Wealth Management Research

24 June 2011

UBS daily guide Asia

Inflation - the five rules for survival
We have raised our US core inflation forecasts on the back of a stronger-than-expected inflation acceleration since early in the year. We now expect core CPI inflation of 1.9% in 2011 and 2.1% in 2012. Investors should fasten their seatbelts. In various recent publications we have highlighted the comeback of inflation. While here in Asia it is already at elevated levels (though it should ease a bit after the summer), the US seemed more shielded until recently. We had made the argument that since capacity in the US is still underutilized, inflation would be more of an end-2013 theme. Latest data suggest it may yet come a lot earlier. We now expect headline inflation of 2.9% in 2011 and 1.8% in 2012. However, we have advised that exposure to real assets such as equities, commodities and real estate is the answer. In a new report we highlight five properties of stocks that should be sought. It also includes stock recommendations. Specifically, they include exposure to natural hedges such as mining and metals companies and regulated utilities where prices are linked to inflation. Dividend yield is another theme as dividends can rise in line with prices. Inelastic demand such as for food, beverages and other consumer staples can help. Lastly, stocks with pricing power that arises from little competition due to the industry structure tend to benefit. Whether we like it or not, inflation is here to stay, but if portfolios are adjusted it can actually be defeated. Hartmut Issel analyst, UBS AG

Overnight markets
Equity
Dow Jones S&P 500 Nasdaq EuroSTOXX DAX FTSE Nikkei Hang Seng ASX 200

. %change
-0.49 -0.28 0.66 -2.30 -1.77 -1.71 -0.34 -0.46 -0.71

close
12,050.00 1,283.50 2,686.75 2,730.86 7,149.44 5,674.38 9,596.74 21,759.14 4,500.50

ytd %
4.08% 2.06% 1.28% -2.22% 3.40% -3.82% -6.18% -5.54% -5.16%

Bond
UST 10Yr UST 30Yr JGB 10 Yr

. %change
0.62 0.82 0.07

close
101.82 103.52 100.83

YTM
2.910 4.170 1.100

Today's watch list

New reports
s Asia Pacific equities: China outbound tourism- Veni, Vidi, Visa s The debt crisis: An insider's view on the Greek situation s Private equity: Benefiting from improved M&A activity

Currency
EURUSD USDJPY USDGBP USDCHF CADUSD AUDUSD NZDUSD USDSGD

last
1.4253 80.53 0.6247 0.8385 1.0216 1.0527 0.8139 1.2364

high
1.4257 80.57 0.6248 0.8390 1.0217 1.0527 0.8140 1.2365

low
1.4249 80.51 0.6247 0.8384 1.0215 1.0523 0.8138 1.2363

Commodity
WTI Crude Gold Silver

. %change
-3.27 -0.02 -0.07

close
92.29 1,521.15 35.29

high
94.47 1,521.30 35.30

Source: Bloomberg, UBS WMR as of 24 June 2011

This report has been prepared by UBS AG. Please see important disclaimers and disclosures that begin on page 8. Past performance is no indication of future performance. The market prices provided are closing prices on the respective principal stock exchange. This applies to all performance charts and tables in this publication.

UBS daily guide Asia

Economics
Divergence in the German ifo index Given the latest PMI numbers for Germany, the ifo business climate index is likely to be firm as well. The ifo component focusing on the current economic assessment should be strong and has room to be above market expectations. However, the outlook component is likely to be weak. Here we expect a reading below 106 compared to street estimates of 106.3 for June. Thus, we dont expect markets to be cheered by the data release. Later in the day, stronger US durable goods orders should give markets the needed support. We expect durable goods orders to have expanded by almost 3% m/m in May compared to 1.5% m/m envisaged by markets. The increase should be concentrated outside the transportation industry. Dominic Schnider analyst, UBS AG

Rates
Interest rates
Short rates (3m) Current USD EUR JPY GBP CHF AUD SGD NZD HKD 0.25 1.47 0.20 0.83 0.18 4.91 0.44 2.74 0.26 Fcst 12m 0.60 2.25 0.40 1.25 1.25 5.50 0.60 3.25 0.75 Current 2.95 2.91 1.12 3.17 1.66 5.11 3.61 5.00 2.31 Bond yields (10y) Fcst 12m 4.00 3.75 1.60 4.00 2.50 6.00 3.00 6.25 3.50
24 June 2011

Source: Bloomberg, UBS WMR

Today's macro highlights

Events
Time 09:30 10:45 Country Events JP AU BoJ's board member Morimoto speaks in Nagasaki City RBA's Lowe speaks at Banking Luncheon in Adelaide

