Investment Strategy - SGKB

Economy and Financial Markets November 2011

Investment Strategy

Impressum

Issuer Hyposwiss Private Bank Ltd.Stauffacherstrasse 41CH-8021 ZurichPhone +41 (0)44 214 31 11 Fax +41 (0)44 211 52 23www.hyposwiss.ch

Analysts

Caroline Hilb ParaskevopoulosThomas StuckiPatrick HäfeliThomas Jäger, CIIADr. Alexander F. Galli

Editorial deadline

October 25, 2011

Release

Monthly

1 Editorial Greece, centre of the earth?

2 Economy Financial crisis: back to square one?

4 Interest Rates and Yields Trichet keeps all options open for successor Draghi

5 Equity Markets Hit by the debt crisis

6 Currencies US dollar: the mirror image of the euro

7 Commodities Prices shake off downward trend

8 Investment Strategy Solution within reach

Enclosure Perspective Africa – the untold story Anton Schaad Fund Manager

Recommended Stocks

Contents

Title Picture

Li River, Guilin, China Photo: Roland Gerth

November 2011 Investment Strategy 1

Dear investor,

The world has a lot to thank Greece for. Just think of the timeless beauty and grandeur of the Acropolis, Pythagoras' mathematical princi-

ples, the philosophies of Plato or Aristotle and democracy as a form of state, to name just a few examples. However, the ancient times in which Greece was a world power and served as an example for other civilizations are long gone. Today, the world is trembling due to the burden of

debt that is threatening to bring modern-day Greece to its knees.

Greece's status and importance has waned over the centuries. In economic terms, Greece is not one of Europe's or, indeed, the world's powerhouses. With the end of the Cold War, it also lost some of its strategic value. If Greece were not part of the eurozone, the country would have quietly declared its bankruptcy. The financial world would have shrugged its shoulders before turning its attention back to more important matters.

As Greece is in the eurozone, however, the stakes in the event of the country's bankruptcy are much higher. After Greece joined the mo-netary union, Greek bonds became an appea-ling investment. In comparison to government bonds from other eurozone countries, they have always offered a somewhat higher yield. The bonds could also be deposited with the Eu-ropean Central Bank (ECB) as collateral in or-der to obtain liquidity relatively cheaply. The country thus had no problems refinancing and

expanding its high debt in the years prior to the financial crisis.

Now, the relatively minor problem of Greece has the potential to bring the European finan-cial system crashing down. This situation bears worrying parallels to the 2008 financial crisis. If you think about it, the subprime market wasn't huge either compared to the entire US real es-tate market. Nevertheless, subprime mortgage losses almost caused the financial system to col-lapse entirely, catapulting the issue onto the world stage. Experience from the financial cri-sis also shows how rapid and heavy an impact banks' problems can have on the real eco-nomy.

Insolvency would have dramatic consequences for Greece and its citizens. That said, other state bankruptcies have shown that they also present an opportunity for the country to get on the right track. The negative impact on the eu-rozone and global economy would be limited, provided that the financial system is not desta-bilized again. European politicians are, thank-fully, coming around to this view. It's not about rescuing Greece's government budget, but rather about rescuing European banks.

Dr. Thomas Stucki

Chief Investment Officer

EditorialGreece, centre of the earth?

Investment Strategy November 20112

Differences between 2008 and nowBut there are also differences. The actions of the central banks, including the European Central Bank (ECB), are particularly worthy of note. In the case of the ECB, malicious voices will main-tain that the ECB raised interest rates at the wrong time yet again. However, the ECB has at its disposal the instruments it needs to calm the situation. For instance, in the interbank mar-ket the ECB is providing unlimited liquidity to banks that can post the appropriate collateral. This action serves to ward off the proverbial straw that broke the camel's back and brought

It all began three years ago, when the US real estate bubble burst. After a financial crisis that caused a recession and left many industrialized countries sitting on mountains of debt, the next round must once again focus on restoring the stability of the banks, particularly in Europe. Some aspects of the current situation are remi-niscent of the 2008 financial crisis. Does this mean «back to square one»?

