Economy and Financial Markets March 2012

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

Thomas StuckiThomas StadelmannPatrick HäfeliDr. Alexander F. Galli

Editorial deadline

February 23, 2012

Release

Monthly

1 Editorial Is an AAA rating necessary?

2 Economy Switzerland as a model for Europe?

4 Interest Rates and Yields Are companies the better states?

5 Equity Markets A flying start to the first half of the year

6 Currencies All quiet on the Western front

7 Commodities Glencore and Xstrata in the sights of investors

8 Investment Strategy Carefree stock markets

Enclosure Perspective Latin America – forging ahead in the slipstream of the USA? Cyril Gehrer

Recommended Stocks

Contents

Title Picture

El Teide, Canary Islands, Spain Photo: Roland Gerth

March 2012 Investment Strategy 1

Dear investor,

In mid-January, the rating agency Standard & Poor's downgraded France one notch from an

AAA rating to AA+, its second-highest level. The financial news was filled with an unending stream of reports and commen-taries. You could be forgiven for thinking that the Gallic cockerel had been slaughtered. By con-trast, the fact that at the same

time Austria lost its AAA rating and most other members of the eurozone were also down-graded was a side issue and not worth talking about.

Is it really such a terrible thing for a country or a company to lose its AAA rating? The question is easy to answer: No.

Standard & Poor's downgrade of France's credit rating reflected what capital market in-vestors had long known. France's standing as a borrower was undermined by its ballooning budget deficits, a looming recession, and French banks' potential losses on their holdings of Greek debt. Between June and December 2011, the risk premium on French bonds wide-ned from 65 to 250 basis points. By way of comparison, at the same time the risk premium for Brazil, whose bonds carry a BBB rating, was «only» 160 basis points. Capital markets appear increasingly to be ignoring the ratings of the credit rating agencies. Since France was downgraded, the risk premium on its bonds has narrowed substantially.

Most people have already forgotten that US debt has not had an AAA rating from Standard & Poor's since last summer either. Contrary to media prophecies that the cost of financing US government debt would rise in the capital mar-kets, borrowing costs have fallen to their lowest level in decades. After a few pithy expressions of indignation, American politicians have turned to other topics of greater interest to citi-zens and voters.

The consequences for the real economy in the countries concerned are small. Rather, it is a question of hurt reputation and pride in no longer belonging to the distinguished circle of countries with a hallowed S&P AAA rating. The situation only becomes critical when a rating falls below an A, or even worse below BBB, at which point the country or company loses its in-vestment grade rating, i.e., has junk status. In this case, many institutional investors, who are by far the largest buyers of bonds, are prohi-bited by internal guidelines or statutory regula-tions from buying this debt, and may even be required to sell it. The effect of this may have a substantial impact on the affected entity's fi-nancing possibilities. However, France is still a long way from this point.

Dr. Thomas Stucki

Chief Investment Officer

EditorialIs an AAA rating necessary?

Investment Strategy March 20122

wrong with regional differences as such. In this regard it is often overlooked that even in rela-tively small Switzerland, there are significant regional differences, for instance between the economic performance of individual cantons. As a consequence of geographic location and differences in economic development, added value differs from region to region. Thus, gross domestic product (GDP) per capita in Basel is around three and a half times that in Canton Fribourg. The implementation of financial equalization and burden sharing in Switzer-land has smoothed out regional economic dif-ferences between individual cantons and ac-cordingly compensated individual cantons for certain expenses. These include equalization payments to cover the special burdens of core

Almost ten years after the introduction of the euro, the European Union is in crisis. The spreading financial crisis severely impacted the old continent last year, recently forcing the eu-rozone to institute fundamental reforms. As a re-sult, the concept of an economic union with dif-ferent economic structures and without a uni-form fiscal policy has to be completely rethought. Switzerland could serve as a model in this respect.

In the current environment, the original goals and objectives of the currency union have largely been forgotten. Although creation of a common currency area was an expression of political will, the introduction of the euro also made it possible to realize important economic advantages. These have strengthened Europe's international competitiveness. Besides reduc-ing transaction costs, they include improved market transparency, which has become in-creasingly significant as markets continue to globalize. However, greater transparency has also ruthlessly exposed long ignored, latent structural problems associated with restrictive economic structures, in particular in the coun-tries on the southern periphery of the currency union, such as Italy and Greece. This has been compounded by overly generous social wel-fare systems and swollen government bureau-cracies, which together have thrown public fi-nances completely out of kilter. Another conse-quence is the loss of competitiveness on the part of European Mediterranean countries.

