedFunds

SPY – secular trading range in tact

Source: Reuters, UBS WMR(prices as of 31 March 2009(

SPY – key near-term supply overhead

Source: Reuters, UBS WMR(prices as of 31 March 2009(

Our analysis is generally a top/downapproach and we spend much of our timeanalyzing the major financial markets. Froma technical perspective, we determinewhich assets look best, which sectors ofthat asset class are most appealing, andwhich specific securities have potential.Before exchange traded funds (ETFs) werecreated, investing in costly mutual fundswas the only reasonable investment avenuefor retail clients to properly diversify theirportfolios.

However, ETFs allow any investor to gainaccess to major equity indexes, as well ascurrency, fixed income, commodity, andstyle indexes. As ETFs are generally availablewith minimal management fees and areable to trade daily, the advantages are obvi-ous. Below we analyze the major financialmarkets, and bear in mind that ETFs areavailable to replicate the performance ofthe domestic markets discussed below.

Major Stock Indexes – The good news isthat our long-term technical study (8-20

years) indicates the secular trading rangetrend that started in March ‘00 is nowapproaching the midpoint of its long-termcycle. The less good news is that it will takeanother 5–10 years of sideways tradingbefore the start of the next secular bull mar-ket. On a long-term basis (1–3 years), theprimary trend remains down. However, theOctober ‘07 bear decline is probably enter-ing the fifth and final phase(acceptance/capitulation) of its cyclicaldecline.

The intermediate-term trend outlook(2–9 months) has improved, but we suspectanother pullback is necessary to confirm orreject the 6 March low as an importantmajor market bottom. The short-term tech-nical view is that an overbought conditionhas developed that may soon lead toanother consolidation phase. Key technicalsupport and resistance levels for SPX Indexare: Initial support now moves up to themid-700s. The March bottom near 666.79remains pivotal support. Key near-term

resistance is in the low-to-mid 800s. Inter-mediate-term supply is evident in the mid-900s to low-1,000s corresponding withprevious reaction highs from Election Day inNovember 2008 and on 6 January 2009.

Macro Indexes: Currency/Bond/Com-modity Indexes – The US Dollar Index hasfailed to convincingly break out above keysupply near the high-80s to low-90s. A con-vincing decline below initial support near82–83 or the July 2008 uptrend may signalthe start of a decline possibly back to keyintermediate-term support near 78.5–80.5.A breakdown here may signal the resump-tion of the primary downtrend. In themeantime, we expect the US dollar to entera trading range between the high-70s andhigh-80s. The 10-year Treasury yield (TNX)has also approached crucial supply near3%. Its recent failure to break out here hasled to another decline toward initial supportat 2.46%–2.5%. However, stronger sup-port still resides near the recent December2008 and January 2009 lows at2.04%–2.16%.

Commodity prices have begun recover-ing from the sharp 2008 downturn, withGold continuing to lead the commodities

recovery cycle. Gold’s break-out above lastyear’s record high of 1,034 renders upsidetargets at 1,280-1,300 and then to1,380–1,400, over time. Silver hasimproved technically and is now emergingas a plausible risk/reward technical valuecall within metals. Crude oil has also bro-ken out of key near-term supply in the low-50s and appears headed for a sustainablenear-term recovery.

Broader Indexes and Style Indexes – Wecontinue to favor large-cap growth invest-ing (IVW) over large-cap value style invest-ing (IVE). We also favor large-cap US stocks(SPY) over small-cap Russell 2000 (IWM).

Sector Indexes – From the November2008 lows and the January 2009 highs, rel-ative strengths remain concentrated in S&PTechnology (XLK) and S&P Communicationsand S&P Materials (XLB). Relative weaknessremains in S&P Financials (XLF).Peter Lee, Chief Technical StrategistJonathan Beck, Technical AnalystUBS Financial Services [email protected]@ubs.com


Appendix

UBS Financial Services Inc. Technical Research Dept.: Definitions and Distribution

UBS Financial Definiton and Criteria CorrespondingServices Rating Rating

CategoryBullish Well-defined, reliable up-trend, an increase in the rate Buy

of change (or strong momentum) and confirming technical indicators

Mod. Bullish Positive overall trend, momentum and confirming Buytechnical indicators

Neutral Trading range trend, a flat rate of change and Neutral/Holdconfirming technical indicators

Mod. Bearish Weakened trend, momentum and confirming Selltechnical indicators

Bearish Negative trend, momentum and confirming Selltechnical indicators

N/A Not enough historical data to make an evaluation N/A

For information on the ways in which UBS manages conflicts and maintains independence of its research product; his-torical performance information; and certain additional disclosures concerning UBS research recommendations, pleasevisit www.ubs.com/disclosures.