A few weeks ago Dexia turned to governments for support, as it had done in 2008. The latest volatility in the global credit markets and the level of distrust in the interbank market made it impossible for the Franco-Belgian bank to refi-nance its debts in the market. The French and Belgian governments reacted very quickly and provided state funding for Dexia. At the same time, the bank was split up, with one part go-ing to France and another to Belgium. The fact that a bank needs government funding awa-kens memories of 2008. A glance at the finan-cial markets also reveals some parallels with the situation in 2008. For instance, this time round market reactions to growing mistrust in the financial sector again include high risk pre-miums on bonds, a significant tightening of li-quidity in the interbank market and a rise in in-surance premiums on bank loans (CDSs). The lack of transparency is also reminiscent of 2008. Which banks have invested how much in securities of risky countries like Greece? All figures currently bandied about are estimates. Similarly it is unclear which banks have al-ready written down how much of which debt, if any. What is clear is that, with about EUR 350 billion in outstanding sovereign debt, Greece is only small fry. The situation in the subprime cri-sis was similar: these low-quality bonds consti-tuted only a small part of the bond market, yet were able to completely destabilize the entire system. In this connection, a crucial factor in this development was the fact that for a long time no one knew which banks had lost how much on their sub-prime holdings.

EconomyFinancial crisis: back to square one?

Source: Bloomberg

Economic Snapshot (figures as of Oct 25, 2011)

Switzerland Germany Eurozone USA Japan

Real GDP QoQ 0.4 % 0.1 % 0.2 % 1.3 % – 0.5 %

Inflation YoY 0.5 % 2.6 % 3.0 % 3.9 % 0.2 %

Unemployment rate 2.8 % 6.9 % 10.0 % 9.1 % 4.3 %

300

250

200

150

100

50

0Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep

2007 2008 2009 2010 2011

Credit Default Swaps (CDS) of 25 Investment Grade Entities

Growing mistrust leads to higher risk premiums

Source: Bloomberg


about Lehman's collapse: liquidity in the Euro-pean interbank market will not dry up. Similarly, by buying bonds of indebted states, the ECB seeks to lower the yield on this paper and cor-respondingly keep a lid on their refinancing costs. This liquidity policy causes the ECB to act in ways that, first, send a positive signal, which in turn helps to calm the market and, second, ef-fectively ease the situation of these states. But the major, and most important, difference this time around was the quick response of govern-ments as well as the central banks, which has prevented the situation from escalating. Accord-

ingly, the most important point in connection with any Greek default is that it is controlled.

More clarity after the summitPotential writedowns related to a haircut on Greek debt left plenty of scope for speculation in the run-up to the summit. Similarly, the result-ing necessary recapitalization of the banks was also viewed critically. Uncertainty about the ability of the eurozone to resolve its long-term debt problem was another explosive is-sue. The EU meeting brought more clarity. The necessary recapitalization of the banks was also viewed critically. Since the summit, it has emerged that the European banks will need 106 billion euro for recapitalization. Greek bond holders face a haircut of 50% and the EFSF will be provided with a leverage. The dominant role played by politics in this process is continuing to make matters more unpredicta-ble, because opportunistic behaviour and the lack of clear responsibilities are now part of day-to-pay business, particularly in the euro-zone.

Back to Black?Can the current situation cause another reces-sion in the global economy? Despite all the risks to growth, we are working on the premise that the world economy will scrape by again. We do not anticipate an economic boom; in-deed, we assume below-average growth in the industrialized countries. The latest US eco-nomic data give cause for optimism. Although these figures are anything but impressive, they do signal some stabilization. Precisely the situ-ation in the US is crucial for global economic development. We also assume that the euro-zone will continue to work hard to find a solu-tion. In the medium term a haircut on Greek debt and viable solutions for the other states and the banking sector will ensure that the eu-rozone gradually returns to stability. The global outlook is neither bright nor black: grey will re-main the dominant colour. n

4

3

2

1

0

-1

-2

-3

-4

-5

-6

11

10

9

8

7

6

5

4

395 97 99 01 03 05 07 09 11

Change in employment YoY in % Unemployment rate in %

95 97 99 01 03 05 07 09 11

US labour market: on its way, but not there yet

Source: ZKB


Interest rates and yieldsTrichet keeps all options open for successor Draghi

Three months after the ECB's last rate hike, the situation has changed completely. The US and European economies are continuing to slow down, Europe's sovereign debt crisis is enter-ing the decisive phase, and the financial sector cannot escape these negative developments ei-ther.

