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									ab                                                                                                     Global Equity Research

 UBS Investment Research
                                                                                                        Equity Strategy
 Globalization of the S&P 500
                                                                                                        Equity Strategy

 Quantifying Euro-Risk to 2011 EPS
                                                                                                                                         28 June 2010
     Globalization Is Supporting Profitability
 A rising share of S&P 500 revenue is foreign; for 350 firms, foreign exposure rose
 from 30% in 1999 to 38% in 2008. EBIT margins are higher outside the U.S. and
 tax rates are lower. So globalization tends to boost profitability—particularly for
 “global growers.” Regional shares of S&P 500 profits: North America ~65%,                                          Thomas M. Doerflinger, Ph.D.
 Europe ~17%, Emerging Markets ~13%, Other ~5%. Surprisingly, Europe’s share                                                                     Strategist
 of U.S. foreign investment has been trending up.
                                                                                                                                         +1-212-713 2540
     How to Play It: M I T                                                                                                      Natalie Garner, CFA
 Best positioned sectors are materials, industrials, and tech. Their foreign exposure                                                            Strategist
 has increased the most in the past decade, as emerging markets build modern                                            
 infrastructure. They produce a large share of U.S. exports—particularly to                                                               +1-212-713 4915
 emerging markets. Industrials benefit both directly (sales to emerging markets) and                                            Jonathan Golub, CFA
 indirectly (sales to commodity producers). Relevant Key Calls: MMM, GLW,                                                                       Strategist
 CMI, TEL.                                                                                                             
                                                                                                                                         +1-212-713 8673
     If Europe Double Dips, How Bad Would 2011 S&P 500 EPS Be?                                                                 Chip Miller, CFA, CPA
 In this scenario, we assume U.S. GDP continues to grow because exports to Europe                                                                Strategist
 are only ~2-3% of U.S. GDP—far less than exports to emerging markets.                                                     
 Nevertheless, 2011 profits would be roughly flat with 2010, mainly due to                                                               +1-212-713 3531
 declining commodity prices. Every $10 decline in WTI crude cuts S&P 500 EPS                                                          Manish Bangard
 $2.50, before offsets in sectors benefiting from low WTI. We assume WTI                                                                        Strategist
 averages $60 in 2011. Apart from declines in energy & materials, profits would be                                    
 curtailed in industrials, tech, consumer staples & financials. Best positioned:                                                         +1 212 713 3036
 consumer discretionary which benefits from depressed oil prices and interest rates.

 This report has been prepared by UBS Securities LLC
 UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
 have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making
 their investment decision.
Globalization of the S&P 500 28 June 2010

Portfolio Manager’s Summary
We use government data and annual reports of 28 multinationals to analyze
foreign operations of the S&P 500. Key findings:

    Approximate regional shares of S&P 500 profits: North America 65%,
    Europe 17%, Emerging Markets 13%, Other (Japan, Australia) 5%.

    Profitability (EBIT/revenue, EBIT/assets) is higher outside North
    America. Relative profitability of foreign operations improved between
    2002 and 2008.

    For 350 firms generating 76% of revenue, foreign share of revenue rose
    sharply from 30% in 1999 to 38% in 2008.

    Rising foreign exposure + higher profitability outside North America + lower
    tax rates outside the U.S. has two effects: A) buoys overall S&P 500
    profitability, B) enables many “global growers” to outpace the index.

    Industrials, materials and tech appear to be best plays on this theme; their
    foreign exposure grew fastest, 1999-2009, by 1000 bps, 1400 bps, and 800
    bps, respectively. Consumer staples’ foreign exposure gain was a less
    impressive 400 bps.

    Surprisingly, the share of S&P 500 revenues in Europe appears to be
    rising, despite anaemic GDP growth, perhaps because some countries have
    low tax rates and it is a good base for serving emerging markets.

What are 2011 S&P 500 EPS if Europe has financial panic and “double-dip”
recession? Our estimate is $90, vs. our current 2010/2011 estimates of $87 /
$97. We sketch a sector scenario, guided by 1998 Asian crisis.

    We assume Asia and U.S. GDP keep growing in 2011. U.S. exports to
    Europe are only 2% of U.S. GDP, less than half of exports to emerging

    Main hit to earnings would be in energy and materials sectors. Every $10
    decline in annual average WTI crude prices implies $2.50 cut to S&P 500
    EPS, apart from offsets in other sectors. We assume average 2011 WTI price
    of $60 (implying temporary dip to low $50’s).

    Judging from 1998 scenario, tech, industrials, and consumer staples earnings
    growth would be curbed by declining Europe demand.

    We assume Wall Street takes a $7 billion after-tax hit from financial turmoil
    in Europe. Positives for sector: low funding costs, consumer credit costs
    reduced by low interest rates and energy prices.

    Domestically oriented consumer discretionary stocks would probably
    fare best, due to low interest rates and oil prices.

                                                                                    UBS 2
Globalization of the S&P 500 28 June 2010

Globalization of the S&P 500
This report attempts to accomplish two things. First, it summarizes fresh
research we have done on the operations of “global growers” in the S&P 500.
Then we apply that research, along with analysis of the earnings impact of the
1998 Asian financial crisis, to estimate 2011 S&P 500 EPS if Europe has a
financial panic and double-dip recession.