Large regional differences in Switzerland tooThe large economic differences between the in-dividual regions of the eurozone have been discussed ad infinitum in the past. In a currency union, regional differences can be smoothed out only through the mobility of the production factors labour and capital. On account of country-specific linguistic and educational bar-riers, however, people cannot move that easily from one region to another even if they want to; hence, that leaves capital as the balancing factor to defuse these tensions. There is nothing

EconomySwitzerland as a model for Europe?

Source: Bloomberg

Economic Snapshot (figures as of Feb 23, 2012)

Switzerland Germany Eurozone USA Japan

Real GDP QoQ 0.2 % – 0.2 % – 0.3 % 2.8 % – 0.6 %

Inflation YoY – 0.8 % 2.1 % 2.7 % 2.9 % – 0.3 %

Unemployment rate 3.1 % 6.7 % 10.4 % 8.3 % 4.6 %

400

300

200

100

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-100

-200

-300

-400

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Bern

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GDP (indexed by average) Financial compensation (indexed by average)

The Swiss financial compensation: Basel Stadt is the leader in terms of GDP, Zug pays the most per capita

Source: BAK Basel, Eidgenössisches Finanzdepartement, eigene Darstellung

March 2012 Investment Strategy 3

cities or the higher regional and topographic expenses for the preservation of mountainous areas. Thus it is possible that even regions with comparatively high added value, such as Can-ton Glarus, receive compensatory payments. For instance, on account of its me tropolitan burdens, Basel-Stadt, the canton with the high-est GDP per capita, only contri butes 450 Swiss francs per person to the financial equalization fund, whereas Zug, the canton with the se-cond-highest added value per ca pita, pays more into the common fund than any other can-ton, namely 2,229 Swiss francs per inhabi tant. On the other hand, the federal structures, which give individual cantons a lot of auto-nomy, encourage positive competition in tax rates between the cantons and municipalities and promote financial discipline in the respec-tive institutions. The most important point is that the system is generally regarded as fair; on balance, all cantons benefit from it: while the rural regions function as local recreation, ex-cursion and leisure areas, most of the country's added value is generated in the urban agglo-merations.

Adapting to Europe?The EU is on the way to creating a fiscal union and, in the process, is examining means that have already proved themselves, such as a balanced budget requirement, which Switzer-land introduced in 2003. Among other things, a country's annual deficit may not exceed 0.5% of GDP and public debt must be reduced to 60% of GDP. Even without the agreement of the Czech Republic and the UK, the recently accepted fiscal package is surely a step in the right direction. However, given the fact that only Finland and Luxembourg currently fulfil these criteria, the goal is extremely ambitious. How states that fail to meet the requirements can be brought to account, and indeed, whether the national parliaments will ratify these proposals, is still open. These are only one aspect of the necessary reforms that need to be implemented by the EU. Besides the con-solidation of public finances, the currency un-

ion has to create a harmonized labour market framework. This includes, for example, a uni-form pensionable age and working hours across Europe. That said, the long-term goal once financial consolidation has been brought to a successful conclusion should be the crea-tion of some other form of financial equaliza-tion between the individual regions that will produce a fairer, sustainable allocation of re-sources. Economic differences between re-gions should not be an obstacle to implemen-tation. On the contrary: if the individual re-gions would focus on their strengths, this would ultimately result in greater prosperity for the en-tire EU. What has worked well in a small coun-try like Switzerland could well be adapted to the EU.

ConclusionBesides the fiscal package, a feasible step for the EU after completion of fiscal union would be the introduction of a transfer union based on the Swiss model. Countries with special geographic and topographical burdens, such as Austria, would, despite a high GDP, tend to benefit, while economically weaker regions with fewer special burdens, for example Greece, would on balance receive less money in future. The resources would be allocated by the local governments of the individual coun-tries. In return, the countries would undertake to generate a corresponding tax base, which could have a positive impact in the form of tax competition, thereby enhancing the overall at-traction of Europe as a business location. Re-sources would be used more efficiently, and their transparent allocation would noticeably increase the acceptance of the administrative authorities in Brussels. It is obvious that finan-cially stronger countries, such as Germany, would have a legitimate interest in codetermi-ning the purposes to which their payments are put. This also requires each country to critically question the use of its own resources. To date, this has functioned well in Switzerland, despite significant economic differences. Why should it not work in Europe as well? n

Investment Strategy March 20124

Interest rates and yieldsAre companies the better states?

The European debt crisis has unduly influenced credit risk premiums in the capital markets. The popular perception of risk-free government bonds and risky corporate bonds is increa-singly being questioned.

The credit spread provides information about investors' assessment of the probability that the ca pital they have loaned will not be repaid in full. In recent years, investors' awareness of credit risk and of the importance of borrowers' credit ratings has risen enormously. In particu-lar, the financial crisis and especially the grow-ing role played by the debt crisis have made markets more sensitive to this topic.

