UBS Research Based Advice - August 2011

Key research-based messages & investment themes

August 2011

UBS Research-based Advice

STRICTLY CONFIDENTIAL

For clients

Wealth Management

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Table of contents

Section 1 Key messages & strategy update

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Section 2 Investment strategy and overview of research stories

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Appendix A Investment strategy – detailed asset class updates

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Appendix B Risk Information & disclaimer

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Section 1

Key messages & strategy update

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Disclaimer:This report reflects the view of UBS WM&SB's Global Investment Committee (GIC) and is not research. The GIC members are senior investment professionals and economists from various departments in UBS WM&SB. The GIC is not a unit of UBS WM&SB's independent financial research unit and rules and regulations regarding the independence of financial research such as the respective SBA "directives on the independence of financial research" are not applicable to this publication. This publication does not fully comply with the legal requirements to guarantee independence of financial analysis and does not underlie the prohibition of trading before publication of financial analysis. For this reason, private clients (retail clients) should not base their investment strategies on this material.

Investment Strategy – Key Messages 1/2

• Equity markets rebounded at the end of June as the economic picture brightened up a bit. The latest US labour market report made clear, though, that the US economic "soft patch" is not over yet. The Global Investment Committee (GIC) therefore reiterates its view of having a current preference for "safer" corporate assets in expectation of rising volatility. This includes more defensive equity investments as higher dividend yielding stocks, and also corporate credit.

• Despite an agreement on the next bail-out tranche for Greece on the back of a Greek "yes" to further austerity measures, the Eurozone crisis is not over yet. The recent market focus on Italy proves this point. However, debt problems are not exclusive to Europe as underlined by the US debt ceiling debate. This confirms the GIC's view that government bonds are far from risk-free. Shorter maturities should therefore be preferred.

• The US dollar is likely to appreciate in coming months on the back of further Euro concerns. The US dollar is also expected to appreciate against the Swiss franc over this period.

Global Investment Committee Update – Meeting of July 2011

Seek "safer" corporate assets

Source: UBS. For illustrative purposes only. Past performance is no indication of future returns. You should not base your investment decisions on the information shown here. Please read in conjunction with the relevant risk information, factsheets and key features documents. UBS does not provide tax or legal advice – you must seek your own counsel prior to making any investment decisions.

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Recent US leading indicators stabilised pointing to a more robust third quarter. But stable job growth and corporate spending is needed. Fiscal tightening is a long-term drag but not apparent yet.

In Europe the debt crisis remains the focal point. The ECB is expected to pause after its July hike. Emerging market inflation likely peaks in the next months and monetary tightening should slow.

Economics

Asset Class

Strategy

We continue to prefer equities, commodities, high-yield and emerging market bonds over cash and government bonds over the medium-term. Main arguments remain attractive valuation and rising corporate earnings. However, investors should prefer more defensive and safer corporate assets in current volatile times.

Investors' sentiment is currently still neutral to depressed providing a good entry point into equity markets. Modest upside surprises from the macro front look likely.

Bonds

Equities

We reiterate our recommendation for short durations. Current low yields on government bonds look unsustainable to us given rising money market rates, higher inflation and deteriorating public finances.

We prefer fixed income investments into EM bonds in foreign currencies (USD, EUR, CHF). Some Asian local currency bonds also provide attractive appreciation potential. Corporate bonds are still supported.

US equities should be supported by a robust earnings season and improving economic data. Our favourite market in Europe remains Germany due its structural demand story and export strength. Easing inflationary pressures will benefit Emerging Market equities in the second half of 2011.

Investment Strategy – Key Messages 2/2

Source: CIO WMR

Prefer "safer" corporate assets

Source: UBS. For illustrative purposes only. Past performance is no indication of future returns. You should not base your investment decisions on the information shown here. Please read in conjunction with the relevant risk information, factsheets and key features documents. UBS does not provide tax or legal advice – you must seek your own counsel prior to making any investment decisions.

FX

All four major currencies (EUR, USD, GBP, JPY) remain structurally challenged and diversification into small alternatives is advisable. Short-term the USD is expected to strengthen against the EUR.

Of our favourite 5 currencies SEK and NOK currently look most attractive while AUD and CHF are already expensive. We introduce 8 currencies from small developed and emerging markets providing upside.

Commo-dities

We keep a preference for selected commodity investments in the short term (1 to 3 months). Higher prices should materialise on the back of still strong demand and low inventories.

