Financial Pacific: Wealth Management Research (third party), july 29.2010

Michael P. Ryan, CFA, Head WMR Americas, [email protected]

Stephen R. Freedman, PhD, CFA, Strategist, [email protected]

Wealth Management Research 28 July 2010

Investment Strategy Guide

Region: US

From “tail risk” to “trail risk”

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

Having highlighted near-term “tail risks” two months ago as a reason to position portfolios more cautiously, we now believe that some of these risks have abated, in particular those arising from the European sovereign crisis.

We are therefore adopting a more neutral tactical stance across asset classes. At the same time, we stress that the soft patch wit-nessed in recent economic data may well last for some time, thereby limiting the upside potential for equities and other cyclical assets.

Tactical changes:

We are upgrading equities and fixed income from moderate un-derweight to neutral while downgrading cash from overweight to neutral.

Within our regional fixed income allocation, we upgrade Eurozone bonds and as a result non-US Fixed Income from moderate under-weight to neutral, while downgrading US Fixed Income to neutral.

Among US Equity sectors, we’ve made various adjustments. We have increased our overweight in Tech, increased our underweight in Materials, closed our moderate overweight in Energy and our moderate underweight in Health Care. We have also reduced the magnitude of our underweight in Consumer Discretionary and in-troduced a moderate underweight in Telecom.

Within our US Equity size/style/REITs allocation, we have closed our moderate overweight on Mid Cap stocks, and reduced the magni-tude of our underweight in REITs.

In US Fixed Income, we are extending our recommended duration, while continuing to recommend a below-benchmark duration. Among fixed income segments, we are increasing our overweight in credit-sensitive areas, by reintroducing moderate overweights in High Yield Corporates and Preferred securities.

A shift in focus In the wake of the mini “flash crash” of May 6th, investors began tofocus once again upon the occurrence of extreme events or so called“tail risks.” While a technical glitch related to algorithmic trading may ormay not have been primarily responsible for the steep selloff in the mar-ket that day, the violent price shifts within equity markets rekindled con-cerns of credit meltdowns, liquidity events and market dislocations. Thedeepening of the sovereign debt crisis across the Eurozone, increasedbelligerence on the part of North Korea and Iran, and the uncertaintiesassociated with financial regulatory reform only served to reinforce thosefears. This was clearly reflected by a surge in market volatility and further declines in government bond yields. But with the successful completionof the European bank “stress tests” and passage of financial regulatoryreform in the US, some of the worries over extreme outcomes have be-gun to fade and the acute sense of risk aversion has eased. As a result,markets have rebounded off their recent lows, risk appetite has im-proved and volatility has eased.

Contents Page Focus 1

Asset allocation overview 5

Market scenarios 6

Equity and bond regions 7

US equity sectors 8

US equity size, style and REITs 9

US fixed income 10

Chartbooks 12

Detailed asset allocation 16

Fig. 1: Tactical deviations across asset classes Deviations from benchmark

Equity

Fixed Income

Cash

Commodities

+ ++ +++–– –– – – nunderweight overweight

Source: UBS WMR, as of 28 July 2010. See Deviations from bench-mark allocation in the Appendix for a detailed explanation of these suggested deviations.

Fig. 2: Benchmark and current allocation Percentage of portfolio (moderate risk portfolio)

5.0

44.0

37.0

2.0

12.0

CommoditiesAltern. Investments

Current allocation

12.0

2.0

37.0

44.0

5.0

EquityFixed IncomeCash

Benchmark allocation

Source: UBS Investment Solutions and WMR, as of 28 July 2010. See Sources of benchmark allocations and investor risk profiles in the Appendix for a detailed explanation regarding benchmarks and their suitability. The current allocation is the sum of the benchmark alloca-tions and tactical deviations.

The Tables on pages 16 and 17 in the Appendix also show asset allocations applicable to risk profiles other than the moderate risk profile shown here, both with and without nontraditional assets.



Investment Strategy Guide 2

But even as “tail risks” are beginning to fade, evidence of “trail risks”has started to surface. Recently released economic data suggest that theeconomic recovery is showing signs of moderating. It’s not surprising tosee growth ease somewhat following an initial surge in activity as theeconomy emerges from recession. However, the current deceleration ingrowth is somewhat more troubling in that the rebound in activity is far shallower than normal and the slowdown is occurring more rapidly thanis typically the case. Figure 4 compares the current recovery with others of the post-war era at a similar phase of the business cycle. As this figureclearly illustrates, the current pace of growth trails the levels that wouldnormally be expected given the depth of the recession and the aggres-sive nature of the response by policymakers. This sluggish pace ofgrowth will likely serve to both limit job creation as well as further dampen improvements in consumer sentiment. Attention will thereforenecessarily shift away from event-driven “tail risks” and toward eco-nomic-centered “trail risks.” Against this backdrop, we have opted to both remove our underweightposition in equities and redeploy a portion of low-yielding idle cash bal-ances. We still see significant structural challenges ahead ranging fromthe deleveraging of consumer balance sheets, to an ongoing recapitaliza-tion of the financial sector, to a growing need for fiscal consolidation. What’s more, while valuation remains undemanding, the upside earningssurprises that have been one of the principal catalysts behind marketgains are likely to be mixed going forward. Still, the more acute threatfrom an event-driven market meltdown has now abated. Ironically, evenas the economic recovery process has shown some clear signs of slow-ing, the risks that a locking up of credit markets and/or reflexive de-risking will lead to an adverse outcome have likely diminished. We now see equity markets as largely range-bound, with the S&P 500 likely totrade within plus/minus 7% of the current 1100 level for the balance ofthe year. While this hardly constitutes a compelling near-term buying opportunity, the downside appears more limited and the returns arecompetitive with the modest yields on competing asset classes such asbonds and cash. Stress pause in Europe The much awaited stress tests for European banks were released on July23. While the results were hardly convincing, their publication does ap-pear to have restored some confidence in the European financial system,as the decline in bank and sovereign spreads indicates (see Figure 6). The results were disappointing to the extent that a very limited number ofbanks were found to have failed the test (7 out of 91) and the aggre-gate capital shortfall of EUR 3.5 bn clearly fell short of expectations. Thefact that the test did not assume a sovereign default, but merely a sover-eign debt market stress situation, helped to set the bar rather low. The vast majority of banks’ exposure to sovereign credit risk, which is locatedin their banking book rather than their trading book, was thereby ex-cluded from the stress scenario. From this perspective, the stress tests were a bit lacking in terms of the rigor applied to testing the true impactof sovereign losses. What the operation did achieve, however, is to increase transparency inthe European banking system by requiring considerable disclosure re-garding banks’ exposures to sovereign risk. This will allow investors andanalysts to better separate the wheat from the chaff among Europeanfinancial institutions, which is typically a significant step toward restoringconfidence. Therefore, while the exercise missed an opportunity to serveas a catalyst toward recapitalizing the banking system, the greater trans-parency does reduce the systemic risk arising from Europe to an impor-tant extent. Keep in mind that the stress tests of the US banks repre-sented a critical turning point for the recovery in financial assets. While

Fig. 3: Asset Class Scorecard

Valuation Cyclical Timing Equities +1 -1 0

Commodities 0 0 0

Fixed Income -1 0 0

Range: -3 (very unsupportive) to +3 (very supportive)

Source: UBS WMR, as of 28 July 2010

Fig. 5: Growth and inflation forecasts

in % GDP Growth Inflation '09 '10 F '11 F '09 '10 F '11 F

World -1.1 4.1 3.8 1.3 2.9 2.9

US -2.4 3.0 3.0 -0.3 1.7 1.6

Canada -2.5 3.5 3.2 0.3 1.8 2.4

Japan -5.2 3.4 1.7 -1.3 -0.6 -0.1

Eurozone -4.1 1.5 1.9 0.3 1.5 1.5

UK -4.9 1.3 2.4 2.2 3.1 2.1

China 8.7 10.0 8.7 -0.7 3.0 4.0

India 7.4 9.0 8.0 6.4 8.6 5.9

Russia -7.8 7.5 6.0 11.7 5.9 5.8

Brazil -0.2 8.2 5.4 4.3 5.4 5.2

Asia ex-Jp/Chi/Ind -0.6 5.3 4.3 1.8 2.7 3.2

F: forecast. Source: UBS WMR, as of 28 July 2010

In developing the forecasts set forth above, WMR economists worked in collaboration with economists employed by UBS Invest-ment Research (INV). INV is published by UBS Investment Bank. Forecasts and estimates are current only as of the date of this publi-cation and may change without notice.

Fig. 4: A trailing recovery Current US recovery compared to others in the post-war era at a similar phase of the business cycle

0%

2%

4%

6%

8%

0% 1% 2% 3% 4%Real GDP loss

Real

GDP

reco

very

2008/09

Note: Real GDP loss is measured as peak-to-trough decline during recessions, real GDP recovery is measured as the cumulative gain in the first year after the end of recessions.