Global Equity Rating AllocationsUBS 12-Month Rating Rating Category Coverage1 IB Services2

Buy Buy 51% 36%Neutral Hold/Neutral 37% 31%Sell Sell 12% 22%1Percentage of companies under coverage globally within the 12-month rating category.2Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.Source: UBS. Rating allocations as of 31 March 2009.

Global Equity Rating DefinitionsUBS 12-Month Rating DefinitionBuy FSR is > 6% above the MRA.Neutral FSR is between –6% and 6% of the MRA.Sell FSR is > 6% below the MRA.KEY DEFINITIONSForecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a fore-cast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock’s price target and/or rating are subjectto possible change in the near term, usually in response to an event that may affect the investment case or valuation.

EXCEPTIONS AND SPECIAL CASESCore Banding Exceptions (CBE): Exceptions to the standard +/–6% bands may be granted by the Investment ReviewCommittee (IRC). Factors considered by the IRC include the stock’s volatility and the credit spread of the respective company’sdebt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating.When such exceptions apply, they will be identified in the Companies Mentioned or Company Disclosure table in the relevantresearch piece.

UBS Investment Research

UBS Closed-End Funds Ratings: Definitions and Allocations

UBS Financial Definiton and Criteria % of companies % for which IBServices Rating under coverage services have

with this rating been providedBuy Higher stability of principal and higher stability of dividends 43.0 17.0Hold Potential loss of principal, lower degree of dividend stability 40.0 37.0Sell High potential for loss of principal and dividend risk 17.0 67.0Source: UBS WMR, as of 1 April 2009

Appendix

Analysts provide two ratings, an absolute rating and a relative rating. The absolute rating is based on the current EstimatedFair Value Range (EFVR) for the stock and the recent trading price for that stock. The relative rating is based on the stock’stotal return potential against the total estimated return of the appropriate sector benchmark over the next year.

The EFVR is the price range within which the analyst estimates the stock to be fairly valued. The estimation of the EFVR isbased on methods such as Discounted Cash Flow model or valuation multiples comparison. In the definition of the EFVR,analysts take into account the risk profile (predictability) of the stock.

Absolute Stock Rating System

BuyWe believe the stock is undervalued relative to current market pricesHoldWe believe the stock's current market valuation is within a fair range. SellWe believe the stock is overvalued relative to current market pricesUnder reviewUpon special events that require further analysis, the stock rating may be flagged as “Under review” by the analyst. SuspendedIf data is not valid anymore, the stock rating may be flagged as “Suspended” by the analyst.RestrictedIssuing of research on a company by WMR can be restricted due to legal, regulatory, contractual or best business practiceobligations which are normally caused by UBS Investment Bank’s involvement in an investment banking transaction in regard to the concerned company.

Industry Sector Relative Stock View

Outperform (OUT) Expected to outperform the benchmarkMarketperform (MKT) Expected performance in line with the benchmarkUnderperform (UND) Expected to underperform the benchmark.Current WMR Global Rating Distribution (as of last month-end)

Buy 24%** (55%*) Outperform 32%*** (47%*)Hold 72%** (53%*) Marketperform 52%*** (45%*)Sell 4%** (39%*) Underperform 16%*** (45%*)

* 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 April 2009.** At present, not all securities in WMR’s global coverage universe have been assigned an Absolute Stock Rating in a Corporate Report. The Absolute Stock Rating distribution calculation includes only securities that have been assigned anAbsolute Stock Rating as of the last month-end.*** Under our Industry Sector Relative Stock View system, “Outperform” most closely corresponds with a “Buy” recom-mendation, “Marketperform” most closely corresponds with a “Hold” recommendation, and “Underperform” most closely corresponds with a “Sell” recommendation.

Stock Recommendation System

Analyst CertificationEach research analyst primarily responsible for the content of this research report, in whole or in part, certifies that withrespect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflecthis or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be,directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the researchreport. If the date of this report is not current, the investment opinion and contents may not reflect the analyst's currentthinking.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.