Our 12-months oil price forecast remains at 110 USD (WTI). Given current political issues higher volatility is expected over the next months. Short-term favourites include platinum, copper, nickel and grains.

Section 2

Investment strategy and overview of research stories

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Review

Source: CIO WMRSource: UBS. For illustrative purposes only. Past performance is no indication of future returns. You should not base your investment decisions on the information shown here. Please read in conjunction with the relevant risk information, factsheets and key features documents. UBS does not provide tax or legal advice – you must seek your own counsel prior to making any investment decisions.

Financial markets remain volatile

Shaky equity marketsFollowing the late-June rally of almost 6% after the Greek agreement and stabilising US data global equities switched into sell-off mode again recently. Contagion fears regarding Italy hurt sentiment. The MSCI World remains within the 10%-range it has been trading in so far this year.

Government bond yields are still depressedGovernment bonds still profit from uncertainty about the growth outlook and the Eurozone debt crisis. Emerging market bonds proved resilient during the latest downturn and achieved attractive returns. Corporate bond spreads tightened but remain well above this year's lows.

Swiss franc even more expensive nowThe euro remains in the grip of the debt crisis. EURCHF reached another all-time low, EURUSD broke blow 1.40 after having traded in a tight range for 2 months. GBP came under pressure due to some weak economic data.

Commodities still weakCommodity prices fell over the month grains being the worst performer. Base metals hold up relatively well while oil prices lost 5%. The end of QE2 might have played a roll in weak commodity performance.

Source of Data: IPS WMR as of 11 July 2011; performance in local currencies

Key messages Performance

-5% 0% 5% 10%

Cash

Infl. Linked (Global)

Global Government Bonds

Global Corporate Bonds

High Yield

Em. Market Bonds

Em. Market Equities

Global Equities

Listed Real Estate

Commodities

Hedge Funds

Bond

sEq

uitie

s

Non

trad

it.

asse

t cl

asse

s

YTD Last month

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Asset class strategy

Source: UBS WMRSource: UBS. For illustrative purposes only. Past performance is no indication of future returns. You should not base your investment decisions on the information shown here. Please read in conjunction with the relevant risk information, factsheets and key features documents. UBS does not provide tax or legal advice – you must seek your own counsel prior to making any investment decisions.

Prefer "safer" corporate assets to navigate through the summer chill

Key messages Asset class outlook

Asset class Preference* Previous

Cash

Government bonds

Corporate bonds (IG)

Equities

Listed real estate

Commodities

* indicates our preference based on the

expected risk-adjusted return over a 3- to

12-month horizon

Bonds – We do not believe that current low government bond yields are sustainable and expect them to gradually move higher. Selected corporate credit is still preferred but likely rising rates speak for short durations. We generally like high yield corporate and in particular emerging market bonds.

Equities – Should perform well during 2H 2011 as valuations are attractive and the upcoming earnings season should be supportive. Still, short-term volatility primarily coming from an ongoing Eurozone debt crisis speaks in favour of a more defensive stance e.g. high dividend yield.

Listed real estate – Listed real estate remains supported by rental growth. But after the good performance so far a lot of good news now seem to be priced in.

Commodities – We are still bullish on selected commodities over a short time horizon (1-3 months). Our favourites include oil, platinum, copper, nickel and grains.

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Current Research Investment Themes

Asset Class

Theme Horizon* RationaleIllustrative selection of instruments (some may not be available)**

Equities

Mid-caps supported by M&A

Medium

•Over the last year merger and acquisitions (M&A) activity has clearly been on an uptrend•Growth in Europe is quite anaemic which should force large cap stocks to pay increased premiums for smaller cap stocks with good growth profiles

•Findlay Park American Smaller Comp. Fund•AXA Framlington UK Select Opps Fund

High dividend yieldsTOP THEME

Medium•Stable dividends present a good source of yield•Dividend yield-based strategies have historically paid off

•DWS Invest Top Dividend Fund•Artemis Income Fund

Emerging market growth and Asian consumptionTOP THEME

Long

•Favourable monetary conditions, good economic growth momentum and moderately higher inflation should support earnings growth in 2011 •Average emerging equity valuations currently look reasonable

•Aberdeen Global EM Equity Fund •JP Morgan Emerging Markets Equity Fund •Structured product may also be available

