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Eurozone equities
Preference: underweight

UBS View
Euro Stoxx (27 June): 217 (last month: 215)
Euro Stoxx (6-month target): 223

• The crisis in the Eurozone will remain the main driver in the coming months. After the elections in Greece, progress on the reform program will be closely monitored. Spain and Italy will also remain in the spotlight with levels of government bond yields too high for being sustainable.
• With the sovereign debt crisis dragging on we expect the Eurozone market to stay highly volatile in coming months.
• Economies in peripheral countries increasingly feel the burden of austerity. The economic weakness affects company earnings negatively. Analysts' earnings growth forecasts (consensus) for 2012 have come down to about 3% for this year, but we see this as still too high against the weak economic backdrop.
• All in all, the ongoing risks stemming from the sovereign debt crisis lead us to the view that Eurozone equities will underperform other major markets.

Recommendations
Tactical (6 months)
• We continue to recommend defensive sectors. We like Consumer Staples and Healthcare.
• We also like the Energy sector, where the valuation is very attractive.
• Because of risks stemming from the sovereign debt crisis, we keep a cautious stance on Financials – especially Banks and diversified Financials.

Strategic (1 to 2 years)
• For investors with a multiyear horizon, we believe there are attractively valued opportunities in core Europe (see also slide 21).

Positive scenario
Euro Stoxx (6-month target): 275
• Global economic growth reaccelerates and Eurozone growth shows clear signs of bottoming out, enabling 2–4% earnings growth over the rest of the year. The trailing P/E ratio could re-rate to 12x from the current reading close to 10x.

Negative scenario
Euro Stoxx (6-month target): 165
• Europe slides into a deep recession, and the debt crisis leads to severe pressure on Spain and Italy. In a major crisis, earnings could fall by 10% to 15% from current levels until year-end, and the trailing P/E ratio could drop to 8.5x by the end of 2012.
Note: Scenarios refer to global economic scenarios (see slide 7)

Our sector stance in the Eurozone
Sectors | Eurozone
Consumer Discretionary | ↘
Consumer Staples | ↗
Energy | ↗
Financials | ↘
Healthcare | ↗
Industrials | ↗
IT | →
Materials | →
Telecom | ↘
Utilities | ↘

What we're watching
Growth indicators

Why it matters
Economic growth indicators provide information on the development of a potential Eurozone recession. Key dates: 2 July, Final PMI manufacturing Eurozone, Germany, France for June; 24 July, Flash PMI Eurozone, Germany, France for July; 25 July, IFO business climate Germany

Policy action
Decisions by European politicians and the ECB affect the course of the debt crisis. Key dates: 5 July, ECB meeting

Earnings season
Earnings reports of the Euro Stoxx companies. Key dates: Mid July until mid August

Source: UBS CIO, as of 28 June 2012
Note: Past performance is not an indication of future returns.

UBS
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For further information please contact CIO's asset class specialist Markus Irngartinger, markus.irngartinger@ubs.com
Please see important disclaimer and disclosures at the end of the document.
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