ubs global outlook 2009: proceed with caution · ubs global outlook 2009: proceed with caution ......

UBS global outlook 2009:Proceed with caution

UBS Wealth Management Research5th EFAC Assembly Technology Conference, Davos

1

Table of Contents

SECTION 1 2008: Annus horribilis It happened so fastSECTION 2 2009: The lost year Macroeconomic Outlook SECTION 3 Outlook for Industries No one is safeSECTION 4 Currencies Dislocations to reverseSECTION 5 Some advice Take (only) calculated risks

Q&A

SECTION 1 – 2008: Annus horribilis

It happened so fast or borrowing Queen Elisabeth II words: "(It) is not a year on which I shall look back with undiluted pleasure."

3

It started with the housing marketThe long way of housing market corrections

Source: Reuters EcoWin, UBS WMR

USA, 6/2006 UK, 10/2007 Spain, 4/2007 Ireland, 2/2007-24 -12 0 12 24

75.0

77.5

80.0

82.5

85.0

87.5

90.0

92.5

95.0

97.5

100.0

Months after peak

Index = 100 at peak, number of months before/after peak

4

Now pessimism is everywhereConsumer confidence dropped


5

Saving more and spending lessSavings rate must rise in the US


Savings as percent of GDP

6

Now pessimism is everywhereBusiness confidence too


7

Earnings recessionEarnings per share versus leading economic indicator

Source: Thomson Financial, UBS WMR

35

40

45

50

55

60

65

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

-20

-15

-10

-5

0

5

10

15

20

25

ISM mfg (shifted 6 mo. forward) 12 mo. trailing EPS, 6 mo. change in % (rhs)

Index Percent

8

The credit market stopped working properly


LIBOR EURO 3 month and ECB target

9

Credit where credit is (still) dueBaa corporate credit spreads over US 10y treasuries (%)

Source: Robert Shiller, Moody's, Federal Reserve, UBS WMRPre1953: interpolated observations from annual data

10

Corporate default rates to go up firstUS high yield default rate

Source: Moody's, Bloomberg, UBS WMR

11

Central banks at workMonetary policy


Central bank rates (%)

1212

Governments at work (1)

Source: The Economist

Rescue plans

13

Governments at work (2)Debt-to-GDP to go up

Source: IMF, Eurostat, UBS WMR

0

50

100

150

200

250

US Japan Eurozone Switzerland UK Canada

Debt-to-GDP (%)

14

Stimulus packages, who to benefit?China 6% of GDP, Europe 0.5-1.5% of GDP, US 1.5% of GDP

Source: UBS IB, UBS WMR

MAIN BENEFICIARIES

Mass transit transportation (rail, road, airports)

Power grids

Environmental: Water, Energy efficiency

Building construction and renovation

SECONDARY BENEFICIARIES

Engineering & construction companies

Communication equipment

Software (CAD, Healthcare)

Laboratories

Tax preparation

Note: different stimulus packages in different countries have different beneficiaries -> case by case analysis needed

15

Inflation or Deflation?Inflation rates


SECTION 2 – MACROECONOMIC OUTLOOK

2009: The lost year

17

0

2

4

6

8

10

12

China EMU India Japan Switz. UK US World

2007A 2008E 2009E

Economic outlook

♦ Recession in US, Europe and Japan, weak recovery in late 2009

♦ Sharp slowdown in emerging markets, but most to avoid recession

♦ Deflation risks have risen, inflation to retreat further

♦ Governments are back – expect loose fiscal and monetary policy

♦ Sharply higher savings rate is a large risk to global economy

♦ Uncertainty remains high

Sources: Thomson Financial, UBS WMR

-4-202468

101214

China EMU India Japan Switz. UK US World

2007A 2008E 2009E

Real GDP growth in percent

Inflation in percent

18

USA in recession, World is notWMR economic forecasts


19

USA in recession, World is notFirst to dive, first to return again

♦ US recession is old news

– First to return to (moderate) growth again in H2 of 2009

– But no sharp positive turnaround to be expected

♦ Canada and Brazil depend on commodities

– Expect some rebound in 2010

♦ World is "saved" by Emerging Markets

– Strong contribution to world growth mainly from China and India (leaves some concentration risk)

20

Developed Europe in recessionWMR economic forecasts


21

Developed Europe in recessionBroad but uneven recession

♦ Most at risk for prolonged recession are UK and Spain

– Pay-back for exuberance in real estate and financials

♦ Switzerland and Germany might see signs of turnaround in H1 already

– Biggest risk from export destinations

♦ Italy from a low base

– There was no boom in the first place

22

Emerging Europe affectedWMR economic forecasts


23

Emerging Europe affectedParty is over for a while

♦ New EU members among the weakest countries

♦ Currencies lose ground again

– Strength from 2000 to early 2008 vs. USD thanks to better monetary and financial policy and growth ended in a sharp sell-off

