UBS House View - Black Oak Family Office SA · 2017-08-17 · UBS House View Monthly Extended...

UBS House ViewMonthly Extended January 2017

Chief Investment Office WM

PublishedDec 15 2016

This report was prepared by UBS AG.Please see the important disclaimer at the end of the document.This document is a snapshot view. We update the tactical asset allocationas changes occur and resend it to subscribers. For all other forecasts andinformation, we advise you to check the Investment Views section in your E-Banking or in Quotes. 1

Table of Contents

Section 1 Base slides 3Section 2 Asset class views 19 2.A Equities 20 2.B Bonds 29 2.C Foreign exchange 39 2.D Precious metals & Commodities 43 2.E Alternative investments Hedge funds 47Section 3 Fixed income tactical asset allocation 49Section 4 Tactical asset allocation for global credit portfolio 51Section 5 Emerging market tactical asset allocation 53Section 6 APAC tactical asset allocation 56Appendix Global portfolios 60

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Section 1

Base slides

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For further information please contact Head, Global Asset Allocation Mads N. S. Pedersen, [email protected] or CIO asset class specialist Philipp Schöttler, [email protected]

Financial Market Outlook – short term (6 months) US earnings growth set to accelerate

Source: Thomson Reuters, UBS CIO, as of December 2016

Average credit quality in euro highyield has improved

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

1

201

3

201

4

201

5

201

6

BB B CCC

Source: BoAML, UBS CIO, as of December 2016

Global Tactical Asset Allocation

• Asset allocationWe keep our overweight positions in US equities and Euro high yield vs. high grade bonds. Solid global economic growth, as signaled by a compositeof global purchasing manager indices, supports a moderate tactical risk-on stance. The simultaneous pick-up in inflation globally supports thepotential for higher earnings generation into 2017. At the same time, the growth-inflation mix, particularly in the US, remains attractive for riskasset prices. Company refinancing costs, as measured by US corporate bond yields, are still 100bps below their 10-year average. So, despite theslightly more hawkish communication by the US Fed and higher US yields over the past month, the environment is supportive for risk assets. TheFed is still expected to raise rates only gradually and in line with improving economic data. We interpret the ECB's latest policy measures as primarilyan extension of quantitative easing for the foreseeable future.

• EquitiesWhile we continue to hold an overweight position in US equities vs. HG bonds, we have reduced the position recently, taking some profits as HGbonds have underperformed US equities by a wide margin since the US elections. While the rise in US government bond yields was supportive ofthe position's performance, an unhalted continuation thereof could become harmful for economic growth and thus equities beyond a certain level.US equities are a long-duration instrument and their discounted future earnings growth is compressed by higher bond yields. Still, the ongoingpick-up in corporate earnings on the back of solid US private consumption and increasing margins supports a continued overweight position in USstocks against HG bonds. Furthermore, we are keeping our preference for EM equities over Swiss stocks. The strong Swiss franc remains a drag onSwiss earnings. Meanwhile, EM firms benefit from the recovery in domestic growth. EM company earnings have stabilized in past months.

• BondsFollowing the substantial rise in global government yields over the past month, we expect them to move by and large sideways in the monthsahead. US inflation protected securities (TIPS) are likely to continue outperforming nominal bonds, as inflation is rising gradually, so we are keepingour overweight position. We are overweight euro high yield vs HG bonds. We find current valuations attractive, as credit quality is solid and defaultrates are likely to remain low. Qualified investors with a tolerance for somewhat less liquid assets should have an increased exposure to US seniorloans, which are still offering average yields close to 6%.

• Foreign exchangeWe expect the euro to appreciate to 1.15 against the US dollar over the next six months and are overweight the currency. The euro is substantiallyundervalued according to purchasing power parity. The economic recovery in the Eurozone is on track and the ECB has likely reached the peak ofits monetary easing measures for now, suggesting a stronger currency. We furthermore prefer a basket of EM currencies (BRL, INR, RUB, ZAR) overselected DM currencies (AUD, CAD, SEK). The position offers an interest rate carry of around 8% p.a. Meanwhile, the cyclical and commodity-sensitive nature of the underweight basket helps to stabilize the position.