Source: Datastream and UBS WMR, as of 27 July 2010




the conditions and stakes are much different this time around, the suc-cessful completion of the European stress tests does eliminate one im-portant source of tail risk for the market and, therefore, can be viewed as a constructive development. Gauging the slowdown As we’ve already noted, activity typically surges at the early stage of aneconomic recovery / expansion – only to be followed by a mid-cycle moderation as the economy slows toward a more sustainable growthpath. Yet the current cycle has been anything but typical. Faced withdaunting structural challenges, uncertain public policy actions and a stillfragile cyclical outlook, businesses and consumers alike are taking a farmore cautious approach this time around. Although non-farm payrolls have shown signs of improvement and the unemployment rate hasticked lower, these encouraging signs mask underlying weakness in pri-vate sector job creation. As figure 7 illustrates, the level of private sectorjobs being added lags behind the pace seen during other recoveries asemployers are careful about adding to headcount. This subdued level ofemployment growth will, in turn, further weigh upon consumer confi-dence and restrain demand. Keep in mind that one of the most impor-tant drivers of consumption is personal income growth, which is highlycorrelated with the pace of job creation. Manufacturing activity also shows signs of decelerating. The ISM Manu-facturing index has softened a bit following the initial surge as the econ-omy emerged from recession. Once again, there is nothing terribly sur-prising about a mid-cycle slowdown. According to our economics team,the ISM index typically peaks during the early stages of the recov-ery/expansion, and then drops. However, given how highly dependent this recovery has been upon an aggressive policy mix – and considering the daunting nature of the structural challenges we face – the current slowdown has understandably drawn a bit more attention. Keep in mind, equity markets often take their cues from leading indicators, suchas the ISM. Still, the prospects for a “double-dip” recession remain low.Private sector demand has been reignited with the boost from monetaryand fiscal policy, as evidenced by eight consecutive months of positiveconsumption. The US consumer has benefited from a rebound in netwealth, lower interest rates and falling inflation which has supported realpurchasing power. The savings rate has stabilized at around 3.5% sinceJuly 2009, indicating that the correction in savings behaviour has likelyrun its course. The positive feedback loop between consumption, em-ployment and labour income may be weaker than normal but should stillprove strong enough to avoid a double-dip, in our view. Still a range-bound market Within this still sluggish growth environment, the “margin of error” forinvestors will remain especially tight. The potent mix of policy drivers thatdrove the reflation rally through March is no longer adequate to lift allrisk assets. What’s more, the tail winds from upside earnings surpriseshave tapered off as expectations have been reset. While it’s a bit of acliché to say that selectivity is critical, range-bound markets by definition demand a more discriminating approach. Consider the following: Valuation: While equity markets are trading nearly 10% below the

highs reached back in late April, there is little to suggest that valua-tion has become especially compelling. According to our ownvaluation models, equities currently trade just about 13% below fair value. Current P/E ratios are only slightly below the averageseen over the past decade, suggesting that stocks are well withinranges consistent with a neutral market weighting. On the otherhand, valuation isn’t very demanding either, suggesting that any material setback in equity prices from here would have to be driven

Fig. 6: Improving confidence in European banks European banks average 5 year Credit Default Swap spread, in basis points

100

150

200

Mar09

May09

Jul09

Sep09

Nov09

Jan10

Mar10

May10

Jul10

250

300

350

400

Source: Bloomberg and UBS WMR, as of 27 July 2010

Fig. 7: Lack of private payroll growth is trouble-some

95

0 4 8 12 16 20 2

100

105

110

4Postwar recessions (average) 2008/09 recession

# of months (recession trough = 0)

US nonfarm private payrolls (recession trough = 100)

Source: Datastream and UBS WMR, 27 July 2010

Fig. 8: Business and consumer confidence have declined recently

(10)1030507090

110130150

1990 1994 1998 2002 2006 2010

20

30

40

50

60

70

Consumer Confidence, Conference Board (left)Business Confidence, ISM Manufacturing PMI (right)

Source: Bloomberg and UBS WMR, 27 July 2010

Wealth Management Research

28 July 2010



by either a sharp earnings deceleration, material rate increases,marked policy tightening or a disruptive exogenous event.

Profits: Second quarter profits have come in a bit better than ex-

pected, with about 3/4s of companies once again beating analystexpectations. However, amid more cautious company guidanceand an overly rosy profit picture, analysts have begun to scale backtheir earnings estimates. Consensus estimates for 2011 earnings currently stand at about $96. This is well above our own $88 fore-cast, and suggests there is additional room for downward revisions. Overall, while we expect profits to grow 10% next year following a near 30% rise this year, significant earnings beats are less likely to materialize looking forward (see figure 10).

Rates: Despite both a rebound in risk assets and a recovery in eco-

nomic activity, interest rates across the board remain low by histori-cal standards. It is our view that the current low rate environment is largely a function of accommodative monetary policy, sluggish growth prospects, diminished inflation risks, limited capital re-quirements from the private sector and a continued sense of riskaversion. While yields would be expected to drift higher over the course of the next year, the overall interest rate environment islikely to remain low for an extended period.

Policy: Chairman Bernanke has made it clear both in his testimony

before Congress as well as the statements following meetings of the FOMC that the Fed has no intention of shifting policy any timesoon. In fact, the Chairman even raised the prospects for the de-ployment of additional extraordinary policy options in the event theeconomy slowed sharply or deflationary pressures began to build. It would therefore appear that the policy backdrop – at least from the monetary side – will remain supportive of both economic growthand risk assets.

Uncertainties abound While “tails risks” may have faded, that is not to say that uncertainties have been eliminated. The approach of the congressional mid-term elec-tions and the prospects for a change in the composition of Congress represents both a risk and an opportunity for markets. While “gridlock”in DC is viewed favorably, a deeply dysfunctional divide on Capitol Hill isnot. Likewise, the expiration of the Bush tax cuts at the end of this yearpose another potential challenge. In the absence of either a reform bill orextension of the tax cuts, rates would automatically revert back to the Clinton era levels. This would be a significant blow to a recovery that hasalready had enough difficulty in gaining traction. Although we still viewthat prospect of a double-dip as low, the fallout from the Eurozone crisis and a tightening of policy in Asia still have the potential to push theeconomy into a ditch. Michael P. Ryan, CFA, Head WMR Americas, UBS FS Inc.

Fig. 9: Equities attractively valued vs. bonds Equity risk premium (earnings yield minus real bond yield)

-7%

-2%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

US Equity Risk Premium (Average 10 year real earnings)

3%

8%

13%

18% averageUS Equity Risk Premium (Forward earnings)average

Equities attractive relative to bonds

Equities unattractive relative to bonds

Source: IBES, Shiller and UBS WMR, as of 28 July 2010

Fig. 10: Earnings beats supportive until now, less likely looking forward % of S&P 500 companies beating consensus estimates

0%

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 est

10%20%30%40%50%60%70%80%

Sales Earnings

Note: After 60% of companies reporting 2Q 2010 earnings.

Source: FactSet and UBS WMR, as of 27 July 2010

Fig. 11: Benign inflation backdrop means rates to stay low for longer US consumer price inflation, year-over year, in %

-4-202468

10121416

60 65 70 75 80 85 90 95 00 05 10 Source: Bureau of Labor Statistics and UBS WMR, as of 27 July 2010



UBS FS Investment Strategy Guide 5

Asset Allocation Overview Asset Class Comments

WMR Tactical View

Model Portfolio Moderate Risk Profile (in %)

Benchmark Allocation

Tactical Deviation

Change Current Allocation

Equities Upgraded from moderate underweight to neutral. Moderately attractive valuation offset by more challenging cyclical environment. Systemic risk from European financial sector has abated.

Neutral 44.0 +0.0 44.0

US Equities Valuations have turned attractive but less so than in other re-gions. Solid earnings growth, but 2011 consensus estimates appear too high, leaving room for disappointments.

Neutral 32.0 +0.0 32.0

US Large Cap Value Large-cap relative valuations remain attractive. The segment should benefit from lingering risk aversion.

Moderate Overweight 11.0 +1.0 12.0

US Large Cap Growth Large-cap relative valuations remain attractive. The segment should benefit from lingering risk aversion. Valuations and our sector tilts suggest modest preference for Growth over Value.

Moderate Overweight 11.0 +2.0 13.0

US Mid Cap Expensive vs Large Cap. The expected pick-up in M&A activity, which benefits Mid Cap, appears delayed.

Neutral 5.0 +0.0 5.0

US Small Cap Expensive vs. large caps and more challenging earnings picture.

Moderate Underweight 3.0 -2.0 1.0

US Real Estate Investment Trusts (REITs) Expensive after this year's outperformance. Commercial real es-tate market still faces challenges. Upgraded due to modest im-provement in fundamentals.


Non-US Developed Equities Valuations more attractive than US, especially in Europe. More sluggish European recovery and fiscal concerns, as well as ex-pensive valuations in Japan suggest more cautious stance.


Emerging Market (EM) Equities EM equities are more attractively valued than developed mar-kets and more immune to fiscal risk.

Moderate

Overweight 2.0 +2.0 4.0

Fixed Income Upgraded from moderate underweight. While we expect bond yields to progressively rise, monetary policy normalization has been delayed well into 2011, creating a more supportive fixed income environment.

Neutral 37.0 +0.0 37.0

US Fixed Income Currency considerations no longer favor the dollar.

Neutral 29.0 +0.0 29.0

Non-US Fixed Income While the euro main remain under pressure in the near term, we expect it to appreciate modestly vs. the dollar over the next year. The yen is set to weaken in the medium term, in our view.

Neutral 8.0 +0.0 8.0

Cash (USD) Downgraded to neutral. Low yields create high opportunity costs.

Neutral 2.0 +0.0 2.0

Commodities Valuations are broadly in line with marginal costs of production. Supply and demand fundamentals suggest price appreciation, but negative roll yields should trim total returns.