Europe Is Not Very Important to U.S. GDP . . .
Europe accounts for about 22% of U.S. exports (Table 1), which in turn account
for only 12% of U.S. GDP, so exports to Europe only account for 2.6% of GDP.
All else equal, if they fell 5% the hit to GDP would only be 0.13%. This is
important for equity investors because—similar to what occurred during the
1998 Asian financial crisis—domestic demand would likely remain healthy
even if Europe double-dipped
Table 1: U.S. Exports, 2010 Year to Date, by Region

                                        Exports ($ bil)    Share

World                                         406.0       100.0%

Canada                                         78.6       19.4%

Europe                                         90.0       22.2%

Latin America                                  96.2       23.7%

Africa                                           9.9       2.4%

Middle East                                    17.1        4.2%

Japan                                          19.0        4.7%

Asia Pacific ex Japan and Australia            88.4       21.8%

Australia                                        6.9       1.7%

Source: Dept. of Commerce, UBS

. . . but Accounts for ~17% of S&P 500 Profits
This metric cannot be measured directly because U.S. firms divide up the globe
very differently in 10Ks. We do know that foreign revenue accounted for about
30% of total S&P 500 revenue in 2009 (Table 2), and government data shows
that 57% U.S. foreign direct investment abroad is in Europe (Table 3). Based
just on this FDI data, one would conclude that (0.30*0.57) or 17% of S&P 500
revenue is in Europe. However, Europe claims only 22% of U.S. exports, many
of which are produced by S&P 500 firms, as we show below. Therefore we are
inclined to adjust this 17% figure downward to 15%. Emerging markets, account
for about 12% of S&P 500 revenue.

As discussed below, EBIT margins are higher outside North America; therefore,    North America 65%, Europe 17%, EM
foreign share of S&P 500 profits exceeds foreign share of revenue. Taking this   13%
into account, we estimate that regional shares of S&P 500 profits are: North
America, 65%, Europe 17%, Emerging Markets 13%, other (mainly Japan and
Australia) 5%. These figures understate the overall influence of foreign
economies, which drive global commodity prices.

                                                                                                               UBS 3
Globalization of the S&P 500 28 June 2010

Table 2: Percentage of S&P 500 Revenues from Foreign Sources (historical

                                    2004         2005           2006           2007   2008   2009

Materials                           39%          39%            39%            43%    44%    50%

Consumer Discretionary              23%          23%            24%            27%    29%    24%

Consumer Staples                    26%          27%            28%            28%    29%    26%

Energy                              50%          48%            45%            48%    49%    50%

Financials                          16%          16%            16%            16%    16%    20%

Health Care                         18%          18%            18%            19%    20%    17%

Industrials                         31%          33%            34%            37%    37%    35%

Information Technology              54%          53%            53%            59%    56%    55%

Telecomm Services                    2%            2%            2%             2%     0%     2%

Utilities                            6%            7%            8%             7%     5%     7%

Total                               28%          28%            28%            30%    32%    30%

Source: FactSet, Worldscope, Compustat, UBS

Table 3: U.S. Direct Investment Abroad -- Regional Shares, 2008

                                           Investment ($ bil)          Share

World                                           3,162.0           100.0%

Canada                                            227.3                7.2%

Europe                                          1,809.9            57.2%

Latin America                                     563.8            17.8%

Africa                                              36.6               1.2%

Middle East                                         32.5               1.0%

Japan                                               79.2               2.5%

Australia                                           88.6               2.8%

Asia Pacific ex Japan & Australia                 324.1            10.2%

Emerging Markets                                  957.0            30.3%

Source: Bureau of Economic Analysis, UBS

Europe’s Share of Foreign Investment Is Growing . . .
U.S. multinationals have been making substantial investments in Europe since
the 1950s, and given its anaemic GDP growth rate one might assume that
Europe’s share of U.S. direct investment abroad has been declining. Not so. It
was about 50% in 1990 but climbed to 57% by 2008, even as emerging markets’
share was also climbing, from 28% to 33% (Chart 1). Meanwhile, Canada and
Japan’s share declined.

                                                                                                    UBS 4
Globalization of the S&P 500 28 June 2010

Chart 1:Europe as a percent of Total U.S. Direct Investment Abroad







            1989    1991     1993      1995   1997   1999   2001   2003   2005   2007

Source: Bureau of Economic Analysis, UBS

The 10Ks of U.S. multinationals confirm the continuing importance of Europe             Close look at 10Ks of 28 Global
for U.S. firms. We did a “deep dive” into the annual reports of 28 major Global         Growers
Growers in the tech, industrial, consumer, and healthcare sectors—such stocks
NKE. Their aggregate revenue in 2008 was $1.6 trillion, or 18% of the entire
S&P and a much larger share of the revenue of multinational firms in the index.
From 2002 to 2008, these firms’ revenue growth in Europe was much faster than
in North America (10.3% vs. 6.2%)—see Table 4. Furthermore, their asset
growth was also much faster in Europe (10%) as compared to North America
(just 0.3%)--see Table 5).

Table 4: 2002-08 Revenue Compound Annual Growth Rate, by Region, for 28 U.S.
Multinational Firms

                                               Number of
Region                          CAGR           companies

North America                       6.2%              28

Europe                          10.3%                 19

Asia                            12.7%                 12

Japan                               2.9%               8

World                               9.6%              28

Non-North America               14.0%                 28

Source: Company reports, UBS

                                                                                                                          UBS 5
Globalization of the S&P 500 28 June 2010

Table 5: 2002-08 Assets CAGR by Region for 28 Multinationals

                                            Number of
Region                          CAGR        companies

North America                    0.3%              28

Europe                          10.3%              18

Asia                             4.7%              10

Japan                            3.0%               6

World                            6.7%              26

Non-North America                9.9%              26

Source: Company reports, UBS

Why are U.S. multinationals investing heavily in Europe despite its slow
demographic and economic growth? We suspect Europe is an attractive base of
operations for globalizing companies because of:

    Relatively low tax rates in Europe, particularly in such countries as Ireland
    and Switzerland,

    A hospitable culture for American executives,

    Cheap and well-educated labor in parts of Europe.

    The relative propinquity of Europe to certain emerging markets such as
    Russia, Eastern Europe, Africa, and the Middle East.

    The historical and cultural ties of European countries to emerging markets,
    many of which were once colonies.