Source: Bloomberg, UBS WMR; HK/SG time

Indicators Expected Today

Time Country Indicator 15:00 20:30 20:30 SP US US Industrial Production % y/y Gross Domestic Product Durable Goods Orders M/Q UBS May 1Q May n.a. 2.1 1.5 Cons. -9.3 1.9 1.5 Prev. -9.5 1.8 -3.6
24 June 2011

Source: Bloomberg, UBS WMR; HK/SG time M = Month, Q = Quarter

Wealth Management Research 24 June 2011

UBS daily guide Asia

Currencies & Commodities

New FX forecast Currencies bridge the soft patch What follows the soft patch a dip or a rebound? Our new currency forecast is based on our assumption that the future is brighter than the past quarter, for some countries and regions brighter than others. Economies and equities are set for a rebound. Nevertheless, financial markets continue struggling to decide what is more dangerous, the euro or the US dollar. Assessing the situation, we moderated our call for short-term US dollar strength by setting the three-month forecast at 1.39 rather than 1.35. However we uphold our view of more USD weakness further down the road, and kept the twelve-month forecast at 1.48. The change of view in EURUSD implies a series of other changes. Most prominently we had to adjust the path of Swiss franc depreciation, as the Swiss franc's safe haven function appears to be even more important than we thought and the Swiss economy so far coped much better with the currency strength than we had expected. News highlights Forex News: Currency markets explore risk aversion trades On Wednesday currency markets went in line with equity markets and went deeply into risk-aversion trades. Swiss franc soared and the USD also rose solidly - apparently due to the end of the quant easing in the US. The coming days remain critical. Investors still worry about the soft US data and the European debt issues. Thomas Flury, strategist Forex News: EURUSD forecast change We change our forecast for EURUSD in three months to 1.39 (previously 1.35), in six months to 1.43 (1.38) and keep the twelve months forecast at 1.48. The long-term view remains negative for the US dollar, as the ECB remains more dedicated to tighten monetary conditions than the Fed. Short-term, however, the end of quant easing will support the USD. The demand for the dollar is, however, much weaker than we have hoped for when we changed the forecast last time in April. Thomas Flury, strategist Forex News: GBP forecast change UK macro data continues to be mixed, but we believe in a recovery in Q3 an Q4, after the weak second quarter. Consequently we have changed our EURGBP forecasts to 0.87 (previously 0.84) in three months, 0.86 (0.84) in six months and 0.85 (0.86) in 12 months. GBPUSD stay unchanged in 3 months, up to 1.66 (1.65) in 6 months and up to 1.75 (1.72) in 12 months. GBPCHF is revised down due to the strong franc to 1.39 (1.56) in 3 months, 1.45 (1.59) in 6 months and 1.54 (1.60) in 12 months. Constantin Bolz, analyst Forex News: CHF forecast change We change our forecast for EURCHF in three months to 1.21 (previously 1.32), in six months to 1.25 (1.33) and in twelve months to 1.30 (1.38). The USDCHF forecast changes to 0.87 (0.98) in three months, to 0.87 (0.93) in six months and to 0.88 (0.93) in twelve months. The Swiss franc should fall of current highs, which are marked by extreme risk aversion, as soon as the economic recovery gains pace again and the ECB continues to hike interest rates. Thomas Flury, strategist Thomas Flury strategist, UBS AG

