Investment Strategy - Hyposwiss Privatbank AG

Investment Strategy
Economy and Financial Markets
October 2010

Title Picture
Beach at Jökulsarlon, Iceland
Photo: Roland Gerth
Impressum
Issuer
Hyposwiss Private Bank Ltd.
Bahnhofstrasse/Schützengasse 4
CH-8021 Zurich
Phone +41 (0)44 214 31 11
Fax +41 (0)44 211 52 23
www.hyposwiss.ch
Analysts
Caroline Hilb Paraskevopoulos
Thomas Jäger
Thomas Stadelmann
Dr. Alexander F. Galli
Editorial deadline
September 24, 2010
Release
Monthly
Contents
1 Editorial
Commodities as a hedge – myth or reality?
2 Economy
Is the strong franc slowing things down?
4 Interest rates and yields
All options now open
5 Equity markets
A more positive trend
6 Currencies
More than just a quest for security
7 Commodities
No consistent picture
8 Investment Strategy
Matter of trust
Enclosure
Topic of the month:
International trade –
return to previous growth
Thomas Stadelmann,
Strategy Analyst
Recommended Stocks

Editorial
Commodities as a hedge – myth or reality?
Dear Investor,
Although there is little inflationary pressure
around at the moment and many central banks
are warning more of deflationary
risks, a large number of investors
fear that inflation could
rise in the future and are wondering
how to protect themselves
against such a scenario. Commodity
investments are often
mentioned in this context. But do
commodities really offer an effective
hedge against inflation?
There are various reasons why the prices of
goods rise, thus eroding the value of money. In
this context we can distinguish between «real»
inflation and «monetary» inflation. Real inflation
follows a cyclical trend driven by an economic
upturn. When the economy is at the high
point of the cycle, it runs short of capacity and
is no longer able to meet increased demand for
either personnel goods or commodities. Prices
rise accordingly at a rate of 2% to 3% per annum.
When the economy slows down again,
the pressure on prices also eases, albeit with
some time lag, and inflation rates fall again.
Monetary inflation, on the other hand, is
caused by an excess of money. This type of inflation
is associated with a loss of confidence in
the central bank, which has neglected its principal
task of guaranteeing price stability. This
also undermines confidence in the currency in
question. The value of that currency then falls,
which further fans the flames of inflation by
pushing up the price of imported goods. This
results in inflation rates well above 5% and a
rising trend. Once monetary inflation has got
out of hand, it can only be reined in through
radical monetary and fiscal policies with all the
negative consequences these entail for the
economy.
Like real inflation rates, commodity prices depend
on the current stage in the economic cycle.
When the economy is booming, more commodities
are required and prices are pushed up
by the increased demand. Commodities can
therefore protect investors from a rise in real inflation
since both are largely influenced by the
same factors. Monetary inflation is a diffe rent
matter. This type of inflation does not increase
actual production of goods. There is therefore
no increase in demand for commodities and
hence no rise in commodity prices. In such an
environment real assets such as land and property
are a much more suitable means of hedging
against inflation. As central banks need to
respond to monetary inflation by raising key interest
rates sharply, money market interest rates
rise particularly steeply. Fixed­term and fiduciary
investments are therefore also an attractive
alternative. Thus, in the early 1990s Switzerland
saw the three­month Libor rate climb well
above 8% as the Swiss National Bank sought
to combat inflation.
Dr. Thomas Stucki
Chief Investment Officer
October 2010 Investment Strategy 1

