UBS Investment Research

Australian & Global Equity Market Outlook

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David Cassidy 9324 3721

UBS Australian Equity StrategyApril 2011

This material has been prepared by UBS Securities Australia Ltd

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 49

11

Equity Market Outlook - Key Views

Positive on global equities. Earnings recovery is ongoing and valuations undemanding.

Australia lagged global and regional equities in 2010. Earnings have disappointed. February reporting season indicates subdued conditions (ex resources) but the earnings cycle should gather momentum through this year.

We believe Australian equities are undervalued in an absolute and relative sense.

Risks for 2011: Chinese inflation/property cycle, the oil price, global bond yields, pace of RBA tightening.

22

Recent Global Stock Market Trends

400

600

800

1000

1200

1400

1600

1800

1990 1995 2000 2005 2010

MSCI World Index

Source: Datastream

Back in a cyclical bull market

33

Equity Valuations Reasonably Attractive

5

10

15

20

25

30

1990 1995 2000 2005 2010

x

MSCI World Index P/E

Source: I/B/E/S, Datastream

13x-15x forward earnings is “normal”

44

Corporate Profits Recovering…

0

20

40

60

80

100

120

1990 1995 2000 2005 2010

MSCI World Index trailing Earnings Per Share1-year forecast

Source: I/B/E/S, Datastream

55

The Bad News

66

Excessive WESTERN GOVERNMENT Debt

Budget Deficit Net Government DebtFY10 as % of GDP FY10 as % of GDP

Portugal -7.3% 78.9%Ireland -17.6% 55.2%Italy -5.1% 99.0%Greece -7.9% 109.5%Spain -9.3% 54.1%

Germany -4.5% 58.7%Japan -9.6% 120.7%United Kingdom -10.2% 68.8%United States -11.1% 65.8%

Australia -4.5% 5.4%

Threatens to drive up interest rates in the medium/long-term

Source: IMF

77

Australian Performance V Global Equities

96

98

100

102

104

106

108

110

112

2009 2010 2011

rela

tive

tota

l ret

urn

Performance of ASX200 relative toMSCI World in LC

80

100

120

140

160

180

200

220

240

2001 2003 2005 2007 2009 2011re

lativ

e to

tal r

etur

n

Performance of ASX200 relative to MSCIWorld in LC

Australia has underperformed (local currency) for more than 12 months.

Weak earnings outside the resource sector the chief culprit.

88

Earnings Have Been Relatively Weak

Weak earnings story outside resources

A$ and below “trend” domestic activity are to blame.

Consensus EPS Revision Over Last 12 Months

Australia World Australia World

CY11e CY11e CY12e CY12e

Market -1.1% +7.4% -3.1% +1.9%

Industrials -4.7% +8.3% -9.2% +1.5%

Resources +9.8% +3.1% +13.0% +4.0%

CY10a EPS Growth of Australia vs World

Australia World

Market +10.9% +40.2%

Industrials +4.8% +37.9%

Resources +30.3% +53.8%

99

Australia’s Terms of Trade Boom

40

50

60

70

80

90

100

110

1959 1968 1976 1984 1993 2001 2010

Australia Terms Of Trade

Source: Datastream

Commodity boom creates opportunities and challenges

1010

A New-Found Propensity To Save?

High savings and weak spending. Un-Australian?

-1%

3%

7%

11%

15%

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Retail Sales Growth

Source: ABS

-5

0

5

10

15

20

25

1959 1964 1969 1974 1980 1985 1990 1995 2000 2005 2010

Savings Ratio

1111

Australian Market 1-Year Fwd PE 12.0xPE is low versus the low inflation period post 1990.

PE suggests Australian equities are approx.10% undervalued

Market PE will likely continue to trade below LT median but expect some moderate re-rating. Our 5500 ASX200 target uses a 13.25x year end multiple.

Source: I/B/E/S, Datastream

5

10

15

20

25

1991 1996 2001 2006 2011

x

Australian Market P/E20-year median

1212

Australian Equities Attractive vs Govt Bonds

0

2

4

6

8

10

12

14

16

1990 1995 2000 2005 2010

%

Australia earnings yieldAustralian government 10-year bond yield

Source: I/B/E/S, UBS calculations

1313

A Two- Speed Stock-Market Over Past Year

Performance of Australian Sectors3 month 12 month

MARKET +0.3% +0.8%

Mining & Metals -2.8% +11.9%Energy +5.5% +8.4%Materials ex Mining & Metals +2.5% +6.6%Property Trusts +3.5% +5.6%Gaming -0.4% +3.8%Consumer Staples +0.1% +1.6%Utilities -3.5% +1.1%Telcos +2.6% -1.3%General Industrials -0.6% -3.1%Health Care -3.5% -4.7%Banks +2.9% -5.3%Insurance -1.3% -6.2%Discretionary Retail -0.5% -10.8%Diversified Financials -1.9% -11.6%Media -0.5% -14.0%

Source: IRESS, Datastream

Resources have led over the past year.