Neutral 5.0 +0.0 5.0

Alternative Investments No tactical view. Included into portfolio for diversification purposes.

Neutral 12.0 +0.0 12.0

The benchmark allocations are provided for illustrative purposes only by UBS for a hypothetical US investor with a moderate investor risk profile and total return objective. See "Sources of benchmark allocations and investor risk profiles" in the Appendix for a detailed explanation regard-ing the source of benchmark allocations and their suitability and the source of investor risk profiles. The current allocation is the sum of the benchmark allocation and the tactical deviation. See "Deviations from benchmark allocation" in the Appendix regarding the interpretation of the suggested tactical deviations from benchmark.

“WMR tactical deviation” legend: Overweight Underweight Neutral Source: UBS WMR and Investment Solutions, as of 28 July 2010.

“Change” legend: ▲ Upgrade ▼ DowngradeFor end notes, please see appendix.


28 July 2010



Market Scenarios (next 12 months) While we continue to view a moderate recovery as the mostlikely scenario, we have further increased the probability of the double dip recession scenario and trimmed the likelihood of a V-shaped recovery. This reflects the recent slight downward ad-justment in our economic growth forecasts. Moderate recovery: Base Case Scenario Probability: 65% The global economy remains on expansion course. The recovery is more subdued than in prior cycles because of de-

leveraging pressures on the consumer and the financial sector. However, private pent-up demand is strong enough to allow

growth to become self-sustaining. The Eurozone crisis remains contained and its impact on the fi-

nancial sector is limited. The abundant slack in the economy keeps inflationary pressures

from building up. Double-dip recession: First Alternative Scenario Probability: 25% (previously 20%) New bouts of weakness in the housing market, a weak labor

market, a retrenched consumer, and first steps toward fiscal con-solidation create additional headwinds.

The economy returns back into contraction mode for severalquarters, as consumer and investment demand decline once again.

Falling commodity prices and a rise in excess capacities lead tonegative consumer price inflation (deflation).

V-shaped recovery: Second Alternative Scenario Probability: 5% (previously 10%) The strong policy impulse continues to filter through the eco-

nomic and financial system. Beyond the build-up in inventories, further fiscal impulses, and a

marked pickup in investment spending, improvements in the la-bor market and in credit conditions allow a more dynamic con-sumer recovery.

Improving conditions abroad drive export growth. Commodity prices rise moderately without derailing the recovery.

Stagflation: Third Alternative Scenario Probability: 5% Rising commodity prices set an inflationary process in motion and

contribute to choking the emerging recovery. Higher inflation expectations become entrenched. The combination of rising price levels and weak growth prospects

poses significant challenges to most financial assets. Stephen R. Freedman, PhD, CFA, Strategist, UBS FS Inc.

Moderate recovery

Deflation StagflationNegativeGrowth

LowGrowth

LowInflation

HighInflation

NegativeInflation

SupercycleGoldilocksHighGrowth

Deflation Stagflation

SupercycleGoldilocks


LowGrowth

LowInflation

HighInflation

NegativeInflation


Source: UBS WMR

Double-dip recession


LowGrowth

LowInflation

HighInflation

NegativeInflation


Deflation Stagflation

SupercycleGoldilocks


LowGrowth

LowInflation

HighInflation

NegativeInflation


Source: UBS WMR

V-shaped recovery

Deflation

Supercycle

Stagflation

Goldilocks

NegativeGrowth

LowGrowth

HighGrowth

LowInflation

HighInflation

NegativeInflation

Deflation

Supercycle

Stagflation

Goldilocks

Deflation

Supercycle

Stagflation

Goldilocks

NegativeGrowth

LowGrowth

HighGrowth

LowInflation

HighInflation

NegativeInflation

Source: UBS WMR

Stagflation

Deflation

Supercycle

Stagflation

Goldilocks

NegativeGrowth

LowGrowth

HighGrowth

LowInflation

HighInflation

NegativeInflation

Deflation

Supercycle

Stagflation

Goldilocks

Deflation

Supercycle

Stagflation

Goldilocks

NegativeGrowth

LowGrowth

HighGrowth

LowInflation

HighInflation

NegativeInflation

Source: UBS WMR


28 July 2010



Equity and bond regions Keep preference for Emerging Market Equities

We maintain a preference for emerging market equities overdeveloped markets. Within international fixed income we aretaking a more neutral view between US and non-US bonds. Emerging Market (EM) Equities: keeping an overweight We continue to view the prospects for Emerging Market (EM) stocks as superior to those of their developed market peers. Valuations remain attractive. EM Price-Earnings (PE) ratios at 10.5 times forward earningscompare favourably with 12.0 in the US. Moreover, consensus earnings growth expectations remain broadly similar in both regions, while EM appear better position to deliver on these expectations. Finally, in a context where fiscal risks have taken center stage among investors’concerns, EM sovereigns are in a much more solid position than they have been in the past, whereas developed economies have yet to begin dealing with their fiscal problems in earnest. Tail risk reduced in Eurozone but structural challenges remain As discussed in the lead article, we believe that systemic risk has been reduced within the European banking system for the immediate future. However, we believe that the structural issues that the Eurozone isfacing, in particular the need to adopt fiscal austerity measures soonerthan other countries, is likely to mute growth prospects. Therefore, even though Eurozone equities are trading at an attractive discount vs. US stocks, we are not inclined to shift into the region. Japan and UK Equities Japanese stocks have lagged other markets during the last month. Aslightly stronger yen did little to offset this underperformance. We re-main cautious on Japanese stocks and stick to a moderate underweightstance within the international equity portion of the portfolio. Valua-tions are among the most demanding across markets, and we expectearnings momentum to decelerate as global leading indicators have likely passed their peak. We are neutral on UK equities. Their valuationsare the most attractive among the major regions, and the equity indexis very heavily geared toward international demand rather than thestruggling UK economy. However, the markets sector composition withMaterials, Financials and Energy accounting for half of market capitali-zation offsets some of the appeal from valuations. Neutral view between US and non-US Fixed Income The diminished systemic risk concerns in the Europe have reduced thelikelihood of a further tailspin in the euro. Our view on the dollar is more balanced over the next twelve months. While we see the eurostrengthening somewhat, we expect the Japanese yen to weaken vs.the dollar. Overall, this suggests taking a less defensive stance on non-US Fixed Income. From a currency perspective, we prefer varioussmaller international bond markets such as Switzerland, Canada, Swe-den and Norway. Stephen R. Freedman, PhD, CFA, Strategist, UBS FS Inc.

Fig. 13: Equity regions Tactical deviations from benchmark, incl. view on currency.

Emerging Markets

UK

Other Developed

US

Eurozone

Japan


Source: UBS WMR, as of 28 July 2010. Scale explained in Appendix.

Fig. 14: Bond regions Tactical deviations from benchmark, incl. view on currency.

Other

US

UK

Eurozone

Japan

+ ++ +++–– –– – – n

underweight overweight

Note: Arrows indicate changes adopted in this report.


See appendix for detailed asset allocations. See explanations in the Appendix regarding the interpretation of the suggested tactical deviations and the procedure for combining asset class and country allocations.

Fig. 15: Regional equity valuations and earnings momentum 12-month forward Price-Earnings Ratios 3-month change in 12-month forward Consensus Earnings

12.010.2 9.5

13.9

10.513.1

11.6 11.3

-4

0

4

8

12

16

20

24

US

Euro

zone UK

Japa

n

Emer

ging M

arke

ts

Canad

a

Austra

lia

Switz

erlan

d

-3%

0%

3%

6%

9%

12%

15%

18%Price/Earnings ratio (left)Earnings momentum (right)

Source: IBES, UBS WMR, as of 27 July 2010.




US equity sectors Buy stability

Weakening leading economic indicators suggest a rotation intomore defensive market sectors. Commodity-sensitive sectors, particularly Materials, are the most vulnerable to waning globalgrowth momentum. We remain positive on Technology as earn-ings reports continue to confirm strong end-market demand.

Focus on secular growth—Increasing Tech overweight, trimmingConsumer Discretionary underweight

We upgrade the Consumer Services industry within the Consumer Dis-cretionary sector to Moderate Overweight from Neutral. The fast foodrestaurants represent almost two-thirds of the Consumer Services indus-try group. We believe this group of companies can continue to post solidearnings in a tepid domestic recovery given the low cost of the averagefast food meal. Additionally, we also like the group’s relatively high expo-sure to faster-growing emerging markets. We remain underweight Re-tailing and Consumer Durables within the Consumer Discretionary sector (see Appendix 4 for complete table of US sector allocations).

Apple, Cisco and Hewlett Packard represent over 60% of the TechHardware & Equipment industry which we upgrade from neutral tomoderate overweight. Commentary from key technology companiesduring second quarter earnings season has confirmed our thesis that therebound in enterprise technology spending is gaining traction.

Dialing back commodity exposure—downgrade Energy and Mate-rials

On the heels of our recently reduced expectations for commodity prices (see “Commodity Markets: A haircut to expectations” 22 July 2010), weare reducing the Energy sector to Neutral from Moderate Overweightand reducing Materials to Underweight from Moderate Underweight.