Currently, the banks in particular are suffering from an accelerated loss of confidence. Confi-dence is being undermined by speculation over how much banks have invested in government bonds of countries whose public finances are in disarray, and many are finding it increasingly difficult to raise sufficient liquidity. In addition to its existing one-month and three-month tenders, the ECB is now also offering the commercial banks new loans with terms of 12 months. As an additional measure, from November onward the European Central Bank is again offering to purchase covered bonds from the commercial banks. This provides them with an additional means of obtaining liquidity if need be. Buying these bonds also has the welcome side-effect of ensuring that yields on such instruments remain low.

Will these measures increase the inflationary pressure?The above measures will, at least temporarily, have the effect of further expanding the money supply and increasing the potential for inflation. However, expanding the money supply can only lead to increased inflationary pressure if it is ac-companied by higher demand in the markets for goods and/or labour. The additional money supply also needs to flow into the real economy. At present, neither of these conditions is met. Moreover, the additional liquidity will automati-cally be re-absorbed: if the loans granted are not extended again within 12 months, the money will be returned without requiring any further intervention by the ECB.

ECB faced with conflicting objectives Inflation in Europe is currently still running at 3% p.a. which is well above the ECB's target band of just under 2%. Moreover, it is not expected to fall below this price stability threshold until next year. On the other hand, this is a time when a

rate cut would give Europe's faltering economy a particularly useful shot in the arm. The ECB's Governing Council did not take this monetary policy decision lightly. Nor was it a unanimous decision. In the end, though, a consensus was reached on the need to guarantee price stability and the key interest rate was left at 1.5%. This means that at the next meeting in November all the options will be open for the ECB's new Pres-ident Mario Draghi. If the situation in Europe does not calm down somewhat by then, the hawks in the ECB's Governing Council can be expected to gain the upper hand. n

Outlook key interest rate

Figures as of Oct 25, 2011* In 3 months In 12 months

Switzerland (SNB) 0.00 % 0.00 % 0.00 %

Eurozone (ECB) 1.50 % 1.00 % 1.00 %

USA (Fed) 0.25 % 0.25 % 0.25 %

*Source: Bloomberg

Outlook capital market yields (10 years)

Figures as of Oct 25, 2011* In 3 months In 12 months

Switzerland 1.016 % 1.20 % 1.60 %

Germany (Eurozone) 2.059 % 2.00 % 3.00 %

USA 2.109 % 2.00 % 3.00 %

*Source: Bloomberg

6.00

5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.5003.01.2000 03.01.2002 03.01.2004 03.01.2006 03.01.2008 03.01.2010

ECB Main Refinancing Rate

ECB main refinancing rate since 2000

Source: Bloomberg


Equity marketsHit by the debt crisis

Developments in the international equity mar-kets once again reflect the widespread uncer-tainty. Indeed the yo-yoing of stock market indi-ces has been quite considerable in the past four weeks.

The cause of these ups and downs remains the debt crisis. So long as politicians are unable to come up with convincing solutions as to how individual countries' debt problems can

be resolved on a lasting basis, the majority of investors will remain reticent. The market is dominated by those who are seeking to ex-ploit the current situation in their favour by means of short-term investments. This highly speculative element is producing the volatility currently in evidence on nearly all markets.

German bank stocks under pressureThat the German equity market has been par-ticular badly battered in recent weeks is pro-bably due firstly to Germany's role in bearing the biggest burden of the euro bail-out fund and secondly to the fact that, in the absence of a comprehensive debt restructuring, no-one has any faith in a solution to Greece's pro-blems. A «haircut» would also primarily affect German banks, which in some cases have very large holdings of Greek – but also Portu-guese, Spanish and Italian – bonds. The index of German banking stocks has thus tumbled by more than 40% since the start of July – nearly twice as much as its Swiss equivalent.