Credit risk premiums recover at the beginning of the yearThe fear that debtors could default on their payments, as measured by the level of the average credit risk premium, rose sharply to-wards the end of last year. On the back of un-certainty about the further development in Greece and the eurozone as a whole, risk aversion among investors soared. In response to the stock market rally and improved investor sentiment in the first weeks of the new year, however, credit spreads also recovered. The European debt crisis is still the prime driver in the capital markets. Whereas in recent years government bonds of industria lized countries were by and large viewed as safe, this picture has changed since the outbreak of the finan-cial crisis. The indeb tedness of certain EU states and public debate about their «survival» has triggered a shift in investors' perceptions. Currently, it is felt that big, well-known compa-nies are more likely to service their debts than are the eurozone countries now under pres-sure. Credit spreads have developed accor-dingly. For instance, the KFW, whose debt is explicitly guaranteed by the German govern-ment, currently has to pay a higher rate of interest on its debt than the US entertainment company Walt Disney.

Corporate bonds will remain popularUltimately, corporate earnings depend to a si-gnificant degree on consumers' disposable in-come. As a result of the austerity programmes

already announced, and almost certainly to be implemented by a number of governments, the amount of disposable income will fall. Corres-pondingly, sooner or later it will become into-lerable for the financial authorities of the lar-gest and most important state in the EU to have to pay more than an entertainment company to refinance its debt. Notwithstanding this, the concern about Greece and the EU debt crisis will continue to dominate the capital markets for some time. As a result, corporate bonds will remain popular. n

Outlook key interest rate

Figures as of Feb 23, 2012* In 3 months In 12 months

Switzerland (SNB) 0.00 % 0.00 % 0.00 %

Eurozone (ECB) 1.00 % 1.00 % 1.00 %

USA (Fed) 0.25 % 0.25 % 0.25 %

*Source: Bloomberg

Outlook capital market yields (10 years)

Figures as of Feb 23, 2012* In 3 months In 12 months

Switzerland 0.744 % 1.00 % 1.20 %

Germany (Eurozone) 1.957 % 2.20 % 2.50 %

USA 1.997 % 2.20 % 2.50 %

*Source: Bloomberg

140

120

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80

60

40

20

0

Jan

08

Apr

08

Jul 0

8

Oct

08

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9

Oct

09

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10

Apr

10

Jul 1

0

Oct

10

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11

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11

Jul 1

1

Oct

11

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12

Germany CDS 5 yearsWalt Disney CDS 5 years

Credits Spreads of Walt Disney and Germany since 2008 – Corporate bonds are in demand (CDS premiums in basis points)

Source: Bloomberg

March 2012 Investment Strategy 5

Equity marketsA flying start to the first half of the year

After a strong start to the new year, equity mar-kets have continued to rally into the second re-porting month, despite the fact that the debt cri-sis in Europe is by no means resolved and the future of the eurozone is anything but rosy.

Investors appear to be paying more attention to developments in individual companies than to economic policy, which keeps changing. Al-though the ongoing flow of annual financial statements is a source not only of positive sur-prises – the big banks are a case in point – in the industrial sector (Swatch, ABB, Holcim, Ca-terpillar, Daimler) earnings have been more than satisfactory, especially as many investors assumed a recessive trend in the fourth quarter. The earnings surprises announced in the annual financial statements have been welcomed with a gratifying display of fireworks on most inter-national stock markets.

German shares in demandFor the year to mid-February, the MSCI World Share Index rose by 8.4%. In particular the Eu-ropean equity markets have made a positive contribution to this rally. The DAX, for instance, soared by 16.1% in this period. Automotive companies are among the top performers on this exchange, among them Daimler, BMW and Volkswagen. The star performer, however, is Commerzbank, which has rocketed by almost 60%, clawing back much of the 70% loss it re-corded last year. The Japanese market, too, has presented itself in a positive light in the first one and a half months of the year. In recent years, either the Topix or the Nikkei was bottom of the league table; this year, the Topix has rebounded by more than 11%. Outperformers in the Japa-nese market include financial institutions such as Nomura, Daiwa Securities and Sony Finan-cial. Car manufacturers such as Toyota and Honda Motors also seem to be back in favour again. All of these shares have gained well over 20%.