With regards to Energy, our commodities team now projects oil prices to average $79 and $85 in 2010 and 2011, roughly a $10 reduction fromour prior twelve month ahead forecast. The new estimates suggest onlyan 8% increase in oil prices in 2011. Given the close correlation betweenoil prices and Energy sector earnings, we believe there is downside risk toconsensus Energy sector earnings estimates, which currently assume over20% growth in 2011. In addition, the political fallout from the oil spill inthe Gulf of Mexico will likely lead to tougher regulations and ultimately higher costs, potentially further crimping earnings growth and limitingupside for sector valuations.

The Materials sector has rallied sharply over the past month, benefittingfrom expectations that the Chinese government is nearing the end of its policy tightening campaign to reign in price inflation in its property mar-ket. However, we believe the slowing developed market growth com-bined with full valuations will lead to underperformance.

Swapping defensives—Health Care to Neutral, Telecom to Moder-ate Underweight

We reduce Telecom to Moderate Underweight from Neutral and up-grade the Healthcare sector to Neutral from Moderate Underweight. While the telecom sector carries an attractive dividend yield, its recentoutperformance of over 10 percentage points over the past threemonths leaves sector valuations stretched. Following Health Care’s recentunderperformance, we believe that the risk-reward trade-off is more attractive.

Jeremy Zirin, CFA, Strategist, UBS FS Inc.

Fig. 16: Sector strategy – a moderate defensive tilt Tactical deviations from benchmark

Consumer Staples

Tech

Utilities

Energy

Financials

HealthCare

Telecom

Industrials

Consumer Discretionary

Materials



Source: UBS WMR, as of 28 July 2010.

See explanations in the Appendix regarding the interpretation of the suggested tactical deviations from benchmark.

Fig. 17: Defensive outperformance has more room to run Performance of cyclicals vs defensives; 100 = ISM peak

90

95

0+1m +2m +3m +4m +5m +6m +7m +8m +9m

+10m

+11m

+12m

100

105

110

115

Historical average Current cycle (peak April 30, 2010)

Cyclicals outperform

Defensives outperform

Note: Defensives = Consumer Staples, HealthCare, Telecom and Utilities; Cyclicals = Consumer Discretionary, Industrials, Materials and Tech

Source: Bloomberg, DataStream and UBS WMR, as of 26 July 2010

Fig. 18: Tech is the most under-leveraged sector and well below its historical average Net debt / assets—S&P 500 current constituents

-20%

-10%

0%

10%

20%

30%

40%

Tech

Hea

lth C

are

Ener

gy

Mat

eria

ls

Dis

cret

iona

ry

Stap

les

Tele

com

Indu

stria

ls

Util

ities

Current Avg since 1990

Source: FactSet and UBS WMR, as of 26 July 2010




US equity size, style and REITs Growth is valuable

Downgrade mid-caps to neutral; maintain preference for large-caps The Russell Midcap index has outperformed large-caps year-to-date driven by strong stock price gains in the recovering consumer sectors (both cyclical and non-cyclical), a pickup in M&A activity, and thestrengthening US dollar. In this report we downgrade mid-caps to Neu-tral from Moderate Overweight. Economic growth momentum is mod-erating and given the myriad of uncertainties, a pickup in M&A activity may take more time to gain traction. We expect corporate manage-ment teams will likely continue to conserve cash rather than aggres-sively bid up potential targets. In fact, we found it noteworthy that, sofar in 2Q earnings reporting season, the market has punished compa-nies that have ramped up spending in order to support revenue growth. In terms of valuation, after posting multiple years of outper-formance, mid-cap valuations appear stretched versus large-caps. We continue to prefer large-caps over both mid and small given their farmore attractive valuation, defensive characteristics, higher emergingmarket exposure and higher-quality balance sheets which should provevaluable in the current market environment. Sector strategy and attractive valuations support Growth overValue Over the last month, the Russell 1000 Growth and Value indices have performed in line. We have often cited that sector influences are a very strong determinant of the relative performance between Growth and Value. Broadly, the sector changes that we are making in this reportimprove the attractiveness for Growth. Our two largest overweightpositions—Technology and Consumer Staples—have far greater repre-sentation in the Growth index, while we have a neutral view on the two largest Value contributors, Energy and Financials. Assessing aggre-gate index level valuations, Growth also is clearly more favorable. Therelative valuation premium that Growth commands over Value (bydefinition) is low relative to history across varying valuation metrics. Reduce Real Estate Investment Trusts (REITs) underweight REITs have been one of the strongest S&P sub-sectors thus far in 2010.We remain skeptical on further outperformance, however, as: 1) valua-tions are near historical peak levels; 2) a large percentage of commer-cial real estate loans mature in the coming years and property ownersmay become forced sellers if they cannot refinance; and 3) industrypricing power will likely remain weak given stubbornly high unem-ployment and vacancy rates. Despite these concerns, we are increasingour allocation to REITs by upgrading the sector from Underweight toModerate Underweight. Admittedly, our long-standing bearish positionon the group has not worked out this year as REITs have benefitted from improved access to capital (somewhat underpinned by strongflows into dedicated REIT mutual funds) and on a relative basis itsgreater domestic exposure (i.e., practically zero exposure to Europe). While we remain concerned about valuation, fundamentals have mod-estly improved, particularly in the multi-family and central businessdistrict properties. Additionally, with strong market price gains unlikely,REITs high dividend (compared to the market dividend yield) is appeal-ing to investors. Jeremy Zirin, CFA, Strategist, UBS FS Inc.

Fig. 19: Favor large-caps Size, style, and REITs recommended allocation, deviation from benchmark

Large-Cap Growth

Large-Cap Value

Mid-Cap

REITs

Small-Cap

+ ++ +++– –– – – n

underweight overweight

–




Fig. 20: Mid-cap valuations appear stretched Average mid-cap Z-score relative to large-cap

(3.0)

(2.0)

(1.0)

85 87 89 91 93 95 97 99 01 03 05 07 09 11

Mid-caps expensive relative to large-caps

0.0

1.0

2.0

3.0Mid-caps cheap relative to large-caps

Note: Z-Score includes an average of: Price to Book, Price to Sales, and P/E on forward EPS

Source: DataStream, Russell Investment Group and UBS WMR, as of 26 July 2010

Fig. 21: REIT valuations remain stretched, but improving US REIT price to forward FFO multiple

0

5

10

15

20

25

93 95 97 99 01 03 05 07 09 11

Source: DataStream, SNL and UBS WMR, as of 28 July 2010.




US fixed income Increase credit exposure

After touching 4.0% in early April, Treasury yields quicklytrended lower. Initially, the catalyst was a flight-to-quality bid triggered by Greece’s sovereign debt woes, and fears of conta-gion to peripheral countries and the European banking system. As these fears surrounding sovereign debt receded, however, anew worry emerged, as investors fretted that the US recoverywas stalling. The 2-year Treasury yield remains stuck near a his-toric low of 0.6% as the short end of the curve remains an-chored by a Fed that remains on hold for an extended period,while the ten-year Treasury hovers near 3% due to weaker USeconomic data and a benign inflation backdrop. Historically,Treasury yields at these levels have been a precursor for futureeconomic weakness (“double dip”) or concerns of deflation.However, we believe that the current level of low yields insteadprovides confirmation that the recovery will be a modest one,marked by low inflation and heightened risk aversion. Not too hot, not too cold In our opinion, the combination of decelerating economic data, coun-tered by respectable news flow from the corporate world and a legisla-tive picture coming into focus offers a supportive backdrop for fixedincome, and more specifically, for overweighting credit sectors overnon-credit sectors. Second quarter earnings reports have continued to demonstrate balance sheet strengthening trends. Although companieshave been cautious on their guidance for future revenue and earnings projections, the fundamental variables that impact creditors such asleverage ratios, capital levels, and funding availability appear more thanadequate to support credit spreads. Finalization of Financial sector re-form legislation has provided much needed clarity, lending to firmingof Financial sector corporate bonds and preferred securities. Reducedvolatility in asset prices has resulted in a stronger bid for High Yield(HY) corporate bonds, while default rate forecasts continue to drop. This comes against an outlook for benchmark Treasury rates that maybe lower for longer, and expectations for little inflation in the near fu-ture. Putting it together, we see the remainder of 2010 offering outperfor-mance of credit sectors due to range-bound Treasury yields and thepotential for modest spread tightening in the investment grade, highyield, and preferred security segments of the market. With price volatil-ity expected to be relatively modest and credit spreads still above long-term averages, we are raising our recommended total allocation to credit sectors (+4%) – maintaining an overweight of Investment Grade(IG) corporates (+2%) and adding increased exposure to HY (+1%) and preferreds (+1%) at the expense of treasuries (-1%) and TIPS (-1%). We believe that accommodative new issue markets, low default rates,and high income levels will be positive attributes for the HY. We arealso more comfortable with preferred securities following the signingof the US financial reform bill and the stress tests that were conductedon European banks. The US bill phases out the regulatory treatment forUS bank trust preferreds, which will likely add technical support to thisportion of the market. At the same time, there were no negative sur-prises among the large European banks that have preferreds out-standing. Preferreds should also fare better in a more benign environ-ment for Treasury yields since they exhibit high duration characteristics.

Fig. 23: US interest rate forecasts, in %

27 July 2010

in 3 months

in 6 months

in 12 months

3-month LIBOR 0.48 0.50 0.75 1.00

2-year Treasury 0.63 1.00 1.25 1.50

5-year Treasury 1.79 2.25 2.50 2.75

10-year Treasury 3.05 3.25 3.50 3.75

30-year Treasury 4.09 4.00 4.25 4.50

Source: Bloomberg, UBS WMR, as of 27 July 2010

Fig. 22: US dollar taxable fixed income (TFI) strategy Tactical deviations from benchmark

Treasuries

TIPS

Agencies

Mortgages

Inv. Grade Corporates

High Yield Corporates

Preferred Securities

Emerg. Market

TFI non-Credit

TFI Credit

+ ++ +++–– –– – – n

underweight overweight Note: Arrows indicate changes adopted in this report.