1414

Sector Valuation and Earnings Estimates

Source: UBS, I/B/E/S

P/Es still look moderate in most areas.

Upside risk to resources at spot commodities. Still some near term downside to industrials (soft economy & A$)

P/E EPS Growth1yr fwd FY10E FY11E FY12E

Market 12.4 +7.8% +15.0% +12.4%Market ex Resources 12.2 +3.8% +5.6% +11.0%

Resources 12.8 +21.2% +41.7% +15.3%of which Mining & Metals 11.5 +24.2% +46.6% +13.0%& Energy 21.3 +6.7% +14.5% +31.7%

Financials 11.6 +6.3% +7.5% +9.3%of which Banks 11.3 +22.4% +8.6% +6.7%& Real Estate 12.9 -27.0% +6.5% +3.8%

Industrials-ex-financials 13.4 -0.1% +2.5% +14.1%

1515

Resource Sector Relative Performance

Source: IRESS

50

100

150

200

250

300

2000 2002 2004 2006 2008 2010

Performance of Australian Resourcesrelative to Market

60

70

80

90

100

110

120

130

140

150

2000 2002 2004 2006 2008 2010

Performance of Small Resourcesrelative to Large Resources

Sector has outperformed over the past year. Small has beaten large.

Still believe secular uptrend is intact.

1616

Resource Valuations

Source: UBS estimates

BHP Billiton/Rio Tinto preferred.

Mid and small caps have come back to more reasonable valuations on NPV but be selective.

5

10

15

20

25

30

1991 1996 2001 2006 2011

x

Australian Mining & Metals P/E

1717

Is This Trend Sustainable? Iron Ore and Met Coal?

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1990 1995 2000 2005 2010

China Steel Production

Housing cycle is the key for steel production.

We expect slower but still positive rates of growth.

1818

Resources: The Big Structural Trend Still In Place

0

10

20

30

40

50

60

70

80

1950 1960 1970 1980 1990 2000 2010 2020 2030

%

China urbanisation ratio

Japan urbanisation ratio

Source: IMF, UBS

China urbanisation & re-urbanisation should continue to see commodity intensive growth.

Public housing initiative to support steel production in 2011/2012

We expect Chinese steel intensity to peak around 2015

1919

Commodity Prices – Due For A Pullback?

0

20

40

60

80

100

120

140

160

2005 2006 2007 2008 2009 2010 2011

Oil price

0

50

100

150

200

250

2005 2006 2007 2008 2009 2010 2011

Iron Ore price

0

50

100

150

200

250

2005 2006 2007 2008 2009 2010 2011

Thermal Coal price

Source: Datastream, Bloomberg

Metals have run hard and are likely topping.

Still structurally positive bulks but also likely peaking.

Oil price “risk premium” $15 plus but will be stubborn

0

1

2

3

4

5

2005 2006 2007 2008 2009 2010 2011

Copper price

2020

Bank Valuation – Absolute Looks Quite Attractive

4

6

8

10

12

14

16

18

1990 1995 2000 2005 2010

x

Banks 1-year forward P/E

Source: I/B/E/S, UBS

1-yr fwd PE consensus PE of 10.5x & 6.5% dividend yield.

LTA PE = 12.3x. We target 12x

Lower growth should provide scope to keep div payouts high

2121

Australian Credit Growth

-5

0

5

10

15

20

25

30

1980 1985 1990 1995 2000 2005 2010

%y/

y

Credit Growth - TOTAL

Aust Nominal GDP

Source: Datastream

How fast can banks grow their balance sheets. In line with nominal GDP or below?

No reason for business to keep de-leveraging in our view.

2222

Australian REIT Valuation - P/E 1 Year Forward

Source: UBS estimates

8

10

12

14

16

18

20

1990 1995 2000 2005 2010

x

AU REIT sector P/E20-year median

Looks about fair in an absolute sense. A little expensive versus the broader market

2323

Statement Of Risks

Forecasting earnings and corporate financial behaviour is difficult because it is affected by a wide range of economic, financial, accounting and regulatory trends, as well as changes in tax policy.

Equity market returns are influenced by corporate earnings, interest rates, and investor demand risk premiums. The outlook for any and all of these variables is subject to change.

2424

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