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For further information please contact Head Global Asset Allocation Mads N. S. Pedersen, [email protected] or Head Strategic Asset Allocation Christophe de Montrichard,[email protected]

Financial Market Outlook – long-term (5+ years) Illustration of a Strategic AssetAllocation (USD) for a balancedinvestor risk profile

Source: UBS CIO, as of December 2016

High grade bond yields (in %)

(1)

0

1

2

3

4

5

6

7

8

'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16USD AA+ 5-7y EUR AA+ 5-7y CHF AA+ 5-7y

Source: UBS CIO, as of December 2016

Strategic Asset Allocation (SAA)

• CIO constructs the SAAs for its model portfolios to offer investors the best risk-return trade-off. They are consistent with the modernportfolio theory approach of investing in traditional, relatively liquid asset classes and making use of diversification to reduce risk. TheseSAAs are set up to withstand different types of market environments and are reviewed at least annually. Each asset class enters the portfoliobased on our internally constructed Capital Markets Assumptions (CMAs), which are forward-looking risk and return expectations.

• In recent years, CIO has added exposure to high yield bonds and emerging market (EM) sovereign and corporate bonds and reduced thecash allocation. CIO recommends global exposure to equities, a larger spectrum of bonds diversified across styles, quality, regions, centralbank exposures and durations, and exposure to multi-strategy alternative investments.

• Since 2015, CIO has advised against direct commodity investing, including investments in precious metals. The expected risk-return trade-off of the asset class is not attractive enough, in CIO's view.

• CIO recommends fully hedging foreign currency exposure on a strategic level (except for EM equities). The expected returns do notcompensate for the volatility of the asset class and the potential for structural shifts in FX regimes.

• Although high grade bonds have underperformed recently, especially since the US presidential election, developed market equities havedelivered positive returns, ensuring that our model portfolios have performed in line with CIO's expectations across risk profiles. Thishighlights the importance of investing in a diversified manner.

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Cross-asset preferences Most preferred Least preferred

Equities

• US equities

• US share buybacks and dividends

• US technology

• Emerging markets

• Sustainable value creation in EMs

• Switzerland

Bonds

• Corporate hybrids

• US leveraged loans

• US TIPS

• EUR HY

• Developed market high grade bonds

• Replacing "well-worn" bonds

Foreign exchange • EM FX (BRL, INR, RUB, ZAR)

• EUR• DM FX (AUD, CAD, SEK)

• USD

Hedge Funds • Navigating rising US rates with hedgefunds

Precious Metals& Commodities

Recent Upgrade Recent Downgrade

Global model portfolio (EUR)

Liquidity5% High grade

bonds11%

US TIPS2%

Inv. gradecorporate

bonds8%

High yieldbonds

7%

EM bonds4%

Equitiesothers

2%

Equities EM5%

EquitiesEurope

23%

Equities US13%

Hedge Funds20%

As of 15 December 2016

Note: Portfolio weightings are for a EUR model portfolio, witha balanced risk profile (including TAA). We expect a balancedportfolio (excluding TAA) to have an average total return of 4.2%p.a. and volatility of 8.2% p.a. over the next five years.

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Global tactical asset allocationTactical asset allocation deviations from benchmark*

Liquidity

Equities total

US

Eurozone

UK

Switzerland

Japan

EM

Others

Bonds total

High grade bonds

Corporate bonds (IG)

High yield bonds

EM sovereign bonds (USD)

EM corporate bonds (USD)

US TIPS

Precious Metals & Commodities

new old

neutral overweightunderweight

Source: UBS, as of 15 December 2016

*Please note that the bar charts show total portfolio preferences. Thus, it can be interpreted as therecommended deviation from the relevant portfolio benchmark for any given asset class and sub-asset class.

Currency allocation

USD

EUR

GBP

JPY

CHF

SEK**

NOK

CAD**

NZD

AUD**

EM FX basket**

DM FX basket**

new old

neutralunderweight overweight

**The EM FX basket consists of the Brazilian real, the Indian rupee, the Russian ruble and the SouthAfrican rand. The DM FX basket consists of the Australian dollar, the Canadian dollar and the Swedishkrona (all with equal weights).

