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UBS investor’s guideWealth Management Research 11 January 2008 Asia

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Focus Currencies change their tune

AlsoStocks stumble out of the gate

Bonds with a hangover, too

UBS investor’s guide 11 January 2008 3

Contents Editorial

This report has been prepared by UBS AG and UBS Financial Services Inc. UBS Financial Services Inc. is a subsidiaryof UBS AG.

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11 January 2008

Editorial 3Focus 4Economy: Markets 8Economy: Calendar 10Economy: Forecasts 11Equities: Strategy 12Equity markets 14Equity funds 22Bonds-Strategy 24Bonds: Recommendations 26Bond markets 28Portfolio principles 31Bond funds 32Foreign exchange: strategy 33Foreign exchange 34Real estate 36Commodities 37Emerging markets 38Recommendations 40Readers’ questions 43Overview of investment policy 44Explanations 45Important disclosures 46Publication data 47

A passer-by on thestreets of Tokyostops to check outthe latest exchangerates. To learn more about thebackground to this

year’s currency market trends, see our Focus article on page 4. Photo: Katsumi Kasahara /AP

You will find a comprehensive glossary of technical terms on the internet sitewww.ubs.com/1/e/about/bterms.html

If you require further information on the instrumentsor issuers mentioned in this publication, or you requiregeneral information on UBS Wealth Management Research including research policies and statistics regarding past recommendations, please contact either your Client Advisor or the mailbox<[email protected]> giving your country ofresidence.Please see important disclaimer and disclosuresin the “Important Disclosures” section.

UBS Financial Services Inc. analysts did not provide anycontent relating to equity or debt securities, or issuersof equity or debt securities, contained in this report.

Andreas Höfert

Dear Readers

Stock markets began 2008 just about aspoorly as they ended 2007. The Dow Jonestumbled more than 5% in the first five trad-ing days of the year, the second-worst startto the year since the index began trackingstocks in 1886. Does this augur a bad yearfor equities? Looking at the years in whichthe Dow got off to a similarly bad start –seven years in which the Dow fell by morethan 2.5% in the first five trading days –one sees that the index rose by an averageof around 8% by the end of the year. Whilethis observation should not be used as aserious basis for investment decisions, itdoes show that pithy statements such as“January is a harbinger of the rest of theyear” should be taken with a grain of salt.In his equity strategy article, Mark Andersenprovides fundamental reasons why weshould not write off equities and which sec-tors we should favor.

Stumbling stock markets have overshad-owed all other markets, especially the cur-rency market, where there have been someinteresting developments of late. Despitethe widespread opinion that the dollarwould continue its slide, it appears to havebottomed out against the euro, while thepound has lost more than 6% of its valueagainst the dollar and the euro in the pastmonth. Moreover, the yen still appears to beon an upward trajectory and even the Swissfranc is no longer as weak as it once was.The previous explanation for the exchangerates (i.e. carry trades) no longer appears tohold water. In his focus article, our currencyexpert Tom Flury analyzes whether this istrue and looks at what the future holds forthe dollar, the euro, the yen and other cur-rencies.

There has been a lot of talk lately aboutAsia as an entity. But this vast regionincludes a number of very different coun-tries, from very poor nations such asBangladesh to superpowers such as Chinaand India to highly developed cities such asSingapore and Hong Kong. Investors inter-ested in Asia often think of equities. But inher article on emerging economies, Alice Podiscusses Asian bonds and brings some clar-ity to the diversity of countries in the region.

UBS investor’s guide 11 January 2008 54 UBS investor’s guide 11 January 2008

Focus Focus

GBP: the beginning of a correction2.2

1.6

1.4

1.2

1.8

2.0

Source: Thomson Financial, UBS WMR

82 84 88 9286 90 94 96 98 00 02 04 06 08

GBPUSD

?

?

PPP GBPUSD

Historically strong corrections of overvalued GBPUSD

EURCHF: widest gap recorded2.4

1.8

1.6

2.0

2.2


82 84 88 9286 90 94 96 98 00 02 04 06 08

EURCHFPPP EURCHF

Widest Gap since 1982

EURJPY: need for correction320

200

120

160

240

280


82 84 88 9286 90 94 96 98 00 02 04 06 08

EURJPYPPP EURJPY

Since 2000 the trend of PPP decreases (low inflation in Japan) while the exchange rate goes up (low interest rates in Japan). Strong need for correction now!

023

002

021

061

042

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28 48 88 2968 09 49 69 89 00

20 40 60 80

USD: long-term undervaluation


EURUSDPPP EURUSD

Long-term USD undervaluationLong-term USD undervaluation expected1st twin deficit in Reagan

administration 2nd twin deficit in Bush administration

1.6

1.2

1.0

0.8

1.4

82 84 88 9286 90 94 96 98 00 02 04 06 08

PPP: Purchasing power parity

Currency markets change their tune

The currency markets face major challengesin 2008. Last year’s trends are graduallywaning and being replaced by new tenden-cies. The franc, for example, weakened tosuch an extent against the euro last yearthat a sharp correction is called for. Themarket’s positioning with regard to the USdollar is also so negative that a recovery canbe expected, at least temporarily. In theeurozone, meanwhile, the negative conse-quences of the strong euro are slowly feed-ing through, which represents an argumentfor a reversal in the euro’s appreciation. Weare also somewhat less enthusiastic for thisyear regarding the typical carry currencies,i.e. the Brazilian real (BRL), South Africanrand (ZAR), and the new Turkish lira (TRY).These appreciated so much in 2007 that asideways trend now looks more likely. Over-all, we expect to see heightened uncer-

tainty on the currency markets and thus atrend toward safe investments, which willtend to boost the USD, CHF, and JPY rela-tive to the carry currencies.

Risk reduction also ahead for currenciesMoney has been made on the currencymarkets in recent years through systematicrisk-taking in the form of carry trades, i.e.taking out loans in low-interest currenciesto invest in high-interest ones. We think thistrend will come to an end.

The US mortgage crisis shows veryclearly that risks can lead to losses as wellas gains. This has been obvious on thecredit and stock markets for severalmonths now. The currency markets, on theother hand, have thus far remained largelyuntouched by the increase in risk aversion.

In fact, the US Federal Reserve’s rate cutsin the second half of 2007 served to givecarry trades a renewed lift. According toour estimates, there are still a lot of out-standing loans in francs and yen thatcould be endangered by the turmoil onthe financial markets. This could wellcause these two low-yielding currenciesto appreciate abruptly. We therefore fore-cast that the franc will appreciate versusthe euro to CHF 1.56 by the end of theyear. This would make the franc muchstronger than it is now, but it would stillnot be in equilibrium, since we put the purchasing power parity rate atEURCHF 1.46.

While the reduction in risk will help thefranc, it will also be good news for all othercurrencies. It should strengthen the US dol-lar temporarily. The key word here is repa-triation, meaning the liquidation of foreign-currency positions in favor of the domesticcurrency. Many carry trades have beenentered into from the USD zone thatinvolve high-interest emerging marketssuch as South Africa, Brazil or Turkey, anda reduction in these trades will naturally bepositive for the dollar. Like the franc, the UScurrency will take on the role of a safe

haven in turbulent times. Indeed, thegreenback has not only weaknesses, but italso has some attractive aspects, includingits high liquidity, which is a boon in timesof turmoil.

Swiss franc a safe havenHave low interest rates destroyed thefranc’s appeal? This question was asked alot in 2007. In view of the excellent state ofthe Swiss economy, the franc’s slide againstthe euro was little short of astonishing.What has happened to its traditional roleas a safe haven? These question marks overthe franc had us puzzling last year, but wenow think we have an answer – one thatwould be good news for the Swiss cur-rency.

Our hypothesis is that the franc never ac-tually lost its safe haven status, but that itsattractions in this respect were overshad-owed by carry trades. But carry trades areslowly losing their appeal. They are risky be-cause they can result in hefty losses if thefranc or yen move higher. Until recently,this risk was more or less ignored – after all,the financial markets were doing so well ingeneral that risks were being sought out asa means of improving returns in all asset

The central element of our currency forecasts for 2008 is a temporary apprecia-tion of the US dollar versus the euro, pound, Swiss franc, and other G7 curren-cies. At the same time, we also expect the franc and yen to recover against theeuro and pound. The rebound in these low-yielding currencies – an upturn basedon fundamentals – is likely to last longer than the short-lived easing of the situation for the embattled dollar.


Focus Focus

classes. The currency trends, with the yenand franc falling steadily, were additionallyconducive to such risky credit positions. Asinvestors become more risk-averse, one ofthe main prerequisites for carry trades willprobably begin to falter, which may giverise to a marked trend reversal.

No USD rally in coming yearsThe USD appreciation we predict for 2008will bring the Swiss franc exchange rateback to 1.20 and push EURUSD to 1.30.Even at this level, the dollar will still lookweak against the euro. The equilibrium levelis about USD 1.18 per EUR, but it seemsunlikely that this level will be reached dur-ing the next few years. The US’s deficitfinancing has led to a huge increase in USDinvestments outside the United States.USD-heavy portfolios will exploit phases ofstrength in the dollar to diversify into EURinvestments. Our conclusion as regards thegreenback is thus that it is currently sobeleaguered that a temporary rebound isoverdue, but it is set to remain under pres-sure from a structural perspective for a longtime to come.

Strong euro poses threat to competitivenessThe opposite is true for the euro, the sec-ond most important currency on foreignexchange markets. Strong fundamentalfactors such as controlled governmentdebt, the European Central Bank’s clear pol-icy, and the economic upswing haveprompted USD-weary investors seeking liq-uid currencies to opt for the euro in droves.The euro’s appreciation relative to the USdollar and the currencies pegged to it hasnow reached an extent that has Europeancompanies very worried. The damage it is

doing to their competitiveness calls for acorrective downturn. A temporarily strongUSD will provide some relief in 2008. Overthe medium term, however, the Chineserenminbi and other Asian currencies, as wellas the Russian ruble or the currencies of theoil-producing Gulf states, will also need tostrengthen if the eurozone’s competitive-ness is to be restored.

Beware the pound!The British pound has profited immensely inrecent years. Stable global financial mar-kets helped the UK economy to performwell. Rising house prices caused a positivewealth effect for many households. TheBank of England thus kept interest rateshigh, generating further confidence in theGBP. All of this has changed dramatically oflate. The Bank of England has ushered in acycle of rate cuts that, in our view, is set tocontinue and will weigh heavily on the GBP.

Selective approach to emerging-marketcurrenciesDealing with emerging-market currenciesis unlikely to be as straightforward this yearas it has been in the past two years. Invest-ments in Brazil, Asian countries, SouthAfrica, and Turkey paid off handsomely in2007. There are of course good fundamen-tal reasons for this. Globalization is helpingthese countries to develop at a steady pace.The countries of the South and East aregradually approaching the standards ofwestern industrialized nations. We there-fore see good support over the longer termfor currencies in the BRIC countries (Brazil,Russia, India, and China) as well as a wholeseries of emerging markets whose curren-cies are less popular on the foreignexchange markets, such as India, Indonesia,

and the Philippines. The problem at present,however, is that high demand for suchinvestments to date means that the per-formance outlook for 2008 is rather mixed.From a medium-term viewpoint, we favorcountries with good financing conditions.These include Brazil, China, and Russia.Nevertheless, Chinese and Russian currencyinvestments are likely to disappoint some-what in 2008. In contrast to Brazil, money-market rates in these two countries are verylow. We are also cautious with regard tocountries that have relatively high current-account deficits, such as South Africa andTurkey. Since we expect investors to wantto reduce their risk levels this year, we thinkthese two countries will be susceptible tothe negative effects of risk aversion.

2008 a difficult year for currenciesThis year therefore promises not to be aneasy one for currency markets. While themarkets face the challenge of coolinggrowth, an even greater threat comes fromthe excessive build-up of carry trades andthe massive undervaluation of the US dol-lar and low-yielding currencies like the francand yen. It is by no means certain that thecorrections expected on the currency mar-kets will follow familiar patterns. [email protected], UBS AG


Economy: Markets

JapanAsia

Economy: Markets

EurozoneUS

Losing a bit of steam25

15

0

–10

5

20

10

–5

–15

–20Source: CEIC, Bloomberg, UBS

2000 2002 2004 20062001 2003 2005 2007

GDPExternal DemandDomestic DemandChange in stocks; Delta

change year-on-year, Singapore real GDP growth with main components

Singapore: weakening growthSingapore’s real GDP growth dropped to 6%year-on-year in the fourth quarter, downfrom 9% in the third. Furthermore, the PMIfell noticeably in December and, at 51, isnow close to the level marking the thresholdbetween contraction and expansion. Despitethe stellar performance of the overall econ-omy in 2007, Singapore’s industry witnesseda sharp slowdown in the latter half of theyear on the back of very sluggish pharma-ceuticals and electronics production. In Sin-gapore, a slowdown in industrial productionis usually followed by export deceleration,supporting our case for significantly weakergrowth in 2008. On the other hand, stimu-lus is coming from the monetary side as 3-month Sibor interest rates have droppedsharply. While this was partly due to therecent decrease in global rates, abundant liq-uidity and market expectations for strongerSGD appreciation have likely played a role aswell. We expect Singapore‘s GDP growth toslow to 4.9% in 2008 on the back of a neg-ative contribution from trade, while domes-tic demand should remain [email protected], UBS AG

Inflation has turned positive0.6

0.2

–0.4

–0.8

–0.2

0.4

0

–0.6

–1.0Source: Bloomberg

Nov 99 Nov 00 Nov 02 Nov 04 Nov 06Nov 01 Nov 03 Nov 05 Nov 07

CPI excl. fresh foodCPI excl. food & energy

% y/y

Inflation not a welcome signThe core inflation rate, which excludes freshfood prices but includes energy, rose to0.4% in November. This is the highest ratesince the consumption tax was raised in1997. A year ago, this would have beenwelcomed as a positive sign that Japan wasemerging from deflation. Back then, theBank of Japan was expected to use risinginflation as a reason to justify further ratehikes. However, under current circum-stances, higher prices are bad news for theeconomy. Domestic demand actuallyshrank in the second and third quarters of2007, and there are few signs of a strongrebound in the fourth quarter. Higherenergy and food prices are damaging con-sumer sentiment and reducing real house-hold incomes. Businesses are also feelingthe pain as they try to maintain prices in theface of rising production costs. Rather thanrate hikes, some economists have startedtalking about the possibility of rate cutsshould conditions deteriorate [email protected], UBS AG

The emergence of urgencyTwo bellwether indicators, the ISM Manu-facturing PMI and the labor market report,showed substantial weakness in Decem-ber. While we have been expecting themanufacturing sector to fall into a mildrecession and employment growth to slowfurther, the magnitude of the weaknesssurprised. The releases thus highlight therisk of more pronounced growth weaknessand the need for more Fed easing. Conse-quently, we are revising our forecasts. Westill expect real GDP growth to be 1.8% ona calendar average basis in 2008. However,after an assumed moderate 1.3% q/qannualized growth rate in Q4 2007, weexpect GDP to rise 0.9% in Q1 and Q2,1.6% in Q3 and 2% in Q4 2008, which isa weaker profile than before. In an attemptto stem any bigger growth fallout, we nowexpect the Fed to cut rates two additionaltimes by 25bp in March and April, andmaintain our estimate for a 25bp cut inJanuary. [email protected], UBS Financial Services Inc.