– Many economies now face current account deficit

– Impaired ability to attract foreign investments

– For those exporting commodities it's a double whammy

– Eg. Hungary was already in fiscal and account deficit and weak currency, hence, has little defense left

– Fight for capital

♦ Russia and CIS depend on commodities

– Expect some rebound in 2010

24

Larger Asian economies expected to fare betterWMR economic forecasts


25

Larger Asian economies expected to fare betterStill high growth possible

♦ Some countries better able to withstand global slowdown

– China, India, Indonesia seem positioned for some internal strength

♦ Japan affected by currency and exports

– Japan industrial production -16.2% in November

26

Domestic demand runs out of steam Domestic demand versus GDP growth

Source: CEIC, UBS WMR

0

2

4

6

8

10

12C

hina

Hon

gK

ong

Indi

a

Indo

nesi

a

Japa

n

Kor

ea

Mal

aysi

a

Phili

ppin

es

Sing

apor

e

Taiw

an

Thai

land

Domestic Demandreal GDP growth

%-contribution to real GDP growth (average over past 4 quarters)

SECTION 3 – OUTLOOK FOR DIFFERENT INDUSTRIES

No one is (really) safe in parallel downturn

28

ConsumersSome anecdotal evidence

♦ US holiday season sales -4%, worst in modern times

♦ US weak players exitingCircuit City, Linen'n Things, Sharper Image in Chapter 11 (moratorium of debt enforcement)

♦ UK weak players exitingMFI Furniture and Woolworth bankruptcy(Woolworth UK is different from Woolworth US, South Africa or Australia)

♦ BUT Germany, Switzerland and France seem relatively OK

29

Non-financial corporate capex in EuropeIn the last two downturns -30% over 3 years

Source: Worldscope, Morgan Stanley

30

Automation industrySome anecdotal evidence

♦ Invensys (6th November, First half results 1.4.-30.9.08)

– Revenue at Process Systems unit at +12%

– Orders at 10% organic growth, but capex spend of clients may begin to slow

– Margins down due to higher investment spend

– Co. suggest that client may change focus from capacity expansion to more efficient operations

– meanwhile controls (for household appliances) continues to be in negative growth territory (-5.1% in sales, -9.1% in orders)

♦ Rockwell Automation (12th November, 4th quarter 1.7.-30.9.08)

– Revenue at Control Products & Solutions unit at +6%, Process +20%

– Oil & Gas very strong; Global Auto in-line; Food & Beverage, Consumer Products, Home and Personal Care slightly weak; US Auto, Life Sciences weak

– Margins down due to higher investment spend and more lower margin solutions

– Reducing 3% of workforce in anticipation of falling demand

– Guidance for -3 to +1% organic growth for 2009

31

Car industrySome anecdotal evidence

♦ Europe 1993 Car demand was -16% yoy (from 13.4m) only back to 1992 level by 1997 (2007 at 14.7m, +9.7% since 1997)

♦ Toyota opened an assembly plant every six month, has now delayed three

♦ US car sales down > -30% for most manufacturers in November, across the product range not just SUV but as well sub-compacts and even Toyota Prius down

♦ Risk of supplier bankruptcyleading to systemic risk and increasing working capital (inventory, financial help)

32

Mining capexCut estimates could go even lower

Source: Morgan Stanley

33

Oil & gas upstream capexLarge companies still investing (USDm)

Source: Credit Suisse

Abbreviations:HES Hess CorpBG BG GroupCVX ChevronCOP ConocoPhillipsXOM ExxonMobilMRO Marathon OilRDS Royal Dutch ShellSTO StatoilHydroTOT Total

34

Commodities should pick up modestly in late 2009Commodity prices versus leading indicators

Source: Bloomberg, CRB, OECD, UBS WMR

SECTION 4 – CURRENCIES

Dislocations to partially reverse

36

Corrections have taken place…Deviations from purchasing power parity in percent versus USD


37

EUR USD: Supported by US twin deficits


EURUSD spot rate and purchasing power parity rate

38

Exchange rate EUR USDPrice performance, forecast and implicit volatility

Source: Thomson Reuters, UBS WMR

--- Forward

--- Volatility Range

--- Forecast

39

Exchange rate EUR GBPPrice performance, forecast and implicit volatility


--- Forward


--- Forecast

40

Exchange rate EUR CHFPrice performance, forecast and implicit volatility


--- Forward


--- Forecast

41

Exchange rate EUR JPYPrice performance, forecast and implicit volatility


--- Forward


--- Forecast

SECTION 5 – SOME ADVICE

Time to take (only) calculated risks

43

Advice on riding the stormFrom a Financial Analysts perspective

♦ Cash is king save cash not to be starved of breathing air

♦ Time long-term financingrisk premium of capital (equity and debt) is very high currently