Economy
Is the strong franc slowing things down?
The Swiss economy has turned in a spirited
economic performance this year, but the
strong franc and the global economic outlook
are also casting a shadow over the outlook.
In the second quarter of this year, the Swiss
economy grew more strongly than expected.
Swiss GDP grew by 1% quarter­on­quarter in
Q1 2010, before expanding by a further 0.9%
in Q2. Investment activity in particular surged
by 2.4% in comparison with the first quarter,
which saw it contract by 1.4%. By contrast, export
growth declined slightly from 3.7% in Q1
to 1.7% in Q2. Consumer spending remained
stable compared to the first quarter. However,
consumer spending had already proved more
robust than expected during the crisis, when it
stabilized the economy. The industrial sector in
particular benefited from brisk investment activity
and growing demand for exports, with Q2
once again seeing Swiss industrial output expand
strongly. The increase in output came to
7.8% year­on­year and 5.7% quarter­on­quarter.
New orders also rose significantly, as did
orders on hand. Sales increased, with exports
playing a key role. The strongest sectors included
the chemical industry, the electrical and
precision engineering industries and the metal
industry, all of which reported growth rates of
more than 10%.
Growth driven by exports
The Swiss economic recovery was very much
driven by the revival of global trade and growing
demand for exports. Switzerland's most important
trading partner is Germany (19.4%),
followed by the US (9.7%). However, Asia and
South America account for an increasingly
large proportion of exports. In 2009, goods
worth CHF 34.4 billion were exported to Asia.
Although the volume of exports bound for
China is still roughly equal to the volume sold
to Austria, the growth rates for this region are
impressive. Also, exports to Asia came under
less pressure during the recession. While exports
to Germany have slipped back from more
than CHF 40 billion in 2008 to around CHF 35
billion, over the same period Asian­bound tra­
2
Investment Strategy October 2010
ding volumes remained steady at just under
CHF 35 billion. It is not just that Swiss trading
partners are more globally diversified than they
were a few years ago: their product ranges are
also more diversified. Traditional Swiss products
are still the big hits, however. Chemical
products are most in demand abroad (accounting
for 41% of exports), followed by machine
exports, which account for 18%. Watches ac­
Economic Snapshot (Figures as of Sep 24, 2010)
Switzerland: a solid recovery takes place
6
4
2
0
-2
-4
Inflation rate
Switzerland Germany Eurozone USA Japan
Real GDP QoQ 0.9% 2.2% 1.9% 1.6% 0.4%
Inflation YoY 0.3% 1.0% 1.6% 1.1% ­0.9%
Unemployment rate 3.6% 7.6% 10.0% 9.6% 5.2%
Real GDP growth
(%-change qoq, annualized)
KOF-leading indicator
(r. h. scale)
00 01 02 03 04 05 06 07 08 09 10 11
Source: Bloomberg
3.00
2.50
2.00
1.50
1.00
0.50
0
-0.50
-1.00
-1.50
-2.00
Source: Thomson Reuters Datastream

Switzerland: strong industry
20
15
10
5
0
-5
-10
-15
-20
Industry expands
count for around 8% of all Swiss exports. In recent
years, the proportion of chemical products
has steadily increased, while machinery's
share has declined.
Is the strong franc slowing things down?
Despite all the global shifts, 50% of all exports
still go to the eurozone. According to a survey
conducted by the KOF economic research unit,
60% of transactions are concluded in euros,
PMI (leading indicator)
Industry contracts
-20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Thomson Reuters Datastream
20
15
10
5
0
-5
-10
-15
30% in Swiss francs and around 10% in other
currencies. The 12% decline in the value of the
euro represents a stumbling block for Swiss exporters.
However, in the short term the problem
is less acute than might be expected: supply
contracts are often fixed and export companies
are able to hedge against exchange rate movements
with financial instruments. In the long
term, though, a strong Swiss franc against the
euro would put Swiss exporters at a competitive
disadvantage since it would make their
products more expensive. That said, in South
America and Asia Swiss companies have
gained a competitive advantage in spring
thanks to currency movements. And even in Europe,
the currency alone is unlikely to be the decisive
factor as many Swiss exporters are
highly specialized niche players. A strong
franc can also be expected to put pressure on
the future margins of some exporters. So while
the strength of the franc will exert a braking effect,
this effect on its own is likely to be smaller
than feared by some pessimistic commentators.
Outlook for 2011
The State Secretariat for Economic Affairs
(SECO) has sharply upgraded its GDP growth
forecasts for 2010. This June, SECO was still
expecting this year's GDP growth to come to
1.8%. After a brisk economic recovery in the
first two quarters, the Swiss government’s Expert
Group on Economic Forecasts also upgraded
its predictions to 2.7%, but downgraded
its forecasts for 2011. In particular, the
positive contribution of the export sector can be
expected to be smaller next year. SECO mainly
attributes this trend to the strong franc and to
the outlook for the global economy. Thus,
SECO anticipates 7% year­on­year export
growth in 2010, but dropping to just 2.2% in
2011. We agree with SECO's assessment that
2011 will see a slowdown in economic momentum
after an exceptionally strong 2010. Growth
will remain in the positive range, however. The
strong franc will certainly slow down the export
sector. But the main reason for the fall­off in demand
growth will be slower momentum at the
global level. n
October 2010 Investment Strategy 3