Moderate need for cuts20

14

8

4

18

10

16

12

6

2Source: Datastream, UBS WMR

1961 1971 1981 1991 2001

Fed funds rateModified Taylor Rule (Core PCE deflator)

%

The ECB is not likely to cut interest 5

4

3

2

1

40

20

30

10

02002 2004 2007 20082000 2001 2003 2005 2006


% IndexECB main refinancing rate (lhs)Inflation expectations (EU Commission Survey, rhs)

ECB remains steadfastThe European Central Bank (ECB) keptinterest rates unchanged in January. By sig-naling that rate hikes remain more likelythan rate reductions, the ECB remained inopposition to the US Federal Reserve andthe Bank of England, which have bothembarked on monetary easing campaigns.Against a background of high inflationrates, the ECB’s position is understandable.With consumer price inflation at around3%, the Bank is eager to anchor inflationexpectations and prevent a transitory infla-tion spike from pushing up wages and thusetching itself permanently into the fabric ofthe economy. The latest rise in oil pricesseems to validate the ECB’s rather pes-simistic inflation forecast of 2.5% this year.Such a rate is significantly above the ECB’sdefinition of price stability (1.8% to 1.9%)and gives the Bank little leeway to lowerinterest rates in coming months. [email protected], UBS AG


Economy: Calendar Economy: Forecasts

Exchange rates

PPP 2006* 9.1.08 3 M 6 M 12 M

EURUSD 1.18 1.32 1.47 1.40 1.33 1.30USDJPY 96.10 119.0 109.3 115 115 112GBPUSD 1.68 1.96 1.97 1.97 1.87 1.84USDCHF 1.23 1.22 1.11 1.17 1.20 1.20AUDUSD 0.67 0.79 0.88 0.84 0.82 0.82USDCAD 1.09 1.16 1.00 1.05 1.08 1.15

USDIDR 8994 9434 9200 9000 8800USDINR 44.1 39.3 40.0 38.5 37.8USDKRW 930 937 920 900 880USDPHP 49.1 40.6 44.8 42.0 40.5USDSGD 1.53 1.43 1.45 1.45 1.44USDTHB 35.5 33.2 33.5 33.0 34.6USDTWD 32.6 32.5 31.8 31.4 31.2* Year end Source: UBS WMR, Bloomberg

Growth and Inflation

GDP Real GDP growth (%) Consumer Price Inflation (%)Weight1 2004 2005 2006 20072 2008F2 2009F2 2004 2005 2006 20072 2008F2 2009F2

USA 20.3 3.9 3.2 2.9 2.0 1.8 2.3 2.7 3.4 3.2 2.8 2.9 3.0Australia 1.1 2.7 2.8 2.7 4.1 3.5 3.0 2.2 2.7 3.6 2.4 2.8 2.5Japan 6.5 2.7 1.9 2.2 1.8 1.6 1.8 0.0 –0.3 0.2 0.0 0.3 0.5Germany 4.0 1.2 0.9 2.8 2.7 2.0 1.9 1.7 2.0 1.7 2.0 1.8 1.6France 3.0 2.3 1.7 2.2 1.8 1.5 1.6 2.1 1.7 1.7 1.4 1.8 1.7Italy 2.7 1.0 0.2 1.9 1.8 0.9 1.2 2.2 2.0 2.1 1.9 1.9 2.0UK 3.2 3.3 1.8 2.8 3.1 1.7 1.9 1.3 2.1 2.3 2.4 1.9 1.9Eurozone 14.8 1.8 1.6 2.9 2.6 1.7 1.7 2.1 2.2 2.2 1.9 2.0 1.9

China 14.1 10.1 9.9 11.1 11.1 9.8 10.5 4.0 1.8 1.5 4.4 4.2 3.8India 6.3 7.5 8.1 9.4 8.2 8.4 8.5 4.5 4.3 4.8 4.8 4.5 4.0Hong Kong 0.4 8.6 7.3 6.9 6.1 4.8 5.6 –0.4 1.1 2.0 2.1 3.7 3.4South Korea 1.7 4.7 4.0 5.0 4.9 4.5 4.7 3.6 3.0 2.2 2.4 2.8 2.5Taiwan 0.7 6.1 4.1 4.7 4.5 4.1 4.8 1.6 2.3 0.6 1.4 2.4 2.8Singapore 0.2 8.4 6.4 7.9 8.0 4.9 4.0 1.7 0.5 1.0 1.9 3.8 2.0Indonesia 1.4 5.1 5.6 5.5 6.4 6.4 6.2 6.1 10.6 13.1 6.5 6.0 5.0Thailand 0.9 6.2 4.5 5.0 4.0 4.8 5.2 2.7 4.6 4.6 2.0 3.2 3.0Asia ex Japan3 19.4 7.9 7.5 8.4 8.2 7.5 7.9 3.7 3.1 2.9 3.7 3.8 3.5Asia ex Jp/Cn/In3 5.4 5.9 4.8 5.4 5.4 4.9 5.1 3.0 4.0 3.8 2.7 3.3 3.01Weight in world GDP, based on World Bank purchasing power calculations 2UBS WMR ForecastsSources: Thomson Financial, UBS WMR

Expected economic indicators

Date Country Indicator Unit Month Frequency Forecast 1 Consensus 2 Previous

14-Jan EU-13 Industrial Production % yoy Nov m 4.2 3.8

15-Jan US Retail Sales % yoy Dec m 6.3

15-Jan US PPI (finished goods) % yoy Dec m 7.9 7.2

15-Jan FR CPI % mom Dec m 2.4 0.5

16-Jan SG Unemployment Rate level % Dec m 3.2

16-Jan JP Machinery Orders % yoy Nov m 0.0 3.3

16-Jan US CPI % yoy Dec m 4.1 4.3

17-Jan AU Unemployment Rate % yoy Dec m 4.4 4.5

17-Jan CY Retail Sales % yoy Dec m 18.8

17-Jan CY Industrial Production % yoy Dec m 17.3

17-Jan CY Real GDP % yoy Q4 q 11.5

17-Jan CY CPI % yoy Dec m 6.9

17-Jan CY PPI % yoy Dec m 4.6

17-Jan JP Industrial Production % yoy Dec m 2.9

17-Jan US Building Permits 1000 ann. Dec m 1130.0 1162.0

17-Jan US Philly Fed PMI level Jan m –2.5 –5.7

18-Jan JP Consumer Confidence level Q4 q 39.0 39.8

22-Jan HK CPI % yoy Dec m 3.4

22-Jan TW Unemployment Rate level % Dec m 3.9

23-Jan AU CPI % yoy Q4 q 3.0 1.9

23-Jan MY CPI % yoy Dec m 2.3

23-Jan SG CPI % yoy Dec m 4.2

23-Jan UK Real GDP % qoq Q4 q 0.7

25-Jan JP Tokyo Area CPI % yoy Jan m 0.5 0.4

25-Jan SG Industrial Production % yoy Dec m –1.5

25-Jan SK Real GDP % yoy Q4 q 5.3 5.21 UBS Wealth Management Research 2 Bloomberg Survey Source: UBS WMR, Bloomberg, Reuters

Date Country Event

17-Jan US Fed’s Bernanke testifies on economic outlook. 22-Jan CA BoC to announce its interest rate decision. After the december 25 bps cut, we and consensus see

rates to be kept at 4.25.22-Jan JP BoJ to announce interest rates. We expected no change in January. Current target rate is 0.50.23-Jan NW Norges bank will announce its deposit rate decision. We expect a 25 bps hike to 5.50.23-Jan NZ RBNZ to announce its interest rate decision. We see rates kept at 8.25.Source: Bloomberg

Other economic events

Interest rates

2005 2006 9.1.08 6 M1 12 M1

United States 3m 4.5 4.2 4.5 4.2 4.2

10y 4.4 4.9 3.8 4.5 4.8

Japan 3m 0.1 0.9 0.9 0.9 1.0

10y 1.5 2.0 1.5 1.7 1.9

Eurozone 3m 2.5 3.7 4.6 4.3 4.3

10y 3.3 4.1 4.1 4.4 4.6

UK 3m 4.6 5.1 5.7 5.0 5.0

10y 4.1 4.8 4.5 4.8 5.1

Switzerland 3m 1.0 2.0 2.8 2.8 2.8

10y 2.0 2.7 2.9 3.2 3.4

Australia 3m 5.6 6.0 7.1 7.0 7.0

10y 5.2 5.7 6.1 6.0 6.0

Canada 3m 3.5 4.0 4.4 4.9 4.3

10y 4.0 4.3 3.9 4.2 4.21 UBS WMR Forecast Sources: Reuters, UBS WMR


Equities: Strategy Equities: Strategy

Stocks stumble out of the gate

Global equity returns115

105

110

100

Source: MSCI, UBS WMR

Mar 07Jan 07 May 07 Sep 07Jul 07 Nov 07 Jan 08

Global equities (rebased)

The focus of financial markets is once againon developments in the US economy. Theregional ISM purchasing managers’ indexsuggests that the US manufacturing sectoris contracting, and the latest job reportshowed that the unemployment rate hasrisen from 4.7% to 5%. However, we con-tinue to see equities as an attractive assetclass for 2008 as a whole, but maintain aneutral tactical stance while the US econ-omy struggles to find its footing.

Earnings growth is slowingIn the last five years global equity priceshave been supported by an unprecedentedsurge in corporate earnings. This has coin-cided with a booming global economy. Asglobal growth now decelerates, lead by theindustrialized world, earnings are not likelyto provide the same support for equityprices. But to which extent can we expectearnings to slow?

When taking the temperature of the cor-porate sector on a global basis, the overallsituation remains solid, as measured by thecurrent level of the global purchasing man-agers’ index (see fig. 2)2. But there has beena clear deceleration of business activity overthe last six months. This leads us to the con-clusion that earnings growth is likely to slowto a similar extent (as suggested by the clearrelationship shown in fig. 2), leaving us withearnings growth in low single digits forglobal equities. However, for 2008 as awhole we expect price/earnings ratios toexpand, thereby contributing to an improv-ing equity performance.

Too early for bottom fishingIn general, we believe it is too early for bot-tom fishing in equities at this stage, espe-cially in the first half of the year, as thechoppy waters in financial markets are likelyto persist. However, as more transparency

regarding the fallout from the US subprimedebacle sets in over the course of the year,and the low point in the US economicgrowth is left behind, we anticipate that theinvestment environment will improve.Given that equity market valuations remainfair, we expect equities will once again beable to generate a positive performance,enough to provide a sufficient risk premiumabove fixed income [email protected], UBS AG

Equity markets & sectors

Equity Performance (%)1 EPS P/E P/E Div. yield2007 3 M Ytd 5 years growth 2007F 2008F 2007F

2007F

World 5.2 –8.5 –4.1 17.3 5.7 15.7 14.0 2.3

US 6.0 –9.9 –5.3 13.8 1.6 17.4 15.0 1.9

EMU 8.5 –5.3 –2.8 23.5 11.9 13.3 12.2 3.0

UK 6.6 –3.1 –1.8 18.3 4.9 12.9 11.9 3.3

Japan –10.1 –15.2 –4.9 16.5 13.9 16.1 14.7 1.5

Asia Ex Japan 38.0 –4.3 –2.7 47.2 24.9 17.3 15.6 1.9

Switzerland –1.6 –8.9 –2.2 17.8 –8.0 16.8 13.2 2.2

Energy 25.3 4.4 –1.4 35.7 3.6 13.5 12.3 1.9

Materials 25.3 –4.8 –2.5 36.7 10.9 15.0 13.6 1.8

Industrials 11.0 –12.4 –6.2 23.1 15.5 16.7 15.0 1.9

Consumer Discretionary –6.7 –16.4 –7.3 11.4 12.0 16.8 14.5 1.8

Consumer Staples 15.0 2.4 –1.2 15.5 6.8 20.3 18.2 2.1

Health Care 1.9 –1.6 1.6 9.9 12.2 17.1 15.5 2.0

Financials –12.0 –17.9 –5.8 13.7 –3.9 12.0 10.9 3.6

Information Technology 12.8 –12.9 –9.3 12.6 17.1 22.7 18.8 0.8

Telecom Services 16.8 0.4 –1.4 14.6 9.7 16.4 15.0 3.6

Utilities 16.7 6.3 1.0 34.5 4.3 19.0 16.9 2.81base currency for all indices: local currencies Sources: Thomson Financial, JCF, MSCI

After giving investors a return of more than 7% in 2007, global equities1 havehad a rough start to the year 2008 due to weak economic data from the US. Wethink equities are likely to tread water in the short term, and only begin to moveforward once the US economy finds its footing and investors start lookingbeyond the current slowdown.