German equities Medium•Most economic news still points to an expansion in Germany•Improving consumer sentiment should fuel domestic demand

•Fidelity Germany Fund

Enterprise IT spending

Medium

•Companies with international exposure benefiting from increased corporate spending•Attractive valuation

•Henderson Horizon Global Technology Fund

US equities Medium

•Economic outlook for US H2 2011 is well supported by fiscal and monetary policy measures•Solid US earnings should ultimately carry US equities higher, reinforcing our positive stance

•Findlay Park American Fund

•UBS US Growth Fund

Scarcity of resources: Materials, Water & Agribusiness

Medium

•Materials is the most attractive cyclical sector with earnings growth estimated above 30% for 2011•The world's population continues to grow and more people need to be fed. Meanwhile, arable land is under threat from population growth and renewable energy production.

•JPMorgan Natural Resources Fund

•DWS Invest Global Agribusiness Fund

•Pictet Water fund

Source: UBS. To be read in conjunction with UBS Wealth Management Research reports. For illustrative purposes only. * Investment horizon: medium indicates between 3 and 12 months, long indicates over 12 months. ** Please note that some investments may not be available in the appropriate currency, tax or legal format or share class. UBS does not provide tax or legal advice and any information contained herein cannot be relied upon, please seek tax and legal advice from your own advisor prior to making any investment decision. You should not make your investment decisions solely on the information provided in this presentation. All investment information should be read in conjunction with the appropriate risk information, key features and/ or fact sheets.

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Current Research Investment Themes

Asset Class

Theme Horizon RationaleIllustrative selection of instruments (some may not be available)**

Bonds

Strategic bond funds

TOP THEMELong

•Being dynamic and nimble within the bond space is recommended in the current difficult interest rate environment and unpredictable credit conditions

•PIMCO Unconstrained bond Fund •Henderson Strategic Bond Fund•L&G Dynamic Bond Fund•JP Morgan Income Opportunity Fund

Emerging market growth and Asian consumption

Long

Emerging Markets and in particular Asia present stronger fundamentals and economic growth prospects than many developed countries

Still reasonable value in EM sovereign bonds

We favour currencies such as SGD, CNY and KRW and think they should continue to gradually appreciate against the USD

Be willing to accept volatility

•Bluebay Emerging Market Bond Fund•Bluebay Emerging Market Local Currency Bond Fund•BNY Mellon Emerging Market Local Currency Bond Fund •UBS Asian Local Currency Bond Fund•Templeton Asian Bond Fund

Convertible bonds

Medium•Bond and equity characteristics•Good tool for rebalancing equity exposure

•Jefferies Global Convertibles Fund•UBS Convertibles Global Fund

Source: UBS. To be read in conjunction with UBS Wealth Management Research reports. For illustrative purposes only. * Investment horizon: medium indicates between 3 and 12 months, long indicates over 12 months. ** Please note that some investments may not be available in the appropriate currency, tax or legal format or share class. UBS does not provide tax or legal advice and any information contained herein cannot be relied upon, please seek tax and legal advice from your own advisor prior to making any investment decision. You should not make your investment decisions solely on the information provided in this presentation. All investment information should be read in conjunction with the appropriate risk information, key features and/ or fact sheets.

Platinum: attractively valued

Long•Platinum is the most attractively valued metal from a production cost perspective, with supportive fundamentals

•Dual Currency Investments ("DCIs")•Structured product may also be available

FX yield enhancement

Focus on solid Scandies

Long

•Yield enhancement opportunity by taking exposure to currencies•Diversification versus other asset classes•Norway and Sweden provide a number of supportive fundamental and “safe haven” characteristics for long-term diversification

•Dual Currency Investments ("DCIs")

FX & commo-dities

NTACAttractive Hedge Fund strategies

Long•Hedge funds offer diversification benefits and aim to deliver positive returns in most market environments

• Offshore funds available• UCITS funds available

Appendix A

Investment strategy – detailed asset class updates

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Equity market outlookUS and German equities preferred for the time being

Source: UBS WMR

Preference*

Current

N. America USA

Canada

Europe EMU

UK

Switzerland

Sweden

Apac Australia

Hong Kong

Japan

Singapore

EM Emerging markets

* indicates our preference relative to global equity markets

over a 3- to 12-month horizon in local currency terms

Markets

US equities – earnings still supportiveThe US economy has entered a soft patch and does not enjoy a superior economic momentum anymore. Still, earnings momentum remains strong.