It is remarkable that, as Table 5 shows, the U.S.-based assets of 28 successful      Slow asset growth in U.S.
multinationals grew just 0.3% annually from 2002 to 2008 while their
worldwide assets were growing 6.7% annually. This may reflect the migration
of corporate assets away from a region where profitability is relatively low (see
below), corporate tax rates are virtually the highest in the world, and regulation
is increasingly burdensome. Weak corporate investment in the U.S. is, in turn,
one likely cause of “wage stagnation” over the past decade.

Profitability Is Higher Outside North America . . .
For our sample of 28 global growers corporate profitability—as measured by           Higher EBIT margins outside U.S., and
EBIT/revenues and EBIT/assets—was significantly higher outside North                 lower tax rates
America, by around 300 bps in 2008 (Table 6). This is consistent with research
we did in 2007, which found that the pre-tax profit margins of 288 U.S.
multinational companies were much higher outside North American (11.6%)
than in North America (8.8%). (See Q-Series: How to Find Growth? Look for
High Exposure to Global Economy, March 7, 2007).

                                                                                                                      UBS 6
Globalization of the S&P 500 28 June 2010

Table 6: Profitability of 28 U.S. Multionationals, by Region, 2002 and 2008

                        2002        2008     2008 - 2002

EBIT / Revenue

North America            14.6%       12.4%     -2.2%

World                    14.4%       14.4%      0.0%

Non-North America        14.0%       15.9%      1.9%

EBIT / Assets

North America            14.0%       13.2%     -0.8%

World                    13.6%       15.4%      1.8%

Non-North America        13.1%       18.4%      5.3%

Source: Company reports, UBS

. . . and the Relative Profitability of Foreign Operations
has been Rising
As Table 6 shows, between 2002 and 2008, both measures of profitability (EBIT       Operating leverage in fast-growing
/ revenues and EBIT / Assets) deteriorated in North America and improved            emerging markets
outside North America. This could reflect tax planning, as companies used
transfer pricing to position profits in low-tax regions. However it seems likely
that a main driver is that, following a period of heavy direct investment by U.S.
firms in China and other emerging markets, margins are rising as rapid growth
in output and revenue leads to operating leverage.

Foreign Share of S&P Revenue Rose Sharply in Past
Decade, led by M I T
Given the superior profitability of foreign operations and the rapid growth of
emerging markets, it is no surprise that foreign markets claim a rising share of
the revenues of Global Growers. Table 7 covers 350 firms that accounted for
76% of S&P 500 revenue in 2009. Foreign revenues’ share of total revenue rose
fairly dramatically from 30% in 1999 to 36% in 2008, then dipped in 2009.
We know from a smaller sample that during the 1990s foreign revenues’ share
edged up only 100 bps between 1990 and 1999. So over the past decade there
was a clear acceleration in the rate at which foreign revenues gained share.
(Interestingly, this metric appears to dip ~100 bps during recessions.)

The biggest gains in foreign exposure over the past decade were in two cyclical     Materials, industrials, tech
sectors, industrials and materials, which are benefiting from the
industrialization of emerging markets. Materials rose 1400 bps and industrials
rose 1000 bps (Table 7). Thanks to secular growth in foreign demand, some
companies in these traditionally slow-growing “cyclical” sectors are looking
more like “growth cyclicals.” UBS U.S. Key Calls that fit this profile include
3M and Cummins Engine. The story is similar for information technology,
which gained 800 bps; the sector is benefiting not only from the infrastructure
build-out in Emerging Markets but also from rising consumer spending on
electronics. (Relevant Key Calls include Corning and Tyco Electronics). These
three sectors may well be a better play on emerging markets than consumer
staples, whose foreign exposure climbed only 400 bps and is well below four
other sectors.

                                                                                                                     UBS 7
Globalization of the S&P 500 28 June 2010

Table 7: Percent of Revenues foreign, 1999-2009 for 350 S&P 500 Firms

                              n      1999   2000   2001   2002   2003   2004   2005   2006   2007     2008    2009     1999

Consumer Discretionary       54      24%    22%    24%    24%    25%    28%    27%    27%     29%     31%     28%         4%

Consumer Staples             25      26%    26%    25%    25%    27%    29%    29%    30%     31%     27%     27%         1%

              ex MO          24      23%    23%    22%    22%    24%    25%    25%    26%     27%     28%     27%         4%

Energy                       30      55%    48%    49%    56%    53%    53%    51%    49%     52%     52%     55%         0%

Financials                   47      19%    19%    19%    20%    23%    23%    22%    23%     23%     24%     27%         8%

Health Care                  37      23%    21%    19%    17%    20%    22%    21%    20%     21%     23%     22%         -1%

Industrials                  46      30%    30%    29%    30%    32%    34%    35%    37%     40%     42%     40%         10%

Information Technology       53      49%    51%    52%    51%    54%    56%    56%    55%     60%     58%     57%         8%

Materials                    28      34%    34%    35%    36%    39%    39%    40%    39%     43%     44%     47%         14%

Telecomm Services             5        0%    0%     0%     0%     0%     0%     0%     0%      0%      0%      0%         0%

Utilities                    25        4%    4%     5%     5%     5%     5%     5%     6%      6%      6%      6%         1%

Total                       350      30%    29%    29%    29%    32%    33%    33%    33%     35%     36%     34%         5%

Source: Haver

S&P 500 Has High Exposure to U.S. Exports
Most of the top 20 U.S. exports are product categories in which S&P 500               MIT sectors: high export exposure
companies are heavily involved (Table 8). By our count, the M I T sectors
account for 15 of the 20 top exports. So even though exports of goods and
services are only 12% of GDP they are extremely important to fluctuations in
S&P 500 earnings—particularly because cyclical industries such as
semiconductors, autos, aircraft, industrial machinery, and chemicals are major
exporters. Contraction of foreign demand and / or a protracted period of dollar
strength (as occurred in 1980-85 but is not happening now) is distinctly bearish
for earnings, even if U.S. GDP is rising nicely. A useful indicator of export
health is the ISM Export Order Index, which is at a robust reading of 62. (See
Appendix for the top 50 exports to selected U.S. markets.)