See the appendix for a detailed asset allocation illustration in the context of a moderate-risk taxable US dollar fixed income portfolio.


Fig. 24: Treasury yields remain anchored by Fed policy, slower growth, and low inflation. Two and ten-year Treasury yields (%)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10

10-Year Treasury Note 2-year Treasury Note Source: Bloomberg, UBS WMR, as of 27 July 2010

Wealth Management Research 10

28 July 20



But where has the yield gone? Although credit spreads remain above-average for IG, HY, and pre-ferred securities, the decline in benchmark rates has resulted in lowerlevels of absolute yields. This trend has been most pronounced for theIG market. For example, the average yield level of the Barclays Capital US Credit Index has declined to 4.08%, which is very close to the low-est historical levels that were last seen in mid-2003 and early 2004.Preferred security yields remain near 7.20% on average, howeverhigher-quality issuers have seen yields dip below 7%. HY bonds aver-age about 8.75%, but are far below the double digit rates of 2009.Overall, we look for more modest levels of returns, but also believe thatthese yield-enhanced credit sectors in fixed income should continue tooffer incremental value relative to government-related sectors such asagencies and mortgages that offer less spread-tightening potential. Pare duration underweight Following WMR’s reassessment of growth prospects in the US andmodified expectations that the Federal Reserve will keep the target fed funds rate unchanged at zero to 25 basis points until June 2011, we revised our interest rate forecasts lower in mid-July. Over the next few quarters, we believe yields are apt to stay range bound at very low lev-els. Although we expect Treasury yields to move higher over a 12-month horizon, we now see a lower trajectory for the rate path for allmaturities. Given these changes to our forecast, we recommend that investors pare back the duration underweight to a moderate under-weight (0.5 year short) from a full underweight (1 year short). From a practical standpoint, this means that investors with new money to in-vest may consider extending the maturity range they consider for pur-chases. Specially, in the Treasury, agency, and corporate bond market,we favor extending maturities to the 4 to 7-year range, a modest ex-tension from our previously recommended range of 3 to 7 years. In themuni market, we favor the 7 to 12-year range. While yields are histori-cally low, very muted inflation and a steep yield curve suggests that investors are being compensated to extend. In addition, investors couldpotentially benefit from rolling down the curve over time. Munis march on despite credit concerns In July, muni bond performance picked up along with the broader fixed income markets. Supported by thin net tax-exempt supply and low USTreasury yields, muni sector returns outpaced Treasuries and edgedahead of the performance seen on investment grade corporate bonds.As shown in Figure 28, taxable Build America Bond (BAB) issuance con-tinues to shift share from the traditional tax-exempt muni market.Flows into muni mutual funds have been positive and consistent asinvestors seek after-tax returns above money market rates and are will-ing to take on some additional risk to meet investment objectives. In terms of relative value, AAA muni-to-Treasury (after-tax) yield ratios are near the lower end of historical ranges on the earliest maturitiesand are at fair-to-cheap valuations on intermediate and longer-dated securities. A rated muni-to-Treasury (after-tax) ratios are at cheap rela-tionships at the 5, 10 and 30-yr maturity points. Compared to corpo-rate bonds (after-tax), muni yields remain expensive for low maturitiesyet have become more attractive at the longer segment of the curve. Anne Briglia, CFA, Strategist, UBS FS Inc. Barry McAlinden, CFA, Strategist, UBS FS Inc. Mike Tagliaferro, CFA, Strategist, UBS FS Inc. Kathleen McNamara, CFA, CFP, Strategist, UBS FS Inc.

Source: MMD Interactive, UBS WMR as of 27 July 2010

Fig. 25: Duration recommendation Duration deviation from benchmark, in years

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.528-Jul Previous month

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.528-Jul Previous month

Source: UBS WMR, as of 28 July 2010

Fig. 26: IG has firmed up in recent weeks US IG Corporate credit spreads, in basis points

0

100

200

300

400

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

500

600

700

800

All IG Corporates Industrial Financials Source: Barclays Capital, UBS WMR, as of 27 July 2010

Fig. 27: Corporate bond yields near 10-year low IG bond index yield to maturity, in %

3

4

5

6

7

00 01 02 03 04 05 06 07 08 09 10

8

9

10

Source: Barclays Capital, UBS WMR, as of 27 July 2010

Fig. 28: Taxable BABs continue to shift share Taxable BAB volume (USD billions) and market share

7.6

2.75.0

3.5

9.56.7

12.5

7.5 7.56.1 6.9

11.8

6.29.0 8.3

3.72

0

5

10

15

20

25

30

35

April July October January April July mtd

BABs (bln's) BABs/total muni% 27%


28 July 2010


Financial Market Performance Chartbook

Fig. A1: Asset Classes Total Return in USD and %

-4.1%

8.3%1.7%

5.9%

1.6%

9.2%

8.2%US Equities

Non-US Dev. Equities

EM Equities

US Fixed Income

0.1%3.9%

0.0%

-0.3%

-7.4% 2.4%

0.5%

-15% -10% -5% 0% 5% 10% 15%

Non-US Fixed Income

Cash (USD)

Commodities

year-to-date quarter-to-date Source: Bloomberg, UBS WMR, as of 27 July 2010

Fig. A3: International Fixed Income Total Return in USD and %


-0.3%3.9%

-6.5%

5.9%0.5%

US Fixed Income

Non-US Fixed Income

9.2%

6.4%

2.9%

1.7%

1.0%

-15% -10% -5% 0% 5% 10% 15%

EMU

UK

Japan

year-to-date quarter-to-date


Fig. A5: US Fixed Income Total Return in USD and %

4.2%

7.2%

5.4%

4.6%

3.2%

4.0%

3.8%

3.4%

5.7%

1.2%

0.7%

1.1%

0.2%

-1.0%

-0.2%

-8% -6% -4% -2% 0% 2% 4% 6% 8%

Treasuries

TIPS

Agencies

IG Corporates

HY Corporates

Preferreds

Mortgages

EM Sovereigns

Municipal bonds

year-to-date

quarter-to-date

Source: Thomson Financial, UBS WMR, as of 27 July 2010

Fig. A2: International Equity Total Return in USD and %

-4.1%9.2%

1.6%

-10.4%13.8%

8.2%US Equity

Non-US Developed

EMU

-2.8%

-1.2%13.5%

1.5%

8.3%1.7%

-15% -10% -5% 0% 5% 10% 15% 20%

UK

Japan

Emerging Markets



Fig. A4: US Equity Total Return in USD and %

0.1%

1.2%8.4%

8.1%

2.4%7.9%

Large Cap Value

Large Cap Growth

Large Cap

6.3%

6.6%8.5%

8.7%

9.8%15.9%

-5% 0% 5% 10% 15% 20%

Mid Cap

Small Cap

REITs



Fig. A6: Currencies Appreciation vs. USD in %

6.0%

1.7%

-1.4%

3.6%

0.8%

2.7%

1.4%

5.7%

2.1%

0.2%

-2.5%

-3.6%

-9.9%5.6%

-15% -10% -5% 0% 5% 10%

EUR

GBP

JPY

CAD

CHF

AUD

BRL

year-to-date quarter-to-date Source: Bloomberg, UBS WMR, as of 27 July 2010


28 July 2010


Economic and Asset Class Chartbook

Fig. A7: Moderate recovery underway US GDP growth and component contributions

-10%

-8%

-6%

-4%

Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010


-2%

0%

2%

4%

6%

8%

Consumption Commercial real estate investmentCapital expenditures Residential investmentInventories Net ExportsGovernment Real GDP (q/q annualized)

q/q annualized UBS WMR

forecast

Source: Thomson Financial, UBS WMR, UBS WMR, as of 28 July 2010.

Fig. A9: Depressed Individual Investor sentiment AAII net bullish sentiment (individual investors)

-60

-40

-20

90 92 94 96 98 00 02 04 06 08 10

0

20

40

60

80

Net bullish sentiment 3-month averageLong-term average Last data point

Individual investors bearish

Individual investors bullish

Source: American Association of Individual Investors, Bloomberg, UBS WMR, as of 28 July 2010.

Fig. A11: Euro bearishness has abated somewhat Net speculative long futures position divided by open interest

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10Yen net long % Open interest EURO net long % Open interestGBP net long % Open interest USD net long % Open interest

Source: CFTC, Bloomberg, UBS WMR, as of 28 July 2010

Fig. A8: Spare capacity prevents pickup in core inflation Capacity utilization and US consumer price index (CPI)

65

67

69

71

73

75

88 91 94 97 00 03 06 09

-3

-2

-1

0

1

77

79

81

83

85

2

3

4

5

6

US Capacity Utilization (in %, LHS)CPI (yoy in %, RHS)Core CPI (yoy in %, RHS)

Source: Thomson Financial, UBS WMR, as of 27 July 2010.