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UBS daily guide Asia

Forex News: AUDUSD forecast change We revise our AUDUSD forecast to 1.03 (previously 1.00) in three months, 1.06 (1.00) in six months and 1.08 (1.00) in 12 months. The AUD is prone to downside risks in the short term amid global growth uncertainties, driven by fears of Greek debt default, China monetary tightening and downturn in global PMI indicators. We see AUDUSD regaining its uptrend in the longer term, given our view of global economic recovery as well as sustained growth in China, being Australia's largest trade partner. Teck Leng Tan, CFA, strategist Forex News: NZDUSD forecast change We revise our NZDUSD forecast to 0.79 (previously 0.74) in three months, 0.80 (0.74) in six months and to 0.82 (0.75) in 12 months. Global growth uncertainties pose downside risks to the NZD in the short term, given its growth-sensitive profile. Longer-term, the NZD should remain close to its multi-year high levels against the USD, attributing to strong global consumption demand for its soft-commodity exports, as well as an ongoing post-earthquake economic recovery. Teck Leng Tan, CFA, strategist FX heat map
Currency Pair Actual Forecast Technical Indications 3m 6m Bias 2. Support EURUSD 1.4166 1.39 1.43 bullish 1.4158 USDJPY 80.4300 82.00 85.00 neutral 76.2500 GBPUSD 1.5983 1.60 1.66 neutral 1.5297 AUDUSD 1.0482 1.03 1.06 bullish 0.9706 NZDUSD 0.8110 0.79 0.80 neutral 0.7118 USDCNY 6.4680 6.45 6.35 N/A na USDTWD 28.93 29 28 N/A na USDKRW 1076.85 1080 1060 N/A na USDSGD 1.2388 1.23 1.22 N/A na USDMYR 3.0320 3.00 2.95 N/A na USDTHB 30.6350 30.00 30.00 N/A na USDINR 44.8700 44.00 43.50 N/A na Date & Time / 23.06.2011 / 23:40:52 / HKT Implied Volatility Volatility Comment Comment 2. Resistance 3m 6m 1.5144 13.27 13.42 Volatility is high 87.9500 9.75 10.75 in relation to last 12 1.7041 10.05 10.50 months. This favors 1.1230 13.00 13.70 structured products with 0.8214 13.45 14.15 short option positions or na 2.00 2.60 selling options. na 6.55 7.00 Volatility is low na 10.30 11.45 in relation to last 12 na 6.20 6.60 months. This favors na 6.90 7.40 structured products with na 3.30 3.60 long option positions or na 6.95 8.15 buying options. Source: THOMSON REUTERS; UBS WMR

1. Support 1.4282 80.2000 1.5937 1.0256 0.7620 na na na na na na na

1. Resistance 1.4940 85.9300 1.6747 1.1012 0.8122 na na na na na na na

Wealth Management Research 24 June 2011

UBS daily guide Asia

Equities & Corporate Bonds

Asian Equity Market Comment Asian markets traded mixed on Thursday, but China rebounded. On the major news across the Atlantic, the FOMC meeting confirmed that policy makers will have their hands tied as they maintained their "extended period" stance. The Fed highlighted that the slower pace of the recovery "in part" reflects factors that are likely to be temporary, like higher commodity prices. The term "in part" suggests that the Fed may acknowledge more persistent and structural elements behind the current soft patch. They suggested that inflation is likely to moderate but to levels somewhat higher than previous forecasts. As we expected, there were no obvious signals that QE3 is imminent. Emerging market equities have been highly correlated with global equities, triggered by a series of disappointing US macro economic releases. We favor Asia among emerging markets as the road ahead seems less bumpy on inflation front coupled with attractive valuations. News highlights Asia Pacific equities: China outbound tourism- Veni, Vidi, Visa
s Starting off a low base, there are strong growth opportunities for

Sundeep Gantori CFA, analyst, UBS AG

Asia stock markets

Equity
China A Share Hang Seng CE Hang Seng Sensex Jakarta Composite Kospi KLCI PSEi Taiwan weighted Thailand SET Strait Time Index Vietnam Index

. %change
1.46 -0.68 -0.46 1.01 0.05 -0.39 -0.27 -0.10 -0.62 -0.95 0.06 -1.11

close
2,816.15 12,066.52 21,759.14 17,727.49 3,823.65 2,055.86 1,563.19 4,241.14 8,567.28 8,288.97 3,044.72 434.75

ytd %
-4.22% -4.93% -5.54% -13.56% 3.24% 0.24% 2.92% 0.95% -4.52% -0.55% -4.56% -10.30%

China's outbound tourism industry due to multiple catalysts.

s While we expect Hong Kong and Macau's leading position to remain

Source: Bloomberg, UBS WMR as of 24 June 2011

unchallenged, we see strong near-term growth opportunities for other destinations in Asia like Taiwan and Singapore. Longer-term, with rising income levels, we see an increasing trend of "long-haul" trips to Europe and the Americas.
s Key beneficiaries from these positive trends include companies with

industry-leading positions and strong brand value in the tourism and luxury goods industries. Sundeep Gantori, CFA, analyst The debt crisis: An insider's view on the Greek situation
s The Greek debt crisis is everything but resolved, and the concern of

the financial markets is increasing constantly. For many, the question is no longer if there will be a restructuring, but rather when.
s Professor Yanis Varoufakis is one of the leading Greek experts on the

economic and financial situation of the country. The former adviser to Prime Minister Papandreou has a plan for how to resolve not only the Greek debt crisis, but the euro crisis altogether.
s WMR interviewed Professor Yanis Varoufakis of the University of