Fear of a growth slowdownWorries about developments in Europe caused equity markets in the US too to falter. The fact that growth numbers for the Chinese economy have been slightly below expecta-tions caused particular jitters on the equity market. The negative fee ling among US inves-tors was further amplified by the fairly nega-tive economic news from the other emerging-market countries – in other words, markets that until recently delivered one positive sur-prise after another.

Shares are attractively valuedWidespread setbacks depressed most shares to a level that can be described as attractive, provided the general situation does not dete-riorate any further. In Switzerland, for exam-ple, the current price of Swiss Life shares is less than 50% of the reported return on equity per share. Dividend yields are also very high relative to the extremely low interest rates for bonds. These factors are repeatedly bringing investors back to the market, but not on an en-during basis thus far. Unfortunately, there is no sign of this changing any time soon. n

P/E* Year to Date (Curr Yr Est) (Oct 25, 2011)*

SMI 12.80 –9.25%

EuroStoxx 50 9.14 –14.02%

DAX 9.93 –12.55%

S&P500 12.50 –1.78%

Nikkei 225 14.40 –12.76%

MSCI Emerging Markets 10.21 –15.97%

Equity markets

*Source: Bloomberg

CHINA

FTSE Goldmines

FTSE 100

Germany

Eurozone

Brazil

Russia

USA

Japan

Nasdaq

Switzerland

India

0 5 10 15 20 25 30 35

Current P/E

07.10.2011Average 2000 – 2011

Uncertainty is high, primarily valuation speaks for stocks

Source: Thomson Reuters Datastream


CurrenciesUS dollar: the mirror image of the euro

Since spring 2011 the USD exchange rate has moved in a narrow band of between 1.40 and 1.44 against the euro, demonstrating a degree of stability that we had become unaccustomed to in the three years since the start of the finan-cial crisis.

When it became evident in September that debt rescheduling and thus the de facto insol-vency of Greece is no longer avoidable, inves-tors recalled the former «safe haven» proper-ties of the US dollar and it rose significantly against the euro. Hopes of controlled resched-uling of Greek debt and action to safeguard Eu-ropean banks subsequently gave the euro a re-newed boost. This brief overview of events shows that the value of the US dollar is currently determined by what is happening in Europe and that US monetary policy and economic data are less significant.

Controlled rescheduling of Greek debt We assumed that a Greek debt haircut deal has been only a matter of time. It would there-fore be better if European institutions were to al-low it to happen sooner rather than later. Con-sequently, a key factor for the successful recov-ery of Greece will be whether the EU authorities and ECB are able to provide credible evidence that they will rescue systemic banks that get into difficulties as a result, together with details of how they intend to do so. The financial markets would then regain confidence in the euro, so it would indirectly put pressure on the US dollar.

Fed keeping all the options openIn view of the turmoil in the eurozone, it is often forgotten that recent economic data in the USA have proven a positive surprise. Although the data are not especially good, they did exceed the now low expectations. This shows that the Fed was right not to adopt a new quantitative easing program at its last meeting. Extending the maturities of Treasuries may have a short-term impact on interest rates at the long end of the market, but it does not increase the liquidity available within the economy. Moreover, we are convinced that an additional program to in-

crease liquidity (QE3) would be adopted if – contrary to our expectations – the US economy were to slip into recession.

Dollar maintaining its present levelThe present stalemate situation, in which short-term advantages swing constantly between the USD and EUR, looks set to continue. Overall, therefore, the EUR/USD exchange rate will move sideways. Following the de facto cou-pling of the Swiss franc to the euro, the same applies for the USD/CHF exchange rate. n

US dollar: the mirror image of the euro

Currencies Figures as of Oct 25, 2011* In 3 months In 12 months

EUR/CHF 1.221 > 1.20 1.20 – 1.30

USD/CHF 0.878 0.85 – 0.95 0.85 – 0.95

EUR/USD 1.391 1.32 – 1.42 1.35 – 1.45*Source: Bloomberg

2005 2006 2007 2008 2009 2010 2011

1.6000

1.5000

1.4000

1.3000

1.2000

Exchange rate EUR/USD

US dollar: the mirror image of the euro

Source: Bloomberg


Although most commodity price indices remain lower than at the start of the year, the down-ward trend now seems to have come to an end. This is especially apparent in the case of the Baltic Dry Index (BDI).