Interest rates and yields
All options now open
The Swiss National Bank's decision to leave
interest rates unchanged at their present
expansionary level was in line with our predictions.
What surprised us more was the sharp
downgrading of the SNB's inflation expectations.
This statement means the SNB is keeping
all its options open.
As expected, the Swiss National Bank (SNB) left
its target band for the three­month Libor rate at
0%–0.75%. Monetary policy remains as expansionary
as ever: the SNB intends to keep the
Libor in the lower range of the band. For 2010,
the SNB expects GDP growth to be in the region
of 2.5%, but sees economic momentum weakening
in 2011. The SNB identifies the causes of
this slowdown as the strength of the Swiss franc
and weaker global growth momentum.
Inflation forecasts significantly downgraded
More striking than the SNB's economic forecasts
are its inflation predictions. Thus, the conditional
inflation forecast is significantly lower
than in June and the SNB is now expecting inflation
to average just 0.7% in 2010 and 0.3%
in 2011, and only expects it to rise to 1.2% in
2012. The SNB is basing these inflation predictions
on the assumption that interest rate policy
will remain unchanged. So, even the SNB sticks
to its highly expansionary monetary policy, inflation
would not rise back above 1% until
2012. The SNB does not even rule out a temporary
phase of negative inflation at the beginning
of 2011. Based on these forecasts, the current
highly expansionary monetary policy appears
appropriate.
Where does the fear of deflation come from?
The fear of a deflationary tendency probably
stems mainly from the strength of the franc. A
strong currency has a similar effect to a tight
monetary policy and can lead to «imported deflation».
We interpret the SNB's latest assessment
of the monetary policy situation mainly as
«talking the franc down». This is unlikely to go
beyond talk, however, since the SNB's large
holdings of euros mean it will probably not
resume intervention on the currency markets.
Another factor which is fuelling expectations of
low price pressure is Switzerland's lower­than­
4
Investment Strategy October 2010
average capacity utilization. One argument
against the scenario of very low to negative
price pressure, however, is the trend on the labour
market. In contrast with other industrialized
countries, Switzerland's unemployment
rate has already fallen and some companies
are already reporting problems recruiting qualified
staff. If this trend persists it could generate
positive inflationary pressure via higher pay
claims. Any such pressure is unlikely to be sufficient
to rid the market of all its deflationary concerns,
however. n
Outlook key interest rate
Figures as of Sep 24, 2010* In 3 months In 12 months
Switzerland (SNB) 0.25% 0.50% 0.75%
Eurozone (ECB) 1.00% 1.00% 1.50%
USA (Fed) 0.25% 0.25% 0.75%
Outlook capital market yields (10 years)
Figures as of Sep 24, 2010* In 3 months In 12 months
Switzerland 1.44% 1.60% 2.20%
Germany (Eurozone) 2.32% 2.60% 3.40%
USA 2.59% 3.00% 3.80%
SNB: monetary policy still expansive
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Yields 10yr confederation bonds
LIBOR, 3M
*Source: Bloomberg
*Source: Bloomberg
SNB target band
03.01.2000 03.01.2002 03.01.2004 03.01.2006 03.01.2008 03.01.2010
Source: Thomson Datastream

Equity markets
Emerging markets since the beginning of the year (in %)
35
30
25
20
15
10
-5
-10
-15
-20
-25
-30
5
0
Sao Paolo
Shanghai
Bombay
Moscow
Goldbugs
Djakarta
Equity markets
A more positive trend
The MSCI World index, in which stock markets
are weighted according to their
capitalization, gained around 6% during the
month under review and is now up
3.30% on the beginning of the year.
In Switzerland, the SMI remained practically unchanged
over the period under review, while the
SPI gained roughly half a percentage point. The
DAX shows little change, although it is up by a
good 5.7% on the beginning of the year. The
Japanese stock market has experienced a real
P/E* Year to Date
(Curr Yr Est) (Sep 24, 2010)*
SMI 12.29 ­2.83%
EuroStoxx 50 10.58 ­5.81%
DAX 11.43 5.72%
S&P500 13.81 3.01%
Nikkei 225 12.29 ­8.94%
MSCI Emerging Markets 12.64 8.55%
01.01.2010 01.03.2010 01.05.2010 01.07.2010 01.09.2010
*Source: Bloomberg
Source: Thomson Datastream
rollercoaster ride. At the end of August, the
Nikkei was down more than 16% on its January
level, but has since recovered slightly and is now
down by a little less than 9%.
Double dip fears
It was the fear of future economic developments
that held investors back from moving into the
stock markets in any overly bold fashion. Towards
the end of August in particular, the markets
were dominated by expectations of a renewed
economic setback. These expectations took their
cue from a statement from the Fed indicating that
it would continue to supply the market with liquidity
if need be. This was immediately interpreted
negatively, particularly as conditions on the labour
market only appeared to be easing gradually.
The Basel III agreements finally helped calm
the jitters. These agreements envisage drastic increases
in capital adequacy requirements for
banks worldwide. Since an immediate implementation
of higher capital ratios would slow down
growth, however, the new rules will be phased in
over an extended period. These measures, which
are ultimately aimed at stabilizing the financial
markets, were well received on the stock markets
– which are also gaining support from better economic
data.
Improved operating environment
The stock markets have since regained some
ground. Positive reports from companies are now
once again being recognized as such. As profit
statements are largely in line with expectations
the rather weak price performance means that
price­earnings ratios have fallen significantly,
leaving equity valuations at attractive levels.
However, another factor which has helped improve
P/E ratios is the fact that many US companies
have undertaken extensive share­buybacks
in recent months. The exceptionally high volumes
of share buy­backs indicate on the one hand that
companies such as Microsoft and Hewlett Packard
are currently making few if any investments
and, on the other hand, that the ultra­low interest
rate environment is ideal for financing such buybacks.
As a result, share prices worldwide have
rallied and both the Dow Jones and the S&P500
have recently risen to their highest levels since
last May. n
October 2010 Investment Strategy 5