♦ Cut down where possibleIf you have been weak yesterday, you might be out of business tomorrow

♦ Check again who you are dealing withWhat if your main supplier disappears; what if one of your suppliers of critical parts disappears; what if your patent holder/taker is taken-over; what if your main customer cannot pay; and don't take backlog for granted-> think about contingency plans

♦ Avoid non-business risks where possiblecurrency and commodity exposure, financial investments need extra scrutiny

44

Performance of main asset classesTotal return in percent

Source: MSCI, JP Morgan, Merrill Lynch, Bloomberg, Thomson Financial, HFR, GPR, UBS WMR

45

Financial markets felt the consequences Long-term equity returns (S&P 500)


-100%

0%

100%

200%

300%

400%

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

5year rolling returns 10year rolling returns

46

Outlook for 2009Proceed with caution

♦ Corporate bonds offer deep value despite rising default rates

♦ Remain defensive within equities

♦ Too early to increase exposure to emerging market assets

♦ Efforts to reflate the economy pose risks to the US dollar

♦ Listed real estate market likely to weaken further

♦ Rotation within nontraditional asset classes

♦ Diversification benefits to reemerge in 2009

47

Time to take calculated risksHistorical and expected returns (%)

Source: JP Morgan, Merrill Lynch, MSCI, GPR, Bloomberg, Thomson Financial, UBS WMR

* Composite of 75% investment grade and 25% high yield corporate bondsNote: Return range shows +/– one annualized standard deviation from the expected 2009 return, based on the past

10-years of monthly returns. Historical average return is the compounded average annual return over the past 10 years.

48

Equities offer long-term valuePrice-to-earnings ratios based on cyclically adjusted earnings


0

10

20

30

40

50

60

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

World US UK Switzerland

49

US GDP growth versus change in the S&P 500In percent, annual change


-4

-3

-2

-1

0

1

2

3

4

5

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

-45

-30

-15

0

15

30

45

GDP GDP forecast S&P 500

50

-300

-200

-100

0

100

200

300

400

500

600

700

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

IG spread Estimated spread Residual

Corporate bonds offer attractive investment opportunitiesUS corporate spreads versus fair value model results (bps)

Explanatory indicators: US high yield default rate, VIX index, US term structure and 10-year Treasury yield

Source: UBS WMR

51

Q&A

? !

52

Disclosure (as of 30.12.2008)

Circuit City Stores Inc. 1, 2, 3. Invensys 1. Linens 'N Things 4. Rockwell Automation Inc. 1, 4, 5, 6.

Toyota Motor 1, 2, 3, 4, 6, 7, 8. Woolworths Group plc 5, 6, 7, 9, 10.

1. UBS Securities LLC makes a market in the securities and/or ADRs of this company.

2. This company/entity is, or within the past 12 months has been, a client of UBS Financial Services Inc, and non-investment banking securities-related services are being, or have been, provided.

3. Within the past 12 months, UBS Financial Services Inc has received compensation for products and services other than investment banking services from this company.

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

5. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided.

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

7. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months.