Global earnings growth is slowing40

0

–20

20

10

30

–10

–30

–40

65

60

50

55

45

401999 2000 2002 2004 2007 20082001 2003 2005 2006

Source: MSCI, I/BE/S, Bloomberg, JP Morgan, UBS WMR

Earnings growth 12m trailing (lhs)

Global PMI all economy (6 months lead, rhs)

1 As measured via the MSCI AC World index(including emerging market equities)

2 Please note that a level above 50 for the globalpurchase manager index (PMI) signals expansion.


Equity market: Asia-Pacific Equity market: Asia-Pacific

Company Sector ISIN Curr. Price P/E P/E Div. Yield Rec. Since Rel. Perf.9.1.08 07E 08E 2006 (in %)

(in %)

Asia ex JapanSinopec Energy CNE1000002Q2 HKD 11.22 14.4 10.8 1.3 27.03.07 0.1

Keppel Corp Industrials SG1U68934629 SGD 13.10 19.8 15.9 2.1 03.12.07 1.6

Bangkok Bank Financials TH0001010R16 THB 112.00 9.4 7.3 2.5 07.12.07 –3.0

Shenzhen Express Industrials CNE100000478 HKD 8.38 23.9 15.8 1.6 09.03.07 0.8

Sun Hung Kai Propert. Financials HK0016000132 HKD 168.80 32.8 33.1 1.3 27.11.07 1.3

Advanced Info Telecomm. TH0268010R11 THB 98.00 14.0 12.4 6.4 12.10.07 1.5

China Telecom Telecomm. CNE1000002V2 HKD 6.22 19.4 18.8 1.4 07.12.07 0.7

China Merchants Hold. Industrials HK0144000764 HKD 45.15 33.0 25.4 1.1 15.11.07 –3.1

China Shipping Dev Industrials CNE1000002S8 HKD 23.45 19.4 16.1 1.3 12.10.07 4.0

SP Setia Bhd Financials MYL8664OO004 MYR 5.15 13.4 11.7 4.2 12.10.07 3.0

PTT Chemical Materials TH0882010R19 THB 118.00 10.3 9.3 4.4 29.05.07 –2.8

Taiwan Cement** Materials TW0001101004 TWD 49.30 17.8 15.2 3.4 06.07.06 4.6

China Steel** Materials TW0002002003 TWD 44.60 9.9 9.6 6.2 13.09.07 0.7

Cheung Kong Holding Financials HK0001000014 HKD 142.60 23.0 20.8 1.6 08.02.07 1.0

ICICI Bank Financials INE090A01013 INR 1333.50 38.5 34.5 0.6 19.11.07 5.6

Asustek Computer** Inform. Techn. TW0002357001 TWD 88.50 9.7 9.3 1.4 14.08.07 –0.3

Satyam Computer Svcs Inform. Techn. INE275A01028 INR 424.50 19.79 16.67 0.8 07.12.07 –4.8

JapanToyota Motor Cons. Discr. JP3633400001 JPY 5710 9.8 9.3 1.9 05.01.04 –0.3

Shin-Etsu Chemical Materials JP3371200001 JPY 6520 15.2 13.3 1.1 04.02.05 –2.0

Canon Inform. Techn. JP3242800005 JPY 4940 12.8 12.1 1.7 04.05.04 –1.0

Denso Cons. Discr. JP3551500006 JPY 4300 14.9 13.6 1.0 05.01.04 0.3

Honda Cons. Discr. JP3854600008 JPY 3510 9.2 8.7 1.9 04.06.04 0.0

Mitsui & Co Industrials JP3893600001 JPY 2270 9.8 9.4 1.5 10.12.07 1.3

Takeda Health Care JP3463000004 JPY 6290 13.9 13.2 2.0 18.02.05 0.4

Nippon Yusen Industrials JP3753000003 JPY 843 9.7 8.3 2.1 22.05.06 –2.3

Mitsui Fudosan Financials JP3893200000 JPY 2220 22.4 19.4 0.6 19.07.06 –2.4

Asahi Kasei Materials JP3111200006 JPY 704 12.8 11.7 1.7 19.07.06 0.3

MEI Cons. Discr. JP3866800000 JPY 2165 19.2 14.9 1.4 04.05.07 –2.0

Kyocera Inform. Techn. JP3249600002 JPY 9320 16.38 15.59 1.2 14.06.07 0.5Sources: UBS WMR, Bloomberg

* New recommendation

** Taiwan maintains capital controls, which restrict stock market access for foreign investors. Please contact your client advisor for further information.

This selection of proposed shares is organised according to their relative attractiveness. The relative performance refers to the performance in terms of the MSCIAsia ex Japan and MSCI Japan Index since the beginning of the year or, if the share was added to the proposal list after 1.1.2008, since the date of the recom-mendation. The information provided refers to the closing price on the respective principle stock exchange.

The shares are ranked “Marketperform/Hold” as a minimum. An addition to or removal from the proposal list does not generally imply a change in the sharerating. A share is added to the list if we anticipate that it will perform better than other shares in its region. A share is removed from the list when the expect-ed increase in share prices occurs or if the analyst revises his positive rating.

Recommended stocksA Christmas tale from Nagoya

MSCI Japan vs. MSCI World

Regional indicators

Japan JCF Estimates

PE 2008 (x) 14.7

PB 2007 (x) 1.7

ROE 2007 (%) 9.6

EPS Growth 2008 (%) 8.9Sources: MSCI, IBES

235

110

135

160

185

210

85

602003 20052004 2006 2007 2008

MSCI JapanMSCI World

Source: Thomson Financial

The attentive reader may notice somethingodd about the title of this article. Firstly, weare already into January; secondly, Japandoes not even celebrate Christmas (themarkets are open for trading on 25 Decem-ber); and thirdly, well, let’s start from thebeginning. It has been 44 years since thenow-legendary Shinkansen bullet train waslaunched on the Tokyo-Osaka route. TheShinkansen today covers this 500 kmstretch in under two and a half hours,including stops in Kyoto and Nagoya, hometo JR Central. This company is one of manyprivate successor firms to the former staterailway and these days is responsible foroperating this highly profitable section oftrack.

Japanese researchers have long beenamong those studying the possibilities ofmagnetic levitation (maglev) trains, and a JRCentral prototype holds the world speedrecord. On Christmas Day, the company’sboard of directors made the surpriseannouncement that it is considering con-structing a commercial maglev linebetween Tokyo and Nagoya, without anystate support. The third oddity, then, is thatthis Christmas tale does not have a happyending! The board reckons that once the

track, running a full half the distancebetween Tokyo and Osaka has beenfinanced, built and put into operation, JRCentral will return to its current earningslevel some 30 years from now. Unsurpris-ingly, its share price tumbled.

But sadly such sorry tales are not unusualon the Japanese stock market. While theyare rarely quite so crass or obvious about it,managements still all too commonly disre-gard shareholders’ interests. But there are aselect number of companies that do not –or have ceased to – act like former stateenterprises, that raise dividends and buyback shares, but that are still attractivelyvalued. Foremost among these is Toyota(Buy/Outperform), which is also based inthe Nagoya area – a classic case of pearlsand swine. [email protected], UBS AG


Equity market: Eurozone Equity market: Eurozone

Company Sector ISIN Price P/E P/E Div. Yield Rec. Since Rel. Perf.09.01.08 07E 08E 2006 (in %)

(in %)

Axa Financials FR0000120628 25.84 8.6 8.3 4.1 04.01.07 –0.4

KPN Telecommunication NL0000009082 12.86 15.9 14.1 3.9 05.12.07 5.1

Carrefour Consumer Staples FR0000120172 50.37 18.5 16.6 2.0 09.03.06 –1.3

ING Financials NL0000303600 25.54 6.0 7.0 5.2 10.10.07 –1.2

Fresenius MC Health Care DE0005785802 37.82 23.1 20.0 1.2 24.10.06 2.7

Total Energy FR0000120271 58.90 10.7 9.5 3.1 21.02.05 3.9

Allianz Financials DE0008404005 139.79 7.3 7.5 2.7 05.12.07 –0.8

Saint Gobain Industrials FR0000125007 58.27 10.5 9.5 2.9 22.05.06 –4.2

E.ON Utilities DE0007614406 149.21 18.1 16.7 2.2 05.12.07 4.8

BNP Paribas Financials FR0000131104 71.82 7.7 8.2 4.3 19.04.05 0.7

Suez Utilities FR0000120529 48.13 19.5 17.1 2.5 18.10.07 5.7

Bayer Materials DE0005752000 64.80 16.2 14.9 1.5 05.12.07 3.0

Unicredit* Financials IT0000064854 5.43 9.5 8.5 4.4 24.12.07 –0.7

Commerzbank Financials DE0008032004 25.27 7.4 8.8 3.0 16.08.07 0.2

Accor Consumer Discretionary FR0000120404 51.03 19.3 16.5 2.8 04.01.07 –0.4

Telefonica Telecommunication ES0178430E18 22.57 16.1 13.9 2.7 31.05.06 –0.5

Bank of Cyprus Financials CY0000100111 12.60 16.8 13.3 2.3 05.12.07 3.2

Fiat Consumer Discretionary IT0001976403 16.06 10.5 8.0 1.0 05.12.07 –9.2

CRH Materials IE0001827041 24.15 9.4 8.7 2.2 17.10.07 9.2

Ryanair Industrials IE00B1GKF381 3.92 12.6 11.9 0.0 05.11.07 –7.6

No longer recommended

Unipol FinancialsWe remove Unipol to make way for UniCredit.

Sources: UBS WMR, Bloomberg

* New recommendation

This selection of proposed shares is organised according to their relative attractiveness. The relative performance refers to the performance in terms of the MSCIEurope Index since the beginning of the year or, if the share was added to the proposal list after 1.1.2008, since the date of the recommendation. The infor-mation provided refers to the closing price on the respective principle stock exchange.

The shares are ranked “Marketperform/Hold” as a minimum. An addition to or removal from the proposal list does not generally imply a change in the sharerating. A share is added to the list if we anticipate that it will perform better than other shares in its region. A share is removed from the list when the expected

Recommended stocks

Regional indicators

Volatile start to the year

MSCI Europe vs. MSCI World

Eurozone JCF Estimates

PE 2008 (x) 12.2

PB 2007 (x) 2.2

ROE 2007 (%) 15.9


200

140

100

160

180

120

80

602003 20052004 2006 2007 2008

MSCI EuropeMSCI World


2008 started volatile, with the first tradingdays of the year marked by recession fearsin the US and lower sentiment indicators inEurope. The Dow Jones Euro Stoxx 50 lostroughly 3%, wiping out the recovery thathad taken place since mid December. Themarket is still trying to digest the fears thatprevailed in the latter part of 2007. Techni-cally speaking, European stocks are stilltrading above an intact uptrend line datingback to 2003 but the inability to overcome4500 puts the bulls in the defensive camp,with the Dow Jones Euro Stoxx 50 aimingto test the November lows at 4176. Criticallevels to the downside for the index are theNovember low, but the 4000-3900 level iseven more important. As long as these lev-els hold we can at least expect a range-bound trading environment. A clearing ofthe macroeconomic fears and a break ofthe 4500 level to the upside would correctsome of the chart technical damage causedsince the summer months of last year.

Yet it is not all doom and gloom, at leastnot on a stock level. The German utility andchemical companies are bucking the trend.We highlight Bayer (“Buy/Outperform”).For 2008, our investment case for Bayer isbased mainly on the sound operational out-

look for its agrochemicals and healthcareunits. Bayer’s CropScience division shouldcontinue to perform very well. We expecthigh crop prices to boost farmers’ income,which should spur agrochemical demand.We also have a positive outlook on Bayer’shealthcare unit, where earnings shouldimprove thanks to a better product mix andsynergies of more than EUR 800mn fromthe Schering acquisition. We have raisedour estimated fair value range from EUR61–69 to EUR 67.7–[email protected], UBS AG


Equity market: US Equity market: US

A rough start to the New Year

MSCI USA vs. MSCI World

Regional indicators

Over the past two months, economic con-ditions have deteriorated even more thanwe had anticipated, and a wave of write-downs at financial institutions has haltedthe previously uninterrupted five yeargrowth expansion in corporate profits.While we continue to expect positive equitymarket returns in 2008, gains are likely tobe seen in the latter part of the year. Weenvision the following path: stocks maystruggle early in the year as a slumpinghousing market, growing recession fears,negative corporate earnings revisions, Fedpolicy uncertainty, and elevated energycosts weigh on both economic growth andinvestor sentiment. However, undemand-ing market valuations should limit thedownside. As the year progresses, wewould expect earnings estimates to beginto stabilize and the combination of theimpact of easier monetary policy (andpotentially additional rate cuts) and easieryear-on-year comparisons for corporateearnings growth should help stocks stage asecond-half recovery.

Over the past few months, the defen-sively-oriented utilities and consumer sta-ples sectors have been the top performingsectors, while financials and consumer dis-cretionary stocks have continued to lag. In

the short-term, we expect the rotation intosectors with more predictable earnings tocontinue.

American Electric Power (Hold/Outper-form): we see three crucial investmentissues for American Electric Power: a)potential transition to higher market-basedpower prices in Ohio; b) potential approvalof much needed new transmission invest-ment; and c) possible approval of a nextgeneration coal plant in West Virginia.

CVS/Caremark (Buy/Outperform): weview CVS as a solid retail holding. The non-cyclical nature of the drug retail business,the longer-term opportunities possible withthe Caremark merger, and the estimated22% profit growth that we project for 2008should, in our view, result in CVS perform-ing better than other retail [email protected], UBS AG

US JCF Estimates

PE 2008 (x) 15.0

PB 2007 (x) 2.8

ROE 2007 (%) 19.8


200

160

100

120

180

140

80

602003 20052004 2006 2007 2008

MSCI USAMSCI World



(in %)

Gilead Sciences Health Care US3755581036 46.89 28.4 24.8 0.0 20.02.07 7.6

Microsoft Inform. Technology US5949181045 33.45 23.4 18.8 1.0 17.12.07 –0.7

Metlife Financials US59156R1086 57.67 9.6 9.2 1.0 12.09.07 –1.0

Travelers Financials US89417E1091 50.35 7.5 8.1 2.1 12.07.05 –0.9

AFLAC Financials US0010551028 63.45 19.0 17.0 0.9 12.09.07 7.3

Abbott Laboratories Health Care US0028241000 58.95 20.8 18.1 2.0 05.10.07 10.9

Bristol-Myers Squibb Health Care US1101221083 26.67 17.9 16.1 4.2 02.08.07 7.3

Colgate-Palmolive Consumer Staples US1941621039 79.91 23.7 21.1 1.6 19.10.07 8.3

XTO Energy Energy US98385X1063 53.11 11.8 10.3 0.6 04.12.07 9.2

Chevron Energy US1667641005 90.95 10.6 10.7 2.3 04.05.07 2.9

United Technologies Industrials US9130171096 71.67 16.7 14.6 1.4 22.04.05 –0.9

General Dynamics Industrials US3695501086 85.62 17.3 15.3 1.0 20.02.07 1.7

CVS/Caremark Consumer Staples US1266501006 37.58 19.6 16.0 0.4 14.06.07 –0.3

Exelon Utilities US30161N1019 85.00 20.1 18.3 2.0 05.01.04 10.0

Cisco Systems Inform. Technology US17275R1023 25.43 20.5 16.4 0.0 22.06.07 –0.7

Cognizant Inform. Technology US1924461023 30.61 26.6 20.1 0.0 17.12.07 –4.6

McDonald's Corp Cons. Discretionary US5801351017 57.11 20.6 19.7 1.8 11.05.07 2.3

Air Products and Chemicals Materials US0091581068 94.09 21.6 19.1 1.4 20.02.07 1.0Sources: UBS WMR, Bloomberg

This selection of proposed shares is organised according to their relative attractiveness. The relative performance refers to the performance in terms of the MSCIUSA Index since the beginning of the year or, if the share was added to the proposal list after 1.1.2008, since the date of the recommendation. The informa-tion provided refers to the closing price on the respective principle stock exchange.

The shares are ranked “Marketperform/Hold” as a minimum. An addition to or removal from the proposal list does not generally imply a change in the sharerating. A share is added to the list if we anticipate that it will perform better than other shares in its region. A share is removed from the list when the expectedincrease in share prices occurs or if the analyst revises his positive rating.