                                                                                                                      UBS 8
Globalization of the S&P 500 28 June 2010

Table 8: Top 20 U.S. Export Categories

                                                                                Share of
                                                             15-yr CAGR         Exports*

 Automotive Vehicles, Parts & Engines                            2%                7.8%

 Pharmaceutical Preparations                                     13%               4.4%

 Other Goods                                                     3%                3.7%

 Semiconductors                                                  3%                3.6%

 Civilian Aircraft                                               4%                3.3%

 Industrial Machines, nec                                        6%                2.9%

 Telecommunications Equipment                                    4%                2.7%

 Medicinal Equipment                                             8%                2.6%

 Electric Apparatus                                              4%                2.5%

 Plastic Materials                                               7%                2.4%

 Computer Accessories                                            0%                2.4%

 Chemicals: Organic                                              5%                2.3%

 Fuel Oil                                                        18%               2.3%

 Industrial Engines                                              6%                2.1%

 Petroleum Products, nec                                         11%               2.1%

 Civilian Aircraft: Engines                                      9%                2.0%

 Chemicals, Other                                                6%                2.0%

 Civilian Aircraft: Parts                                        7%                1.7%

 Other Industrial Supplies                                       6%                1.7%

 Measuring, Testing & Control Instruments                        5%                1.6%

*Based on top 50 categories of exports, which accounted for ~90% of the total
Source: Haver

                                                                                           UBS 9
Globalization of the S&P 500 28 June 2010

Table 9: Top 20 Markets for U.S. Exports

                                               15-yr CAGR              Share of Exports

Canada                                                 4.0%                      19.4%

Mexico                                                 6.4%                      12.2%

China, Mainland                                       14.4%                       6.6%

Japan                                                 -0.3%                       4.8%

United Kingdom                                         3.6%                       4.3%

Germany                                                5.6%                       4.1%

Netherlands                                            6.0%                       3.1%

Republic of Korea                                      3.1%                       2.7%

France                                                 4.5%                       2.5%

Brazil                                                 8.1%                       2.5%

Singapore                                              3.6%                       2.1%

Belgium                                                4.6%                       2.0%

Hong Kong                                              4.2%                       2.0%

Australia                                              4.7%                       1.9%

Taiwan                                                 0.5%                       1.7%

Switzerland                                            7.9%                       1.7%

India                                                 14.0%                       1.6%

Italy                                                  3.6%                       1.2%

United Arab Emirates                                  14.5%                       1.1%

Saudi Arabia                                           4.0%                       1.0%

*Based on top 50 categories of exports, which accounted for ~90% of the total
Source: Haver

In which countries are these products sold? Table 9 shows the 20 top markets for
U.S.-made products. Exports to China have been compounding at a 14% pace
for 15 years and now account for 6.6% of exports. Other fast-growing markets
include the Netherlands, Brazil, Belgium, Hong Kong, Australia, India and the
UAE. As Table 10 shows, emerging markets (defined as Eastern Europe, Middle
East, Africa, Non-Japan Asia, Latin America, and “other”) account for 38.7% of
exports, up from 29.8% a decade ago, and far above Western Europe’s share of

                                                                                          UBS 10
Globalization of the S&P 500 28 June 2010

Table 10: Regional Distribution of U.S. Exports

                                                    15-yr       Share of
                                                   CAGR         Exports

North America (Mexico & Canada)                       4.8%        31.6%

Western Europe                                        4.9%        23.1%

Eastern Europe                                        7.0%         1.4%

Middle East & Africa,                                 6.9%         6.5%

Japan,                                             -0.3%           4.8%

Non-Japan Asia                                        6.9%        16.2%

Latin America (everything south of Mexico),           6.6%         9.2%

Australia                                             4.7%         1.9%

Other                                                 3.2%         5.4%

Emerging Markets                                      6.2%        38.7%

World                                                 4.9%         100%

Source: Haver

Table 11 shows how the “shopping baskets” of goods imported from America
differ from one region to the next. Some key features:

     Tech accounts for 10-16% of the imports of most regions, but it is much
     higher (24%) for Asia ex-Japan, presumably because of all the
     semiconductors and other electronic components sent to Taiwan, Singapore,
     South Korea, etc.

     Interestingly, healthcare and consumer products are much more important for
     Japan and Europe than other regions.

     Industrial products are a hefty 22-25% for all regions except Japan, where it                         Industrials ~24% of exports to most
     is 17%.                                                                                               regions

     Commodities (including agricultural commodities and chemicals, but not                                Asia is major market for commodities
     energy) arevery important for all regions, notably China (47%), Japan (47%)
     and Asia ex Japan (40%).

     In general, the sectors that should benefit most from strong emerging market
     growth are tech, industrials, and materials. Asia is important to U.S. capital
     goods producers both directly (via exports) and indirectly (global demand for
     mining and agricultural equipment).

Table 11: Sector Distribution of U.S. Exports by Major Market

Country                         Tech          Healthcare     Industrial    Commodity   Energy   Consumer        Total

China                           16%              4%            26%           47%        2%        5%            100%

Japan                           11%              14%           18%           47%        0%        11%           100%

EU                              10%              22%           25%           25%        5%        13%           100%

Asia ex Japan                   24%              3%            23%           40%        5%        5%            100%

Latin America ex Mexico         16%              6%            28%           26%        16%       7%            100%

Source: Haver

                                                                                                                                           UBS 11
Globalization of the S&P 500 28 June 2010

Mixed Implications for 2011 S&P 500 EPS . . .
With respect to 2011 earnings, these research findings offer both bad and good

    The bad news: Despite its slow growth, Europe is still very important,            Europe still important S&P EPS
    accounting for around 17% of S&P 500 profits. If the Euro and European
    GDP collapse, the damage to S&P EPS will be significant, even if the rest of
    the world continues to grow.

