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Swiss equities
Preference: neutral

UBS View
SMI (24 Oct): 6,627 (last publication: 6,540)
SMI (6-month target): 6,700

• We stay neutral on Swiss equities relative to global ones. Swiss companies are internationally well diversified, with about 2/3 of revenues generated in the US and in emerging markets. This provides the basis for solid revenue and earnings, despite economic weakness in Europe.
• Swiss companies are trying to mitigate concerns about global economic prospects and a strong Swiss franc using tight cost controls. This should protect operating margins.
• While the Swiss franc remains overvalued, the currency is not longer a drag. In fact, after depreciating since summer versus the USD and related currencies, Swiss companies' earnings will show positive currency translation and margin effects.
• Especially in an environment of low economic growth we like the properties of decent earnings growth, solid balance sheets and a reasonable valuation.

Positive scenario
SMI (6-month target): 7,500
• Eurozone economic growth is reaccelerating considerably, providing further relief to Swiss financials as well as Swiss exporters. Defensive sectors would likely be left behind in a strong global relief rally. In this scenario, we would expect the equity market P/E to be re-rated to 15x and earnings to grow by 5% over the next six months.

Negative scenario
SMI (6-month target): 5,600
• The global economy slides into a recession. Despite being less dependent on the global business cycle, Swiss companies will also feel the drop in global demand. In this scenario, corporate earnings are likely to drop slightly over the next six months and we would expect the P/E to contract toward 12.0x.
Note: Scenarios refer to global economic scenarios (see slide 7)

Recommendations
Tactical (6 months)
• We favor large caps over small caps.
• We like stocks paying high and sustainable dividends.
• Within defensives, we favor the Healthcare and Consumer Staples sectors.
• Among the cyclical companies, we prefer those with a broad emerging-markets exposure and/or cheap valuation, including insurers.

Strategic (1 to 2 years)
• We favor leaders in regards to the two key Swiss success factors: innovation and globalization.

Swiss market relative to world equities
[Chart showing SMI realized P/E vs MSCI World realized P/E from 2003 to 2011]
Source: Thomson Reuters, UBS, as of October 24, 2012
Note: Past performance is not an indication of future returns.

What we're watching | Why it matters
Economic indicators | Key announcements of domestic economic indicators: Nov 1, Manufacturing PMI index; Nov 30, KOF Swiss leading indicator;
Monetary and economic policy | Key Swiss monetary policy dates that could impact Swiss equities: Nov 1, SNB meeting
Corporate news | Key corporate announcement dates: Oct 30, Geberit, Oerlikon, Straumann & UBS; Oct 31, Lonza & Sika

UBS
For further information please contact CIO's asset class specialist Stefan Meyer, stefan-r.meyer@ubs.com
Please see important disclaimer and disclosures at the end of the document.
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