Restructuring of the banking sector continuesOne index that has failed to beat the MSCI World Share Index is the Dow Jones. Al-though the star performer in 2011, posting a gain of 5.5%, for the year to date the Dow Jones Index is up by just 6%. For the year to date, the outperformer with a gain of 44.2% is Bank of America, the very same company that posted the worst performance – a drop of almost 60% – in the blue chip benchmark in 2011. The financial crisis took its toll world-wide; now courageous investors are reaping the rewards. However, the restructuring of the banking sector is far from finished and is likely to continue to impact on the perfor-mance of financial shares. In addition, in Switzerland tax disputes with the USA and Germany are also weighing on the perfor-mance of banking shares. Furthermore, the 5.1% advance in the SMI was also notice-ably weaker than the performance of the World Share Index. In this case, however, the big banks are not responsible, but rather the index heavyweights Nestlé, Roche and Novartis, all of whose performance is well below the index average. n

P/E* Year to Date (Curr Yr Est) (Feb 23, 2012)*

SMI 12.59 +4.46 %

EuroStoxx 50 9.70 +8.27 %

DAX 10.64 +15.45 %

S&P500 13.07 +8.42 %

Nikkei 225 22.80 +14.10 %

MSCI Emerging Markets 10.80 +15.59 %

Equity markets

*Source: Bloomberg

-2

0

2

4

6

8

10

12

14

16

18

1.1.2012 13.1.2012 27.1.2012 10.2.2012

SMI DAXDow Jones Nikkei

Nasdaq

Development of international stock markets (percentage change year to date)

Source: Thomson Reuters Datastream

Investment Strategy March 20126

CurrenciesAll quiet on the Western front

Despite the predictions of the doom-mongers, Canada's economy again performed extremely robustly in 2011. GDP grew by around 2.4% for the year, and while momentum may have slowed toward the end of the year, Canada is nowhere near falling into recession.

Indeed, there is nothing to suggest that 2012 will be anything but another year of growth: The Bank of Canada is anticipating a solid GDP rise of at least 2% as the US economy picks up. A perennial reason for the Canadian economy’s continued buoyancy is the wealth of natural re-sources that the country possesses. This develop-ment could become even further accentuated in future: Both Canada's southern neighbour and China have a major strategic interest in partici-pating in Canada's energy resources, and are investing vast sums in the exploration of new oil and gas reserves. With such potential slumber-ing beneath Canadian soil, foreign direct invest-ment in Canada has also had an influence on the balance of payments, which has, unsurpri-singly, been in negative territory since 2009, with the deficit now accounting for some 3% of GDP. Nonetheless, the Canadian economy is not dependent upon oil alone. Unlike the coun-tries of the Middle East, which generate the li-on's share of their revenues from the export of crude oil, black gold accounts for just 12% of Canadian GDP. Given the latest developments in the Canadian energy sector, however, it is likely that this component will rise further in the future, which in turn should provide further sup-port to the Canadian dollar.

Cyclical relationship with Swiss francsA highly cyclical picture emerges when one con-siders the performance of the Canadian dollar against the Swiss franc: No general trend is evi-dent for this currency pairing, in contrast to the US dollar. Only phases of prolonged risk aver-sion tend to weaken the Canadian dollar against the Swiss franc. On the other hand, a combina-tion of robust fundamentals and a hawkish cen-tral bank approach to inflation has had a positive impact on the Canadian currency. Given that the Canadian dollar should be viewed as a cyclical currency, it has held its value extremely well against the Swiss franc over the last 12 months.

But this is only one side of the coin. The strong performance of the Canadian dollar also reflects the fact that the Swiss franc is under pressure ge-nerally, given the effective floor set by the SNB against the euro.

ConclusionCompared to the Canadian dollar, the Swiss franc has been hit harder by developments in the eurozone. Ever since the SNB introduced a floor of 1.20 for euro/Swiss franc, the franc has effectively been coupled to the euro, greatly increa sing the correlation of this currency pair. The SNB has been paying even more attention to European developments since its intervention. As a result, a weaker franc is again moving largely in step with a weaker euro – despite the fact that the Swiss economy (and therefore the Swiss franc) appear to be in much better funda-mental health than the eurozone. We therefore envisage Canadian dollar/Swiss franc trading in a range of 0.92 to 0.97 over the next three months, and see a major correction to the Cana-dian dollar as relatively unlikely given the de-cline in risk aversion. n

Outlook currencies

Currencies Figures as of Feb 23, 2012* In 3 months In 12 months

EUR/CHF 1.205 > 1.20 1.20 – 1.30

USD/CHF 0.901 0.90 – 1.00 0.88 – 0.98

EUR/USD 1.311 1.25 – 1.35 1.32 – 1.42*Source: Bloomberg

1.15

1.10

1.05

1.00

0.95

0.90

0.85

0.80

0.75

0.70001.01.2010 01.07.2010 01.01.2011 01.07.2011 01.01.2012

CAD/CHF exchange rate and forecast bandwidth

Source: Bloomberg

March 2012 Investment Strategy 7

It is still too soon to speak of the merger of the year, but when Glencore, the largest commo-dity trader in the world, asks for the hand of the mining company Xstrata, the impact is certainly felt in the commodities market.

