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Asian equities (ex-Japan) MSCI Asia ex-Japan (24 Oct): 518 (last publication: 510) UBS view MSCI Asia ex-Japan (6-month target): 545 ¢ China released a set of positive data for September. While the headline 3Q GDP number only met expectations at +7.4% YoY (consensus +7.4%, prior +7.6%), the higher frequency data was better. Industrial production of +9.2% YoY (consensus +9.0%, prior +8.9%), retail sales of +14.2% YoY (consensus +13.2%, prior +13.2%), and fixed asset investment of +20.5% (+20.2% consensus, prior +20.2%) all came in higher. Chinese H-Shares are up almost 10% in the last month, while the S&P 500 is within 0.4 index points of where it was a month ago. Valuations of MSCI China remain extremely attractive as the market continues to price in a hard landing scenario, although sentiment is clearly turning. In India, the government has proposed several key economic reforms, but there are implementation risks and consensus GDP forecasts still have downside risk, while Indonesia's economic momentum is on track. We expect 12.8% earnings-per-share growth over 12 months for the MSCI Asia ex-Japan. It trades on 11.0x 12-m forward earnings and 1.6x price-to-book. We expect a stable earnings multiple in the next six months. Economic growth should stabilize and earnings downgrades come to an end toward the end of 2012. A Positive scenario MSCI Asia ex-Japan (6-month target): 670 e More supportive monetary and fiscal policy, stable inflation, sustained domestic demand growth, and an improved global growth outlook lead to a better earnings outlook. In such a scenario, we expect earnings growth of 15% and a trailing P/E of about 15.0x. & Negative scenario MSCI Asia ex-Japan (6-month target): 400 e A hard landing in China with a global recession leads to negative earnings revisions for 2012. In this scenario, Asia ex-Japan could trade down to about 10.5x realized earnings. What we're watching Why it matters Politics Leadership in China is set to change, resulting in a newly defined future economic policy. The US Presidential elections have implications on the outcome of the Fiscal Cliff. Key dates: Nov 6, 57" US Presidential Elections; Nov 8, 18" Communist Party Congress Policy responses Some other countries in the region have near-term macroeconomic issues due to fiscal and current account deficits, as well as hiccups in market and economic reforms. Policy responses often come on an ad-hoc basis. 2 UBS Recommendations Tactical (6 months) ° The Fed's implementation of QE3 provides support to Asia ex-Japan equities. In conjunction with improving growth prospects we see good near term upside. Should economic growth surprise to the upside, more defensive markets such as Singapore and Malaysia are likely to underperform. Instead, higher beta, export-oriented markets like South Korea, Taiwan, Hong Kong and China are likely to take advantage from a strengthening in global growth. Strategic (1 to 2 years) ¢ Consider a portfolio mix of high yield stocks largely found in Singapore, Taiwan & HK, complemented by growth-oriented stocks in the rest of Asia. Country preferences within Asia ex Japan (relative to MSCI Asia ex Japan) underweight neutral overweight China —————] Hong Kong India Indonesia | Korea a Malaysia Saaz Philippines fz Singapore Taiwan Thailand Others Bnew old For further information please contact ClO asset class specialist Kelvin Tay, kelvin.tay@ubs.com 20 Please see important disclaimer and disclosures at the end of the document. HOUSE_OVERSIGHT_025267