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Equity styles

UBS View Prefer value and large caps in Europe, mid caps in US
• We recommend that investors look for value opportunities in Europe: The cheapest stocks within each sector are at extreme relative valuations, which should begin to normalize. Within Financials, however, investors should limit their direct exposure to the Eurozone debt crisis. We assess the cheapness of a stock by looking at its price-to-earnings and price-to-book ratios relative to its peers.
• We believe US mid caps will outperform large caps. US economic data is forecast to stabilize and GDP growth should be resilient in the second half of 2012. Greater domestic sales exposure reduces earnings risk coming from Europe. In Europe, we prefer large over small caps in the current very challenging economic environment.
• High quality dividend paying stocks provide a real and stable income stream to investors during the current low yield environment. Furthermore, they give exposure to the long term potential of equity markets while also providing some support in declining markets.

Positive scenario Prefer value, low quality and small caps
• Leading indicators continue to move higher, and risks related to the Eurozone debt crisis subside. In this case, add deep cyclical value (cheap price/book, price/earnings) regardless of sector, with high beta and high leverage. In such an environment, small- and mid-cap stocks should also perform well, but a dividend strategy would be too defensive to outperform the market.

Negative scenario Prefer quality and large caps
• The global economic picture deteriorates markedly. In this case, buy high-quality growth companies and large caps. Do not look for value opportunities, but be as defensive as possible with your equity exposure. Look to high-quality, dividend-paying stocks for yield.
Note: Scenarios refer to global economic scenarios (see slide 7).

What we're watching Why it matters
Earnings revisions – see chart
(3-month moving average upgrades vs. downgrades) Watch for signs of continued improvement in earnings revisions (aggregated from stock level). An improved earnings outlook would cause investors to add more risk, allowing multiples to expand and triggering the outperformance of value stocks.

US and Eurozone PMIs If PMIs stabilize or improve, value stocks should outperform as there is no longer justification to pay the high price for earnings stability (quality). Key dates: 2 July, PMI Manufacturing Eurozone; 2 July, US ISM Manufacturing

Regional differentiation
• Within Europe, look for value opportunities within each sector, but be aware of the higher-risk Financials.
• In the US, there are opportunities in value names that also show strong growth.
• Within Europe, avoid small caps and instead rotate into large caps.
• In the US, prefer mid caps to large caps while GDP growth is above 2%.

Strategic (1 to 2 years)
• We expect value strategies to outperform the market significantly over the long term.
• Mid-cap stocks provide attractive opportunities over the longer term.

European earnings revisions fell hard last year, but the down cycle might be be ending (net revisions, in %; MSCI Europe)
[Chart showing graph trends from Jun.05 to Jun.12]
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
Jun.05 Jun.06 Jun.07 Jun.08 Jun.09 Jun.10 Jun.11 Jun.12
Source: FactSet, UBS CIO, as of 27 June 2012
Note: Past performance is no indication for future returns.

UBS
For further information please contact CIO's asset class specialist Christopher Wright, christopher-zb.wright@ubs.com 21
Please see important disclaimer and disclosures at the end of the document.
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