Currencies
More than just a quest for security
The euro is suffering from a combination of
the eurozone's debt problems and a
general lack of confidence. The US dollar's
fundamental weaknesses are catching
up with it. The Swiss franc, by contrast, is displaying
great strength.
The Swiss currency has for decades been regarded
as a safe haven. Switzerland's political
stability, sound public finances and economic
prowess have enabled the franc to gain a reputation
as the «gold of the currency market».
The franc is strong in phases of market turbulence,
whereas its relatively low yield level
makes it unattractive for many investors when
the markets are doing well. The franc only
strengthens when investors once again shun
risk and primarily seek security.
The euro is the big loser
During the recession, the euro lost ground
partly because of its cyclical nature, but was
also undermined by the eurozone's debt problems.
This structural weakness of the eurozone
has been severely testing confidence in the single
currency to this day. The euro is currently
trading at around CHF 1.30, as against CHF
1.67 before the financial crisis erupted in September
2008. During the course of its steady
decline the EUR took a «breather» at around
CHF 1.50, partly thanks to the Swiss National
Bank's attempts to stabilize it by intervening in
the currency markets. Last year, the CHF 1.50
mark was also regarded as a psychologically
important «line in the sand» which the SNB appeared
determined to defend. However, since
the beginning of this year the euro's downward
movement could no longer be halted and it fell
by nearly 12%. The SNB has since stopped intervening
in the currency markets as its efforts
have met with little success this year.
Dollar weaknesses moving to centre stage
The «Swissie» has also been flexing its muscles
against the greenback. In recent weeks, the
US dollar has slipped below parity against
the franc on several occasions. In contrast with
August, the US Dollar no longer has strong credentials
as a «safe haven», particularly against
the franc. On the contrary, the case for the
6
Investment Strategy October 2010
US Dollar does not look convincing in comparison
with the franc. One problem is government
debt, while another is the economy, which
is slowing down sooner in the US than in Switzerland.
Strong franc: more than just an image?
There are two main driving forces behind the
Swiss franc. The first is undoubtedly its reputation
as a safe haven – which, however, is not
undeserved. This brings us to the franc's second
source of support: its fundamental
strength, particularly against the euro and the
US dollar. We find Switzerland's fundamentals
convincing. We still expect the euro to
strengthen, but less than so far anticipated. In
twelve months' time we expect the US dollar to
be below parity against the franc. n
Outlook currencies
Currencies Figures as of Sep 24, 2010* In 3 months In 12 months
EUR/CHF 1.33 1.32 – 1.37 1.37 – 1.42
USD/CHF 0.99 1.00 – 1.05 0.95 – 1.00
EUR/USD 1.35 1.28 – 1.33 1.36 – 1.41
A strong Swissie
1.90
1.80
1.70
1.60
1.50
1.40
1.30
1.20
1.10
1.00
0.90
CHF per EUR
CHF per USD
CHF per 100 YEN
CHF per GBP
J F M A M J J A S O N D J F M A M J J A
*Source: Bloomberg
Source: Thomson Reuters Datastream