    The good news: A double-dip in Europe likely would not cause a recession          Europe recession not likely to cause
    in the U.S., which still accounts for about two thirds of profits. Furthermore,   U.S. recession
    about 13% of S&P 500 earnings are in Emerging Markets that are expected
    to grow rapidly in 2010 and 2011. U.S. exports to fast-growing emerging
    markets—which are more than twice as big as exports to Europe—would
    cushion the decline in exports to Europe.

Global Growers Should Out-Pace the S&P 500
Companies generating a rising share of revenue outside the U.S., where A)             Global Growers have moderate PEs
profitability is higher, B) tax rates are lower, and C) revenue growth is strong
should be able to generate faster secular EPS growth than the overall index.
Currently PE ratios are compressed and investors do not have to pay a stiff
excessive premium to get exposure to global growth. The seventeen “global
growers” on our Key Call list have an average 2011E PE of 14.0 vs. 11.4 for the
S&P 500. To highlight stocks with high global exposure, the Appendix has two

    Fifty S&P 500 firms with highest foreign exposure (out of 500 firms now in
    the index).

    Fifty S&P 500 firms with fastest global growth, 1999-2009 (out of 450 firms
    for whom data is available).

. . . and Support S&P EPS Growth
This dynamic means there is a widening disconnect between the U.S. domestic
economy and S&P 500 profits. Intelligent deployment of corporate free cash
flow to buy-backs and M&A could also boost EPS growth above the growth rate
of U.S. GDP. With emerging markets accounting for 13% of S&P EPS, the
“new normal” for debt-constrained U.S. and Western European economies has
less of an impact on S&P 500 EPS growth than one might expect. Strong
emerging market demand is one reason why we have been getting a “V-shaped”
recovery in profits amidst a “U-shaped” recovery in U.S. GDP. Unfortunately
the migration of corporate capital out of the U.S. to more hospitable climes is
negative for U.S. economic and employment growth, and is squeezing living
standards in the U.S.

EPS Impact of 2011 Double Dip in Europe
Our Base Case
UBS forecasts that in both 2010 and 2011 U.S. GDP grows ~3%, Europe grows
1.7% and then 2.2%, and global GDP grows about 4% in both years. In that
environment, we expect S&P 500 EPS to hit $87.00 this year, via 10% revenue
growth and net margins rising from 8.0% in Q1 2010 to 8.8% by Q4. Our

                                                                                                                       UBS 12
Globalization of the S&P 500 28 June 2010

estimate is $5.00 above the analyst bottom-up consensus. Analysts’ estimates
have been far too low for the past three quarters. With industrial production still
expanding rapidly while banks’ credit costs are peaking, we think analysts will
have to continue to raise estimates, albeit more slowly than over the past three
quarters. In terms of sectors, 70% of the 2010 gain is driven by three sectors:
financials and consumer discretionary (which have very easy comparisons) and
tech (which has strong momentum and easy comps in H1 2010).

For 2011, our $97 is in line with bottom-up consensus, so we are forecasting less
growth (11%) than analysts expect (17%). We expect high-single-digit revenue
growth but little margin expansion vs. the Q4 2010 level.

Europe Double Dip: Flat EPS, Driven by Commodities
Let’s assume Europe’s sovereign debt problems are worse than feared; major
German and French banks are forced to raise capital; and the resulting financial
panic, credit stringency, and confidence collapse plunge Europe into a recession
in 2011. We assume: The Euro drops to $1.00 USD, commodity prices collapse,
the Fed stays on hold, and the 10-year Treasury yield averages 2.9%. But the
U.S. keeps growing because exports to Europe are less than 3% of GDP.

The 1998 Template

What happens to S&P EPS? We can get some guidance from the 1998 “Asian                1998: commodity profits plunge
financial crisis,” characterized by recessions in Asia, Brazil and Russia;
plunging commodity prices; a soaring US Dollar; and a financial panic in
October 1998. On our numbers S&P profits were flat that year; official S&P
data show them rising 6.6%. The 1998 sector scenario is shown in Table 12. A
few features stand out. Weakness was driven by materials and energy, which
declined 29% while other sectors rose 13%. Gains for consumer staples,
industrials and tech—all sectors with significant European exposure—were
tepid at around 5%. But most other sectors—consumer discretionary, financials,
health care, telecom—were reasonably strong, as U.S. real GDP grew 4.4%.

                                                                                                                       UBS 13
Globalization of the S&P 500 28 June 2010

Table 12: S&P 500 Sector Earnings, 1997-99
$ billions

                                                               Abs chg   % chg    Abs Chg       % Chg
                                       1997    1998    1999      97-98   97-98      98-99        98-99

Basic Materials                         18.2    16.2    18.1      -2.0   -11.0%       1.9        11.7%

Consumer Discretionary                  38.7    43.1    54.3       4.4   11.3%       11.3        26.1%

Consumer Staples                        32.6    34.4    34.9       1.9    5.7%        0.5         1.4%

Energy                                  34.5    21.3    24.1     -13.2   -38.3%       2.8        13.1%

Financials                              68.7    83.9   102.5      15.2   22.2%       18.5        22.1%

Health Care                             26.4    32.2    37.7       5.8   22.0%        5.5        17.1%

Industrials                             37.8    39.8    44.2       1.9    5.1%        4.5        11.3%

Tech                                    40.2    42.2    56.7       2.1    5.1%       14.5        34.4%

Telecom                                 19.9    25.4    30.3       5.5   27.6%        4.9        19.3%

Utilities                               15.0    15.3    15.9       0.3    2.0%        0.6         3.9%

Total                                  332.0   353.8   418.8      21.9    6.6%       65.0        18.4%

Materials + energy                      52.7    37.5    42.2     -15.2   -28.8%       4.7        12.5%

Rest of Index                          279.3   316.3   376.6      37.1   13.3%       60.3        19.1%

Source: FactSet, UBS

We think the 2011 Euro Pain sector scenario would broadly resemble 1998                     We assume $60 WTI in 2011
because the macro circumstances are similar. Let’s start with energy and
materials. The UBS Energy Team expects global oil demand to rise 1.2 million
barrels per day in 2011, with Europe accounting for 0.2 mbd or one sixth of the
total increase. If Europe double-dips, its energy demand might be flat with
already-very-depressed 2010 levels. However demand in the rest of the world
(led by China’s 4.4% growth) would continue to expand, so global demand
would rise 1.2%. Nevertheless, with the dollar very strong in our scenario, we
assume WTI averages $60 in 2011, 25% below the $80 that UBS is forecasting
and 20% below 2010. Of course if WTI averaged $60 in 2011 it would likely
fall to near $50 for part of the year.