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CIO themes in focus Equities

• US technology: Secular growth, on sale

Secular growth drivers (online advertising, cyber security, cloud investments) are likely to propel US technology sector earnings over the coming years. More tactically, we expect the sectorto continue to benefit from resilient business spending and ongoing labor market gains. Relative valuations are near 20-year lows and companies are returning large sums of cash toshareholders without increasing leverage.

• Profit from US share buybacks and dividends

US companies are generally in good shape: they generate high free cash flow, have plenty of cash on their balance sheets and enjoy low financing costs. The stock market has rewardedinvestors in companies that return capital through dividends and share buybacks. These companies offer attractive yields in the current low-growth, low-interest-rate environment. Onaverage, S&P 500 companies returning cash to shareholders via dividends and/or share repurchases offer investors a total yield of 5-6% (when combining share buyback and dividend yields).Around two-thirds of this yield come from share buybacks. With borrowing costs low, companies have an incentive to return cash to shareholders, and good free cash flow generation is akey factor for this theme. As buybacks are made at management's discretion, we recommend investing in a diversified basket of stocks.

• Sustainable value creation in emerging markets

EM equities offer investors the opportunity to add value to their portfolios by incorporating environmental, social and corporate governance (ESG) considerations into their investmentdecisions. We argue that the wide disparity among individual companies on ESG performance, particularly regarding governance issues, necessitates focusing on those with a strongmanagement to reduce tail-risk events such as severe environmental accidents or weak corporate governance (e.g. accounting/audit issues). As corporate governance rules in emergingmarkets are often less strict than those in developed countries, risks and opportunities are hard to quantify, which suggests that understanding how companies are exposed to ESG risks andopportunities and how they manage them should factor in highly when determining corporate value.

Bonds

• A tip on TIPS: Benefiting from rising inflation

We believe future consumer price inflation in the US is underestimated by current market pricing as measured by the breakeven inflation (BEI) rate. A tighter labor market, stabilizing oilprices and slowing USD appreciation should provide support for headline inflation to move higher. We think this provides an opportunity for a long position in US Treasury Inflation ProtectedSecurities (TIPS) funded by a short position in nominal US Treasuries. This so-called inflation breakeven trade delivered over 2% excess return in 2016 and we see potential for a further 1-2%for investors with a minimum investment horizon of 6-12 months. The 3-7-year maturity spectrum of the curve is our best "tip". TIPS also add portfolio diversification and provide some hedgeagainst a fall in the real value of accumulated capital should inflation climb further.

• Replacing well-worn bonds

Risk-free yields in most major developed markets are either below or close to zero. Even if rates were to remain unchanged, many short- to medium-term bonds would deliver negative totalreturns. Investors who avoid negative yields and instead add longer-dated paper at a slightly positive yield often take an even greater risk, as evidenced in the recent correction. We do notintend to take a strong view on the highly uncertain path of inflation and yield curves, but we believe that investors can preserve wealth by taking profits on assets that will deliver negativetotal returns (exceeding costs of switching out) in most likely scenarios. More attractive alternatives can be found on CIO's bond recommendation lists.

• US loans – Attractive floating yield

We believe US senior loans are an attractive alternative to more traditional fixed income segments. Loans provide exposure to the most senior part of a company's capital structure and areoften secured by the company's assets, leading to higher recovery rates than for bonds. Also, loans offer a floating coupon rate, which benefits from a rise in short-term US interest rates.The recent rise in the USD LIBOR rate above 0.9% supports the investment case. The current yield (to 3-year takeout) at roughly 5.9% is attractive. We expect the default rate to moderately

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CIO themes in focus Bonds

increase towards its long-term average of 3% in 12 months. With an index weight of 4.4%, exposure to the oil and gas sector is much more limited than in US high yield bonds. We thinkUS loans present an attractive investment opportunity for qualified investors who are comfortable holding less liquid asset classes.