Recommended stocks


Equity market: Switzerland Equity market: Switzerland


(in %)

Swatch Group Cons. Discretionary CH0012255151 309.75 16.4 14.0 1.0 15.11.07 –7.4Lonza Group Health Care CH0013841017 138.30 24.8 21.7 1.1 14.08.07 –0.5Richemont Cons. Discretionary CH0012731458 71.10 15.1 13.3 2.9 08.03.07 –4.7ABB Industrials CH0012221716 29.56 22.7 18.1 0.8 21.11.07 –5.0Roche GS Health Care CH0012032048 203.50 18.0 16.2 1.7 03.04.07 1.1Syngenta Materials CH0011037469 307.75 23.2 20.2 1.2 08.06.06 7.8Swisscom Telecommunication CH0008742519 435.25 12.3 12.3 3.9 22.11.07 0.3Swiss Life Holding Financials CH0014852781 267.00 7.2 3.3 2.6 03.04.06 0.5

Recommended stocks Small Caps

Logitech Inform. Technology CH0025751329 36.56 19.0 17.8 0.0 24.07.06 –1.2Bachem Materials CH0012530207 96.70 24.4 21.9 7.2 29.08.07 3.3Dufry Cons. Discretionary CH0023405456 114.00 18.8 15.7 0.9 05.12.07 0.8Panalpina Industrials CH0002168083 184.00 23.2 21.2 1.3 17.09.07 –0.3Schindler Industrials CH0024638196 67.90 14.7 13.3 1.8 02.03.06 –0.2Barry Callebaut Consumer Staples CH0009002962 823.00 20.5 17.9 1.2 03.08.07 –0.2Petroplus Energy CH0027752242 82.00 13.1 7.4 0.0 09.05.07 –0.8Voegele Cons. Discretionary CH0006937772 85.30 9.9 8.7 2.3 11.04.05 1.2Sources: UBS WMR, Bloomberg

This selection of proposed shares is organised according to their relative attractiveness. The relative performance refers to the performance in terms of the MSCISwitzerland Index since the beginning of the year or, if the share was added to the proposal list after 1.1.2008, since the date of the recommendation. The information provided refers to the closing price on the respective principle stock exchange.

The shares are ranked “Marketperform/Hold” as a minimum. An addition to or removal from the proposal list does not generally imply a change in the sharerating. A share is added to the list if we anticipate that it will perform better than other shares in its region. A share is removed from the list when the expect-ed increase in share prices occurs or if the analyst revises his positive rating.

Recommended stocks Large CapsOngoing correction

Regional indicators

MSCI Switzerland vs. MSCI World

Switzerland JCF Estimates

PE 2008 (x) 13.2

PB 2007 (x) 2.9

ROE 2007 (%) 20.3

EPS Growth 2008 (% 27.9Sources: MSCI, IBES

220

180

120

80

140

200

160

100

60

402003 20052004 2006 2007 2008

MSCI SwitzerlandMSCI World


Though investors may have hoped other-wise in their New Year’s resolutions, stockshave had a bad start in 2008. The correc-tion continues unabated. Weak US job mar-ket data, the US dollar’s renewed slide, andthe oil price briefly breaking through theUSD 100 per barrel mark have hardlyhelped to improve sentiment. Write-downsby financial firms are still in the spotlight.

After removing Adecco from our recom-mendation list at the end of last year, we arenow downgrading the stock from “Buy/Sector Outperform” to “Hold/Sector Under -perform”. In view of the modest job mar-ket outlook, we expect Adecco to under-perform the broader market. The latest jobmarket data from the US was poor, andEurope has seen a slowdown as well inrecent months. Although we are impressedby management’s efforts to increase prof-itability, we do not believe that they willresult in a reassessment of the stock anytime soon. Our new expected fair valuerange is CHF 57–70, which is in line withthe sector.

We have raised our rating for SGS from“Hold/Sector Marketperform” to “Buy/Sec-tor Outperform”. We expect the companyto accelerate its organic growth. The mar-ket environment remains positive, and

recent investments are starting to pay off,which should boost margins. In terms of theprice/earnings ratio based on estimated2008 earnings, SGS is valued in line withBureau Veritas and Intertek. Its higher mar-gins and size, however, would justify a pre-mium of 15–25%. We continue to estimatethe fair value at CHF 1,500–1,600. [email protected], UBS AG


Equity funds Equity funds

The above data is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell anyinvestment or other specific product. Certain services and products are subject to legal restrictions and cannot be offeredworldwide on an unrestricted basis.


Current WMR equity market strategy Current WMR equity sector strategy– + ++ +++– –– – –

USAEurozoneUKSwitzerlandJapanSingapore, HK, Australia, NZEmerging Markets (all)Other

Currency-hedged strategySource: UBS Wealth Management Research

Please find the complete strategy and the appropriate explanation on page 44

– + ++ +++– –– – – – + ++ +++– –– – –

Health CareFinancialsTelecommunicationsEnergyIndustrialsConsumer StaplesUtilitiesMaterialsInformation TechnologyConsumer Discretionary



Selected UBS funds

Name ISIN NAV 1 Performance (%) 2 Volat. (%) 3

YTD 1 year 3 years 3 years

REGIONS/COUNTRIESMulti AssetsUBS (Lux) Key Sel. SICAV – Global Alloc. (CHF) B CHF LU0197216715 11.71 –1.16 12.31 n.a. 5.23UBS (Lux) Key Sel. SICAV – Global Alloc. (EUR) B EUR LU0197216558 12.22 0.32 17.09 n.a. 5.20UBS (Lux) Key Sel. SICAV – Global Alloc. (USD) B USD LU0197216392 13.16 3.72 22.28 n.a. 5.36GlobalUBS (Lux) Key Sel. SICAV – Global Equities (USD) B USD LU0161942395 17.07 –0.06 22.89 n.a. 7.79UBS (Lux) Bond SICAV – Conv. Global (EUR hed.) B EUR LU0203937692 9.39 3.78 26.82 n.a. 5.39USAUBS (Lux) Key Sel. SICAV – US Equities (USD) B USD LU0153925929 16.40 –0.64 19.69 70.46 7.83UBS-ETF DJ US (Large Cap) USD LU0136237327 61.25 5.35 25.16 70.03 7.52EU12 & EuropeUBS (Lux) Equity Fund – European Opportunity B EUR LU0006391097 559.19 1.10 54.54 98.18 9.47UBS-ETF DJ EURO STOXX 50 EUR LU0136234068 43.34 9.61 60.24 104.89 9.26UBS (Lux) Bond Fund – Convert Europe B EUR LU0108066076 118.44 2.26 23.59 39.16 4.68United KingdomUBS (CH) Equity Fund – Great Britain GBP CH0002788658 411.45 5.01 36.21 70.80 8.27UBS-ETF FTSE 100 GBP LU0136242590 62.35 6.74 n.a. n.a. n.a.SwitzerlandUBS 100 Index-Fund Switzerland CHF CH0002788807 5384.77 –0.97 59.84 105.49 9.87UBS-ETF SMI CHF CH0017142719 80.49 –1.74 56.46 n.a. 9.88Asia/JapanUBS (Lux) Key Sel. SICAV – Asian Equities (USD) B USD LU0235996351 151.52 42.63 n.a. n.a. n.a.UBS (Lux) Key Selection SICAV – Japan Equities B JPY LU0245619688 8057.00 –15.33 n.a. n.a. n.a.UBS-ETF DJ Japan Titans 100 JPY LU0136240974 6291.00 –10.41 41.23 86.47 14.44UBS (Lux) Equity Fund – Greater China B USD LU0072913022 243.20 70.48 212.50 426.11 19.23UBS (CH) Bond Fund – Convert Asia USD CH0002791587 168.40 15.03 34.28 53.84 7.13Emerging MarketsUBS (Lux) Equity SICAV – Russia B USD LU0246274897 186.91 39.80 n.a. n.a. n.a.UBS (Lux) Equity SICAV – Brazil B USD LU0286682959 123.11 n.a. n.a. n.a. n.a.1 as of 07.01.2008 (or latest available) 2 Performance as of 31.12.2007 3 Volatility as of 31.12.2007, annualized Source: UBS Global AM

Name ISIN NAV 1 Performance (%) 2 Volat. (%)3

YTD 1 year 3 years 3 years

SECTORS/STYLES/MULTI ASSETSEnergyUBS (CH) Equity Fund – Energy USD CH0000584505 358.50 27.49 96.54 206.14 18.80

MaterialsUBS (CH) Equity Fund – Global Materials USD CH0002609698 1402.89 n.a. n.a. n.a. n.a.

UBS (CH) Commodity Fund – USD USD CH0021046914 124.93 15.02 n.a. n.a. n.a.

UBS (CH) Equity Fund – Gold USD CH0002788690 610.84 21.62 80.42 139.24 29.53

Health Care & BiotechUBS (Lux) Equity Fund – Health Care B USD LU0085953304 132.50 2.75 25.45 59.42 7.77

UBS (Lux) Equity Fund – Biotech B USD LU0069152568 156.30 4.78 7.61 52.82 15.75

FinancialsUBS (Lux) Equity Fund – Financial Services B EUR LU0099863671 90.51 –20.40 6.93 29.48 11.51

ITUBS (Lux) Equity Fund – Technology B USD LU0081259029 146.87 1.07 8.33 66.53 13.77

Telecom ServicesUBS (Lux) Equity Fund – Communication B EUR LU0098993750 49.06 –0.89 n.a. n.a. n.a.

StylesUBS (Lux) Equity SICAV – European Value B EUR LU0198838335 13.97 –6.04 38.34 n.a. 10.03

UBS (Lux) Equity Fund – European Growth B EUR LU0118128569 36.54 5.81 42.53 n.a. 8.32

UBS (Lux) Equity SICAV – USA Value (USD) B USD LU0070848113 222.69 –1.64 23.67 78.53 7.53

UBS (Lux) Equity SICAV – USA Growth B USD LU0198837287 14.20 16.02 36.87 n.a. 11.22

ThemesUBS (Lux) Equity Fund – Global Innovators B EUR LU0130799603 83.82 28.26 94.15 175.17 13.88

UBS (Lux) Eq. Fund – Emerg.Markets Infrastr.B USD LU0322492728 97.28 n.a. n.a. n.a. n.a.1 as of 07.01.2008 (or latest available) 2 Performance as of 31.12.2007 3 Volatility as of 31.12.2007, annualized Source: UBS Global AM

Selected UBS funds


Bonds: Strategy Bonds: Strategy

After strong run, bonds unlikely to gain

Forecast 3 month rates Forecast 10 year yields

USD yield curve today/one year ago3.0

2.0

1.0

2.5

1.5

0.5

Source: Bloomberg, WM ResearchMaturity (years)

1 2 3 5 7 94 6 8 10

8. Jan 088. Jan 07

Yield

Yield difference 10-year bonds1.5

1.0

–0.5

–1.5

0

0.5

–1.0

–2.0Source: Bloomberg, WM Research

2004 20062003 2005 2007 2008

USD–EURGBP–EURCHF–EUR

%

Current UBS UBS ImpliedForecast Forecast Forward

6 M 12 M 12 M

USA 4.4 4.2 4.2 3.7

Canada 4.4 4.9 4.3 4.1

Australia 7.1 7.0 7.0 7.5

Japan 0.9 0.9 1.0 0.9

Eurozone 4.6 4.3 4.3 4.1

UK 5.7 5.0 5.0 4.8

Sweden 4.7 4.6 4.5 4.5

Switzerland 2.8 2.8 2.8 2.9

Norway 5.6 5.7 5.8 5.3

New Zealand 8.9 8.5 8.3 8.5Sources: UBS WMR, Reuters

Current UBS UBS ImpliedForecast Forecast Forward

6 M 12 M 12 M

USA 3.8 4.5 4.8 4.3

Canada 3.9 4.2 4.2 4.0

Australia 6.1 7.0 7.0 7.5

Japan 1.5 1.7 1.9 1.7

Eurozone 4.1 4.4 4.6 4.4

UK 4.5 4.8 5.1 4.8

Sweden 4.2 4.3 4.3 4.4

Switzerland 2.9 3.2 3.4 3.1

Norway 4.6 4.9 4.9 4.7

New Zealand 6.3 6.4 6.3 6.0Sources: UBS WMR, Reuters

Yields on ten-year government bondsbegan to fall at the end of December, andthey continued to move lower into the newyear. It was especially pronounced for USDand GBP bonds. These two markets arebeing heavily influenced at present by neg-ative newsflow on the housing market,which points to a weaker overall economy.

US bond market prepared for recessionIt is not yet clear how dramatic the slow-down will ultimately be. The US bond mar-ket, however, seems to be expecting theworst. Two-year Treasury yields, forinstance, have fallen well below 3%,whereas the Fed’s base rate is still at 4.25%.The financial markets are thus pricing in adrastic and sustained easing in US monetarypolicy that would only be justified by signif-icantly weaker growth or even a recession.Real yields on inflation-linked bonds in par-ticular have fallen to an extraordinarily lowlevel. “Linkers” are currently yielding about

a percentage point less than they could the-oretically be expected to based on pasttrends. The same is true for longer-datedpaper, whose yield of less than 4% (around4.5% for UK bonds) is much too low. Thedrop has been especially sharp in the lastthree months at 50 basis points (bp). Sinceyields in continental Europe have remainedcomparatively stable, the spreads betweenUSD and GBP bonds and between EUR andCHF paper have contracted to a consider-able extent. We therefore see limitedpotential for above-average performanceon these markets despite the fact that fur-ther bad news is to be expected on themacroeconomic front.

High probability of rise in yieldsOverall, we must expect yields to rise signif-icantly by the end of the year. Two main fac-tors could trigger this rise: 1) Growth mayturn out not to be as weak as the bond mar-ket is currently expecting, as a result of

which the US Federal Reserve would not cutinterest rates so sharply. 2) Relatively highinflation rates could lead to higher inflationexpectations, which could push up risk pre-miums on long-dated bond investmentsand thus raise yields. We think yields areunlikely to fall further and thus recommendinvestments at the short end of the curveand on the money market.

Corporate bonds attractiveWithin the various bond segments, we seecorporate and high-yield issues as moreappealing than government paper for thetime being. The yield premium on high-rated corporates is currently about 120 bpin EUR and 210 bp in USD. High-yieldspreads, meanwhile, are 520 bp in EUR and640 bp in USD, offering investors a com-fortable risk buffer in that they can widenby a further 130 bp before high yield startsto underperform government [email protected], UBS AG

Bonds enjoyed an excellent start to the year, but yields are now so low that further gains are looking increasingly unlikely. We recommend investing in themoney market and at the short end of the yield curve.


Bonds: Recommendations Bonds: Recommendations

The bonds listed below will mature in the near future. We suggest ways to reinvest the proceeds at similar risk levels.

Reinvestment ideas EUR Reinvestment ideas USD

Redemptions EUR

The bonds listed below will mature in the near future. We suggest ways to reinvest the proceeds at similar risk levels.

Redemptions USD

EUR Bonds for Reinvestment USD Bonds for Reinvestment

The selection of recommended bonds is based on the relative appeal of the bond with respect to others with similar characteristics. The characteristics whichare taken into account primarily include the UBS WMR credit rating and residual duration. In addition, the selection also takes the following into account: sufficient liquidity, a price hovering near 100% or less and the lowest possible accruing interim interest. From our point of view, the bonds included withinthe list are the most interesting for their respective currencies, rating categories and durations, both in reference to their yield to maturity as well as in lightof the change which we forecast for the credit profile of their issuer.