Athens to learn more about his ideas. We publish the interview in full so investors can get a picture of Mr. Varoufakis' proposal and also an insight into how the crisis affects day-to-day life in Greece. We point out that the opinions expressed by Professor Varoufakis are solely his own and do not correspond to the position of UBS. Pierre Weill, economist

Wealth Management Research 24 June 2011

UBS daily guide Asia

Private equity: Benefiting from improved M&A activity

s Recent months have seen several exits of private equity backed

companies to corporate buyers across several industries.

s Prominent transactions include the sale of Nycomed to Takeda, Jimmy

Choo to Labelux or Skype to Microsoft.

s Investors with an existing allocation to private equity have the potential

to benefit from increased distribution activity in coming months. We also expect private equity investment activity to increase further in line with continued M&A activity.
s Secondary funds offer an alternative route for investors without an

existing private equity allocation to get access to a mature portfolio and enjoy an interesting cash flow profile. Stefan Brgger, strategist

Wealth Management Research 24 June 2011

UBS daily guide Asia

Last rating changes

Company
Mosaic 23/06/2011 China Construction Bank 23/06/2011 Bank of China 23/06/2011 ICBC 23/06/2011 China Highspeed Trans. 23/06/2011 Formosa Plastics 23/06/2011 Formosa Chemicals & Fibre 23/06/2011 Teva Pharmaceuticals ADR 23/06/2011 Healthcare
Positive competitive newsflow adds to nearing uncertainty about a potential generic threat to the company's lead product. Despite the recent weak stock price we remove the name from our Equity Preference List as we find better value elsewhere in the sector.

EPL Name
Materials

Old

New
Most Preferred

Comment
We think Mosaic trades at an unjustified discount to global fertilizer peers. The balance sheet is very strong, in our view.

Hong Kong High Yielders

Most Preferred

Removed

CCB is removed from HK High Yield EPL. The stock has gone ex-dividend early this month. In the short term we believe growing concerns over the China bank system's exposure to LGFV debt is creating a sector overhang. The stock remains MP on China, GEM, Pricing Power and AXJ lists. Bank of China is removed from Best of Asia high yield EPL. The stock has gone ex-dividend early this month. In the short term we believe growing concerns over the China bank system's exposure to LGFV debt is creating a sector overhang. The stock remains MP on China and GEM EPLs. ICBC is removed from our Best of Asia high yield EPL. The stock has gone ex-dividend early this month. In the short term we believe growing concerns over the China bank system's exposure to LGFV debt is creating a sector overhang. We discontinue our coverage and remove our rating. We are imposing our -25% stop loss and cutting our losses on China High Speed Trans. Consensus earnings continue to be revised down on falling ASPs and weak wind turbine demand. This appears to have triggered a stock de-rating. We currently have no active view on this company and remove our rating. Given our expectations of slowing industry demand in 2H 2011, we see near-term headwinds for Formosa Plastics. Hence, we remove Formosa Plastics from Taiwan list.

Best of Asian High Yielders

Most Preferred

Removed

Best of Asian High Yielders

Most Preferred

Removed

2010 losers to be 2011 winners

Most Preferred

Removed

Taiwan

Most Preferred

Removed

Taiwan

Most Preferred

Removed

Given our expectations of slowing industry demand in 2H 2011, we see near-term headwinds for Formosa Chem. Hence, we remove Formosa Chem from Taiwan list.

Most Preferred

Removed

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UBS daily guide Asia

Appendix
Disclosures (24 June 2011) Bank of China 1, 2, 3, 7, China Construction Bank 2, 3, 4, 6, 8; China Highspeed Trans. 3, 5, ICBC 1, 2, 3, 6, 8; Mosaic 1, 3, 6, 8; Teva Pharmaceuticals ADR 3, 1. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 2. UBS Securities (Hong Kong) Limited is a market maker in the HK-listed securities of this company. 3. UBS Securities LLC makes a market in the securities and/or ADRs of this company. 4. The equity analyst covering this company, a member of his or her team, or one of their household members has a long common stock position in this company. 5. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company's common equity securities as of last month's end (or the prior month's end if this report is dated less than 10 days after the most recent month's end). 6. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. 7. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month's end (or the prior month's end if this report is dated less than 10 working days after the most recent month's end). 8. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months. Stock selection system: Analysts provide three equity selections (Most Preferred, Neutral View, Least Preferred). Equity preference: Most preferred: Taking into consideration the stock's rating as well as other factors relevant for portfolio management (e.g. risk, diversification), analysts expect the stock to contribute positively to the overall performance of the relevant Equity Preference List (EPL) in the next 12 months, i.e. to outperform versus the thematic benchmark. Neutral view: Analysts expect the stock to neither contribute positively nor negatively to the performance of the relevant EPL, i.e. to perform in line with the thematic benchmark in the next 12 months. Least preferred: Taking into consideration the stock's rating as well as other factors relevant for portfolio management (e.g. risk, diversification), analysts expect the stock to contribute positively to the relevant EPL in the next 12 months, i.e. to underperform versus the thematic benchmark, which results in a positive contribution to the EPL. Suspended Issuing an analyst's research on a company can be restricted due to legal, regulatory, contractual or best business practice obligations, which are normally caused by UBS Investment Banks participation in an investment banking transaction involving the company concerned. Current UBS WMR global rating distribution (as of last month-end) Buy Neutral Sell Suspended Discontinued 51.44% 31.47% 7.02% 2.09% 7.98% (42.68%*) (44.06%*) (20.97%*) (48.65%*) (26.24%*) . . . . . . . . . . . . . . .