Quantifying EPS Impact of Weak WTI Prices

What is the impact on S&P 500 EPS of $60 oil in 2011? An analysis of quarterly              $10 WTI decline = $2.50 EPS decline
profits of the S&P 500 energy and materials sectors since Q4 2003 shows that –
in periods when there is a clear trend in energy prices – a $1 change in WTI
prices is associated with a $0.25 change in S&P 500 EPS (Chart 2). So if WTI
prices are $20 below the UBS forecast in 2011 the direct hit to S&P 500 from
lower energy and materials earnings would be about $5.00 per share or $44.8
billion. This would be only partly offset by extra strength in sectors benefiting
from lower input costs (transportation), increased real disposable income
(consumer discretionary, consumer staples, financials), or lower interest rates

                                                                                                                            UBS 14
Globalization of the S&P 500 28 June 2010

Chart 2: Change in Annual Average WTI price vs. Change in Energy & Materials Earnings
on S&P 500 “per share” basis


          WTI price change
          -60             -40          -20              0         20   40       60


                                             Energy & Materials
                                              earnings change

Source: UBS, U.S. Dept. of Energy

Also, as in 1998, industrials, tech, and consumer staples would be hurt by
weaker demand in Europe and some loss of market share around the world due
to the weak Euro. See Table 13. But it generally takes several quarters for
shifting exchange rates to affect trade flows, so the competitive effects of
protracted Euro weakness would become more evident in 2012. We also assume
that write-downs and trading losses caused by financial turbulence on Wall
Street cuts financials’ after-tax profits $7 billion (4.6%) from our base case,
despite low funding costs, appreciation of Treasury notes in a flight-to-safety
trade, and reduced consumer credit costs as consumers benefit from low energy
costs and interest rates. The caution of Wall Street banks emerging from the
2008-09 global financial crisis makes them less vulnerable to credit risk than
they were in either 1997-98 (when Wall Street funded hedge fund Long Term
Capital Management at very favorable rates) of 2007-2009.

This necessarily speculative exercise suggests 2011 S&P 500 EPS would be $90,
up 3% from 2010. On that estimate the S&P 500’s PE ratio is 12.

                                                                                        UBS 15
Globalization of the S&P 500 28 June 2010

Table 13: UBS estimates of S&P 500 Sector Earnings: Base Case vs. Euro-Pain
$ billions

                                                     Euro pain       Difference    % chng
                                2010E       2011E
                                                     2011 level   from baseline   vs. 2010

Consumer Discretionary            72.0        77.0     80.0             3.0         11.1%

Consumer Staples                  84.0        89.0     82.0            (7.0)        -2.4%

Energy                            80.0        98.0     58.0           (40.0)       -27.5%

Financials                       139.0       152.0    145.0            (7.0)         4.3%

Health Care                      109.0       114.5    113.0            (1.5)         3.7%

Industrials                       75.6        85.5     82.0            (3.5)         8.5%

Information Technology           149.5       162.5    158.0            (4.5)         5.7%

Materials                         17.0        18.5     13.5            (5.0)       -20.6%

Telecomm Services                 20.7        21.5     21.5              -           3.9%

Utilities                         32.4        33.5     33.5              -           3.4%

Total                            779.2       852.0    786.5           (65.5)         0.9%

Non-financials                   640.2       700.0    641.5             (58.5)     -100%

Non-fin & energy                 560.2       602.0    583.5             (18.5)     -100%

Source: UBS

Implications for Stock Selection
Equity investors expecting a double dip in Europe should – all else equal – avoid
energy and most commodity stocks. They should overweight consumer
discretionary stocks with high domestic and emerging market exposure. Such
firms stand to benefit directly and indirectly from lower energy costs (for both
the companies and their customers), lower interest costs for consumers (some of
whom will refinance mortgages), and a stronger dollar (which should reduce
COGS for some retailers). Admittedly it is hard for large-cap investors to avoid
Euro Pain, because most Global Growers have 15-40% of profits in Europe.

                                                                                             UBS 16
Globalization of the S&P 500 28 June 2010

Table 14: Fifty S&P 500 Firms with Highest Percent of Sales Foreign, 2009

                                                                            % of sales
                                                                            foreign in
Company                                Ticker   Sector                           2009

United States Steel Corp               X        Materials                      118.5%

Molson Coors Brewing Co                TAP      Consumer Staples               100.0%

Philip Morris International            PM       Consumer Staples               100.0%

Teradata Corp                          TDC      Information Technology         100.0%

Novellus Systems Inc                   NVLS     Information Technology          98.9%

Qualcomm Inc                           QCOM     Information Technology          93.9%

Nvidia Corp                            NVDA     Information Technology          92.5%

First Solar Inc                        FSLR     Industrials                     92.4%

Sempra Energy                          SRE      Utilities                       92.2%

Texas Instruments Inc                  TXN      Information Technology          89.1%

Advanced Micro Devices                 AMD      Information Technology          87.0%

Memc Electronic Matrials Inc           WFR      Information Technology          86.7%

Intel Corp                             INTC     Information Technology          85.0%

Jabil Circuit Inc                      JBL      Information Technology          83.8%

Aes Corp                               AES      Utilities                       83.1%

Altera Corp                            ALTR     Information Technology          81.6%