Such a jumbo merger is unlikely to affect com-modity prices immediately, but a deal of this na-ture must influence prices in the longer run. This new alliance will give rise to a new global player in the commodities market. The new company will be known as Glencore Xstrata In-ternational. This is a positive sign for the entire industry. However, further consolidation in the market could lead to market inefficiencies that result in higher corporate profits, but also higher prices owing to the disruptive lack of competition. For this reason, the competition

authorities are examining the planned merger very closely. Just two years ago, they prevented the merger of the iron ore divisions of the mi-ning companies Rio Tinto and BHP Billiton. Re-sistance is also mounting among the sharehol-ders of Xstrata, the somewhat smaller com-pany, who view Glencore's offer as inadequate.

Prices rally after consolidation in metalsIndependent of the expected structural changes in the market, commodity prices have been ral-lying after the period of consolidation in De-cember. In particular, the metal price index has soared by about 13% since the beginning of the year. Once again, copper has played a leading role in this upward trend. In many emerging countries, the metal still plays a si-gnificant role in the expansion of the infrastruc-ture. Demand for the metal is an indication that the economy outside of Europe is gaining mo-mentum. In particular, looser monetary policy in China will help to drive demand for com-modities. Since 2008, the price of copper has climbed from about 4000 US dollars to its cur-rent price of 8500 US dollars a tonne. At pre-sent, a tonne of nickel costs almost 20,000 US dollars. A major use of nickel is to increase the corrosion resis tance of steel. Furthermore, this metal, too, plays an important role in the ex-pansion of infrastructure in emerging markets.

Oil and precious metal prices remain highPrices of crude remain elevated. In the USA a barrel of oil (WTI) costs around 103 US dollars, whereas in Europe 122 US dollars has to be paid for a barrel (Brent). Despite the slowing economy in Europe, there are no signs of prices easing in the oil market. On the contrary, prices have firmed in recent weeks, not least because of the Iran crisis. The same holds for the USA, with the difference that there the price increases are driven primarily by positive economic de-velopments. Investor demand for precious met-als such as gold remains strong. On account of persistently low interest rates, expanding cen-tral bank balance sheets, continued uncertainty about developments in the eurozone and ele-ments of uncertainty particularly in the Middle East, demand for gold as a hedge against macro risks is likely to continue. n

CommoditiesGlencore and Xstrata in the sights of investors

Development of commodity prices (indexed as of 1.1.2010)

80.0

90.0

100.0

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120.0

130.0

140.0

150.0

01.01.2010 16.07.2010 28.01.2011 12.08.2011

Rogers International Agriculture Commodity Index

Rogers International Commodity Index

Rogers International Energy Commodity Index

Rogers International Metals Commodity Index

Source: Global Insight WMM

Investment Strategy March 20128

Investment StrategyCarefree stock markets

The uncertainty in the financial markets has eased slightly since the beginning of the year. As a result, stock markets have advanced across a broad front. In particular, equity mar-kets in the USA and the emerging markets have bounced back strongly on the back of better fundamental data and indices are in some cases back at the levels of last summer.

The better fundamental data are also reflected in the Economic Surprise Index, which is pu-blished daily by Citigroup. To put it simply, it measures how the cumulative daily economic announcements met the expectations of the ana lysts. However, a high index level also indi-cates that further potential for positive surprises is relatively small. And vice versa, this also means that equity markets are now more vul-nerable to ne gative surprises.

Stock markets off to a flying start in 2012At the beginning of the year, stock markets were lifted by pleasing US labour market data and persistently low interest rates. In emerging markets, falling rates of inflation, accompanied by the general move to an interest-rate-cutting cycle in these countries, have given these mar-kets a welcome boost after a disappointing year in 2011. On the other hand, it is apparent that bond markets take a far more sceptical view of developments in the financial markets. Yields on paper of countries deemed to be safe are still exceptionally low, which indicates that the current situation is not expected to improve soon. In addition, markets are starting to expe-rience the habituation effect: the markets took the rating agencies' most recent announce-ments, which finally gave effect to the long an-ticipated downgrading of heavily indebted countries in the eurozone, in their stride. The bi-polar world of «good» and «bad» sovereign debtors is likely to persist in the coming months.

Clouds on the horizonIt is possible that negative surprises will weigh on the stock markets in the near future. We still think the unresolved problems of heavily in-debted countries in the eurozone pose the greatest danger, with Greece spearheading the conflict. What type of agreement the coun-

liquidity

liquidity

short duration

euro

governments

precious metals

equities

bonds

corporates

long duration

US dollar

cyclical commodities

try will reach with its creditors still remains to be seen. The recent escalation of the conflict with Iran, culminating in a threat by the EU to boy-cott Iranian oil, demonstrates that even after the Arab Spring there is still considerable potential for conflict in the Middle East. The smouldering conflict between the West and Iran continues to weigh on the entire global economy.