Commodity indices in 2010
150
140
130
120
110
100
90
80
70
60
50
CRB Spot Index
Commodities
No consistent picture
The Baltic Exchange Dry Index is a very
special type of index. It essentially reflects the
volume of trade on the world's oceans.
Freight rates show a correlation with commodity
prices and demand for metals,
fuels and foodstuffs.
The Baltic Dry Index (BDI) records the cost of shipping
raw materials required for the preliminary
stage of the production process. It therefore gives
a measurement of the volume of world trade at
the initial stage and hence serves as a leading indicator
for the global economy. Its sharp fluctuations
since the beginning of the year correctly
predicted the jitters among investors on the financial
markets. If we are to continue to place confidence
in this index, the immediate economic future
does not look particularly rosy. However, this
conflicts with the other commodity indices, which
have been following positive trends since July.
Precious metals and oil on different trajectories
Prices on the gold and oil markets have been following
very different trends in recent months.
Gold scaled new heights, soaring to over USD
Baltic Exchange Dry Index (BDI) – PRICE INDEX
Rogers International Commodity
Reuters Commodities Index
JAN FEB MAR APR MAY JUN JUL AUG SEP
150
140
130
120
110
100
90
80
70
60
50
Source: Thomson Reuters Datastream
1300 per ounce, and many observers expect this
positive trend to continue. At the same time, the
motivation for buying gold is based less on inflationary
fears and more on the lack of alternatives
on the capital and equity markets. Low interest
rates in particular add to the appeal of gold. By
contrast, oil prices followed an unusually calm
trend in a sideways channel centred at around
USD 75 per barrel. Demand for oil fluctuates with
economic developments. As these are exhibiting
a fairly moderate trend at the moment, demand
is also unlikely to increase sharply even though
the Northern Hemisphere is approaching the
colder season. Thanks to its industrial uses, silver
benefited from some degree of economic optimism
inspired by the latest data from China.
Once it had surmounted the USD 20 mark, more
investors were keen to jump on the bandwagon
– as can be seen from the recent inflows into silver
ETF.
Making money from oats
In the agricultural sector, the trend of wheat and
oat prices stands out. Canada produces «only»
around 15% of the oats available worldwide
(55% come from Russia and the EU), but supplies
more than 80% of global exports. After heavy
rainfall, up to one third of the acreage given over
to oats is now said to be at risk. This has given
rise to speculation in oat positions on the commodity
markets. The impact of the huge forest
fires in Russia and other adverse weather phenomena
are still important factors behind the
price rises in the cereals sector, but China's announcement
that it would be relaxing its currency
policy also helped push up wheat prices.
Coffee prices are still on a strong uptrend. Since
the beginning of June, the price of Arabica coffee
has risen by more than 45% to a 13­year high
of 195 US cents per pound. However, this striking
rise and high price level are only partly attributable
to the tight supply situation. A further factor
is strong speculative interest among financial
investors. That said, the harvest situation is extremely
unclear. While coffee is already being
harvested in Brazil, it still seems to be raining in
Columbia. Overall, though, the situation on the
coffee market should ease over the coming
months. n
October 2010 Investment Strategy 7

Investment Strategy
Matter of trust
Since the beginning of the year, developments
on the financial markets have been mar­
ked by uncertainty over the future performance
of the US economy, the debt situation in
the eurozone, and inflation. Yields have fallen
to historic low levels and the stock markets
have been treading water.
The economic outlook for the industrialized
countries is not exactly rosy. Government debt
shot up during the course of the financial crisis
and the ensuing recession. A sustained upswing
in the markets is still being obstructed by
uncertainty over the question of how countries
are going to reduce these debts or how much
impact debt reduction will have in terms of inhibiting
growth. In the US, the economy is
showing initial signs of fatigue, while capacity
utilization remains below average. In particular,
though, the labour market in the US –
where consumers have traditionally been enthusiastic
spenders – is failing to gain any real
momentum. Some recent figures from the
American labour market look encouraging,
but the unemployment rate is stuck at a high
level and the average duration of unemployment
is also relatively high. Although an economic
recovery is taking place in statistical
terms, companies in particular have little confidence
in the sustainability of the recovery. A
reason for their reluctance to hire new staff.
Market still nervous for the time being
The markets lack confidence in the stability of
the global economy. The bond market has normalized
slightly in recent weeks and the level
of interest rates has also risen in the wake of a
more positive trend on the stock markets. By
and large, however, yields are still historically
low. On the stock markets, the nervous mood
could on balance be seen as «treading water».
The markets are still moving within quite
broad bandwidths (S&P 500: 1,050 –1,140
points; SMI: 6,000–6,500 points). Apart
from a brief breakout to higher levels at the beginning
of this year, this trading range has remained
largely unchanged since summer
2009, with market players taking profits in the
8
Investment Strategy October 2010
short term whenever share prices reach the upper
end of the range.
No double dip – markets have support
We still see little risk of the US economy relapsing
into recession, though the weaker growth
momentum will present the financial markets
with mixed macroeconomic data which can
be expected to trigger increased volatility.
However, expectations on the economy have
now fallen to such a low ebb that share prices
are under less pressure from this quarter. On
balance, we expect the next three months to
see the stock markets perform positively,
though with higher­than­average price fluctuations.
Equity valuations are attractive, particularly
in the emerging markets.
Conclusion
In an environment of weaker growth momentum,
heightened levels of uncertainty will
persist. In light of the economic outlook we
therefore expect emerging market equities
to deliver higher returns. We have decided to
further expand our allocation in «growth
regions» and scale back the US allocation
based on the economic outlook and valuation.
We are continuing to keep our equity allocation
slightly overweight. We remain underweight
in bonds owing to valuation considerations.
As we are also expecting yield
rates to rise, we favour a short duration. n
Tactical allocation (Risk profile Balanced)
Equities: +
Bonds: -
Commodities: =
Cash: +
Underweight: -
Neutral: =
Overweight: +

