HOUSE_OVERSIGHT_025279.jpg

Emerging market currencies

UBS View
See table for current exchange rates and CIO forecasts

• We continue to like emerging market (EM) currencies over a medium term horizon. We think monetary policies of major central banks will remain loose for longer whereas the easing cycle in several emerging markets is over. This should support EM currencies relative to major currencies (USD, EUR, and JPY). Long term investors should therefore diversify into EM currencies using surplus exposure to these currencies.
• In Europe, both the Polish zloty (PLN) and the Turkish lira (TRY) have supportive fundamentals in the long-term and could benefit from inflows into their fixed-income market which offers attractive yield relative to G4 currencies. Due to structural reasons we remain cautious on the Hungarian forint (HUF).
• The South African rand (ZAR) is currently attractively valued, but Investors should be willing and able to tolerate bouts of volatility due to the current strikes and a cyclical slowdown of the economy.
• In Asia, we like the Korean won (KRW), the Singaporean dollar (SGD) and the Malaysian ringgit (MYR) as all three countries have a strong economy and should benefit from increasing liquidity and a recovering Chinese economy.
• In Latin America, the Mexican peso (MXN) remains attractively valued, despite its recent rally.

Positive scenario > 5% outperformance of EM FX against G4 currencies over a 6-month horizon
• Macroeconomic data comes in stronger than expected and contagion risks in Europe subside further. EM exchange rates could appreciate swiftly against major currencies (USD, EUR, and JPY).

Negative scenario > 5% depreciation of EM FX across regions against USD over a 6-month horizon
• Global growth prospects suffer a prolonged deterioration and the European debt crisis intensifies. EM exchange rates could see a significant, although likely temporary, sell-off across regions.
Note: Scenarios refer to global economic scenarios (see slide 7)

What we're watching
Inflation dynamics in EM
Why it matters
Inflation dynamics are important to forecast central bank policy rate decisions. Monetary easing typically weighs on EM currencies, while rate hikes tend to be supportive. Key policy rate announcement dates: 11 Nov, Indonesia; Nov 20, Turkey; Nov 22, South Africa; Nov 30, Mexico

European sovereign crisis
Setbacks in sentiment will likely lead to bouts of EM currency depreciation, providing attractive entry points for longer term investors.

Growth
Growth in the US, Europe, and China is key for risk sentiment, growth prospects in EM. Key date: Dec 6, European Central Bank meeting

Recommendations
Tactical (6 months)
• Several EM currencies look attractive at current levels and we advise investors to keep existing holdings for further gains while increasing exposure to our preferred EM currencies (KRW, SGD, MYR, MXN, TRY, PLN, ZAR), using the JPY, USD, and EUR for funding.

Strategic (1 to 2 years)
• We recommend EM currencies backed by stable fundamentals as a strategy to diversify currency exposure.
• Our favorites include the Chilean peso, Mexican peso, Czech koruna, Polish zloty, Chinese renminbi, Korean won, Malaysian ringgit, and Singapore dollar.

UBS CIO EM FX forecasts
24.10.2012 3-month 6-month 12-month
Americas
USDBRL 2.02 1.95 1.90 1.85
USDMXN 12.9 12.7 12.5 12.3
Asia
USDCNY 6.25 6.30 6.30 6.20
USDINR 53.6 53.0 54.0 55.0
USDIDR 9,615 9,400 9,400 9,400
USDKRW 1,103 1,100 1,080 1,050
USDSGD 1.22 1.21 1.20 1.19
EMEA
EURPLN 4.12 4.30 4.15 3.90
EURHUF 280 290 300 300
EURCZK 24.9 26.0 25.0 24.3
USDTRY 1.80 1.75 1.75 1.72
USDZAR 8.66 8.20 7.90 7.80
USDRUB 31.1 33.0 32.0 31.0

Source: Bloomberg, UBS, as of 15 October 2012
Note: Past performance is not an indication of future returns.

UBS
For further information please contact CIO's asset class specialists Michael Bolliger, michael.bolliger@ubs.com or Teck Leng Tan, teck-leng.tan@ubs.com
Please see important disclaimer and disclosures at the end of the document.
32
HOUSE_OVERSIGHT_025279