ConclusionsThe equity markets have started the new year with a solid rally. We think that the potential for further equity gains is limited. In view of in-creasing market risks, we have therefore decided to cut our equity allocation slightly and somewhat reduce portfolio risk. The proceeds will be invested in cash on the one hand and, on account of the determination of the central banks to maintain a low interest rate environment, used to increase our posi-tion in gold on the other. If the various threats anticipated by us in the near future dissipate, we shall have an adequate reserve of cash to allow us to move back to more offensive po-sitioning in the future. In the bond segment, we continue to prefer medium terms to maturity of up to five years and bonds issued by solid corporate borrowers. n

Investment strategy

March 2012 Supplement to the Investment Strategy

PerspectiveLatin America – forging ahead in the slipstream of the USA?

The debt crisis is not over yet. Moreover, eco-nomic development in Europe is being squee-zed by negative growth momentum and the USA has only recently climbed back onto the growth path. Thus, investors are well advised to look for alternatives to western markets. They could well find them in Latin America.

As of the end of 2011, eurozone debt amoun-ted to more than 85% of the currency area’s economic output. In addition, the economy is stagnating. This makes it impossible to rapidly reduce the debt burden, which in turn means that cleaning up public finances will take lon-ger than anticipated. Consequently, govern-ment austerity programmes will of necessity be long-term, and by reducing public spending this will have a further negative impact on growth. Another factor is the demographic trend, which will create challenges for Europe’s highly developed social welfare systems. The situation in the USA is better. Thanks to a flexi-ble labour market and bold intervention by the Federal Reserve, the US economy is expanding again. Growth rates of 2% for 2012 and 2013 are realistic. But in the US, too, the public debt, which is currently equal to about 100% of gross domestic product (GDP), will have a negative impact in the longer term. In short: the indus-trialized states will not be able to match the economic momentum of the emerging markets in Asia and Latin America.

Latin America: strong growth thanks to a solid economic foundationIn view of the muted prospects for the industria-lized countries, investors are well advised not to focus exclusively on western economies but to pay greater attention to more dynamic growth markets. Compared to western coun-tries, emerging markets such as Brazil, China, India and Mexico exhibit significantly lower debt ratios and higher growth rates. Whereas in China the real estate market has recently slow ed down economic growth and India con-tinues to struggle with a high rate of inflation, the Latin American economies in particular ap-

pear to us to offer good value. Mexico in parti-cular should benefit from the recent rebound in the US economy and surprise on the upside. In our view, three factors in particular will fuel a dynamic economic development in Latin Ame-rica:

Solid macroeconomic foundations:Characteristics of the economies of Latin Ame-rica include steady growth rates and low debt ratios. With public debt equal to less than 65% of GDP, Brazil, the biggest economy in Latin America, has less accumulated debt to pay off than, for example, Germany. Moreover, accor-ding to figures published by the International Monetary Fund (IMF), by 2016 this debt ratio will have fallen to well to below 60%. At the same time, Brazil managed real economic growth of just less than 3% in 2011, and from 2012 onwards GDP should again be growing at a rate of well over 4% a year. The most re-cent data show that inflation has also fallen substantially and is now below 7%. Indeed, the IMF forecasts an inflation rate of just 4.5% from 2013 onwards. In Mexico, the second largest

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

USA Eurozone Mexico Brazil

Government debt of selected countries as % of GDP

Source: Bloomberg, IMF, own chart

Supplement to the Investment Strategy March 2012

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.

economy in Latin America, the situation is even better. The USA’s southern neighbour has a debt ratio of some 40%, which puts it in the same league as Switzerland. Even in the crisis year of 2011 Mexico produced real economic growth of 4%. At the same time, inflation in Me-xico is running at less than 3.5%.

Rate-cutting cycle as factor driving stock markets:In August 2011, the Brazilian central bank star-ted its easing cycle; its benchmark interest rate, which initially stood at 12.5%, has been cut in a number of steps. Since the last reduction on 16 January 2012, the Selic has stood at 10.5%. With inflation receding, the central bank has ample scope for further adjustments to its key interest rate. Further rate cuts are thus likely. There is also a possibility that the Mexican cen-

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Prime rate Inflation (r.h.s.)

Falling inflation increases space for the Brazilian National Bank

Source: Bloomberg, own chart

tral bank will cut interest rates on 16 March. Apart from direct positive effects for compa-nies, interest rate easing cycles reduce bond yields, thereby making investments in equity twice as attractive. Hence, stock markets in Central and South America are also likely to be boosted by these moves.