EM equities – Fading inflationary pressuresResilient economic data is a positive for Emerging Markets in the current environment. They offer also good earnings growth. Inflation worries should fade in H2.

German equities preferred within EurozoneWe keep our preference for Germany, the strongest economy in the Eurozone. Companies benefit from strong orders, high competitiveness and an attractive valuation.

UK equities offer an attractive dividend yieldUK equities are among the more attractively valued markets. Higher commodity prices compared to last year support year-over-year earnings growth rates.

Swiss equities – Strong franc is a dragStrong currency is a burden for the earnings development as the upcoming earnings season should show.

Source: UBS WMR. To be read in conjunction with UBS Wealth Management Research reports. For illustrative purposes only. Past performance is no indication of future returns. You should not base your investment decisions on the information shown here. Please read in conjunction with the relevant risk information, factsheets and key features documents. UBS does not provide tax or legal advice – you must seek your own counsel prior to making any investment decisions.

Key messages Equity market outlook (in local currency terms)

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Equity Sector outlookDefensives for the shorter term, cyclicals for the longer term

A mix between defensives and cyclicalsIn the current environment, a mix between the higher beta cyclical sectors and the more stable defensive sectors makes sense. In the shorter term, the summer soft patch and European debt crisis should favor defensives, while the better earnings prospects should support cyclicals further into the second half of 2011.

The debt crisis hits Financials hardThe Financial sector rallied strongly on the Greek approval of the aid package, while the spreading of the crisis to Italy led to a strong sell-off of Eurozone Banks. These movements confirm how much the Financial sector continues to be driven by European political risk. However, the very low valuations keep us from having a negative sector view.

Choose well among defensive sectorsAmong defensives, we prefer Healthcare due to a better earnings outlook and attractive valuations compared to other defensives.

A good longer-term outlook for MaterialsMaterials should benefit from an improving macroeconomic outlook particularly for the emerging markets in the coming months.

Preference*

Sectors Current Previous

Consumer Discretionary

Consumer Staples

Energy

Financials

Healthcare

Industrials

IT

Materials

Telecom

Utilities

* indicates our preference relative to global equity markets over a

3- to 12-month horizon

Source: UBS WMR


Key messages Equity Sector outlook

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Bond outlookEmerging market and corporate debt are most attractive

Segment Preference*

Government bonds

Investment-grade corporates

High-yield corporates

Emerging market USD sovereign debt

* indicates our preference based on the expected

risk-adjusted return over a 3- to 12-month horizon

Source: UBS WMR

Go for short durationsYields are expected to rise gradually given stabilizing macro data, rising money market rates and higher inflation. The Eurozone debt crisis and the US debt ceiling debate underline the risks of debt-loaded sovereign bonds. We therefore recommend focusing on short durations and attractive alternatives within fixed income.

Attractive corporate assetsHigher rated corporate bonds provide an opportunity to profit from the robustness of companies without taking equity risks. Avoid long durations and Financials.

High yield provides attractive opportunitiesRobust corporate fundamentals and easier bank lending standards still support a low default rate for longer. High yield issuers remain rather conservative avoiding massive re-leveraging for now.

Profit from robust emerging marketOur view that emerging markets are in a structurally superior position remains intact (lower debt levels and better growth outlook). We prefer bonds in foreign currencies (USD, EUR, CHF) and short durations. Local currency bonds from some Asian countries provide additional potential for currency appreciation.

Key messages Bond outlook


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FX outlookCurrency diversification remains key

FX ForecastsKey messages

Source: UBS WMR

6M 12M equilibrium ¹

EURUSD 1.43 1.48 1.29

EURCHF 1.25 1.30 1.39

USDJPY 85 89 83

GBPUSD 1.66 1.75 1.70

USDCHF 0.87 0.88 1.08

USDCAD 0.93 0.91 0.95

AUDUSD 1.06 1.08 0.73

EURSEK 8.60 8.50 8.90

EURNOK 7.60 7.60 8.70

¹ Purchasing Power Parity

Keep a preference for minor over major currenciesThe four major currencies (USD, EUR, GBP, JPY) remain structurally challenged.

USD short-term appreciation, long-term weaknessEURUSD has been trading in a tight range for 2 months. We expect some USD strength in the short-term but longer-term more weakness is in store.

GBP looks cheapSterling has lost value due to weak economic data and now looks rather cheap on some valuation metrics.