Fig. A10: Typical pattern around market bottoms Average cycle since mid-1960s

90

100

110

120

40

45

50

130

140

150

160

55

60

65

S&P 500 Trailing real earnings

We believe we are here

Business confidence (ISM Manufacturing right scale)

024 20 16 12 4 8 12 16 20 24 28 32- 8 4- 3690

100

110

120

40

45

50

130

140

150

160

55

60

65

S&P 500 Trailing real earnings

We believe we are here

Business confidence (ISM Manufacturing right scale)

024 20 16 12 4 8 12 16 20 24 28 32- 8 4- 36

Source: Thomson Financial, Bloomberg, UBS WMR, as of 28 July 2010.

Fig. A12: Asset Classes and Regional Preferences Tactical Deviations from Benchmark

US Equity

Non-US Developed Eq.

Emerging Market Eq.

US Fixed Income

Non-US Fixed Income

Cash (USD)

Commodities


Source: UBS WMR, as of 28 July 2010. See explanations in the Appendix regard-ing the interpretation of the suggested tactical deviations from benchmark.



US Equity Chartbook

Fig. A13: Our two largest sector overweights, Tech and Consumer Staples, support our pro Growth bias Share of Growth and Value indices, in %

0%

5%

10%

15%

Tech Consumer Staples


20%

25%

30%

35%

Growth Value

Note: Russell 1000 Growth and Value indices

Source: Bloomberg, FactSet, Russell Investment Group and UBS WMR, as of 26 July 2010

Fig. A15: Large-caps are inexpensive versus small-caps Average Z-score large-cap relative to small-cap

(3.5)

(3.0)

(2.5)

85 87 89 91 93 95 97 99 01 03 05 07 09 11

Large-caps expensive relative to small-caps

(2.0)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5Large-caps cheap relative to small-caps

Note: Z-Score includes an average of: Price to Book, Price to Sales, and P/E on forward EPS


Fig. A17: We continue to prefer higher quality, which supports large-caps Percent of companies with investment grade and non-investment grade credit ratings

61%

17%

39%

70%

83%

30%

0%10%20%30%40%50%60%70%80%90%

Large-caps (Russell1000)

Mid-caps (RussellMid-cap)

Small-caps (Russell2000)

Investment Grade Non Investment GradeNote: Includes only companies with credit ratings issued by Standard & Poor’s. Source: Bloomberg, UBS WMR, as of 26 July 2010

Fig. A14: Growth appears cheap relative to Value

Relative discount / premium growth vs. value

0.00.2

P/E Trailing Price to Book Price to Sales P/E Forward(1yr)

0.40.60.81.01.21.41.6

Current

Long-Term Average

Long-Term Average ex Tech Bubble

Note: Long-term average since 1979.


Fig. A16: Current market environment has historically favored large-caps Average performance following historical bear market troughs

6%9%

0%

10%

12 months after markettrough

6 mo. return 1 yearafter market trough

12 mo. return 1 yearafter market trough

52%

26%

14% 11%20%

30%

40%

50%

60%

Large Caps Small-caps

Note: Average performance during nine bear markets 1928-2003, excluding the current cycle. Source: Bloomberg, DataStream and UBS WMR, as of 26 July 2010

Fig. A18: Commercial property prices are moderately improving

Moody’s / REAL Commercial Property Index (CPPI)

75

100

125

150

175

200

01 03 05 07 09 11

Source: Bloomberg and UBS WMR, as of 26 July 2010



US Fixed Income Chartbook

Fig. A19: Treasury yields should rise over the next 12 months Rate development and UBS WMR forecasts (in %)

0.00

1.00

2.00

Jul-00

Jul-01

Jul-02

Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

3.00

4.00

5.00

6.00

7.00


2-year Treasury note 10-year Treasury note WMRForecasts


Fig. A21: Relationship between IG and HY is roughly in line with long-term averages Credit spreads of IG and HY corporate bonds (basis points)

0

500

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

1,000

1,500

2,000

IG HY Difference 10-yr Average

Source: Barclays Capital, UBS WMR, as of 27 July 2010.

Fig. A23: TIPS breakeven inflation rates have declined (in %)

(1.00)

0.00

1.00

2.00

3.00

4.00

Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10

5-year breakeven 10-year breakeven 30-year breakeven Source: Bloomberg, UBS WMR, as of 27 July 2010.

Fig. A20: Yield curve may flatten in H2 2010 but remain steep US Treasury yield curve, 10 minus 2 year yield, and WMR forecast (in basis points)

(50)

0

50

100

Jul-00

Jul-01

Jul-02

Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

150

200

250

300

10s/2s Curve

WMRForecast


Fig. A22: US Corporates still cheap to munis for short maturities Municipal to Corporate (M/C) yield ratio (after tax)

0.4

0.6

0.8

1.0

Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08

1.2

1.4

1.6

Muni to Corporate (M/C) yield ratio 1-10yr (after tax)

Average 1-10yr

Muni to Corporate (M/C) yield ratio 10yr + (after tax)Average 10yr+

Future tax M/C ratio 1-10yr AT (RHS)

Future tax M/C ratio 10yr+ AT (RHS)

Source: MMD Interactive, BofAML, UBS WMR, as of 27 July 2010

Fig. A24: Preferred security yields have declined recently (in %)

6.0

7.0

8.0

9.0

10.0

11.0

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Non-US Preferreds US Financial Trust Preferreds

REIT Preferreds Senior Notes Source: Bloomberg, UBS WMR, as of 27 July 2010

Wealth Ma

nagement Research 28 July 2010



Appendix 1 Detailed asset allocations with non-traditional assets (NTAs) Investor Risk Profile1

Very conservative

Conservative

Moderate conservative

Moderate

Moderate aggressive

Aggressive

Very aggressive

All figures in %

CashBonds

EquitiesNTAs

CashBonds

EquitiesNTAs

CashBonds

EquitiesNTAs

CashBonds

EquitiesNTAs

CashBonds

EquitiesNTAs

CashBonds

EquitiesNTAs

CashBonds

EquitiesNTAs

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Traditional Assets

Equity 0.0 +0.0 0.0 19.0 +0.0 19.0 32.0 +0.0 32.0 44.0 +0.0 44.0 54.0 +0.0 54.0 62.0 +0.0 62.0 71.0 +0.0 71.0

US Equity 0.0 +0.0 0.0 14.0 +0.5 14.5 23.0 +0.0 23.0 32.0 +0.0 32.0 39.0 +0.0 39.0 44.0 +0.0 44.0 52.0 +0.0 52.0

Large Cap Value 0.0 +0.0 0.0 8.0 +0.0 8.0 8.0 +0.5 8.5 11.0 +1.0 12.0 11.0 +1.5 12.5 11.0 +1.5 12.5 13.0 +2.0 15.0

Large Cap Growth 0.0 +0.0 0.0 5.0 +1.0 6.0 8.0 +1.5 9.5 11.0 +2.0 13.0 11.0 +2.5 13.5 11.0 +3.0 14.0 13.0 +4.0 17.0

Mid Cap 0.0 +0.0 0.0 1.0 -0.5 0.5 4.0 +0.0 4.0 5.0 +0.0 5.0 9.0 +0.0 9.0 11.0 +0.0 11.0 13.0 +0.0 13.0

Small Cap 0.0 +0.0 0.0 0.0 +0.0 0.0 2.0 -1.5 0.5 3.0 -2.0 1.0 5.0 -2.5 2.5 7.0 -3.0 4.0 8.0 -4.0 4.0

REITs 0.0 +0.0 0.0 0.0 +0.0 0.0 1.0 -0.5 0.5 2.0 -1.0 1.0 3.0 -1.5 1.5 4.0 -1.5 2.5 5.0 -2.0 3.0

Non-US Equity 0.0 +0.0 0.0 5.0 -0.5 4.5 9.0 +0.0 9.0 12.0 +0.0 12.0 15.0 +0.0 15.0 18.0 +0.0 18.0 19.0 +0.0 19.0

Developed 0.0 +0.0 0.0 5.0 -0.5 4.5 8.0 -1.5 6.5 10.0 -2.0 8.0 12.0 -2.5 9.5 14.0 -3.0 11.0 14.0 -4.0 10.0

Emerging Markets 0.0 +0.0 0.0 0.0 +0.0 0.0 1.0 +1.5 2.5 2.0 +2.0 4.0 3.0 +2.5 5.5 4.0 +3.0 7.0 5.0 +4.0 9.0

Fixed Income 81.0 +0.0 81.0 67.0 +0.0 67.0 51.0 +0.0 51.0 37.0 +0.0 37.0 24.0 +0.0 24.0 11.0 +0.0 11.0 .0 +0.0 .0

US Fixed Income 74.0 +0.0 74.0 59.0 +0.0 59.0 43.0 +0.0 43.0 29.0 +0.0 29.0 18.0 +0.0 18.0 9.0 +0.0 9.0 .0 +0.0 .0

Non-US Fixed Income

7.0 +0.0 7.0 8.0 +0.0 8.0 8.0 +0.0 8.0 8.0 +0.0 8.0 6.0 +0.0 6.0 2.0 +0.0 2.0 .0 +0.0 .0

Cash (USD) 10.0 +0.0 10.0 2.0 +0.0 2.0 2.0 +0.0 2.0 2.0 +0.0 2.0 2.0 +0.0 2.0 2.0 +0.0 2.0 2.0 +0.0 2.0

Non-traditional Assets

9.0 +0.0 9.0 12.0 +0.0 12.0 15.0 +0.0 15.0 17.0 +0.0 17.0 20.0 +0.0 20.0 25.0 +0.0 25.0 27.0 +0.0 27.0