Topic of the month
International trade – return to previous growth
The recent recession saw a veritable slump in
international trade. For the first time since
the Oil Crisis in 1973, there was a significant
contraction in global trade, which brought
home the implications of the financial crisis for
the real economy in no uncertain terms.
Fortunately, the situation is now showing tan -
g ible signs of easing.
Thanks to the recovery of the western economies,
but thanks also to the stability of other
regions, world trade has picked up again
strong ly, underscoring the current substantial
improvement in global economic conditions.
Since 1948, the volume of world trade had
been rising year by year by an average of 6%.
It reached a temporary peak in 2008. However,
the global financial crisis of 2008 brought
this success story to an abrupt halt. Massive reductions
in inventories and cancellations of orders
in progress had a devastating impact.
There had been repeated setbacks in the past,
but the scale of the 12% plunge witnessed in
2009 was unique. Indeed, if the value of the
goods traded is taken into account, the decline
came to a substantially larger 23%. This is because
the trend was further exacerbated by
the decline in price of oil and other commodities.
However, it is worth taking a slightly closer
look at this decline: all regions did not suffer
an equally sharp downturn and the Asian trading
region in particular proved relatively crisis­resistant.
China's new dominance
For a long time, world trade flows were focused
largely on the US, Europe and Japan. As a result
of America's enthusiasm for consumer spending,
just over 20 years ago this trio was joined
by a new emerging economic power which has
been gaining increasing influence and has now
established itself as a new permanent fixture of
the global trade scene. Fuelled by rising consumer
demand, low oil prices and generally
low unit wage costs for over two decades now.
China has been satisfying an ever larger slice
of consumer demand worldwide. With transport
by sea accounting for 80% of international
trade, it is only logical that this trend should
have been reflected in the country's infrastructure.
Today, the fact that China is home to seven
of the world's ten largest cargo ports is more
than impressive testimony to the country's rise
to become the «factory of the world».
A breakdown of trade flow data by countries
casts China in a positive light: with a decline in
imports of just 11%, China's economy was the
only one to come through the recession relatively
unscathed in 2009, confirming the country's resilience
and power. The last four years alone
saw China's exports grow by 12% per annum.
Even in the crisis year 2009, China exported
goods worth USD 1,202 billion which is more
than twice the volume of goods exported by Japan.
Today, the global situation once again presents
a much more balanced picture. This time
it is not just thanks to the heavily import­dependent
US that world trade is thriving again. In
Rotterdam, Europe's largest port, the volume of
freight traffic has returned to pre­crisis levels.
Little wonder then that the IMF is already expecting
this year's average global GDP growth to
return to 4.5%.
Growth driven by developing countries
China's higher economic growth rate (estimated
at 8.5%) means that its trade volume will
grow at a significantly higher rate than in the
industrialized countries. However, this is not the
only region which has benefited from international
trade in the past, achieving greater affluence
in the process. Other emerging nations
such as India and Brazil recorded pre­crisis
rates of growth in trade volumes of 7% and 12%
p.a. After a recovery phase, we can expect to
see a return to figures of a similar order. If they
are to continue satisfying the huge demand for
raw materials emanating from their fast­growing
industrial sectors, these countries will increasingly
need to resort to importing raw materials:
the commodities required will not be available
in sufficient quantities locally. Above all, oil
October 2010 Supplement to the Investment Strategy