Applied Materials Inc                  AMAT     Information Technology          80.7%

Micron Technology Inc                  MU       Information Technology          80.7%

Analog Devices                         ADI      Information Technology          80.1%

Harman International Inds              HAR      Consumer Discretionary          80.0%

Western Digital Corp                   WDC      Information Technology          80.0%

Avon Products                          AVP      Consumer Staples                79.0%

Fmc Technologies Inc                   FTI      Energy                          77.5%

Exxon Mobil Corp                       XOM      Energy                          76.8%

Lsi Corp                               LSI      Information Technology          76.6%

Corning Inc                            GLW      Information Technology          75.6%

Microchip Technology Inc               MCHP     Information Technology          75.6%

Kla-Tencor Corp                        KLAC     Information Technology          75.5%

Newmont Mining Corp                    NEM      Materials                       74.8%

Teradyne Inc                           TER      Information Technology          74.4%

Intl Flavors & Fragrances              IFF      Materials                       74.2%

Expeditors Intl Wash Inc               EXPD     Industrials                     74.1%

Aflac Inc                              AFL      Financials                      73.9%

Flowserve Corp                         FLS      Industrials                     73.7%

Sandisk Corp                           SNDK     Information Technology          73.6%

Schlumberger Ltd                       SLB      Energy                          73.2%

Coca-Cola Co                           KO       Consumer Staples                73.1%

National Oilwell Varco Inc             NOV      Energy                          73.1%

                                                                                         UBS 17
Globalization of the S&P 500 28 June 2010

                                                                         % of sales
                                                                         foreign in
Company                                Ticker   Sector                        2009

Chevron Corp                           CVX      Energy                       71.3%

Owens-Illinois Inc                     OI       Materials                    70.0%

Western Union Co                       WU       Information Technology       69.4%

Waters Corp                            WAT      Health Care                  69.3%

Colgate-Palmolive Co                   CL       Consumer Staples             69.3%

Autodesk Inc                           ADSK     Information Technology       68.8%

Dow Chemical                           DOW      Materials                    68.5%

Xilinx Inc                             XLNX     Information Technology       68.5%

Baker Hughes Inc                       BHI      Energy                       68.0%

Freeport-Mcmoran Cop&Gold              FCX      Materials                    67.5%

Caterpillar Inc                        CAT      Industrials                  67.3%

Pall Corp                              PLL      Industrials                  67.0%

Source: FactSet, Worldscope, UBS

                                                                                      UBS 18
Globalization of the S&P 500 28 June 2010

Table 15: Fifty S&P 500 Firms with Biggest Increase in Share of Revenue Foreign, 1999
to 2009

                                                     % of sales   % of sales
                                                     foreign in   foreign in
Company                                     Ticker        1999         2009    2009-1999

QUALCOMM Inc.                               QCOM          38%          94%          56%

Western Digital Corp.                       WDC           28%          80%          52%

Jabil Circuit Inc.                          JBL           33%          84%          51%

Analog Devices Inc.                         ADI           36%          80%          44%

National Oilwell Varco Inc.                 NOV           30%          73%          43%

MEMC Electronic Materials Inc.              WFR           48%          87%          38%

Cliffs Natural Resources Inc.               CLF           12%          50%          37% Inc.                             AMZN          10%          48%          37%

Carnival Corp.                              CCL           12%          48%          36%

Xilinx Inc.                                 XLNX          33%          68%          35%

LSI Corp.                                   LSI           42%          77%          34%

Altera Corp.                                ALTR          48%          82%          34%

Corning Inc.                                GLW           42%          76%          34%

Chevron Corp.                               CVX           40%          71%          31%

Flowserve Corp.                             FLS           42%          74%          31%

Schlumberger Ltd.                           SLB           43%          73%          30%

Apache Corp.                                APA           34%          64%          30%

Illinois Tool Works Inc.                    ITW           28%          57%          30%

Noble Energy Inc.                           NBL             6%         35%          29%

Intel Corp.                                 INTC          57%          85%          28%

Newmont Mining Corp.                        NEM           47%          75%          28%

Owens-Illinois Inc.                         OI            42%          70%          28%

ProLogis                                    PLD           12%          39%          27%

Staples Inc.                                SPLS            5%         33%          27%

Avery Dennison Corp.                        AVY           39%          66%          27%

Advanced Micro Devices Inc.                 AMD           60%          87%          27%

United States Steel Corp.                   X               0%         27%          26%

Merck & Co Inc                              MRK           22%          47%          26%

Ecolab Inc.                                 ECL           21%          47%          26%

Johnson Controls Inc.                       JCI           35%          61%          26%

Danaher Corp.                               DHR           22%          47%          26%

Yum! Brands Inc.                            YUM           27%          50%          23%

Ford Motor Co.                              F             31%          54%          23%

Life Technologies Corp.                     LIFE          34%          57%          23%

Marsh & McLennan Cos.                       MMC           30%          53%          23%

Teradyne Inc.                               TER           52%          74%          22%

AON Corp.                                   AON           42%          63%          22%

Dentsply International Inc.                 XRAY          39%          61%          22%

                                                                                           UBS 19
Globalization of the S&P 500 28 June 2010

                                                     % of sales   % of sales
                                                     foreign in   foreign in
Company                                     Ticker        1999         2009    2009-1999

Texas Instruments Inc.                      TXN           68%          89%          21%

Monster Worldwide Inc.                      MWW           45%          66%          21%

ConocoPhillips                              COP           18%          38%          20%

Jacobs Engineering Group Inc.               JEC           16%          36%          20%

General Electric Co.                        GE            34%          54%          20%

Citrix Systems Inc.                         CTXS          37%          57%          20%

AES Corp.                                   AES           63%          83%          20%

Harman International Industries Inc.        HAR           60%          80%          20%

Bemis Co. Inc.                              BMS           16%          35%          20%

Goldman Sachs Group Inc.                    GS            19%          38%          19%

Coach Inc.                                  COH             9%         28%          19%

E.I. DuPont de Nemours & Co.                DD            43%          62%          19%

Source: Haver

    Analyst Certification

Each research analyst primarily responsible for the content of this research
report, in whole or in part, certifies that with respect to each security or issuer
that the analyst covered in this report: (1) all of the views expressed accurately
reflect his or her personal views about those securities or issuers; and (2) no part
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research report.