Date Name Coupon ISIN

15.01. Toyota Motor 4.125 XS0155230260

15.01. Ned. Waterschapsbank 2.125 XS0204001290

15.01. Niederlande 2.500 NL0000102150

15.01. Republik Austria 5.000 AT0000384227

22.01. Rabobank 3.625 XS0160933940

23.01. Bank of Scotland 3.750 XS0161467492

25.01. LB Hessen-Thüringen 5.125 XS0123494832

Date Name Coupon ISIN

15.01. KfW 5.750 XS0083482868

15.01. Daimler North America 4.750 US233835AU10

15.01. GE Capital Corp 4.250 US36962GZZ08

15.01. EIB 5.750 XS0083538594

15.01. Eksportfinans 3.375 US28264QAM69

15.01. LB Baden-Württemberg 6.000 XS0083534502

22.01. LB Baden-Württemberg 3.500 XS0160940135

ISIN Title Coupon Maturity WMR Price Yield Duration Min.(%) Rating (%) Piece*

XS0201582474 LB BADEN-WUERTTEMBERG 3.750 24.09.09 AAA 100.6 3.3 1.7 1+1

XS0172289604 KFW 3.500 15.12.11 AAA 100.7 3.3 3.7 1+1

US36962GR307 GENERAL ELEC CAP CORP 4.250 15.06.12 AAA 100.3 4.2 4.1 1+1

US298785CX26 EUROPEAN INVESTMENT BANK 3.375 12.06.13 AAA 100.0 3.4 5.0 1+1

US92857WAF77 VODAFONE GROUP PLC 5.000 16.12.13 Low A 100.0 5.0 5.2 1+1*Minimum face value plus increment, e.g. 50 +1 means min. 50 000, but 51 000 possible.Data as of 9 January 2008, 09:00h (Zurich) Source: UBS WMR

The bond market awoke from its hiberna-tion in mid-January thanks to a number ofnew and maturing issues. This time marketplayers were really yearning for an end tothe lull in trading, as many borrowers havefound it difficult to sell new bonds sincemid-November. The high number ofredemptions in the second half of Januaryshould help ease buyer trepidation.

Even taking the continuing negativenews about write-downs and declines inearnings following the subprime crisis intoaccount, the bonds issued by many finan-cial institutions are attractively valued at themoment. However, we do not see any rea-son to rush into bank bonds, as the risk pre-miums will probably fluctuate wildly in theshort term. Redemptions of bonds withstrong credit ratings (“AA” or “AAA”)should be reinvested in bonds issued by asimilarly solid borrower for the time being.We therefore only recommend bonds witha very high credit rating in the reinvestmentrecommendations listed [email protected], UBS AG

The credit markets did not get off to a goodstart in the new year. Weak economic data,inflation fears and record high oil pricesdashed hopes for a more constructive cli-mate in the first half of January. Increasingand clearer signs of a spillover of the finan-cial crisis into the real economy caused riskpremiums to spike sharply, especially forcyclical stocks and weaker borrowers.

Despite the sharp rise in some risk premi-ums, we remain conservative in our recom-mendations. Because of the expecteddecline in consumer spending and the weakUS dollar, we continue to favour non-cycli-cal companies that do not depend heavilyon US dollar sales. For the Daimler bondthat is falling due, therefore, we recom-mend the more defensive-minded Voda-fone bond listed below. All of the otherbonds falling due have very high creditquality and appropriate replacements arelisted [email protected], UBS AG


DE0001040368 LAND BADEN-WUERTTEMBERG 3.500 19.11.10 AAA 98.1 4.2 2.7 1+1

DE000NRW1X15 LAND NORDRHEIN-WESTFALEN 3.000 15.11.11 Mid AA 95.7 4.2 3.7 1+1

DE0002158946 MUENCHENER HYPOTHEKENBNK 3.250 23.11.12 AAA 95.6 4.3 4.5 1+1

XS0276679023 BK NEDERLANDSE GEMEENTEN 3.750 16.12.13 AAA 97.5 4.2 5.4 1+

AT0000A011T9 REPUBLIC OF AUSTRIA 4.000 15.09.16 AAA 98.7 4.2 7.4 1+1 *Minimum face value plus increment, e.g. 50 +1 means min. 50 000, but 51000 possible.Data as of 9 January 2008, 09:00h (Zurich) Source: UBS WMR


Bond market: EUR Bond market: USD

USD BondsEUR Bonds



These bonds are a selection from the WMR Bond Top List which is available from your client advisor. These bonds are a selection from the WMR Bond Top List which is available from your client advisor.


DE000HBE0AJ5 HYPOTHEKENBK IN ESSEN 3.250 17.11.09 AAA 98.3 4.2 1.8 1+1

DE000LBW28C1 LB BADEN-WUERTTEMBERG 4.500 04.12.09 AAA 100.6 4.1 1.8 1+1

XS0237050520 AEGON GLOBAL INST 3.250 09.12.10 Mid AA 95.7 4.9 2.8 50+1

DE000A0B1F76 EUROHYPO AG 3.500 30.09.11 AAA 97.5 4.2 3.5 1+1

XS0273910793 HSBC BANK PLC 3.875 09.11.11 AAA 97.9 4.5 3.6 50+1

XS0274906469 IBM CORP 4.000 11.11.11 High A 97.5 4.7 3.6 50+50

DE000HBE1LM4 HYPOTHEKENBK IN ESSEN 3.750 28.09.12 AAA 97.7 4.3 4.4 1+1

XS0231001859 GOLDMAN SACHS GROUP INC 3.125 04.10.12 Low AA 92.4 5.0 4.4 1+1

XS0180181447 FORTUM OYJ 5.000 19.11.13 Low A 100.0 5.0 5.2 1+1

XS0325920824 GOLDMAN SACHS GROUP INC 5.125 16.10.14 Low AA 97.3 5.6 5.8 50+1

XS0230663196 UNILEVER NV 3.375 29.09.15 High A 91.4 4.7 6.8 1+1

XS0272770396 GE CAPITAL EURO FUNDING 4.125 27.10.16 AAA 94.0 5.0 7.4 1+1*Minimum face value plus increment, e.g. 50 +1 means min. 50 000, but 51 000 possible.Data as of 9 January 2008, 9:00h (Zurich) Source: UBS WMR


US500769AQ75 KFW 3.250 30.03.09 AAA 99.9 3.3 1.2 1+1

US78387GAN34 AT&T INC 4.125 15.09.09 Mid A 99.9 4.2 1.6 2+1

XS0230997644 BP CAPITAL MARKETS PLC 4.250 29.09.09 High AA 101.4 3.4 1.7 1+1

US683234WC84 ONTARIO (PROVINCE OF) 3.625 21.10.09 Mid AA 100.4 3.4 1.7 5+1

US00254EDD13 SWEDISH EXPORT CREDIT 4.500 27.09.10 High AA 102.8 3.4 2.5 2+1

XS0202109665 TOTAL CAPITAL SA 4.125 06.10.11 High AA 101.8 3.6 3.5 1+1

US36962GT386 GENERAL ELEC CAP CORP 5.000 15.11.11 AAA 103.0 4.2 3.5 1+1

US298785EE27 EUROPEAN INVESTMENT BANK 4.625 21.03.12 AAA 104.6 3.4 3.8 1+1

US377372AA59 GLAXOSMITHKLINE CAP INC 4.375 15.04.14 Low AA 98.3 4.7 5.5 1+1

US500769AX27 KFW 4.125 15.10.14 AAA 101.8 3.8 5.9 1+1

US4581X0AH11 INTER-AMERICAN DEVEL BK 4.250 14.09.15 AAA 102.2 3.9 6.5 1+1

US92857WAG50 VODAFONE GROUP PLC 5.000 15.09.15 Low A 97.2 5.5 6.3 1+1*Minimum face value plus increment, e.g. 50 +1 means min. 50 000, but 51 000 possible.Data as of 9 January 2008, 09:00h (Zurich) Source: UBS WMR

The money market quickly returns to normal The liquidity bottleneck on the EUR moneymarket, measured as the spread betweenthe 3-month Libor and the European Cen-tral Bank’s target rate, has decreased veryquickly since 17 December 2007. Thespread fell from a high of 97 basis points(bp) to its current level of 59 bp. However,this is still around 40 bp higher than whatthe normal spread has been in the past.This normalization looks set to continueover the next few weeks, bolstered byincreased transparency as a result of thecorporate reporting season and the ECB’sunchanged monetary policy. The easing ofthe money market along with the expecta-tion that the ECB will not tighten interestrates any time soon is also reflected in the decline in 2-year bund yields. Because

2-year yields fell faster than 10-year yieldswithin the month, the yield curve for the 2- to 10-year maturity segment has becomeincreasingly steep. We expect the yieldspread to widen further by the end of theyear, which should make strategies thatbenefit from a steeper yield attractive onceagain. Although 10-year bund yields mayfall again in the short term, we think long-term EUR bonds are expensive and recom-mend a duration below the benchmark. Bycontrast, the money market continues tolook [email protected], UBS AG

Treasury market enjoys stellar returns in 2007The Treasury market was one of the bestperforming sectors of the bond market in2007, posting a return of 9.8%. Treasuriesbenefited from flight-to-quality buyingwhen investors shunned risky assets as thesubprime mortgage contagion spread.With borrowing terms tightening, investorconcern grew that the housing recessionwould spill over into the broader economy.In response, the Federal Reserve began toloosen the monetary policy reins through aseries of rate cuts that lowered the Federalfunds rate by 100bps to 4.25%. Althoughthe re-pricing of risk pressured yields loweracross the maturity spectrum, the drop wasnot uniform. While the yield on the 2-yearnote plunged 175bps, the yield on the 10-year fell 70bps. Consequently, the yield

curve steepened from minus 10bps to apositive 97bps by year-end 2007. Lookingahead, we expect additional Fed easing andan on-going investor preference for safetyto benefit the front end of the yield curve.Our forecast for 3-month Libor is 4.2% overthe next 6 to 12 months. On the otherhand, with the price of crude oil approach-ing USD 100/bbl and core inflation runningabove the Fed’s perceived comfort zone, webelieve 10-year Treasury yields could movehigher. As a result, we continue to preferthe 2- to 5-year portion of the maturityspectrum. [email protected], UBS AG


Bond market: GBP Portfolio principles

GBP Bonds


These bonds are a selection from the WMR Bond Top List which is available from your client advisor.


XS0184578143 RABOBANK NEDERLAND 4.750 30.09.09 AAA 99.7 4.9 1.7 1+1

XS0200018876 GE CAPITAL UK FUNDING 5.500 07.12.09 AAA 100.8 5.0 1.8 1+1

XS0201609426 AMERICAN GENERAL FINANCE 5.625 29.03.10 High A 98.8 6.2 2.0 50+1

XS0162038318 EUROPEAN INVESTMENT BANK 4.250 07.12.10 AAA 98.9 4.6 2.8 1+1

FR0010326892 CIE FINANCEMENT FONCIER 5.125 16.05.11 AAA 100.6 4.9 3.1 1+1

XS0148125551 GENERAL ELEC CAP CORP 6.125 17.05.12 AAA 103.0 5.3 3.8 1+1

XS0148578692 E.ON INTERNATIONAL FINAN 6.375 29.05.12 Mid A 103.6 5.4 3.8 1+1

XS0212069115 KFW 4.750 07.12.12 AAA 100.0 4.7 4.5 1+1

XS0229306138 VODAFONE GROUP PLC 4.625 08.09.14 Low A 92.7 6.0 5.7 50+1

XS0191374817 GE CAPITAL UK FUNDING 5.625 12.12.14 AAA 100.3 5.6 5.9 1+1

XS0223923870 EUROPEAN INVESTMENT BANK 4.375 08.07.15 AAA 97.4 4.8 6.4 1+1

XS0160386875 EUROPEAN INVESTMENT BANK 4.750 15.10.18 AAA 99.6 4.8 8.6 1+1*Minimum face value plus increment, e.g. 50 +1 means min. 50 000, but 51 000 possible.Data as of 9 January 2008, 09:00h (Zurich) Source: UBS WMR

Credit market: uncertainty remains very high

The recent credit condition survey pub-lished by the Bank of England has providedinsightful results. The survey revealedstricter lending conditions and a reductionin the amount of credit available to house-holds and corporates. This was particularlytrue for the secured household sector andfor the commercial real estate sector. Theresults do not bode well either for the over-all economy or consumer spending and theUK mortgage market specifically. Increasingconcerns over the economic outlook, risingrisk aversion, and tighter funding standardswere the main reasons for deterioratinglending standards. The limited ability ofbanks to transfer credit risk off the balance

sheet also played its role. Overall, the resultsdo not speak for a rapid recovery on creditmarkets and suggest that uncertainty couldpersist for some time. However, with thehigh liquidity premium in the GBP interbankmoney market diminishing, given our sup-portive Bank of England base rate outlookand the already heavy fall of corporatebond prices in the second half of last year,we see some chances for corporate bondspreads to gradually decline over the courseof the year. [email protected], Analyst, UBS AG

How much (diversification) is enough?

Lack of diversification hurts 20

15

5

10

0

Source: UBS WMR, as of 20 September 2007

0% 10% 20% Risk p.a.

Well diversified investorsUndiversified investors

% Return p.a.

In our edition of August 31, 2007, wepointed out the crucial role played by diver-sification in achieving investment success.We showed that a well-diversified globalequity portfolio should consist of roughly80 stocks. This is in stark contrast to theaverage three to five stocks held by privateinvestors in the US or Switzerland and sug-gests investors should spread their invest-ments more thoroughly. We have receivedseveral responses to this article stating thatthe goal of most investors is not to matchthe performance of an index but to effec-tively increase wealth and beat the index.The most effective way of achieving this isby focusing on a few stocks which seem tohave the best prospects.

The impact of a lack of diversificationBut is this really the best way to invest yourmoney? We have tried to detect the impactof such a concentration of a few stockswithin a portfolio.

We simulated 10,000 portfolios investedin selected stocks of the S&P 100 and theStoXX 50 indices at the end of 2000. Thesesimulations were carried out by selecting

either one or several stocks out of the bas-ket of 150 global stocks so that the averagenumber of stocks in the portfolio was threeto five. The investors then assigned a ran-dom weight to the stocks in the portfolioand selected an additional investment inUSD cash and a USD Treasury bond indexfund to simulate different risk appetite.