Supplement to the Investment Strategy October 2010
imports from the Middle East and Russia will
continue to rise to satisfy India's – and in particular
China's – enormous demand for ener gy
and commodities. The future will also see larger
quantities of ore and metals from North America,
Australia, South America and the European
Union make their way to China, where the
greatest amount of value is now being created.
The volume of iron ore, for example, is set to increase
by an average of around 10% per year.
However, a process of transformation is underway
even in China itself: the country is moving
away from its role as a cheap production location
in the international community and, as
it becomes more affluent, is increasingly having
to supply domestic consumers. This is generating
additional domestic demand. To meet
their raw material requirements, Chinese companies
have for some time now been seeking investment
opportunities in Africa where political
leaders are noticeably less resistant to foreign
inves tors. So this is another sea route that looks
set to see trading volumes rise sharply.
Overall conclusion
The division of labour in the global economy is
an irreversible process. The emerging nations'
growing share of global trade, financial flows
and financial assets is reflected in a marked rise
in affluence among the middle classes of the
countries in question. The emerging economies
of Asia and South America that are now participating
in global trade have embarked on a
tremendous «catching­up» process and still
have immense potential in terms of bridging the
gap with the industrialized countries. Consumer
spending can be expected to generate the
grea test potential. All economies stand to benefit
from this trend. The current upsurge in sales of
luxury cars and high­end mechanical watches
in China already reflects this trend. n
The history of world trade
It was the modernization and industrialization
of the economy (which first began in Britain)
and the emergence of a society based
on the division of labour that first triggered
global economic interdependence. Once all
the raw materials (originally mainly coal) in
the surrounding area had been exhausted,
they had to be transported from ever further
afield. Better and more efficient infrastructure
subsequently made it increasingly convenient
to transport commodities from their location
of origin to the manufacturing location.
This trade – which by now had assumed a
global scale – reached an initial peak before
the First World War, but declined sharply
in the interwar period amid a growing
trend toward nationalization and protectionism.
After the Second World War, promoting
economic interdependence between nations
was regarded as an effective means of
preventing future wars and was thus advocated
and encouraged by politicians. In recent
years, the deregulation of capital and trade
flows has led to strong growth in the volume
of global trade and a massive increase in interdependence
and mutual ties between individual
countries. Regarded as desirable
by political and business circles and promoted
accordingly, this deregulation took on a
slightly more equivocal perspective during
the recent upheavals and was pushed into
the background by increasingly protectionist
tendencies during the financial crisis. A
WTO report published in March 2009 provides
impressive confirmation of this, noting
that 120 new protectionist measures, such as
import duties or other restrictions on imports,
were introduced during the period from July
to December 2008 alone.

Recommended Stocks
Valor Curr Company Close Price Stop P/E P/B Yield Perf. Rec.-
24.09.10 Taget Loss 2010E Current in % in % date
Switzerland
1222171 CHF ABB Ltd 20.85 24.00 18.50 18.9 3.4 0.0 4.3 12.01.10
1213860 CHF Adecco SA 50.90 62.00 43.00 18.8 2.1 1.5 10.7 2.11.09
4323836 CHF Aryzta 45.05 50.00 36.00 13.6 1.7 1.1 3.1 9.06.10
1282989 CHF Emmi AG 161.50 170.00 125.00 10.5 1.1 1.9 21.6 11.12.06
1553646 CHF Galenica AG 459.50 485.00 365.00 13.7 3.6 1.6 32.2 30.10.09
1064593 CHF Givaudan SA 993.00 1050.00 850.00 17.8 2.5 2.1 35.5 28.01.09
637289 CHF Interroll Holding AG 315.00 400.00 200.00 23.6 2.1 0.0 ­45.9 5.11.07
3886335 CHF Nestle SA 52.70 59.00 48.00 16.1 4.3 3.0 38.5 9.06.09
367144 CHF Rieter Holding AG 279.75 380.00 260.00 71.5 2.4 0.0 7.2 7.01.10
1203204 CHF Roche Holding AG 133.80 180.00 125.00 10.1 20.8 4.5 ­18.4 18.05.10
1225515 CHF Swatch Group AG/The 364.10 380.00 290.00 19.0 3.3 1.1 6.9 5.11.07
1233237 CHF Swiss Reinsurance Co Ltd 44.08 55.00 40.00 9.8 0.7 2.3 2.3 6.08.09
1245391 CHF Temenos Group AG 30.00 33.00 25.00 21.3 6.6 0.0 27.0 27.03.07
1107539 CHF Zurich Financial Services AG 232.90 290.00 215.00 8.7 1.2 6.9 30.2 24.04.09
Germany
581005 EUR Deutsche Boerse AG 50.50 58.00 45.00 13.6 3.2 4.2 ­1.4 20.09.10
1124244 EUR Deutsche Post AG 13.13 15.00 11.00 10.3 1.6 4.5 3.7 25.08.10
520878 EUR Fresenius Medical Care AG & Co KGaA 44.51 50.00 41.00 18.5 2.6 1.4 42.3 1.03.09
1038049 EUR Infineon Technologies AG 4.87 5.50 4.00 13.8 2.1 0.0 ­6.4 17.06.10
341960 EUR Muenchener Rueckversicherungs AG 102.20 120.00 95.00 8.9 0.8 5.6 17.6 1.03.09
345952 EUR SAP AG 36.75 40.00 32.00 17.5 4.9 1.4 19.2 15.02.10
827766 EUR Siemens AG 79.14 85.00 66.00 13.5 2.3 2.0 26.3 16.02.10
1857256 EUR Wincor Nixdorf AG 48.00 52.00 41.00 14.6 4.4 3.9 49.7 1.03.09
Europe
2229080 EUR Alstom SA 36.48 52.00 36.00 8.8 2.6 3.4 ­11.9 11.08.10
428739 EUR CA Immobilien Anlagen AG 10.24 11.00 7.00 46.4 0.6 0.0 17.8 7.01.10
826858 EUR Telefonica SA 18.41 21.00 15.00 10.2 4.3 7.1 2.2 9.09.10
524773 EUR Total SA 38.04 47.00 35.00 8.0 1.4 6.0 3.9 28.01.09
1165915 EUR Vivendi SA 19.94 22.00 15.50 9.1 1.0 7.0 6.0 17.12.09
396765 GBp WM Morrison Supermarkets PLC 301.90 330.00 230.00 15.1 1.6 3.1 11.4 4.08.10
North America
1161460 USD JPMorgan Chase & Co 39.75 50.00 34.00 11.0 1.0 0.5 ­11.0 7.01.10
945034 USD Kimberly­Clark Corp 66.05 70.00 54.00 13.7 5.4 4.0 19.4 22.09.09
1213349 USD Kraft Foods Inc 31.95 35.00 23.00 15.7 1.7 3.6 19.3 28.04.05
10683053 USD Merck & Co Inc 37.34 42.00 30.00 11.1 2.1 4.1 13.2 9.06.10
951692 USD Microsoft Corp 24.77 30.00 22.00 12.0 4.7 2.6 ­10.0 4.11.09
3334731 USD Noble Corp* 34.23 38.00 25.00 8.7 1.2 0.0 ­31.6 24.10.07
1010704 USD PerkinElmer Inc 23.17 26.00 19.00 16.6 1.7 1.2 9.2 8.01.10
974330 USD Stryker Corp 9.70 60.00 40.00 15.2 2.9 1.2 16.2 28.01.09
October 2010 Supplement to the Investment Strategy

