HOUSE_OVERSIGHT_025275.jpg

Emerging market bonds Preference: neutral EMBI Global/CEMBI spread (24 Oct): 281bps / 334bps (last month: 292bps /363bps) UBS View EMBI Global/CEMBI spread target (6-month): 275bps/290bps ¢ Current spread levels of EM sovereign bonds are roughly in line with fundamentals. We think valuations of EM corporate bonds are more attractive than valuations of EM sovereign bonds. Additionally, the gradual recovery in EM we expect over coming quarters should support the performance of EM corporate bonds relative to EM sovereign bonds. Corporate bonds tend to outperform sovereign bonds during periods of accelerating growth. e However, absolute returns of EM bonds will be lower than in the past, we think, as the room for spreads to tighten further has become more limited. We expect total returns of less than 2% for EM sovereigns and close to 4% for EM corporate bonds over the next six months. ¢ Negative headlines from the Eurozone or global growth fears might put renewed short-term pressure on EM bond prices. We think that periods of price weakness offer attractive entry points. 4 Positive scenario EMBI Global/CEMBI spread target (6-month): 235bps/230bps ¢ Yield stability in Europe's core markets and higher-than-expected growth in the US would provide a favorable backdrop for EM fixed-income spreads. In such an environment, issuers of lower credit quality would likely fare better. Average spreads could tighten to below 240bps in such an environment. & Negative scenario EMBI Global/CEMBI spread target (6-month): 555bps/750bps e An environment of renewed escalating risk aversion in Europe, deteriorating EM funding markets, weakening global growth prospects, and lower commodity prices could impact EM credit negatively. Liquidity in emerging market bonds could dry up and spreads could spike. Note: Scenarios refer to global economic scenarios (see slide 7) What we're watching Why it matters Core market yields The direction of US Treasury and German Bund yields are important for EM fixed income spreads, especially for USD- and EUR-denominated bonds. Key date: Dec 6, European Central Bank meeting Capital flows The European debt crisis may lead to further periods of outflows and weaker prices, which could offer attractive entry levels for investors. Monetary policy cycles | Monetary policy easing remains a key topic for local currency bonds. We look for central bank policy announcements in key markets. Key policy rate announcement dates: Nov 11, Indonesia; Nov 20, Turkey; Nov 22, South Africa; Nov 30, Mexico 2 UBS Recommendations Tactical (6 months) e EM corporate bonds are particularly attractive due to their favorable valuations, solid fundamentals, and relatively short duration. We advise clients to focus on investment grade bonds in the current environment. We recommend taking profit on selected EM sovereign bonds. Please refer to our EM bond list for issuer- and bond-specific guidance. Strategic (1 to 2 years) e EM bonds are attractive for longer-term investors looking for higher yields. e Local markets in Asia offer interesting opportunities for longer-term investors because of a supportive currency outlook. EM sovereigns relatively expensive compared to EM corporates Spreads of EM bonds over US Treasuries, in bps 600 500 Okt-09 Apor-10 Apr-11 Okt-11 — Emerging market sovereign bonds (EMBI Global} Emerging market corporate bonds (CEMBI Broad) Okt-10 Apr-12 Source: JP Morgan, UBS, as of 15 October 2012 Note: Past performance is not an indication of future returns. For further information please contact ClO's asset class specialist Michael Bolliger, michael.bolliger@ubs.com and Kilian Reber, kilian.reber@ubs.com 28 Please see important disclaimer and disclosures at the end of the document. HOUSE_OVERSIGHT_025275