Commodities 2.0 +0.0 2.0 3.0 +0.0 3.0 4.0 +0.0 4.0 5.0 +0.0 5.0 5.0 +0.0 5.0 6.0 +0.0 6.0 7.0 +0.0 7.0

Alternative Investments5

7.0 +0.0 7.0 9.0 +0.0 9.0 11.0 +0.0 11.0 12.0 +0.0 12.0 15.0 +0.0 15.0 19.0 +0.0 19.0 20.0 +0.0 20.0



Wealth Ma

nagement Research 28 July 2010



Appendix 1 Detailed asset allocations without non-traditional assets (NTAs) Investor Risk Profile1

Very conservative

Conservative

Moderate conservative

Moderate

Moderate aggressive

Aggressive

Very aggressive

All figures in %

Cash

Bonds

Equities

Cash

Bonds

Equities

Cash

Bonds

Equities

Cash

Bonds

Equities

CashCashCash

BondsBondsBonds

Equities EquitiesEquities

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Equity 0.0 +0.0 0.0 22.0 +0.0 22.0 37.0 +0.0 37.0 52.0 +0.0 52.0 67.0 +0.0 67.0 83.0 +0.0 83.0 98.0 +0.0 98.0

US Equity 0.0 +0.0 0.0 16.0 +0.5 16.5 26.0 +0.0 26.0 37.0 +0.0 37.0 48.0 +0.0 48.0 59.0 +0.0 59.0 72.0 +0.0 72.0

Large Cap Value 0.0 +0.0 0.0 9.0 +0.0 9.0 9.0 +0.5 9.5 13.0 +1.0 14.0 14.0 +1.5 15.5 15.0 +1.5 16.5 18.0 +2.0 20.0

Large Cap Growth 0.0 +0.0 0.0 6.0 +1.0 7.0 9.0 +1.5 10.5 13.0 +2.0 15.0 14.0 +2.5 16.5 15.0 +3.0 18.0 18.0 +4.0 22.0

Mid Cap 0.0 +0.0 0.0 1.0 -0.5 0.5 4.0 +0.0 4.0 6.0 +0.0 6.0 11.0 +0.0 11.0 15.0 +0.0 15.0 18.0 +0.0 18.0

Small Cap 0.0 +0.0 0.0 0.0 +0.0 0.0 3.0 -1.5 1.5 3.0 -2.0 1.0 6.0 -2.5 3.5 9.0 -3.0 6.0 11.0 -4.0 7.0

REITs 0.0 +0.0 0.0 0.0 +0.0 0.0 1.0 -0.5 0.5 2.0 -1.0 1.0 3.0 -1.5 1.5 5.0 -1.5 3.5 7.0 -2.0 5.0

Non-US Equity 0.0 +0.0 0.0 6.0 -0.5 5.5 11.0 +0.0 11.0 15.0 +0.0 15.0 19.0 +0.0 19.0 24.0 +0.0 24.0 26.0 +0.0 26.0

Developed 0.0 +0.0 0.0 6.0 -0.5 5.5 9.0 -1.5 7.5 13.0 -2.0 11.0 15.0 -2.5 12.5 18.0 -3.0 15.0 20.0 -4.0 16.0

Emerging Markets 0.0 +0.0 0.0 0.0 +0.0 0.0 2.0 +1.5 3.5 2.0 +2.0 4.0 4.0 +2.5 6.5 6.0 +3.0 9.0 6.0 +4.0 10.0

Fixed Income 90.0 +0.0 90.0 76.0 +0.0 76.0 61.0 +0.0 61.0 46.0 +0.0 46.0 31.0 +0.0 31.0 15.0 +0.0 15.0 .0 +0.0 .0

US Fixed Income 82.0 +0.0 82.0 67.0 +0.0 67.0 51.0 +0.0 51.0 36.0 +0.0 36.0 23.0 +0.0 23.0 12.0 +0.0 12.0 .0 +0.0 .0

Non-US Fixed Income

8.0 +0.0 8.0 9.0 +0.0 9.0 10.0 +0.0 10.0 10.0 +0.0 10.0 8.0 +0.0 8.0 3.0 +0.0 3.0 .0 +0.0 .0

Cash (USD) 10.0 +0.0 10.0 2.0 +0.0 2.0 2.0 +0.0 2.0 2.0 +0.0 2.0 2.0 +0.0 2.0 2.0 +0.0 2.0 2.0 +0.0 2.0






Appendix 2 Wealth Management Americas Investment Committee (WMA IC) The WMA IC is the primary decision making body within WM Americas for recommended asset allocations across investor

risk profiles. As explained more fully below, the WMA IC vets the flagship tactical asset allocation recommendations whichappear in this publication, the Investment Strategy Guide (ISG). The WMA IC also reviews and approves (i) inputs relating toWM Americas’ strategic asset allocations, and (ii) other tactical asset allocation recommendations which may be developedfor ultra high net worth and other specific client groups by business areas other than WMRA.

Composition

The WMA IC currently has six voting members, and two non-voting members.

The voting members include: Mike Ryan – Head of Wealth Management Research – Americas (WMRA); Stephen Freedman – WMRA Global Investment Strategist; Jeremy Zirin – WMRA Equities Head; Anne Briglia – WMRA Taxable Fixed Income Head; Tony Roth – Head of Investment Strategies and Wealth Planning, within Wealth Management Advice and Platforms (*) Mihir Bhattacharya – Head of Strategic Projects and Services, Wealth Management Solutions (*) (*) Business areas distinct from WMRA The two non-voting members are employee of UBS Global Asset Management, an affiliate of UBS Financial Services Inc.They are: John Dugenske – Global Fixed Income, Head of US Fixed Income; Andreas Koester – Global Investment Solutions, Head of Asset Allocation and Currency.

Vetting of WMRA flagship TAA recommendations

At least monthly, WMRA presents to the WMA IC for its review a flagship TAA proposal and supporting investment case fora moderate-risk profile investor. In order to be published in the ISG, the flagship TAA must be accepted by the WMA IC and be supported by a majority of the WMRA members. The flagship TAA recommendations across other risk profiles publishedin the ISG are further calculated in accordance with a methodology approved by the WMA IC.




Appendix 3

Other Asset Allocation

US Taxable Fixed Income Allocation, in %

WMR Tactical deviation2

Benchmark allocation1

Previous Current

Current allocation3

Treasuries 12.0 -1.0 -1.0 11.0

TIPS (Treasury inflation-protected securities) 5.0 -1.0 -1.0 4.0

Agencies 22.0 -1.0 -1.0 21.0

Mortgages 20.0 -1.0 -1.0 19.0

Investment grade corporates 22.0 +2.0 +2.0 24.0

High yield corporates 10.0 +0.0 +1.0 11.0

Preferred securities 4.0 +0.0 +1.0 5.0

Emerging Market sovereign bonds in US dollar 5.0 +0.0 +0.0 5.0

Total TFI non-Credit 59.0 -4.0 -4.0 55.0

Total TFI Credit 41.0 +4.0 +4.0 45.0

Source: UBS WMR and Investment Solutions, as of 28 July 2010

Non-US Developed Equity Module, in %



Previous Current

Current allocation3

EMU / Eurozone 27.0 -5.0 -5.0 22.0

UK 19.0 +5.0 +5.0 24.0

Japan 21.0 -5.0 -5.0 16.0

Other 33.0 +5.0 +5.0 38.0

Source: UBS WMR and Investment Solutions, as of 28 July 2010

Non-US Fixed Income Module, in %



Previous Current

Current allocation3

EMU / Eurozone 44.0 -7.5 +0.0 44.0

UK 9.0 +2.5 +0.0 9.0

Japan 32.0 -12.5 -10.0 22.0

Other 15.0 +17.5 +10.0 25.0 Source: UBS WMR and Investment Solutions, as of 28 July 2010

1 The benchmark allocation refers to a moderate risk profile. See “Sources of Benchmark Allocations and Investor Risk Profiles” in the Appendix for an explanation regarding the source of benchmark allocations and their suitability. 2 See "Deviations from Benchmark Allocations" in the Appendix for an explanation regarding the interpretation of the suggested tactical deviations from benchmark. The “current” column refers to the tactical deviation that applies as of the date of this publication. The “previous” column refers to the tactical deviation that was in place at the date of the previous edition of the previous edition of Investment Strategy Guide or the last Investment Strategy Guide Update. 3 The current allocation column is the sum of the benchmark allocation and the WMR tactical deviation columns.




