Preference: neutral

Eurozone equities Preference: neutral Euro Stoxx (24 Oct): 247 (last publication: 247) UBS View Euro Stoxx (6-month target): 249 ¢ We keep our neutral stance on Eurozone equities. While the sovereign debt crisis remains a risk factor (see slide 8), the conditional bond buying program by the ECB (OMT) and the introduction of the ESM have significantly reduced downside risks. ¢ Near-term we might see volatility increasing as politicians wrangle about the steps needed to provide a more lasting solution to the debt crisis (setup of a single banking regulator, solving the banking related problems in Spain, etc. ). We think that attractive valuations sufficiently compensate for those risks. ¢ The weak economic environment with recessions in the southern countries continues to weigh on corporate earnings. Consensus expectations (bottom up) of about 10% to 15% earnings growth in 2013 is too high, in our view. In contrast, we forecast just about 3-5% earnings growth next year. 4 Positive scenario Euro Stoxx (6-month target): 320 ¢ Global economic growth reaccelerates and Eurozone growth shows clear signs of bottoming out, enabling mid-single-digit earnings growth over the next six months. The trailing P/E ratio could re-rate to about 14.5x from its current reading of about 11.7x. Negative scenario Euro Stoxx (6-month target): 200 ¢ The debt crisis leads to renewed pressure on Spain and Italy. However, downside risks are expected to be less severe now, after the ECB has put its new bond-buying program in place. ¢ Earnings could fall about 5% to 10% from current levels over the coming six months, and the trailing P/E ratio could drop to a level around 10x over a six-month period. Note: Scenarios refer to global economic scenarios (see slide 7) What we're watching Why it matters Growth indicators Economic growth indicators provide information on the development of a potential Eurozone recession. Key dates: 2 Nov, final PMI manufacturing, EMU; 6 Nov, final PMI services EMU; 22 Nov, flash PMI manufacturing, EMU, France and Germany; 23 Nov, Ifo business sentiment index, Germany Policy action Decisions by European politicians and the ECB affect the course of the debt crisis. Key dates: 8 Nov, ECB meeting 2 UBS Recommendations Tactical (6 months) e We continue to recommend defensive sectors like Consumer Staples and Healthcare. We also like the Energy sector. e We are negative on Industrials and Consumer Discretionary as industry sentiment remains subdued. e We remain cautious on Financials - especially Banks and diversified Financials. The need for recapitalization remains a major concern. Strategic (1 to 2 years) e We have a preference for stocks paying high-quality dividends. e We like companies with high exposure to rapidly growing emerging markets. Our sector stance in the Eurozone Sectors Eurozone Consumer Discretionary Consumer Staples Energy Financials Healthcare ndustrials 7 aterials Telecom Utilities Vielvi Viel ule; ulale Source: UBS Note: Past performance is not an indication of future returns. For further information please contact ClO's asset class specialist Markus Irngartinger, [email protected] 's Please see important disclaimer and disclosures at the end of the document. HOUSE_OVERSIGHT_025262