The portfolios were then held unchangeduntil the end of May 2007 – a period there-fore of more than six years. The resultingreturn of these simulated portfolios and therisk at which this return was achieved isshown in the chart together with the riskand return of investors who chose to investin a subset of 100 stocks (“well-diversifiedinvestors”). The results are impressive: 70%of all the concentrated portfolios underper-formed well-diversified portfolios for agiven level of risk. In other words, for agiven level of portfolio risk, only three outof ten investors with an undiversified port-folio will outperform an investor who cov-ers the stock market through well-diversi-fied funds or mandates. We have analyzedthe results in a separate education note forreaders interested in more details. In a nut-shell, holding a concentrated portfoliomight not be the right way to effectivelyincrease wealth over [email protected], UBS AG


Bond funds Foreign Exchange: Strategy


Regional bond strategy – + ++ +++– –– – –

USD

EUR

GBP

CHF

JPY

SGD, HKD, AUD, NZD

Other



Selected UBS funds ISIN NAV 1 Yield Duration2 Return (%) 3

(%) 2 1 year 3 years

USDUBS (Lux) Bond SICAV – Flexible Term USD B USD LU0151774972 114.59 3.80 0.96 4.68 13.58UBS (Lux) Medium Term Bond Fund – USD B USD LU0057957531 182.39 3.17 2.29 6.20 14.35EURUBS (Lux) Bond SICAV – Flexible Term EUR B EUR LU0151774626 110.18 3.32 1.03 1.79 8.85UBS (Lux) Key Selection SICAV – EUR Bonds B EUR LU0235997086 98.81 4.03 5.05 –3.29 n.a.UBS (Lux) Bond SICAV – Europ. Converge. B EUR LU0214905043 110.61 4.15 5.98 4.08 n.a.GBPUBS (Lux) Medium Term Bond Fund – GBP B GBP LU0074904888 167.67 4.58 2.35 5.22 19.62CHFUBS (CH) Key Selection Fund – Bonds (CHF) CHF CH0002775242 79.61 2.66 4.78 –1.80 n.a.JPYUBS (Lux) Bond Fund – JPY B JPY LU0035348555 153103 0.37 5.88 1.39 –0.35Emerging MarketsUBS (Lux) Emerging Ec. Fund – Global Bonds USD LU0084219863 1323.37 5.80 6.75 7.40 90.09UBS (Lux) Emerging Ec. Fund – Lat. Am. Bonds USD LU0055660533 4402.55 4.90 7.71 0.27 111.57CorporatesUBS (Lux) Bond SICAV – EUR Corporates B EUR LU0162626096 11.26 4.80 4.65 –1.24 n.a.UBS (Lux) Bond SICAV – USD Corporates B USD LU0172069584 11.43 5.98 5.68 0.44 n.a.High YieldUBS (Lux) Bond SICAV – USD High Yield B USD LU0070848972 162.03 9.40 3.90 –1.03 43.82UBS (Lux) Bond Fund – Euro High Yield B EUR LU0086177085 93.98 7.65 3.43 –4.03 44.88Absolute ReturnUBS (Lux) Bond Fund – Abs. Ret. Bond (EUR) B EUR LU0188543846 9.25 2.72 –0.50 –11.84 n.a.UBS (Lux) Bond Fund – Abs. Ret. Bond (USD) B USD LU0188544901 9.98 2.72 –0.50 –8.60 n.a.UBS (Lux) Bond Fund – Abs. Ret. Bond (CHF) B CHF LU0188544901 9.13 n.a. –0.50 –9.22 n.a.For Convertible Bond Funds cf. Page 241 as of 07.01.2008 2 as of 30.11.2007, yield net of fees 3 as of 30.11.2007, net of fees Source: UBS Global AM

Slovakia’s EUR adoption matters for the region

CZK,PLN and SKK to appreciate further

EURCZK (lhs)EURSKK (lhs)EURPLN (rhs)

45

33

41

37

29

5

4

32004 2007 20082003 2005 2006

Source: Bloomberg, UBS WMR

forecast

The central European countries referred toas CE-4 include Poland, Hungary, the CzechRepublic, and Slovakia. Of these, only Slo-vakia has initiated the process to adopt theEUR, which at a minimum takes two years,while the other three countries have not yeteven begun. However, even without a spe-cific target for joining the European Mone-tary Union (EMU), Poland and the CzechRepublic – and, to a lesser degree, Hungary– have initiated economic reforms as theyintegrate into Europe and prepare to meetthe strict fiscal and monetary requirementsnecessary for EUR adoption. These reformsare positive for their currencies.

The decision on Slovakia’s admission toEMU will come during the next six months.While we think it is most likely that Slova-kia will be accepted, there is a real possibil-ity of rejection due to their failure to meetthe inflation criteria, potentially demon-strating reluctance to accept new membersat different levels of economic develop-ment. Should Slovakia be rejected, it wouldbode poorly for the SKK (our forecastsanticipate acceptance). In addition, theother countries’ motivation to join EMU

would be hurt, potentially hindering impor-tant reform efforts. However, the new gov-ernments in Poland and the Czech Repub-lic are quite reform-oriented and will likelybe less vulnerable to this risk. If anything,Slovakia itself is likely to pursue populistpolicies if rejected.

We are positive on the Polish zloty (PLN)and the Czech krona (CZK) for several otherreasons. First, both countries have strongdomestic demand, partially protecting themfrom a European slowdown. Second, bothare experiencing tightening in the labormarket, which has lead to inflationary pres-sure and rising central bank rates. Theincreasing yield attraction of the currencieshelps them appreciate. Third, the externalpositions of the two countries are bothimproving. We think the Hungarian forint(HUF) has a more negative profile, withgrowth slowing down due to high interestrates and fiscal tightening. [email protected], UBS AG


Foreign exchange

USDJPYEURUSD

34 UBS investor’s guide 11 January 2008

AUDUSD

Foreign exchange

USDCHF

AUDUSD

Strong Australian data helps Aussie After AUDUSD reached a two-month low at0.8554, the release of more disappointingUS figures for durable goods, housing data,ISM manufacturing and nonfarm payrolls allput pressure on the dollar, pushingAUDUSD up to 0.88. Later, strong Aus-tralian building approvals and retail salesfurther kept the Aussie strong against arecovering USD. We are still forecasting thatthe beleaguered greenback will start itsrecovery soon and see tentative signs thatUSD has broadly seen its low. As marketsalready anticipate aggressive interest ratecuts by the Federal Reserve, the USD shouldnot suffer when the actual cuts occur. Wetherefore expect AUDUSD to test supportlevels at 0.85, while we see no room for sus-tainable levels below 0.84 in the short [email protected], UBS AG

0.95

1.00

0.90

0.85

0.80

0.75

Source: Reuters, UBS WMR

Volatility Range

Volatility Range

Forward

Forecast

May 08 Aug 08 Dec 08 Apr 09 May 07Jan 07 Sep 07 Jan 08

USDCHF


Volatility Range

Volatility Range

Forward

Forecast

1.30

1.20

1.10

1.05

1.00

1.15

1.25


Beleaguered USD ready to recoverAfter USDCHF reached a seven-week highat 1.1627 on Christmas Day, the release ofmore disappointing US figures for durablegoods, housing data, ISM manufacturingand nonfarm payrolls all put pressure on thedollar, pushing USDCHF down to 1.1020.Once again, the 1.10 level represents achallenging chart-technical barrier for USD-CHF. In the current USD negative environ-ment, we expect to see the key barriertested but not broken. We are still forecast-ing that the beleaguered greenback willstart its recovery soon and see tentativesigns that USD has broadly seen its low. Asmarkets already anticipate aggressive inter-est rate cuts by the Federal Reserve, theUSD should not suffer when the actual cutsoccur. We remain confident with our 3mforecast at [email protected], UBS AG

EURUSD USDJPY


Volatility Range

Forecast

Forward

Volatility Range

1.55

1.60

1.50

1.30

1.45

1.40

1.35

May 08 Aug 08 Dec 08 Apr 09May 07Jan 07 Sep 07 Jan 08

Volatility Range

Volatility Range

Forward

Forecast

125

120

115

110

95

100

105



Waiting for the Fed’s decisionEURUSD fell as expected in the last weeksof 2007. However, at the turn of the year aseries of rather poor US macroeconomicdata hit the markets and led to recessionfears as well as expectations that the Fedwill now cut interest rates more aggres-sively. Despite this, EURUSD did not make itall the way back up to the November highsand we remain confident that the 1.49 levelseen in November marks the peak for thetime being. We are looking for more down-side pressure on EURUSD once the Fed deci-sion has been announced, since we do notthink that they will ease policy as aggres-sively as market prices currently reflect. Nev-ertheless, in the run-up to the Fed decisionmarkets could well turn even more nervous.Therefore, volatility can be expected to staypretty high and may even rise in advance ofthe decision. We like to sell rallies [email protected], UBS AG

JPY not ready to strengthenLately, Japanese data has even been worsethan US data. It appears that industrial pro-duction and consumer demand haveslowed. At the same time, inflation pressureand expectations for interest rate hikes havedisappeared completely. All this is rathernegative for the JPY and prevents it fromappreciating against the USD. Otherwise,the situation would not be bad for JPYappreciation. The USD is under pressure ingeneral, and other low yielders such as theSwiss franc are profiting from that weak-ness. In the CHF, there appears to be someunwinding of carry trades and the JPYshould normally also profit from that trend.The weak spot in the Japanese economyseems to be more dominant, however. Wetherefore stick to our 3-month forecast forUSDJPY at [email protected], UBS AG


CommoditiesReal estate

Asia shielded from credit turmoilBy the end of 2007 listed property stockshad sold off in many markets, with largecompanies in Australia and Spain sufferingdebt servicing problems as a result of risingcredit costs. Since the credit crisis has notyet settled down, we recommend avoidingover-leveraged companies. Blue-chip devel-opers in Hong Kong are inexpensive andhave superior growth prospects.

Global property stocks dropped 12% in2007; investors sold them in anticipation ofcorrections in asset prices in the underlyingmarkets. The credit crunch also took its tollon the listed sector. In markets such as Aus-tralia or Spain, some leading listed proper-ty companies are expected to sell assets tomeet payments to creditors or will eventu-ally have to recapitalize. In sharp contrast,Asia ex-Japan remained the only unscathedregion, with total returns in excess of 45%last year.

Demand continues to be supportive inAsian real estate markets and leverage hasnot reached the extremes of other regions.Hong Kong’s average residential home priceincreased by 24.2% in 2007. For 2008, weare expecting another 25% increase. Thedramatic improvement in housing afford-ability and negative real interest rates inHong Kong bode well for residential prop-erty stocks. This also holds true for the of-fice property market in Hong Kong, wherethe majority of supply due to come onstream in 2008 is so far being relatively eas-ily absorbed.

Our top picks among Hong Kong prop-erty stocks are the blue chip developers SunHung Kai Property (SHKP) and CheungKong Holding (CKH). SHKP is in a uniqueposition not only in the housing market butalso in office, retail and the Chinese real

estate market. It is now trading at a 9.5%premium to our 08/09E NAV, which is inex-pensive compared with the 25-30% premi-um to NAV seen during the up-cycle. CKHis the largest land bank developer in HongKong with 23% market share; hence it isthe biggest beneficiary of the negative realinterest rate environment. CKH’s share pricerepresents a deep 55% discount to its prop-erty-only NAV, which is inexpensive versusthe 5% discount seen during the [email protected]@ubs.comAnalysts, UBS AG

Precious metals in 2008: it’s not only gold that shines

The precious metals group regained itsmulti-decade highs in 2007 and surged pastlevels last seen in the 1980s. The year wascharacterized by robust physical and indus-trial demand, sluggish supply from big pro-ducers, and rising geopolitical tensions. Weremain fairly positive on the prospects ofprecious metals in 2008.

Gold may outperform other commodities in 2008The current rally in gold prices is supportedby many factors such as high liquidity, ris-ing demand for jewelry production, theweak dollar, and increasing economic andgeopolitical uncertainties. We think highgold prices may prevail over the next fewmonths. However, once the dollar strength-ens, geopolitical and inflation fears abate,and seasonally high demand for jewelry isreduced, gold prices will likely start a cor-rective move, probably leading to signifi-cantly lower prices towards summer 2008.Still, we expect gold to shine again in thesecond half of the year and think it has thepotential to outperform other commodi-ties. The reasons for this are a decliningmining supply and rising demand for gold,especially from the Middle East, wherewindfall profits from high oil prices mayspur consumption of luxury goods anddemand for gold as a reserve asset.

White metals not bad eitherSilver might not be able to keep up withgold in 2008 since supply from mines isexpected to rise while demand shouldremain pretty flat. However, given our skep-ticism about commodity prices in general,

silver may still be one of the best perform-ing commodities in 2008, although the out-look for gold and platinum is more promis-ing. Platinum is one of our favorite com-modities for 2008: demand from the autoindustry should increase substantially asmore platinum is needed to build moreenvironmental-friendly cars, where plat-inum is needed for catalysts and other hightech components to reduce emission gases.On the other hand, supply – especially fromSouth Africa – is likely to stall due to strikesand higher safety standards imposed on themining companies. Hence platinum maycontinue to perform well in [email protected], UBS AG


Emerging MarketsEmerging Markets

Asian bonds: risks and opportunities

Emerging market bonds

Philippines: fiscal balance and GDP1

–1

–3

0

–2

–7

–6

–5

–4

–8

7

5

3

6

4

–2

–1

0

1

2

–31999 2000 2002 20041997 1998 2001 2003 2005 2006

Source: Bloomberg

% of GDP % y/y chg

Real GDP growth (rhs)National government balance (lhs)

Asian economies have built up muchstronger current account and foreignreserve positions over the last decade. In1996, only China, Singapore and Taiwanreported current account surpluses. In2007, however, all Asian countries exceptIndia reported healthy surpluses. A strongimprovement in external debt as a percent-age of total foreign reserves creates a morefavorable picture for Asian sovereigns.

Positive on the Philippines while skeptical on PakistanWe are maintaining our moderate over-weight rating on the Philippines‘ USDbonds as we see the low interest rates andimproving fiscal position in the Philippinesas positive. Investors are cautious towardChinese bond markets due to regulatory

concerns about the overheating economy.We are also maintaining our neutral recom-mendation on Indonesia. Growing con-cerns over rising oil prices would result infuel subsidy cuts and rising risk aversion offoreign investors.

Pakistan’s transition to democratic rulereceived a blow from the assassination ofBenazir Bhutto and the delay in the elec-tion. These incidents posed problems to theinternational allies, which had hoped formore stable governance in Pakistan. We ex-pect ongoing negative news flow on Pak-istan to adversely affect the capital marketsand reduce foreign direct investment in thelong run. We believe that both Moody’s andS&P will downgrade their respective B1 andB+ ratings to B2 and B in 2008.

Emerging Bonds1 Spread 2 Moody’s 3 S&P 3 Strategy 4

EMBI Global USD 269

Argentina 428 B3 B+ +Brazil 229 Ba1 BB+ +Chile* 154 A2 A+ nColombia* 219 Ba2 BBB- nEcuador 627 Caa2 B- nIndonesia 310 Ba3 BB- nMalaysia* 120 A3 A- n1 USD-denominated sovereign debt.2 Spreads over US Treasuries (in basis points)3 Long-term foreign currency ratings* These countries have been rated “investment grade” by Moody’s and/orStandard & Poors.