Stimulus from recent expansion in US economy:Mexico, whose economy is closely integrated with the US economy, should benefit in particu-lar from the recent upbeat developments in the USA. In 2011, Mexico exported goods worth almost 350 billion US dollars, of which almost 242 billion US dollars were sent to the United States. Accordingly, the improvement in US de-mand should act as a stimulus for the Mexican export industry. Moreover, in 2011 the USA took 12.4% of Brazil’s exports as well. There-fore, the upturn in the US economy will be a shot in the arm for economic growth throughout the region.

Conclusion Investments in the emerging markets, including those in Latin America, entail substantial risks for investors. Equity markets in the emerging economies continue to be more volatile than those in the industrialized states. However, we expect that the additional risk will be compen-sated for: The medium-term growth prospects of the industrialized states are very mixed. They will not be able to keep pace with the rebound in the emerging markets. The consequence will be demand for alternatives to equity markets in the West. On account of its healthy public fi-nances and geographic location, Latin Ame-rica is set to benefit from the recent upturn in the US economy. Therefore, we think that the mar-kets of Central and South America offer great opportunities. n

March 2012 Supplement to the Investment Strategy

Recommended Stocks

Valor Curr. Company Sector Close Price- Upside P/E P/B Yield 23.02.12 target Potential 2012E Current in %