                                                                                           UBS 20
Globalization of the S&P 500 28 June 2010

Required Disclosures

This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and
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For information on the ways in which UBS manages conflicts and maintains independence of its research product;
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UBS Investment Research: Global Equity Rating Allocations
                                                                                                      1                                2
 UBS 12-Month Rating                    Rating Category                                     Coverage                      IB Services
 Buy                                    Buy                                                       50%                             39%
 Neutral                                Hold/Neutral                                              40%                             33%
 Sell                                   Sell                                                      11%                             24%
                                                                                                      3                               4
 UBS Short-Term Rating                  Rating Category                                     Coverage                      IB Services
 Buy                                    Buy                                               less than 1%                            29%
 Sell                                   Sell                                              less than 1%                             0%
1:Percentage of companies under coverage globally within the 12-month rating category.
2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within
the past 12 months.
3:Percentage of companies under coverage globally within the Short-Term rating category.
4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided
within the past 12 months.

Source: UBS. Rating allocations are as of 31 March 2010.
UBS Investment Research: Global Equity Rating Definitions
 UBS 12-Month Rating                    Definition
 Buy                                    FSR is > 6% above the MRA.
 Neutral                                FSR is between -6% and 6% of the MRA.
 Sell                                   FSR is > 6% below the MRA.
 UBS Short-Term Rating                  Definition
                                        Buy: Stock price expected to rise within three months from the time the rating was assigned
                                        because of a specific catalyst or event.
                                        Sell: Stock price expected to fall within three months from the time the rating was assigned
                                        because of a specific catalyst or event.

                                                                                                                                 UBS 21
Globalization of the S&P 500 28 June 2010

 Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12
 Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a
forecast of, the equity risk premium).
 Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are
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 Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any
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Equity Price Targets have an investment horizon of 12 months.

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performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell:
Negative on factors such as structure, management, performance record, discount.
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debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating.
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Manish Bangard.

Company Disclosures
 Company Name                                   Reuters    12-mo rating Short-term rating               Price         Price date
              5, 6a, 6b, 7, 16, 18b, 22
 3M Company                                     MMM.N               Buy               N/A            US$78.18        24 Jun 2010
             16, 20
 Corning Inc.                                    GLW.N        Buy (CBE)               N/A            US$17.69        24 Jun 2010
                            16, 18c
 Cummins Engine Co.                               CMI.N             Buy               N/A            US$71.36        24 Jun 2010
                            6b, 7, 8, 16, 18a
 Tyco Electronics Ltd.                            TEL.N             Buy               N/A            US$27.64        24 Jun 2010
Source: UBS. All prices as of local market close.
Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing

5.      UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services
        from this company/entity within the next three months.
6a.     This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment
        banking securities-related services are being, or have been, provided.
6b.     This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities
        services are being, or have been, provided.
7.      Within the past 12 months, UBS Securities LLC has received compensation for products and services other than
        investment banking services from this company/entity.
8.      The equity analyst covering this company, a member of his or her team, or one of their household members has a long
        common stock position in this company.
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18a.    The equity strategist covering this company, a member of his or her team, or one of their household members has a long
        common position in this company.
18b.    The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position
        in 3M Company.

                                                                                                                             UBS 22
Globalization of the S&P 500 28 June 2010

18c.    The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position
        in Cummins Engine Co.
20.     Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR
        exceeds the MRA by 10% (compared with 6% under the normal rating system).
22.     UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end
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Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.

3M Company (US$)
                                                                                                        Price Target (US$)                              Stock Price (US$)



















           Buy 1
        No Rating

Source: UBS; as of 24 Jun 2010
Corning Inc. (US$)
                                                                                                        Price Target (US$)                              Stock Price (US$)
























           Buy 2
        Neutral 2
        No Rating

Source: UBS; as of 24 Jun 2010

                                                                                                                                                                                                                                                                                 UBS 23
Globalization of the S&P 500 28 June 2010

Cummins Engine Co. (US$)
                                                                                                           Price Target (US$)                              Stock Price (US$)
























        Neutral 2
        Reduce 2

Source: UBS; as of 24 Jun 2010
Tyco Electronics Ltd. (US$)
                                                                                                           Price Target (US$)                              Stock Price (US$)
























        Neutral 2
        No Rating

Source: UBS; as of 24 Jun 2010

Note: On August 4, 2007 UBS revised its rating system. (See 'UBS Investment Research: Global Equity Rating Definitions' table
for details). From September 9, 2006 through August 3, 2007 the UBS ratings and their definitions were: Buy 1 = FSR is > 6%
above the MRA, higher degree of predictability; Buy 2 = FSR is > 6% above the MRA, lower degree of predictability; Neutral 1 =
FSR is between -6% and 6% of the MRA, higher degree of predictability; Neutral 2 = FSR is between -6% and 6% of the MRA,
lower degree of predictability; Reduce 1 = FSR is > 6% below the MRA, higher degree of predictability; Reduce 2 = FSR is > 6%
below the MRA, lower degree of predictability. The predictability level indicates an analyst's conviction in the FSR. A
predictability level of '1' means that the analyst's estimate of FSR is in the middle of a narrower, or smaller, range of possibilities.
A predictability level of '2' means that the analyst's estimate of FSR is in the middle of a broader, or larger, range of possibilities.
From October 13, 2003 through September 8, 2006 the percentage band criteria used in the rating system was 10%.

                                                                                                                                                                                                                                                                                    UBS 24
Globalization of the S&P 500 28 June 2010

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