The Baltic Dry Index tracks prices for world-wide shipments of commodities (primarily coal, iron ore and grain) on standard routes. If the in-dex rises, more commodities are shipped. Be-cause commodities generally constitute the first stage in a production process, a rise in the BDI also signals a future global economic revival. If more commodities are shipped, this indicates that demand has risen and, consequently, that commodity prices will increase too. The BDI is

therefore a closely watched leading indicator. A look at the current situation shows that after moving sideways for seven months the BDI has made significant gains again since mid-August (+70%). The index remains at a fairly low level by long-term standards. However, we can as-sume from this that world trade will gradually recover again following a period of stagnation.

Stabilization on the oil marketThe various commodity indices failed to res-pond immediately to the changes in the BDI, but have been trending upwards since the start of October. The increase in the price of Euro-pean Brent crude was particularly pronounced. It seems the oil market here expects the Euro-pean debt crisis to ease and is no longer fear-ful of a new recession. In the US, on the other hand, the demand for oil is continuing to de-cline in general terms: although the price of WTI has also risen significantly in the past week, at 85 US dollars per barrel it remains well below the price of Brent (USD 115 per bar-rel) as well as the price of WTI at the start of the year (USD 91).

Precious metals market stable again after setbackThe sharp falls registered by certain precious metals prices on 23 September triggered a wave of panic. Gold shed around USD 300 while the price of silver slumped by USD 10. In the meantime, the situation on the precious me-tals markets has calmed again slightly and buy-ers have returned to the market. The situation on the international financial markets certainly continues to favour gold. Ongoing uncertainty about a resolution of the European debt crisis and its impact on the euro are fuelling demand for gold, thereby ensuring that the price of the commodity continues to rise. With central banks also having appeared as buyers again on the market recently, the price of gold is re-ceiving support from this quarter too. India is showing strong demand at present. On the sup-ply side, China has further bolstered its position as the world's biggest gold producer with 31.9 tonnes produced in August alone. n

CommoditiesPrices shake off downward trend

Gold is sought, volatile price

1800

1600

1400

1200

1000

800

600

400

200

45

40

35

30

25

20

15

10

501.01.1998 01.01.2001 01.01.2004 01.01.2007 01.01.2010

Gold pice per ounce in CHF

Silver price per ounce in CHF

Gold price Silver price

Source: Global Insight WMM


Investment StrategySolution within reach

Uncertainty on the financial markets was wide-spread, particularly prior to the EU summit. The EU has now made a decision. There will be a haircut deal for Greece, the banks need to re-capitalize, and the volume of the rescue fund will be quadrupled, thanks to leveraging. But not all uncertainties are out of the way yet.

At political level the quest for a solution was fe-verish. It was proving extremely difficult to rec-oncile the differing interests of the individual member states – to bring them together under one protective umbrella, in other words. The approaches to solving the problem are un-doubtedly correct, but implementing them is la-borious, even after the decisions taken at the EU meeting. And because the financial markets are impatient, that repeatedly puts them under enormous strain again in the future. Market participants are looking askance at the credit-worthiness of both Spain and Italy, and this will continue to have a negative effect on market developments. Yields of both countries' bonds are still exposed to strong upward pressure. In this environment, on the other hand, «good» borrowers are much in demand – and in the case of German government bonds this is cre-ating distortion in the market. A haircut for the banking sectorThe second uncertainty involved the impact of the Greek haircut on the capitalization of the banking sector in the eurozone. Holding gov-ernment bonds was always an extremely attrac-tive option for banks, because they did not have to be backed with equity capital. That made worried about the size of certain Euro-pean banks' holdings (of Greek paper espe-cially) all the greater. It is now known that the banks will require around 106 billion euro. If major writedowns are needed in the wake of a haircut, some banks may once again need state aid in order to survive.