Switzerland

1222171 CHF ABB Ltd Industrials 18.80 22.00 17% 13.5 3.0 3.5

4323836 CHF Aryzta AG Consumer Staples 44.65 50.00 12% 11.0 1.5 1.3

1064593 CHF Givaudan SA Materials 874.50 990.00 13% 16.5 2.3 2.5

1221405 CHF Holcim Ltd Materials 58.50 60.00 3% 17.8 1.1 2.1

350485 CHF Kuoni Reisen Holding AG Consumer Discretionary 293.25 320.00 9% 9.8 1.7 1.2

1200526 CHF Novartis AG Health Care 52.15 58.00 11% 10.4 2.1 4.5

383889 CHF Sulzer AG Industrials 125.10 140.00 12% 14.3 2.0 2.4

1225515 CHF Swatch Group AG/The Consumer Discretionary 408.50 435.00 6% 15.4 2.7 1.4

874251 CHF Swisscom AG Telecommunication Services 361.30 415.00 15% 10.3 4.4 6.1

803838 CHF Swiss Prime Site AG Financials 69.75 80.00 15% 19.6 1.2 5.0

12688156 CHF Swiss Re AG Financials 54.40 70.00 29% 9.3 0.8 5.5

1103746 CHF Syngenta AG Materials 300.40 330.00 10% 15.3 4.1 2.7

1107539 CHF Zurich Financial Services AG Financials 223.80 260.00 16% 8.9 1.1 7.6

Europe

11730015 EUR Adidas AG Consumer Discretionary 58.95 63.00 7% 15.7 2.4 1.7

1007667 GBp BG Group PLC Energy 1523.00 1600.00 5% 16.5 2.8 1.0

1292393 GBp BT Group PLC Telecommunication Services 215.50 225.00 4% 9.4 53.5 3.8

487663 EUR Danone Consumer Staples 50.70 60.00 18% 15.6 2.8 2.7

829257 EUR Deutsche Bank AG Financials 33.36 45.00 35% 6.8 0.6 2.2

1124244 EUR Deutsche Post AG Industrials 13.11 14.00 7% 10.9 1.5 4.9

332902 EUR Fresenius SE & Co KGaA Health Care 79.15 90.00 14% 15.0 2.3 1.2

2200367 EUR GDF Suez Utilities 19.57 25.00 28% 11.6 0.7 7.7

335740 EUR HeidelbergCement AG Materials 39.20 45.00 15% 12.6 0.6 1.0

335910 EUR Henkel AG & Co KGaA Consumer Staples 48.82 50.00 2% 14.1 2.6 1.6

13421328 EUR K+S AG Materials 38.62 46.00 19% 10.7 2.6 3.6

340045 EUR Linde AG Materials 125.10 135.00 8% 15.8 2.0 2.0

502805 EUR L'Oreal SA Consumer Staples 85.85 95.00 11% 18.5 3.2 2.3

402589 GBp Rio Tinto PLC Materials 3690.00 4500.00 22% 7.4 2.1 2.8

1987674 EUR Royal Dutch Shell PLC Energy 27.56 29.00 5% 8.3 1.4 4.7

614663 SEK Telefonaktiebolaget LM Ericsson Information Technology 66.55 80.00 20% 14.6 1.5 3.8

2560588 EUR Unilever NV Consumer Staples 25.56 30.00 17% 15.6 5.0 3.6

2582928 GBp Vodafone Group PLC Telecommunication Services 173.50 210.00 21% 10.9 1.0 5.6

352781 EUR Volkswagen AG Consumer Discretionary 139.15 165.00 19% 7.5 1.1 2.2

North America

1281709 USD Chevron Corp Energy 108.35 115.00 6% 8.5 1.8 3.2

918546 USD Cisco Systems Inc Information Technology 20.23 22.00 9% 10.9 2.2 1.6

919390 USD Coca-Cola Co/The Consumer Staples 69.18 80.00 16% 16.9 4.9 2.9

933071 USD General Electric Co Industrials 19.31 21.00 9% 12.5 1.8 3.8

1916494 USD Google Inc Information Technology 606.11 760.00 25% 14.3 3.4 -

1161460 USD JPMorgan Chase & Co Financials 38.49 40.00 4% 8.2 0.8 3.1

950605 USD McDonald's Corp Consumer Discretionary 100.81 115.00 14% 17.6 7.7 2.8

10683053 USD Merck & Co Inc Health Care 38.51 42.00 9% 10.1 2.1 4.4

964930 USD QUALCOMM Inc Information Technology 63.51 70.00 10% 16.9 3.8 1.5 Curr.= Currency; P/E= Price Earnings Ratio; P/B= Price Book Ratio; Yield= Dividend Yield*domicile inconsitent with listing

Supplement to the Investment Strategy March 2012 Hyposwiss Private Bank Ltd.

Recommendation-Matrix

Source: Investment Center

Financials/TechnologyAlfred Steininger Tel: +41 44 214 3271 E-Mail: alfred.steininger@hyposwiss.ch

Consumer Staples & Discretionary/Materials/Telecommunication Stella I.A. Dombrowsky Tel: +41 44 214 3252 E-Mail: stella.dombrowsky@hyposwiss.ch

Health Care/Industrials/Energy/UtilitiesThomas Jäger Tel: +41 44 214 3431 E-Mail: thomas.jaeger@hyposwiss.ch

OverweightUnderweight NeutralFebruary 2012

Consumer Staples

Technology

Healthcare

Industrials

Energy

Telecom Services

Materials

Consumer Discretionary

Finance

Utilities

OverweightUnderweight NeutralMarch 2012

Consumer Staples

Energy

Healthcare

Industrials

Technology

Telecom Services

Utilities

Consumer Discretionary

Finance

Materials

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.

Sector / Weight BUY HOLD SELL

Cycli

cal

Techno- logy

Over- weight

Ericsson Google Logitech Infineon SAP EMC Intel Microsoft

Cisco Qualcomm Termenos Nokia Apple Hewlett Packard IBM Oracle

Materials NeutralGivaudan Syngenta K+S Rio Tinto Sika Arcelor-

Mittal BHP Billiton Xstrata EMS-Chemie

Holcim Heidelberg Cement Linde Clariant BASF Thyssen

Krupp

Industrials Over- weight

ABB Deutsche Post Adecco Geberit Kuehne + Nagel Schindler 3M Co Georg

FischerOC

Oerlikon

Sulzer General Electric Bucher Kaba SGS Siemens Meyer

Burger Panalpina

Energy NeutralBG Group Chevron Transocean BP Total Schlum-

berger

Royal Dutch Shell

Weather-ford ENI Exxon

Financials Under- weight

Swiss Re Deutsche Bank Baloise Helvetia Partners

Group UBS AG BNP Paribas Munich Re Wells FargoBanque

Cantonale Vaudoise

Zurich Financial

JP Morgan Chase Sarasin Julius Baer PSP Swiss Allianz HSBC Bank of

AmericaBanco

Santander

Swiss Prime Site Credit

Suisse Mobimo Swiss Life AXA ING Citigroup Commerz-bank

Consumer Discretio-

naryNeutral

Kuoni Adidas McDonald's Richemont Daimler NIKE Amazon-.com

Swatch Volkswagen BMW LVMH

Telecoms NeutralSwisscom Vodafone Deutsche

TelekomFrance Telecom

BT Group Telefonica

Defe

nsiv

e

Utilities Under- weight

GDF Suez BKW FMB Fortum Verbund AG

E.ON RWE

Health Care Neutral

Novartis Merck & Co Actelion Lonza Roche Straumann Johnson & Johnson

Merck KGaA

Fresenius Galenica Nobel Biocare Sonova Bayer AG Pfizer

Consumer Staples

Over- weight

Aryzta Henkel & Co Unilever Barry Callebaut Metro AG Beiersdorf Wal-Mart

Danone L'Oreal Coca Cola Nestlé Kraft Foods Procter & Gamble

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.