*Percentage of companies within this rating for which investment banking services were provided by UBS AG or UBS Securities LLC or its affiliates within the past 12 months.

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UBS daily guide Asia

Appendix
Disclaimer
Wealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affiliate thereof. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS AG, its subsidiaries and affiliates). All information and opinions as well as any prices indicated are current as of the date of this report, and are subject to change without notice. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. Opinions expressed herein may differ or be contrary to those expressed by other business areas or divisions of UBS, its subsidiaries and affiliates, as a result of using different assumptions and/or criteria. At any time UBS and other companies in the UBS group (or its employees) may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to the issuer of relevant securities or to a company connected with an issuer. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. 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UBS daily guide Asia

Appendix
Jersey Financial Services Commission for the conduct of banking, funds and investment business. Luxembourg: This publication is not intended to constitute a public offer under Luxembourg law, but might be made available for information purposes to clients of UBS (Luxembourg) S.A., a regulated bank under the supervision of the "Commission de Surveillance du Secteur Financier" (CSSF), to which this publication has not been submitted for approval. Mexico: This document has been distributed by UBS Asesores Mxico, S.A. de C.V., a company which is not subject to supervision by the National Banking and Securities Commission of Mexico and is not part of UBS Grupo Financiero, S.A. de C.V. or of any other Mexican financial group and whose obligations are not guaranteed by any third party. UBS Asesores Mxico, S.A. de C.V. does not guarantee any yield whatsoever. Singapore: Please contact UBS AG Singapore branch, an exempt financial adviser under the Singapore Financial Advisers Act (Cap. 110) and a wholesale bank licensed under the Singapore Banking Act (Cap. 19) regulated by the Monetary Authority of Singapore, in respect of any matters arising from, or in connection with, the analysis or report. Spain: This publication is distributed to clients of UBS Bank, S.A. by UBS Bank, S.A., a bank registered with the Bank of Spain. Turkey: No information in this document is provided for the purpose of offering, marketing and sale by any means of any capital market instruments and services in the Republic of Turkey. Therefore, this document may not be considered as an offer made or to be made to residents of the Republic of Turkey in the Republic of Turkey. UBS AG is not licensed by the Turkish Capital Market Board (the CMB) under the provisions of the Capital Market Law (Law No. 2499). Accordingly neither this document nor any other offering material related to the instruments/services may be utilized in connection with providing any capital market services to persons within the Republic of Turkey without the prior approval of the CMB. However, according to article 15 (d) (ii) of the Decree No. 32 there is no restriction on the purchase or sale of the instruments by residents of the Republic of Turkey. UAE: This research report is not intended to constitute an offer, sale or delivery of shares or other securities under the laws of the United Arab Emirates (UAE). The contents of this report have not been and will not be approved by any authority in the United Arab Emirates including the UAE Central Bank or Dubai Financial Authorities, the Emirates Securities and Commodities Authority, the Dubai Financial Market, the Abu Dhabi Securities market or any other UAE exchange. UK: Approved by UBS AG, authorized and regulated in the UK by the Financial Services Authority. A member of the London Stock Exchange. This publication is distributed to private clients of UBS London in the UK. Where products or services are provided from outside the UK, they will not be covered by the UK regulatory regime or the Financial Services Compensation Scheme. USA: This document is not intended for distribution into the US and / or to US persons. UBS Securities LLC is a subsidiary of UBS AG and an affiliate of UBS Financial Services Inc., UBS Financial Services Inc. is a subsidiary of UBS AG.Version as per January 2011. UBS 2011. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

Wealth Management Research 24 June 2011

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