Emerging Bonds1 Spread 2 Moody’s 3 S&P 3 Strategy 4

Mexico* 179 Baa1 BBB+ –Peru 188 Ba2 BB+ nPhilippines 239 B1 BB- +Russia* 172 Baa2 BBB+ +South Africa* 184 Baa1 BBB+ nTurkey 262 Ba3 BB- nUkraine 318 B1 BB- +Venezuela 520 B2 BB- –4 Active weights vs. EMBI Globaln = neutral,+ = overweight,– = underweightSource: UBS WMR, Bloomberg and JP Morgan as of 7 January 2008

Given larger spread widening of Asian cred-its compared with their US peers, better val-ues have reappeared for Asian credits. Yetas investors are now more risk averse, we aresticking with issuers that are lowering debtratios, have a strong profitability outlook,have strong corporate governance with bigmarket capitalization listed on stockexchanges, and receive explicit and implicitgovernment and shareholder support.

Bond picking in promising sectorsIn our view, the Indonesian telecommunica-tion sector is one of the most defensive sec-tors with solid credit fundamentals. Thecountry's growing population and fast-growing economy, along with the currentlow penetration rate in the mobile market,could provide high growth potential. Werate Indosat 7.75% due 2010 and 7.125%due 2012 and Excelcomindo 7.125% due2013 as Outperform.

We view the financial profile of the bank-ing sector in Singapore as healthy. Benefit-ing from political stability and prudentmacroeconomic management, banks enjoyhigh capital adequacy and low non-per-forming loan ratios, in our view. DBS Bankreported strong profitability and improvingasset quality. The bank is wholly owned byDBS Group Holdings, which in turn is 31%owned by the Singaporean government.We prefer DBS 5% due 2019, callable in2014.

We have a positive outlook for the con-sumer sector. China Fishery Group (CFG)could benefit from increased globaldemand for fishery products and a shrink-ing fish catch. While we expect CFG'sfuture acquisitions to be smaller, CFGshowed it is improving overall credit ratios.We prefer CFG 9.25% due [email protected], UBS AG

Investors have become more risk averse as a result of recurring poor results inthe financial sector. Asian credit markets have been hurt and we believe theywill continue to be. But stronger economic fundamentals in Asia and possibledips in Asian bond prices will create opportunities for investors. We favor high-quality credits since we expect the performance of high- and low-quality cred-its to polarize in 2008.

Comparing Asian credit bond spreads280

160

200

240

120

700

500

600

300

400

200

Apr 06 Oct 06 Apr 07 Apr 08Oct 05 Oct 07

Source: Bloomberg

bp

*spread over US Treasuries

bpJP Morgan Asian high-grade credit bond spread* (lhs)JP Morgan Asian high-yield credit bond spread* (rhs)


Recommendation

This chapter is for your information only and is not intended as an offer, ora solicitation of an offer, to buy or sell any investment or other specific prod-uct. Certain services and products are subject to legal restrictions and can-not be offered worldwide on an unrestricted basis.

Recommendation

6-Month Outperformance Note: Basketof 3 Hong Kong China-listed stocks versus the S&P 500 Retailing Index The 6-Month Outperformance Noteenables you to take advantage of bothviews: guaranteed coupons as well asbonus coupons to benefit from China andUS relative performances. It is a structuredproduct that belongs to the “Optimization“family. It provides regular guaranteedcoupons and potentially offers bonuscoupons in the case of an early redemption.

The redemption following any bi-monthly observation date is linked to therelative performance of the laggard of thebullish basket of stocks versus the bearishunderlying index.

1 If on any observation date (includingmaturity), the outperformance fixes at orabove zero, an early redemption willoccur. You will receive 100% of the nom-inal amount and an additional bonuscoupon.

2 If not redeemed early, and at maturitydate the outperformance fixes belowzero, anda. no knock-in event occurred, you will

receive 100% of the nominal amount.No bonus coupon will be paid; or

b. a knock-in event occurred, you willreceive 100% of the nominal amountplus the outperformance, and multi-plied by the nominal amount, subjectto a minimum redemption amount ofzero. No bonus coupon is paid.

In all of the above cases, you will be paidguaranteed coupons of 13% p.a. on a bi-monthly basis.

Who should invest?• Investors who expect China to continue

growing and the US economy to slowdown

• Investors who find the selected proxiessuitable to express this view

• Investors who expect the ‘Bull Basket’ toperform better than the ‘Bear Index’within the next 6 months

• Investors who seek high coupon pay-ments linked to the relative performanceof ‘Bull Basket’ and ‘Bear Index’

• Investors who are willing to accept capi-tal at risk and capped returns

• Investors who are looking for short termstructures

Why should you invest?• The structure offers opportunities to

profit in both falling or rising markets• Short tenor of 6 months

• Attractive guaranteed and bonus couponof 13%p.a.

• Defensive knock-in level of –30% on theoutperformance index

What are the risks?• If a knock-in event occurred, the investor

loses the conditional capital protectionand is exposed to the potential negativeperformance of the outperformanceindex.

• The maximum returns are capped withguaranteed and bonus coupons.

• The mark-to-market may not reflect theevolution of the underlying Index as thepayoff is applicable upon maturity.

• Liquidity risk and credit risk of the issuer(rated Aaa/AA)

[email protected] Product Specialist, UBS AG

Benefit from China growth versus US slow down The current US housing recession and deteriorating credit conditions have causeddisruptions throughout the US economy. UBS Wealth Management Research(WMR) forecasts this trend will continue as the negative ripple effects from thehousing recession draw wider circles. Hong Kong H-shares equities continue tooutperform the region, driven by the expected Fed rate cuts, though WMR iskeeping a neutral weighting of the Chinese market within the Asia ex-Japanequity market strategy. WMR expects domestic demand to remain strong andearnings growth to moderate.

175

50

150

125

100

75

25Source: Bloomberg

Jan 07 Apr 07 Jul 07 Oct 07 Jan 07

%Ping An Insurance GroupICBCChina Mobile Ltd

150

50

125

100

75

25

Source: Bloomberg

Jan 07 Apr 07 Jul 07 Oct 07 Jan 07

S&P 500 Retail Index

%

Definition of the ‘Bullish Basket’ – Good proxy to ‘China growth’

Currency Sector Fall from WMR 52 week rating

high

China Mobile Ltd. HKD Telecom –16.69% Buy/MP

Industrial & Commercial Bank of China Ltd. HKD Banks –26.57% Hold/MP

Ping An Insurance (Group) HKD Insurance –36.37% Buy/OPSource: UBS

Bullish Basket Underlyings Bearish Index

‘Bear Index’: S&P 500 Retailing Index (S5RETL) – ‘US retail

stock index as indication for US slowdown’

You are right in sayingthat fiscal policy is not dis-cussed anymore as acredible option in fightingan economic slowdownor even a recession. Itmight seem a triumph ofmonetarism over theremedies advocated by

John Maynard Keynes in his General Theory,which was the framework backing Presi-dent Roosevelt’s New Deal policy to over-come, or at least mitigate, the GreatDepression.

But monetarism, i.e. the theory dismiss-ing fiscal policy as a tool to fight businesscycle slumps and stressing the importanceof monetary tools, would not have tri-umphed if, as you correctly suggest, politi-cians had shown more fiscal responsibility.What applies here to the US Congress istrue for almost every country which exper-imented with fiscal policy in the sixties, sev-enties and early eighties of the last century.Anti-cyclical fiscal policy did not have achance in the first place because suppos-edly one-off programs to stimulate theeconomy were not rolled back once theeconomy was running at full steam again.

This means that the weight of the gov-ernment on the economy and the size ofthe public debt were increased in peace-

time to an extent usually seen only inwartime. Moreover, it was also noticedthat the more the government was grow-ing, the less efficient fiscal measuresbecame in changing the economy’s direc-tion.

Fiscal measures are usually slower to im-pact the economy than monetary means.The time lag between taking a fiscal deci-sion and implementing it can sometimeslast so long that the measures become pro-cyclical, i.e. start to stimulate an economywhich is already running at full steam.

Finally, and this is especially true for theUS, the government’s deficit spending usu-ally implies an increase in the trade deficitif the private sector of the economy is notsaving enough – therefore the term “twindeficit.” Now that the US trade deficit is fi-nally beginning to shrink after eight yearsof deepening, it would be a pity if the gov-ernment made it increase again.Andreas HöfertAnalyst, UBS Financial Services Inc.

Dear Mr Pu,As a 1961 graduate with a BA in economics, I was taught that fiscal policy is a muchstronger tool than monetary policy to affect economic activity. Yet when we want to stim-ulate the economy in order to avoid a recession or curtail the economy to fight inflation,all we hear about is monetary policy. Do we ignore fiscal policy because of entitlementsand the lack of fiscal responsibility on the part of Congress, or is monetary policy reallystrong enough to offset fiscal policy?A client from Palm Beach, Florida


Readers’ questionsRecommendation

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

[email protected]

Yonghao PuAnalyst, UBS AG

Promising Asian and Latin American currenciesLower liquidity, ongoing issues in globalcredit markets, challenging growth/inflationmixes and the considerable risk of a USrecession make 2008 a year in which differ-entiation among countries will have to beopportunistic and any investment decisionbased on fundamental criteria and valua-tion. Emerging market economies still offera higher return potential than developedones. However, our analysts are seeing acouple of high potential currencies amongstour preferred regions, Asia and Latin Amer-ica. In particular, the Indian rupee (INR), theIndonesian rupiah (IDR), the Brazilian real(BRL), the Argentine peso (ARS) and theMexican peso (MXN) look promising.

Two year Digital(+) Bull GROI structuresoffer attractive returns Taking higher volatility levels of emergingmarkets into account, Digital(+) GROIs haveproven to offer attractive return potential for

investors while ensuring full capital protec-tion at maturity. If at the expiration date andtime the underlying basket trades at least atthe same level (strike) as at the pricing date,the investor will receive a fixed digitalcoupon (see table below). With the Digital+tranches, the investor can profit on top froma 100% participation if the basket appreci-ates more than the digital coupon levels .

If you believe in the potential of Asianand/or South American currencies, we offerthe following structures:1 Digital+ Bull GROIs on High-Potential Latin

American Currencies (ARS, BRL, MXN) ifyour focus is on South America only.

2 Digital(+) Bull GROIs on High-PotentialAsian (INR, IDR) and Latin American Cur-rencies (ARS, BRL) if you are looking at amore diversified portfolio.

[email protected] Product Specialist, UBS IB

Digital+ Bull GROIs on Latin AmericanCurrencies

Issuer UBS AG, Jersey Branch (Aaa/AA)

Issue date 4 Feb 08

Expiry date Issue date plus 2 years

Subscription period From Friday, 11th Jan 2008 to Monday, 4 Feb 2008

Capital protection 100%

Underlying USD versus equally weighted basket of ARS, BRL and MXN

Min. investment 10 000 USD / EUR or CHF

Investment ccy Structure Coupon Addition. ISINupside particip.

USD Digital+ 17.50% Yes CH0036773569EUR (Quanto) Digital+ 21.50% Yes CH0036773585CHF (Quanto) Digital+ 12.50% Yes CH0036773501Source: UBS Investment Bank

Digital Bull GROI on Asian and LatinAmerican Currencies

Issuer UBS AG, Jersey Branch (Aaa/AA)

Issue date 4 Feb 08

Expiry date Issue date plus 2 years

Subscription period From Friday, 11th Jan 2008 to Monday, 4 Feb 2008

Capital protection 100%

Underlying USD versus equally weighted basketof ARS, BRL, INR and IDR

Min. investment 10 000 USD / EUR or CHF

Investment ccy Structure Coupon Addition. ISINupside particip.

USD Digital+ 15% Yes CH0036768627EUR (Quanto) Digital+ 18% Yes CH0036768635CHF (Quanto) Digital 11% No CH0036768643Source: UBS Investment Bank

On fiscal stimulation


Explanations

44 UBS investor’s guide 11 January 2008

Actual weightings are representative of the UBS Strat -egy Funds and might not correspond directly to otherUBS Investment Programmes.

The chart above gives an overview of the main focus of UBS investment policy, assuming currency hedging.

In portfolios managed by us, investment categories,markets or sectors regarded as attractive will be over-weighted in relation to the corresponding benchmark(normal weighting), and those seen as unattractive willbe under-weighted. Those areas in between receive aneutral weighting.

Overview of investment policy

Stock Recommendation System

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

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

Absolute Stock Rating System

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

Sector Relative Stock View

Outperform Expected performance versus benchmark is above 10% on a 12-month horizonMarketperform Expected performance versus benchmark is between minus and plus 10% on a 12-month horizonUnderperform Expected performance versus benchmark is lower than minus 10% on a 12-month horizon.

Current WMR Global Rating Distribution

Buy 28% (47%*) Outperform 34% (52%*)Hold 63% (52%*) Marketperform 51% (47%*)Sell 3% (37%*) Underperform 8% (47%*)

*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.

WMR Terminology Definition

AAA Issuer / Bonds have exceptionallystrong credit quality. AAA is the best credit quality.

High AA / Mid AA/ Issuer / Bonds have very strongLow AA credit quality.

High A / Mid A / Low A Issuer / Bonds have high credit quality.

High BBB / Mid BBB / Issuer / Bonds have adequate credit Low BBB quality. This is the lowest Investment

Grade category.

WMR Terminology Definition

Improving / Stable / The WMR credit trend reflects Deteriorating the analyst’s expectations as to

how the company’s credit funda-mentals will change.

Watch+ Increased likelihood of UBS WMR Credit Rating upgrade(s).

Watch– Increased likelihood of UBS WMR Credit Rating upgrade(s).

Definitions of WMR Credit Ratings

– + ++ +++– –– – –

– + ++ +++– –– – –

CashBondsEquities

Health CareFinancialsTelecommunicationsEnergyIndustrialsConsumer StaplesUtilitiesMaterialsInformation TechnologyConsumer Discretionary

USDEURGBPCHFJPYSGD, HKD, AUD, NZDOther

USDEURGBPCHFJPYAUDOther

USAEurozoneUKSwitzerlandJapanSingapore, HK, Australia, NZEmerging Markets (all)Other

Strategy Summary

Equity Markets

Global Equity Sectors

Bond Markets

Currency Markets

+ moderate overweight. ++ overweight. +++ strong overweight. – moderate underweight. – – underweight. – – – strong underweight. Source: UBS Wealth Management Research


ImpressumImportant disclosures

“Some of the companies disclosed in this list might not be cited in thispublication. They are referring to other local editions of the UBS investor’sguide, which is published in Switzerland, Germany, France, Italy, the UKand Asia.”

For a complete set of required disclosures relating to the compa-nies that are the subject of this report, please mail a request toUBS Wealth Management Research Business Management, 1285 Avenue of the Americas, 13th Floor, Avenue of theAmericas, New York, NY 10019.