US economy at the crossroadsThe third «mine» would be if the US economy were to slide into recession – though we do not expect this to happen. Better data on the US la-bour market are now emerging, making for pleasant surprises. But the tense situation in the

equities

developed markets

long duration

euro

governments

precious metals

liquidity

emerging markets

corporates

short duration

US dollar

cyclical commodities

financial markets is feeding through into the macroeconomic data, affecting sentiment indi-cators, consumer confidence and corporate in-vestment activity. We are also concerned about the situation in the housing market. However, the industrial sector and an expansionary mon-etary policy are both positive factors – and the ISM has stayed above the critical level of 50, which we also see as a plus point. Economic activity may be slackening, but we continue to regard this as a growth dip – not as the begin-ning of a new recession.

ConclusionsOn account of persistent uncertainties, we re-main cautious – and our equity allocation re-mains relatively low. It may pay off to slowly move back into equities because of the attrac-tive valuation. Within the equities field we fa-vour sectors with a defensive posture. We are keeping liquidity high so that we can react flexibly to developments. As for bonds, we fa-vour a short duration – especially after the ex-aggerated decline in yields in the last few weeks. In the fixed-interest segment, we are boosting returns by diversifying into emerging market and high-yield bonds. n

Investment strategy

Disclaimer: The information contained on this Recommendation List and specifically the descriptions of individual securities constitute neither an offer to purchase the securities nor an invitation to engage in any other transactions. All of the information contained on this Recommendation List has been carefully selected and obtained from sources that the Investment Center of the St.Galler Cantonal Bank Group fundamentally believes to be reliable. Opinions or other representations conveyed on this Recommendation List are subject to change without notice. No guarantee is assumed as to the accuracy or completeness of the information.

November 2011 Supplement to the Investment Strategy

Africa is the untold story, and could be the big story of the next decade, like India and China were this past decade… The presence and the significance of our business in Africa is far grea ter than in India and China even today. The relevance is much bigger.Muthar Kent, CEO Coca-Cola, October 2010

Even 50 years after de-colonization, Africa is widely considered to be the «lost continent». What many investors fail to notice, however, is that Africa is moving rapidly towards becoming a sustainable growth region, both politically and economically. The growth figures of recent years, from the sub-Saharan region («Black Af-rica») in particular, show that this is not based merely on hopes and wishes. Whereas the ma-jor industrialized countries are growing only slowly and stagnating to an increasing degree, on account of their structural problems such as high indebtedness and ageing populations, countries such as Nigeria, Ghana, Botswana, Rwanda and Kenya are reporting impressive growth.

The IMF puts annual growth in the zone at about 5.5% for the period to 2016, though the forecasts are considerably higher for a number of countries, such as Zambia (7%). We rate the medium to long-term prospects as very positive: Africa is not only enjoying a cy-clical economic boom driven partly by com-modities; after de cades of crises, wars and natural disasters, it is also undergoing a fun-damental political, social and economic trans-formation.

The key pillars of our positive scenario are:Demographics, new generationThe average age in sub-Saharan Africa is 20. The new generation is better educated and better informed (mobile phone penetration: 60%), is awaking from its lethargy and wants to achieve something.

Substantially improved fundamentalsCompared with the previous decade, inflation has declined significantly. Government debt is low – below 20% in Nigeria, for instance.

Huge rise in direct investmentsForeign direct investments, mainly from China and India, but also by many conglomerates such as Nestlé and Siemens, increased from around USD 15 bn in 2000 to USD 55 bn in 2010, and the trend is rising rapidly. African countries and companies are also boosting their investments in domestic markets.

Improved governanceThe Arab Spring in North Africa was in the headlines a good deal recently. By contrast, the democratic and relatively peaceful elections, such as those in Nigeria and Zambia, and the liberal constitution approved by a referendum

PerspectiveAfrica – the untold story

Comparison GDP growth G7 vs. sub-Saharan Africa

8

6

4

2

0

-2

-4

Major advancedeconomies (G7)

Sub-Saharan Africa

20002002

20042006

20082010

20122014

2016

Source: IMF

Supplement to the Investment Strategy November 2011

in Kenya, went almost unnoticed. The fight against corruption is attracting public attention and is a top priority in more and more coun-tries. Transparency in administration and corpo-rate accounting (many companies report in ac-cordance with IFRS) have also greatly im-proved.