The Swiss franc is too expensiveThe historical strength of the CHF looks overdone to us and might make way for some USD appreciation over the next months.

Select from our "favourite 5" currenciesWe currently prefer SEK and NOK. CHF, CAD and AUD look stretched.

We introduce the "next 8"We continue to like small currencies. Currently Taiwan dollar, Korean won and Polish zloty offer the most attractive valuations alongside 5 other currencies from small developed and developing nations.


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Commodity outlookPositive short-term outlook

Source: UBS WMR

Select opportunities in commoditiesWe are still bullish on selected commodities over a short time horizon (1-3 months). In our view investors are currently pricing in a too negative macro scenario discarding fundamental support factor.

Precious metals: Gold is a long-term playThe uptrend in gold has been broken and we expect sideways trading in the coming months. But gold remains a long-term favourite and "safe haven" play. Also prefer platinum.

Energy: Volatility on oil markets aheadWe revised our short-term outlook for oil down and expect short-term volatility. The 12-months bullish view remains intact (110 USD for WTI).

Base metals: Still supported by strong demandAsian inventory destocking in copper provides the background for future price increases as demand holds up. We also like nickel.

Agriculture: Inventories remain lowOur outlook for the grains is still positive. We expect prices to increase by 5% over the next 3 months. To refill inventories an extremely good harvest would be needed.

-2

0

2

4

6

8

10

12

Ener

gy

Prec

ious

Met

als

Base

Met

als Grain

s

Softs

Lives

tock Tota

l

1-3 months 9-12 months

Key messages Commodity outlook


Appendix B

Risk Information & disclaimer

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Risk Information

This material is intended for information and marketing purposes only. It is not to be regarded as investment research, a sales prospectus, an offer or solicitation of an offer to enter in any investment activity. Please note that UBS retains the right to change the range of services, the products and the prices at any time without prior notice and that all information and opinions indicated are subject to change. Certain services and products are subject to legal provisions and cannot therefore be offered world-wide on an unrestricted basis. Asset classes, asset allocation and investment instruments are indicative only.

Some figures may refer to the past or simulated past performance and past performance is not a reliable indicator of future results. Some figures may be forecasts only and forecasts are not a reliable indicator of future performance. If the currency of a financial product or financial service is different from the currency of your home country, the return may increase or decrease as a result of currency fluctuations. Fees may not be included and these will reduce future performance accordingly.

Please be reminded that all investments carry a certain degree of risk. Your attention is hereby drawn to such risk (which can be substantial). Some investments may not be readily realisable since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult. Some investments may be subject to sudden and large falls in value and on realisation you may receive back less than you invested or may be required to pay more. You should consult your UBS client advisor on the nature of such investment and carefully consider whether such investment is appropriate for you.

We would recommend that you take financial and/or legal advice as to the implications of investing in any of the products mentioned herein, including tax matters. UBS does not provide tax advice.

At any time UBS and other companies in the UBS group (or employees thereof) may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to the issuer of relevant securities or to a company connected with an issuer.

This material is not intended for distribution into the US and / or to US persons or in jurisdictions where its distribution by us would be restricted. Source of all information is UBS unless otherwise stated. UBS specifically prohibits the redistribution of this material in whole or in part without the written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect.

Should you have any questions, please contact your UBS client advisor.

© UBS 2011. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

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Disclaimer

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Tel: +44-20-7567-5757www.ubs.com.

Wealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affiliate thereof. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and its affiliates). All information and opinions as well as any prices indicated are currently only as of the date of this report, and are subject to change without notice. Opinions expressed herein may differ or be contrary to those expressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria. At any time UBS AG and other companies in the UBS group (or employees thereof) may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to the issuer of relevant securities or to a company connected with an issuer. Some investments may not be readily realisable since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is considered risky. Past performance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and large falls in value and on realisation you may receive back less than you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or income of an investment. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of our individual clients and we would recommend that you take financial and/or tax advice as to the implications (including tax) of investing in any of the products mentioned herein. This document may not be reproduced or copies circulated without prior authority of UBS or a subsidiary of UBS. UBS expressly prohibits the distribution and transfer of this document to third parties for any reason. UBS will not be liable for any claims or lawsuits from any third parties arising from the use or distribution of this document. This report is for distribution only under such circumstances as may be permitted by applicable law.

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UBS Research Based Advice - August 2011

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