Appendix 4

Equity Industry Group Allocation

US equity industry group allocation (%)


Numeric Symbol S&P 500 Benchmark

allocation1 Previous Current Previous Current

Current allocation3

Consumer Discretionary 10.2 -2.0 -1.0 – – – 9.2

Auto & Components 0.7 +0.0 +0.0 n n 0.7

Consumer Services 1.8 +0.0 +1.0 n + 2.8

Media 3.2 +0.0 +0.0 n n 3.2

Retailing 3.4 -1.0 -1.0 – – 2.4

Consumer, Durables & Apparel 1.1 -1.0 -1.0 – – 0.1

Consumer Staples 11.5 +2.0 +2.0 ++ ++ 13.5

Food, Beverage & Tobacco 6.2 +1.0 +1.0 + + 7.2

Food & Staple Retailing 2.5 +0.0 +0.0 n n 2.5

Household & Personal Products 2.8 +1.0 +1.0 + + 3.8

Energy 10.8 +1.0 +0.0 + n 10.8

Financials 16.4 +0.0 +0.0 n n 16.4

Banks 3.2 +1.0 +1.0 + + 4.2

Diversified Financials 7.7 +0.0 +0.0 n n 7.7

Insurance 4.0 +0.0 +0.0 n n 4.0

Real Estate 1.4 -1.0 -1.0 – – 0.4

Health Care 11.4 -1.0 +0.0 – n 11.4

HC Equipment & Services 3.8 -0.5 +0.0 – n 3.8

Pharmaceuticals & Biotechnology 7.6 -0.5 +0.0 – n 7.6

Industrials 10.6 -1.0 -1.0 – – 9.6

Capital Goods 7.9 -0.5 -0.5 – – 7.4

Commercial Services & Supplies 0.6 +0.0 +0.0 n n 0.6

Transportation 2.0 -0.5 -0.5 – – 1.5

Information Technology 19.0 +1.0 +2.0 + ++ 21.0

Software & Services 8.7 +1.0 +1.0 + + 9.7

Technology Hardware & Equipment 7.6 +0.0 +1.0 n + 8.6

Semiconductors 2.7 +0.0 +0.0 n n 2.7

Materials 3.5 -1.0 -2.0 – – – 1.5

Telecom 3.0 +0.0 -1.0 n – 2.0

Utilities 3.7 +1.0 +1.0 + + 4.7


The benchmark allocation, as well as the tactical deviations, are intended to be applicable to the US equity portion of a portfolio across investor risk profiles.

1 The benchmark allocation is based on S&P 500 weights. 2 See "Deviations from Benchmark Allocations" in the Appendix for an explanation regarding the interpretation of the suggested tactical deviations from benchmark. The “current” column refers to the tactical deviation that applies as of the date of this publication. The “previous” column refers to the tactical deviation that was in place at the date of the previous edition of the Investment Strategy Guide or the last Investment Strategy Guide Update. 3 The current allocation column is the sum of the S&P 500 benchmark allocation and the WMR tactical deviation columns.




Appendix 5 End notes for table labeled detailed asset allocations with non-traditional assets (NTAs) 1 See “Sources of benchmark allocations and investor risk profiles” on next page regarding the source of investor risk profiles. 2 See “Sources of benchmark allocations and investor risk profiles” on next page regarding the source of benchmark allocationsand their suitability. 3 See "Deviations from benchmark allocations" in the Appendix regarding the interpretation of the suggested tactical deviations from benchmark. 4 The current allocation row is the sum of the benchmark allocation and the WMR tactical deviation rows. 5 UBS WMR considers that maintaining the benchmark allocation is appropriate for alternative investments. The recommended tactical deviation is therefore structurally set at 0. See “Sources of benchmark allocations and investor risk profiles” on next page regarding the types of alternative investments and their suitability. End notes for table labeled detailed asset allocations without non-traditional assets (NTAs) 1 See “Sources of benchmark allocations and investor risk profiles” on next page regarding the source of investor risk profiles. 2 See “Sources of benchmark allocations and investor risk profiles” on next page regarding the source of benchmark allocationsand their suitability. 3 See "Deviations from benchmark allocations" in the appendix regarding the interpretation of the suggested tactical deviationsfrom benchmark. 4 The current allocation row is the sum of the benchmark allocation and the WMR tactical deviation rows. Emerging Market Investments Investors should be aware that Emerging Market assets are subject to, amongst others, potential risks linked to currency volatil-ity, abrupt changes in the cost of capital and the economic growth outlook, as well as regulatory and socio-political risk, interest rate risk and higher credit risk. Assets can sometimes be very illiquid and liquidity conditions can abruptly worsen. WMR gener-ally recommends only those securities it believes have been registered under Federal U.S. registration rules (Section 12 of theSecurities Exchange Act of 1934) and individual State registration rules (commonly known as "Blue Sky" laws). Prospective in-vestors should be aware that to the extent permitted under US law, WMR may from time to time recommend bonds that are notregistered under US or State securities laws. These bonds may be issued in jurisdictions where the level of required disclosures tobe made by issuers is not as frequent or complete as that required by US laws. For more background on emerging markets generally, see the WMR Education Notes "Investing in Emerging Markets (Part 1):Equities", 27 August 2007, "Emerging Market Bonds: Understanding Emerging Market Bonds," 12 August 2009 and "Emerging Markets Bonds: Understanding Sovereign Risk," 17 December 2009. 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 decrease the risk that an investor could end up holding bonds on which the sovereign has defaulted. Sub-investment grade bonds are recommended only for clients with a higher risktolerance and who seek to hold higher yielding bonds for shorter periods only. Alternative Investments An investment in alternative investment funds (the "Funds") involves significant risks, including but not limited to, a loss of capi-tal. There can be no assurance that the Funds' respective investment objectives will be achieved or that its investment program will be successful. In particular, limited diversification, the use of leverage, foreign currency fluctuations and the limited liquidityof the respective portfolio securities and other factors can, in certain circumstances, result in or contribute to significant losses tothe Funds. The Funds charge administrative and management fees, which they will earn irrespective of profits, if any.




Appendix 6 Explanations about asset allocations Sources of benchmark allocations and investor risk profiles Benchmark allocations represent the longer-term allocation of assets that is deemed suitable for a particular investor. Except

as described below, the benchmark allocations expressed in this publication have been developed by UBS Investment Solu-tions (IS), a business sector within UBS Wealth Management Americas that develops research-based traditional investments (e.g., managed accounts and mutual fund options) and alternative strategies (e.g., hedge funds, private equity, and real es-tate) offered to UBS clients. The benchmark allocations are provided for illustrative purposes only and were designed by IS for hypothetical US investors with a total return objective under seven different Investor Risk Profiles ranging from very conserva-tive to very aggressive. In general, benchmark allocations will differ among investors according to their individual circum-stances, risk tolerance, return objectives and time horizon. Therefore, the benchmark allocations in this publication may not be suitable for all investors or investment goals and should not be used as the sole basis of any investment decision. As al-ways, please consult your UBS Financial Advisor to see how these weightings should be applied or modified according to your individual profile and investment goals.

The process by which UBS Investment Solutions has derived the benchmark allocations can be described as follows. First, anallocation is made to broad asset classes based on an investor’s risk tolerance and characteristics (such as preference for in-ternational investing). This is accomplished using optimization methods within a mean-variance framework. Based on a pro-prietary set of capital market assumptions, including expected returns, risk, and correlation of different asset classes, combi-nations of the broad asset classes are computed that provide the highest level of expected return for each level of expectedrisk. A qualitative judgmental overlay is then applied to the output of the optimization process to arrive at the benchmark al-location. The capital market assumptions used for the benchmark allocations are developed by UBS Global Asset Manage-ment. UBS Global Asset Management is a subsidiary of UBS AG and an affiliate of UBS FS.

In addition to the benchmark allocations IS derived using the aforementioned process, WMR determined the benchmark allocationby country of Non-US Developed Equity and Non-US Fixed Income in proportion to each country’s market capitalization, and de-termined the benchmark allocation by Sector and Industry Group of US Equity in proportion to each sector’s market capitalization. WMR, in consultation with IS, also determined the benchmark allocation for US dollar taxable fixed income. It was derived from an existing moderate risk taxable fixed income allocation developed by IS, which includes fewer fixed income segments than the benchmark allocation presented here. The additional fixed income segments were taken by WMR from related segments. For ex-ample, TIPS were taken from Treasuries and Preferred Securities from Corporate Bonds. A level of overall risk similar to that of theoriginal IS allocation was retained.

Nontraditional asset classes include alternative investments and commodities. Alternative investments include hedge funds, private equity and managed futures investments. An allocation to alternative investments as illustrated in this report may notbe suitable for all investors. In particular, minimum net worth requirements may apply. For more background, see the WMR Education Note, “Nontraditional assets go mainstream” 12 February 2007. The background for the benchmark allocation at-tributed to commodities can be found in the WMR Education Note, “A pragmatic approach to commodities,” 2 May 2007.

Deviations from benchmark allocation The recommended tactical deviations from the benchmark are provided by WMR. They reflect our short- to medium-term as-

sessment of market opportunities and risks in the respective asset classes and market segments. Positive / zero / negative tactical deviations correspond to an overweight / neutral / underweight stance for each respective asset class and market segment rela-tive to their benchmark allocation. The current allocation is the sum of the benchmark allocation and the tactical deviation.

Note that the regional allocations on the International Equities page are provided on an unhedged basis (i.e., it is assumed that investors carry the underlying currency risk of such investments). Thus, the deviations from the benchmark reflect our views of the underlying equity and bond markets in combination with our assessment of the associated currencies. The twobar charts (“Equity regions” and “Bond regions”) represent the relative attractiveness of countries (including the currency outlook) within a pure equity and pure fixed income portfolio, respectively. In contrast, the detailed asset allocation tables in-tegrate the country preferences within each asset class with the asset class preferences stated earlier in the report. As the tac-tical deviations at the asset class level are attributed to countries in proportion to the countries’ market capitalization, therelative ranking among regions may be altered in the combined view.

Scale for tactical deviation charts

Symbol Description / Definition Symbol Description / Definition Symbol Description / Definition

+ moderate overweight vs. bench-mark

moderate underweight vs. bench-mark

n neutral, i.e., on benchmark

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

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




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