The rise of a middle classEconomic growth and urbanization are giving rise to a middle class (currently 300 million Af-

ricans) who have income at their disposal and are spending more and more as consumers. This gives Africa its own momentum. Only around 25% of the growth of recent years was driven by the exploitation of natural resources, a fact that is completely misjudged.

Expansion of infrastructureThis is where Africa’s greatest weakness but also its greatest opportunity lies. There are con-siderable deficits in particular with regard to transport infrastructure and electricity supply. If these can be reduced in the years ahead, the re-sult would be significant additional growth im-petus for the domestic markets. The signs are positive. Each year, USD 72 bn is invested, mainly via public-private partnerships.

Africa is moving – and it is moving in the right direction. The potential is enormous but this has not yet been reflected in the economy and finan-cial markets.

Financial marketsThe substantial inflows of funds into Africa cur-rently comprise mainly foreign direct investment and private equity investments, as is typical for the early development stage of a country. Port-folio investments are only in their infancy. The fi-nancial markets in the sub-Saharan region are fairly illiquid and in some cases are only now being set up (e.g. Rwanda). For example, the stock market capitalization of Nigeria (the lar-gest market, if South Africa is excluded) amounts to around USD 40 bn. By way of comparison, Nestlé’s market capitalization is CHF 170 bn. Stock exchanges develop as a result of IPOs, mergers and the introduction of modern trading systems and become larger, more representa-tive and more liquid. Anyone who waits until the stock exchanges come close to the western standard will miss out on the first major rise in prices. However, direct investments in equities – except in South Africa and the larger North Af-rican markets – are almost impossible for pri-vate investors and and even for many institu-tional investors, owing to the difficulty of obtaining information and the complex transac-tion processes. n

Africa is «underestimated, under-researched and under-owned»

15% of the world’s population29% of the land mass30% of commodity resources60% of cultivable land

3% of global GDP2% of world trade1% of global stock market capitalization

Some facts about Africa

November 2011 Supplement to the Investment Strategy

Recommended Stocks

Valor Curr. Company Sector Close Price P/E P/B Yield 25.10.11 Target 2010E Current in %