Valor Curr Company Close Price Stop P/E P/B Yield Perf. Rec.-
24.09.10 Taget Loss 2010E Current in % in % date
Asia/Pacific/Emerging Markets
1099448 HKD China Mobile Ltd 80.10 92.00 69.00 11.7 2.6 3.6 13.6 8.05.09
1002318 USD Gazprom OAO 20.55 30.00 18.00 4.0 0.7 1.5 ­1.3 21.08.09
762413 JPY Kurita Water Industries Ltd 2294.00 3000.00 2150.00 18.8 1.5 1.6 ­12.8 30.03.10
914318 JPY Mitsui OSK Lines Ltd 550.00 800.00 540.00 67.0 1.0 1.8 ­17.6 31.03.10
724641 USD Taiwan Semiconductor Manufacturing Co Ltd 9.98 13.00 7.00 13.3 3.2 4.7 87.7 23.08.04
Structured Products
3689533 CHF Global Agribusiness Basket 02/11 94.20 120.00 80.00 ­14.6 7.02.08
11416997 EUR Best of Germany Basket 06/12 97.85 120.00 80.00 0.9 16.06.10
10559592 USD All in one China Basket 04/13 96.80 120.00 80.00 ­1.7 1.04.10
1015724 CHF BKB Global Value Basket 01/11 132.90 150.00 120.00 17.1 25.02.09
11138618 USD Deep Offshore & Exploration 03/13 92.30 120.00 80.00 ­5.1 25.03.10
10376751 CHF World of Best Dividends 09/11 96.50 130.00 80.00 3.6 29.09.09
3836320 USD ZKB Gold Basket 03/11 146.20 160.00 120.00 44.4 26.06.09
3826016 CHF Swiss Premium Basket 03/11 88.00 120.00 60.00 ­8.1 13.03.08
10681495 CHF Valuable Health & Care Basket 11/11 1016.00 1200.00 900.00 1.6 30.10.09
2461480 USD US Selection Basket 02/11 120.00 130.00 100.00 21.3 11.02.09
Curr.= Currency; P/E= Price Earnings Ratio; P/B= Price Book Ratio; Yield= Dividend Yield; Perf.= Performance since recommendation
Rec.­date= Recommendation date
*Domicile inconsistent with listing
We have made the following changes
to our equity recommendations list for
October 2010:
Addition
Telefonica:
Target price of EUR 21 –
Stop Loss of EUR 15
See Company focus
Deutsche Börse:
Target price of EUR 58 –
Stop Loss of EUR 45
See Company focus
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.
Supplement to the Investment Strategy October 2010
Deletion:
Bayer:
Stock has reached our price target
Further capital gains are limited
Performance since recommendation date
10.12.2007: ­2.9 %
Volkswagen:
Stock has reached our price target
Further capital gains are limited
Performance since recommendation date
17.06.2010: +21.3 %
Vodafone:
Stock has almost reached our price target
Further capital gains are limited
Performance since recommendation date
30.10.2009: +26.7 %
Hyposwiss Private Bank Ltd.

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.