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

9. UBS Limited acts as broker to this company.

10. UBS Limited is acting as advisor to Woolworths in relation to its stake in 2Entertain.

53

Disclaimer

This report has been prepared by Wealth Management Research, the Financial Analysis Group of Global Wealth Management & Business Banking, a Business Group ofUBS AG (UBS). In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of anoffer, to buy or sell any investment or other specific product. The analysis contained herein is based on numerous assumptions. Different assumptions could result inmaterially different results. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not beeligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but norepresentation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and its affiliates). All information andopinions as well as any prices indicated are currently only as of the date of this report, and are subject to change without notice. Opinions expressed herein may differ orbe contrary to those expressed by other business areas or groups of UBS as a result of using different assumptions and/or criteria. At any time UBS AG and othercompanies in the UBS group (or employees thereof) may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or otherservices to the issuer of relevant securities or to a company connected with an issuer. Some investments may not be readily realisable since the market in the securities isilliquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to controlthe flow of information contained in one or more areas within UBS, into other areas, units, groups or affiliates of UBS. Futures and options trading is considered risky. Pastperformance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and large falls in value and on realisation you mayreceive back less than you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or income of an investment. Weare of necessity unable to take into account the particular investment objectives, financial situation and needs of our individual clients and we would recommend that youtake financial and/or tax advice as to the implications (including tax) of investing in any of the products mentioned herein. This document may not be reproduced or copies circulated without prior authority of UBS or a subsidiary of UBS. UBS expressly prohibits the distribution and transfer ofthis document to third parties for any reason. UBS will not be liable for any claims or lawsuits from any third parties arising from the use or distribution of this document.This report is for distribution only under such circumstances as may be permitted by applicable law. Australia: Distributed by UBS Wealth Management Australia Ltd (Holder of Australian Financial Services Licence No. 231127), Chifley Tower, 2 Chifley Square, Sydney,New South Wales, NSW 2000. Bahamas: This publication is distributed to private clients of UBS (Bahamas) Ltd and is not intended for distribution to persons designatedas a Bahamian citizen or resident under the Bahamas Exchange Control Regulations. Canada: In Canada, this publication is distributed to clients of UBS WealthManagement Canada by UBS Investment Management Canada Inc.. France: This publication is distributed to clients of UBS (France) SA, 69, boulevard Haussmann F-75008 Paris, R.C.S. Paris B 421 255 670, a duly authorized bank under the terms of the «Code Monétaire et Financier», regulated by French banking and financialauthorities as the «Banque de France» and the «Autorité des Marchés Financiers». Germany: The issuer under German Law is UBS Deutschland AG, Stephanstrasse 14-16, 60313 Frankfurt am Main. UBS Deutschland AG is authorized and regulated by the «Bundesanstalt für Finanzdienstleistungsaufsicht». Hong Kong: This publication isdistributed to clients of UBS AG Hong Kong Branch by UBS AG Hong Kong Branch, a licensed bank under the Hong Kong Banking Ordinance and a registered institutionunder the Securities and Futures Ordinance. Indonesia: This research or publication is not intended and not prepared for purposes of public offering of securities underthe Indonesian Capital Market Law and its implementing regulations. Securities mentioned in this material have not been, and will not be, registered under the IndonesianCapital Market Law and regulations. Italy: This publication is distributed to the clients of UBS (Italia) S.p.A., via del vecchio politecnico 3 - Milano, an Italian bank dulyauthorized by Bank of Italy to the provision of financial services and supervised by «Consob» and Bank of Italy. Jersey: UBS AG, Jersey Branch is regulated by the JerseyFinancial Services Commission to carry on investment business and trust company business under the Financial Services (Jersey) Law 1998 (as amended) and to carry onbanking business under the Banking Business (Jersey) Law 1991 (as amended). Luxembourg/Austria: This publication is not intended to constitute a public offer underLuxembourg/Austrian law, but might be made available for information purposes to clients of UBS (Luxembourg) S.A./UBS (Luxembourg) S.A. Niederlassung Österreich, aregulated bank under the supervision of the «Commission de Surveillance du Secteur Financier» (CSSF), to which this publication has not been submitted for approval.Singapore: This material is distributed to clients of UBS AG Singapore Branch by UBS AG Singapore Branch, an exempt financial adviser under the Singapore FinancialAdvisers Act (Cap. 110) and a wholesale bank licensed under the Singapore Banking Act (Cap. 19), regulated by the Monetary Authority of Singapore. Spain: Thispublication is distributed to clients of UBS Bank, S.A. by UBS Bank, S.A., a bank registered with the Bank of Spain. UAE: This research report is not intended to constitutean offer, sale or delivery of shares or other securities under the laws of the United Arab Emirates (UAE). The contents of this report have not been and will not beapproved by any authority in the United Arab Emirates including the UAE Central Bank or Dubai Financial Authorities, the Emirates Securities and Commodities Authority,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 FinancialServices Authority. A member of the London Stock Exchange. This publication is distributed to private clients of UBS London in the UK. Where products or services areprovided from outside the UK they will not be covered by the UK regulatory regime or the Financial Services Compensation Scheme. USA: Distributed to US persons byUBS Financial Services Inc., a subsidiary of UBS AG. UBS Securities LLC is a subsidiary of UBS AG and an affiliate of UBS Financial Services Inc. UBS Financial Services Inc.accepts responsibility for the content of a report prepared by a non-US affiliate when it distributes reports to US persons. All transactions by a US person in the securitiesmentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. © UBS 1998-2008. The key symbol and UBS are registered and unregistered trademarks of UBS. All rights reserved. Version as per August 2007.

54

Contact Information

Rudolf Leemann5 Temasek Boulevard#18-00 Suntec Tower FiveSingapore 038985+65 6836 [email protected]

UBS AGSingapore BranchOne Raffles Quay#50-01 North TowerSingapore 048583Tel. +65-6495-8000

www.ubs.com

ubs global outlook 2009: proceed with caution · ubs global outlook 2009: proceed with caution ......

Documents