Switzerland

1222171 CHF ABB Ltd Industrials 17.35 28.00 13.0 2.8 3.5

1213860 CHF Adecco SA Industrials 42.24 76.00 12.0 1.9 2.7

11024060 CHF AFG Arbonia-Forster Hldg Industrials 18.30 34.00 19.2 0.6 2.2

4323836 CHF Aryzta AG Consumer Staples 41.40 50.00 11.0 1.4 1.4

4503965 CHF Cie Financiere Richemont SA Consumer Discretionary 49.35 61.00 18.9 3.0 1.3

1064593 CHF Givaudan SA Materials 793.50 1050.00 17.9 2.3 2.7

1221405 CHF Holcim Ltd Materials 56.40 79.00 18.0 1.1 2.5

637289 CHF Interroll Holding AG Industrials 309.50 400.00 12.7 2.0 2.3

1179595 CHF Kaba Holding AG Industrials 344.00 425.00 16.0 2.9 2.3

2523886 CHF Kuehne + Nagel International AG Industrials 105.30 140.00 19.9 5.7 2.7

1200526 CHF Novartis AG Health Care 51.80 63.00 10.4 2.1 4.2

1075492 CHF Schweiter Technologies AG Industrials 490.00 600.00 19.8 1.1 1.9

874251 CHF Swisscom AG Telecommunication Services 370.50 390.00 10.0 3.7 6.0

1233237 CHF Swiss Reinsurance Co Ltd Financials 47.80 48.00 19.0 0.7 5.6

1103746 CHF Syngenta AG Materials 273.70 360.00 16.0 3.4 2.6

1210019 CHF Tecan Group AG Health Care 53.70 75.00 13.2 2.4 2.0

1107539 CHF Zurich Financial Services AG Financials 204.60 270.00 8.8 1.1 8.0

Europe

1007667 GBp BG Group PLC Energy 1327.00 1600.00 17.0 2.6 1.1

487663 EUR Danone Consumer Staples 47.83 52.00 16.3 2.8 2.9

829257 EUR Deutsche Bank AG Financials 28.35 50.00 5.8 0.5 2.8

1124244 EUR Deutsche Post AG Industrials 11.13 15.00 9.6 1.3 6.1

2200367 EUR GDF Suez Utilities 21.58 25.00 11.8 0.8 7.2

335910 EUR Henkel AG & Co KGaA Consumer Staples 44.51 54.00 14.2 2.5 1.8

337898 EUR K+S AG Materials 46.83 52.00 12.5 3.4 3.3

1160189 NOK Telenor ASA Telecommunication Services 93.05 115.00 12.5 1.8 4.8

524773 EUR Total SA Energy 37.94 43.00 7.2 1.4 6.1

North America

382547 CAD Alimentation Couche Tard Inc Consumer Staples 30.20 32.00 15.5 2.6 0.8

915875 USD Campbell Soup Co Consumer Staples 33.67 36.00 13.5 9.9 3.6

1063975 USD Energizer Holdings Inc Consumer Staples 74.99 82.00 14.0 2.2 0.0

933071 USD General Electric Co Industrials 16.45 21.00 11.9 1.4 3.6

1916494 USD Google Inc Information Technology 596.42 760.00 16.2 3.5 0.0

1161460 USD JPMorgan Chase & Co Financials 34.57 40.00 7.6 0.8 2.8

10683053 USD Merck & Co Inc Health Care 33.53 42.00 9.0 1.9 4.6

134820 USD Ultra Petroleum Corp Energy 32.17 54.00 12.7 3.7 0.0

Supplement to the Investment Strategy November 2011

Disclaimer: The information contained on this Recommendation List and specifically the descriptions of individual securities constitute neither an offer to purchase the securities nor an invitation to engage in any other transactions. All of the information contained on this Recommendation List has been carefully selected and obtained from sources that the Investment Center of the St.Galler Cantonal Bank fundamentally believes to be reliable. Opinions or other representations conveyed on this Recommendation List are subject to change without notice. No guarantee is assumed as to the accuracy or completeness of the information. The registration of a product listed on the recommended list may be questionable in one or more countries, it is no guarantee or responsibility for the approval of the recommended or selected by the customer products particularly in the home country of the customer. Nor can any responsibility for any tax consequences are taken which may give rise to the purchase of a product itself.

Hyposwiss Private Bank Ltd.

Valor Curr. Company Sector Close Price P/E P/B Yield 25.10.11 Target 2010E Current in %

Asia/Pacific/Emerging Markets

761515 JPY Asics Corp Consumer Discretionary 1053.00 1350.00 18.0 2.0 1.0

10400408 USD Federal Hydrogenerating Co JSC Utilities 3.68 7.00 8.4 0.6 1.1

1002318 USD Gazprom OAO Energy 11.10 19.00 3.1 0.7 2.0

3422370 AUD Macquarie Group Ltd Financials 23.34 45.00 8.5 0.7 7.8

2119982 AUD Metcash Ltd Consumer Staples 4.21 4.70 12.9 2.3 6.7

1067428 HKD PetroChina Co Ltd Energy 9.75 12.50 9.9 1.5 4.5

Structured Products

11165170 CHF Emerging Infrastructure Basket 11/13 668.81 900.00

11416997 EUR Best of Germany Basket 06/12 98.85 120.00

10559592 USD All in one China Basket 04/13 68.00 100.00

11138618 USD Deep Offshore & Exploration 03/13 102.10 120.00

11919083 EUR European Top Dividend 06/12 84.67 110.00

12420770 CHF Rising Japanese Sun Basket 02/13 719.40 1000.00

10716340 CHF Schweizer Small & Mid Cap Basket II 12/12 78.05 100.00

10681495 CHF Valuable Health & Care Basket 11/11 933.50 1200.00

11492192 USD Best of India Basket 11/14 752.00 1000.00

12820130 CHF Natural Gas Basket 04/13 83.30 110.00

Curr.= Currency; P/E= Price Earnings Ratio; P/B= Price Book Ratio; Yield= Dividend Yield

*domicile inconsitent with listing

Documents

Investment Strategy - SGKB