If the date of this report is not current, the investment opinion and contents may not reflect the analyst’s current thinking.

For a complete set of required disclosures relating to the companies that are the subject of this report, please mail a requestto UBS Wealth Management Research Business Management, 1285 Avenue of the Americas, 13th Floor, New York, NY 10019.

UBSFS and/or its affiliates trade as principal in the fixed income securities discussed in this report.

Required disclosures


Appendix

Other Important DisclosuresIn certain countries UBS AG is referred to as UBS SA. This publication is for our clients’ information only and is not intended as anoffer, or a solicitation of an offer, to buy or sell any investment or other specific product. It does not constitute a personal recom-mendation or take into account the particular investment objectives, financial situation and needs of any specific recipient. We rec-ommend that recipients take financial and/or tax advice as to the implications of investing in any of the products mentioned here-in. We do not provide tax advice. The analysis contained herein is based on numerous assumptions. Different assumptions couldresult in materially different results. Other than disclosures relating to UBS AG, its subsidiaries and affiliates, all informationexpressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warran-ty, express or implied, is made as to its accuracy or completeness. All information and opinions are current only as of the date ofthis report, and are subject to change without notice. This publication is not intended to be a complete statement or summary ofthe securities, mar-kets or developments referred to in the report.

Opinions may differ or be contrary to those expressed by other business areas or groups of UBS AG, its subsidiaries and affiliates.UBS Wealth Management Research (UBS WMR) is written by, and intended for use by clients of, UBS Global Wealth Manage-ment and Business Banking. UBS Investment Research is written by UBS Investment Bank. The research process of UBS WMR isindependent of UBS Investment Research. As a consequence research methodologies applied and assumptions made by UBSWMR and UBS Investment Research may differ, for example, in terms of investment horizon, model assumptions, and valuationmethods. Therefore investment recommendations independently provided by the two UBS research organizations can be different. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other con-stituencies for the purpose of gathering, synthesizing and interpreting market information. The compensation of the analyst(s) whoprepared this report is determined exclusively by research management and senior management (not including investment bank-ing). Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues ofUBS Global Wealth Management and Business Banking as a whole, of which investment banking, sales and trading are a part.

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Appendix

Credit Issuer/Bond Recommendation Definitions

Recommen- Time WMR Definitiondation Horizon Terminology

WMR Credit/Bond*Rating

WMR CreditTrend

Longer Term

Review wit -hin a coupleof monthsReview wit -hin a coupleof months

AAA

High AAMid AALow AAHigh AMid ALow AHigh BBBMid BBBLow BBBHigh BBMid BBLow BBHigh BMid BLow BHigh CCCMid CCCLow CCCCCCD

Improving

Stable

Deteriorating

Watch +

Watch –

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.

Issuer /Bonds have weak credit quality. This is the highest Speculative Grade category.

Issuer /Bonds have very weak credit quality.

Issuer /Bonds have extremely weak credit quality.

Issuer /Bonds have very high risk of default.

Obligor failed to make payment on one or more of its financial com-mitments. This is the lowest quality of the Speculative Grade category.The WMR Credit Trend reflects the analyst’s expectation that the company’s credit fundamentals will improve.The WMR Credit Trend reflects the analyst’s expectation that the company’s credit fundamentals will remain stable.The WMR Credit Trend reflects the analyst’s expectation that the company’s credit fundamentals will deteriorate.Increased likelihood of WMR Credit Rating upgrade(s).

Increased likelihood of WMR Credit Rating downgrade(s).

Recommen- WMR Terminology Definitiondation

Outperform (OUT) The bond is expected to earn a higher total return than a liquid bond benchmark representing a comparable level of risk.

Marketperform (MKT) The bond is expected to earn a total return in line with a liquid Bond bond benchmark representing a comparable level of risk.Recommen- Underperform (UND) The bond is expected to earn a lower total return than a liquid dation bond benchmark representing a comparable level of risk.

Sell (SELL) In light of substantial downside credit or default risk, and the expectation of a lower total return than a liquid bond benchmark representing a comparable risk, investors should sell these bonds.

*The Bond Rating reflects WMR’s opinion of the credit quality of a bond. The WMR Bond Rating is derived by adjusting the WMR Credit Rating of the issuer for anycollateral-type and capital structure considerations specific to that bond. This may result in the bond having a different risk profile, and therefore a different ratingthan the issuer, as well as other bonds of the issuer.

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