PublisherUBS AG, Wealth Management Research P.O. Box, CH-8098 Zurich Editorial teamAndreas Höfert, Editor-in-ChiefThomas Flury, Christian Frey,Katherine Klingensmith,Georg Klein-SiebenbürgenProduct managementSimone Hofer Frei

TranslationsCLS Communication AG, Basel Desktop publishingWerner Kuonen, Hanni Lischer, Rolf Müller,Arthur Meier, Margrit Oppliger, René RüeggPrintingXpress Print Pte Ltd, [email protected] Editorial deadlineThursday prior to publication, 3 p.m. (CET)

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 otherspecific product. Although all information and opinions expressed in this document were obtained from sources believed to be reliable and ingood faith, no representation or warranty, express or implied, is made as to its accuracy or completeness. All information and opinions as wellas any prices indicated are subject to change without notice. At any time UBS AG (“UBS”) and other companies in the UBS group (or employ-ees thereof) may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to theissuer of relevant securities or to a company connected with an issuer. Some investments may not be readily realizable since the market in thesecurities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. Futuresand options trading is considered risky and past performance of an investment is not a guide to its future performance. Some investments maybe subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more.Investors should be aware that Emerging Market (sovereign and corporate) bonds are subject to, amongst others, interest rate risk and highcredit risk, which can cause such bonds to be extremely volatile. Emerging Market (sovereign and corporate) bonds can be very illiquid and liq-uidity conditions can abruptly worsen due to credit deterioration or general market turbulence and/or economic or legal factors. Changes in FXrates may have an adverse effect on the price, value or income of an investment. We are of necessity unable to take into account the particu-lar investment objectives, financial situation and needs of our individual clients and we would recommend that you take financial and/or taxadvice as to the implications (including tax) of investing in any of the products mentioned herein.For structured financial instruments and funds the sales prospectus is legally binding. If you are interested you may attain a copy via UBS or asubsidiary of UBS.This document may not be reproduced or copies circulated without prior authority of UBS or a subsidiary of UBS. UBS expressly prohibits thedistribution and transfer of this document to third parties for any reason. UBS will not be liable for any claims or lawsuits from any third par-ties arising from the use or distribution of this document. 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The contents of this report have notbeen and will not be approved by any authority in the United Arab Emirates including the Emirates Securities and Commodities Authority orthe UAE Central Bank, the Dubai Financial Market, the Abu Dhabi Securities market or any other UAE exchange. UK: Approved by UBS AG,authorised and regulated in the UK by the Financial Services Authority. A member of the London Stock Exchange. This publication is distributedto 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 UKregulatory regime or the Financial Services Compensation Scheme. USA: This document is not intended for distribution into the US and / or toUS persons.The investment funds described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Units of these invest-ment funds may not be offered, sold or distributed to US persons and /or within the US. Sales prospectuses as well as annual and semi-annu-al reports of UBS investment funds are available free of charge from UBS AG, P.O. Box, CH-4002 Basel.© UBS 1998–2008. The key symbol and UBS are registered and unregistered trademarks of UBS. All rights reserved.

EnterprisesAargauische Kantonalbank 1, 2. ABB Ltd 1, 2, 3, 4, 5, 6. Abbott Laboratories 5,7, 8. Accor 1, 5. Adecco 1, 2, 3, 4, 5, 6, 9. Advanced Info Service 5. Aegon N.V. 2, 10, 11. AFLAC Inc. 5, 6, 12, 13, 14. Air Liquide 5, 15. Air Products & Chem-icals Inc. 5. Allianz 2, 3, 4, 5, 6, 9. Alstom 11. American Electric Power, Inc. 2, 5,7, 8, 13, 14, 16. American International Group 1, 2, 5, 8, 12, 13, 14, 16.Argentina 17. Asahi Kasei 5. AT&T Inc. 1, 2, 5, 6, 12, 13, 14, 16, 18. AXA 1, 2,5, 7, 8, 16. Bachem 1, 2. Bank Nederlandse Gemeenten 1, 2, 16, 19. Bank ofAmerica Corp. 1, 2, 5, 6, 7, 8, 12, 13, 14, 16, 20. Bank of Cyprus 9, 17. BarryCallebaut 1, 2, 4. Bayer 1, 2, 5, 9, 10. Bayerische Landesbank GZ 1, 2, 16. BearStearns 3, 5, 6, 7, 8, 12, 13, 14. BMW 1, 2, 5, 16. BNP Paribas 5, 6, 7, 8, 9, 17.BP 1, 2, 5, 6, 10, 16. Brazil 2, 16. Bristol-Myers Squibb 2, 5, 6, 7, 8, 12, 13, 14.Bureau Veritas 1, 2, 16. Canon 5. Carrefour 1, 2, 21, 22. Cheung Kong 1, 2, 5,23. Chevron Corp. 4, 5, 7, 8, 12, 13, 14. China (Peoples Republic of) 9, 17. ChinaMerchants Holdings International 1, 6, 23. China Mobile (HK) Ltd 5, 6, 17, 23.China Shipping Development 6. China Steel 5, 11. China Telecom 1, 3, 5, 6, 11,17, 23. CIF Euromortgage 1, 2, 16. Cisco Systems Inc. 5, 9, 12, 13, 14, 17. Cog-nizant Technology Solutions Corp. 5, 7, 8. Colgate-Palmolive 5, 6, 9, 17. Colom-bia 9, 17. Commerzbank 1, 2, 5, 6, 7, 8, 10, 16. Compagnie de FinancementFoncier 1, 2, 16. Continental 1, 2, 5. Credit Suisse Group 1, 2, 4, 5, 6, 7, 8. CRH1, 2, 5, 10, 16, 19. CVS Caremark Corporation 2, 5, 6, 7, 8, 18. Daimler 5, 6,11. Danone 5, 6, 17. DBS Bank 2, 5. Denso 1. Deutsche Bahn Finance BV 1, 2,9. Dexia Municipal Agency 2, 16. Diageo 1, 2, 5, 6, 9. Dufry 1, 2, 9, 18. E.ON 2,4, 5, 6, 7, 8. EADS 1, 2. EKSPORTFINANS ASA 1, 2, 16. Essilor International 5.Eurohypo AG 1, 2, 16, 19. European Investment Bank 1, 2, 16, 19. Exelon Corp.1, 2, 5, 6, 7, 8, 9, 18. FIAT 1, 2, 4, 5, 6, 7, 8, 11, 18. Fortum 1. France 2, 16.France Telecom 5, 11. Fresenius Medical Care 5. Gaz de France 6, 24. GeneralDynamics Corp. 5, 7, 8. General Electric Capital Corporation 1, 2, 16. GeneralElectric Co. 1, 2, 4, 5, 6, 7, 8, 12, 13, 14, 16, 18, 25. Gilead Sciences 5. Glaxo-SmithKline 5, 6. Goldman Sachs 5, 6, 7, 8, 9, 12, 13, 14, 17. Government ofIndonesia 1, 2, 16. HBOS 1, 2, 5, 6, 16. Henkel 2, 5, 9. Honda Motor 5, 6, 7, 8.HSBC 2, 3, 5, 6, 7, 8, 16, 23. Hypothekenbank Essen 2, 16. IBM Corp. 1, 2, 4,5, 7, 8, 12, 13, 14, 16, 26. ICICI Bank 1, 5, 9, 17. Indonesia Government Inter-national Bond 2, 16. Indosat Tbk 5. Industrial & Commercial Bank of China 6,23. ING 1, 2, 5, 7, 8, 16. Inter-American Development Bank 2, 9. Keppel Corpo-ration 5, 6. KPN Telecom 5, 6. Kreditanstalt fuer Wiederaufbau 1, 2, 16, 19.Kyocera 5. Kyushu Electric Power 1, 2, 16. Land Hessen 9, 17. Land Sachsen-Anhalt 9, 17. Landesbank Baden-Wuerttemberg 2, 16. Landesbank HessenThueringen GZ 1, 2, 16. Lehman Brothers 5, 6, 7, 8, 11, 12, 13, 14. LGT 1, 2, 9.Logitech 1, 2, 3, 4, 5. Lonza Group AG 1, 2, 3, 4, 9. Luzerner Kantonalbank 1,2, 11. Matsushita Electric Industrial 5, 6. McDonalds Corp. 5, 6, 12, 14. MerrillLynch & Co. 2, 5, 6, 7, 8, 12, 13, 14, 16, 25. MetLife 1, 2, 5, 8, 12, 13, 14, 16,18. Mexico 2, 16. Microsoft Corp. 2, 5, 7, 8, 12, 13, 14. Mitsui & Co. 5. MitsuiFudosan 1, 2, 16. Nederlandse Waterschapsbank NV 1, 2, 16. Nippon Yusen 5.North Rhine-Westphalia (State of) 2, 16. NRW. Bank 1, 2, 16. Panalpina WorldTransport (Holding) 1, 2, 3, 4, 16, 27. Pearson 1, 2, 3, 5, 18. Peru (Republic of)9, 17. Perusahaan Listrik Negara 2, 16. Petroplus Holdings 1, 2, 3, 4, 16, 28.Pfandbriefzentrale der Schweiz 1, 2. Philippines (Republic of) 9, 17. Ping An Insur-ance (Group) Co. Ltd. 5, 6, 23. PPR 1, 2, 9. Province of Ontario 1, 9, 17. PTTChemical 1. Rabobank Nederland 1, 2, 16. Republic of Austria 1, 2, 16.Richemont 1, 2, 3, 4. Roche 1, 2, 3, 4, 5, 6, 11. RWE 1, 2, 3, 4, 5, 6, 11, 29.Ryanair 5. Saint Gobain 1, 2, 30. Sanofi-Aventis 1, 5, 6, 9, 17. Satyam ComputerServices Ltd. 5. Schindler 1, 2, 4, 31. Scor 1, 2, 5, 7, 8, 16. Scottish & SouthernEnergy 2, 5. SGS 1, 2, 3, 4, 32. Shire Pharmaceuticals 5. Sinopec 1, 2, 5, 6, 16,23. STMicroelectronics 1, 2, 5, 6, 9. Suez 1, 2, 5, 6, 11, 24, 33. Sun Hung Kai P.1, 5, 6, 23. Svensk Exportkredit 2, 9. Swatch Group 1, 2, 9. Swiss Life 1, 2, 3, 4,6, 16. Swisscom 1, 2, 4, 5, 6, 16. Syngenta 1, 2, 4, 5, 6, 9, 34. Takeda Pharma-ceutical 2, 18. Telefonica 1, 2, 5, 6, 9, 18. Tesco 2, 5. TOTAL 2, 5, 9, 15. ToyotaMotor 1, 2, 5, 6, 7, 8, 16, 18. Travelers Companies 2, 5, 8, 9, 12, 14. Turkey 2,16. Ukraine 2, 16. UniCredit 1, 5, 6, 9, 17. Unilever NV 1, 2, 4, 5, 15, 16, 35.United Technologies Corp. 1, 2, 5, 7, 8, 18. United Utilities 1, 2, 5, 9. Venezuela9, 17. Vinci 1, 2, 6, 9, 15. Vodafone Group 1, 2, 4, 5, 6, 10, 11. Voegele 1, 2, 4.WestLB AG, Düsseldorf 1, 2, 16. WPP 5, 6. XTO Energy Corp. 1, 2, 5, 6, 12, 14,16, 18. Zuger Kantonalbank AG 1, 2.

Footnotes1 UBS AG, its affiliates or subsidiaries expect to receive or intend to seek com-

pensation for investment banking services from this company/entity withinthe next three months.

2 Within the past 12 months, UBS AG, its affiliates or subsidiaries has receivedcompensation for investment banking services from this company/entity.

3 UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of aclass of this company`s common equity securities as of last month`s end (orthe prior month`s end if this report is dated less than 10 days after the mostrecent month`s end).

4 UBS AG, its affiliates or subsidiaries has issued a warrant the value of whichis based on one or more of the financial instruments of this company.

5 UBS Securities LLC makes a market in the securities and/or ADRs of this com-pany.

6 UBS AG, its affiliates or subsidiaries held other significant financial interestsin this company/entity as of last month`s end (or the prior month`s end if thisreport is dated less than 10 working days after the most recent month`s end).

7 This company/entity is, or within the past 12 months has been, a client ofUBS Financial Services Inc, and non-investment banking securities-relatedservices are being, or have been, provided.

8 Within the past 12 months, UBS Financial Services Inc has received compen-sation for products and services other than investment banking services fromthis company.

9 UBS AG, its affiliates or subsidiaries has acted as manager/co-manager inthe underwriting or placement of securities of this company/entity or oneof its affiliates within the past three years.

10 UBS Limited acts as broker to this company.11 UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in

the underwriting or placement of securities of this company/entity or oneof its affiliates within the past five years.

12 This company/entity is, or within the past 12 months has been, a client ofUBS Securities LLC, and non-investment banking securities-related servicesare being, or have been, provided.

13 This company/entity is, or within the past 12 months has been, a client ofUBS Securities LLC, and non-securities services are being, or have been, pro-vided.

14 Within the past 12 months, UBS Securities LLC has received compensationfor products and services other than investment banking services from thiscompany/entity.

15 A director or an employee of UBS AG, its affiliates or subsidiaries is a direc-tor of this company.

16 UBS AG, its affiliates or subsidiaries has acted as manager/co-manager inthe underwriting or placement of securities of this company/entity or oneof its affiliates within the past 12 months.

17 Within the past three years, UBS AG, its affiliates or subsidiaries has receivedcompensation for investment banking services from this company/entity.

18 This company/entity is, or within the past 12 months has been, a client ofUBS Securities LLC, and investment banking services are being, or havebeen, provided.

19 UBS Limited is acting as manager/co-manager, underwriter or placementagent in regard to an offering of securities of this company/entity or one ofits affiliates.

20 UBS Securities LLC is acting as financial advisor to Sallie Mae on its $25.3billion sale to a consortium led by J.C. Flowers & Co., Bank of America andJP Morgan Chase.

21 UBS AG acts as exclusive financial advisor to Coop on its CHF470 million(EUR290 million) acquisition of Carrefour`s hypermarket stores in Switzer-land.

22 UBS Limited acted as Financial Adviser to Colony Capital and Groupe Arnaultfor their joint acquisition of a stake in Carrefour.

23 UBS Securities (Hong Kong) Limited is a market maker in the HK-listed secu-rities of this company.

24 UBS Limited is acting as advisor to Suez in its merger with Gaz de France.25 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 thiscompany.

26 UBS Limited is acting as sole financial adviser to Telelogic on the recom-mended offer from IBM.

27 UBS AG is acting as agent on the share buy-back for Panalpina WeltTrans-port Holding AG.

28 UBS AG, its affiliates or subsidiaries beneficially owned 5.75% of this com-pany`s voting rights as of last month`s end (calculations based on Swiss StockExchange Act (SESTA)).

29 UBS Securities LLC is acting as manager/co-manager, underwriter or place-ment agent in regard to an offering of securities of this company/entity orone of its affiliates.

30 UBS Limited is acting as adviser to Saint Gobain on the acquisition of MaxitGroup from HeidelbergCement.

31 UBS AG is acting as agent on Schindler`s announced share buy-back pro-gramme.

32 UBS AG is acting as agent on SGS` announced share buy-back programme.33 UBS Limited is providing a fairness opinion to the Board of Aguas de

Barcelona in respect to the takeover offer from La Caixa and Suez SA.34 UBS AG is acting as agent on Syngenta`s announced share buy-back pro-

gramme.35 UBS Limited acts as broker to this company or one of its affilliates

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