• Yield pick-up with corporate hybrids

Corporate hybrids are a niche segment in the corporate bond market. At current spread levels, investors with a suitable risk tolerance are well compensated for assuming the risks associatedwith these bonds. We expect mid-single-digit percentage returns on selected instruments over 12 months.

Alternative investments

• Navigating rising US rates with hedge funds

The US Federal Reserve has started to hike interest rates. Based on historical data, we find that most hedge fund strategies are resilient to rising interest rates while high grade bondsperformed poorly. Investors looking for an alternative to their high grade bond exposure should consider a diversified hedge fund portfolio characterized by a low directional exposure toboth fixed income and equities.

This selection of themes is a subset of a larger theme universe. The selection represents the highest conviction themes of the UBS Chief Investment Office WM, taking the current market environment and risk-returncharacteristics into account.

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UBS Chief Investment Office WM considers the highlighted themes as fitting the sustainability framework.

CIO longer-term investment themes in focus Equities

• Security and safety

Security and safety touch lives everywhere, from governments securing infrastructure to enterprises protecting data and consumers trusting products as varied as baby food and fire alarms.Several long-term drivers support the theme, such as urbanization, tighter regulation and growing consumer awareness about product quality, data security, environmental protection andsocial responsibility.

• Automation and robotics

We believe smart automation is powering the ongoing industrial revolution, combining the innovation capabilities of industrial and IT processes to drive global manufacturing productivitygains. Rising wages and challenging demographic developments will pressure costs of manufacturing companies in emerging markets, driving automation investments. By poweringmachine intelligence, artificial intelligence should take automation to the next level.

• Emerging market tourism

Urbanization and income growth in emerging markets (EMs) are fueling a boom in global travel. Aviation services can be accessed in EMs’ largest cities, which are expanding due tomigration, and have the highest incomes. EM governments are supporting tourism as a strategy to diversify their economies. Policy support comes in the form of visa openness, publicinvestment in aviation infrastructure and new air links.

• Energy efficiency

Energy efficiency covers wide-ranging issues with numerous characteristics and starting points for promising investment opportunities. In general, energy efficiency as a field is gainingimportance all over the world, and developments are driven more and more by governmental initiatives. Rising environmental pollution has led to an increased worldwide awareness.

• Digital data

Driven by strong urbanization, the global digital universe is expected to expand 50-fold between 2010 and 2020. From an investment perspective, digital data is a trend that offers solid long-term growth opportunities as significant investments are required to support the surge in data. Investors can participate by investing in either data enablers or data infrastructure companies.

This selection of themes is a subset of a larger theme universe. The selection represents the highest conviction themes of the UBS Chief Investment Office WM, taking the current market environment and risk-returncharacteristics into account. The Longer Term Investment (LTI) theme series focuses on inevitable global trends such as population growth, aging and urbanization. These trends create a variety of opportunities, withcertain companies and sub-sectors experiencing higher-than-GDP levels of revenue growth. Here we include a subset of a larger universe of longer-term investment themes that are expected to offer good entry points fortheme-oriented investors over the coming months and highlight our preference for a diversified approach to themes.

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For further information please contact US economist Brian Rose, [email protected], European economist Ricardo Garcia, [email protected] or UBS WM Global Chief Economist PaulDonovan, [email protected]

Key financial market driver 1 - Central bank policyKey points• Following its second rate hike in this cycle in December 2016, the US Federal Reserve is expected to continue monetary policy tightening

and a slow, subtle quantitative policy tightening in 2017.• We believe that rising inflation and reasonable economic growth will keep the ECB on the policy path unveiled at the December 2016

meeting, with the prospect of further reductions in bond buying via a tapering of policy in 2018.• Currency volatility reduces visibility on Bank of England policy.

CIO view (Probability: 60%) Policy is diverging• Donald Trump's election as US president raises questions about the future direction of the Fed, with two new governors to

be appointed and given the president-elect's previous statements about Janet Yellen's future. Trump is also reported to besympathetic to congressional attempts to challenge the independence and flexibility of the Fed. This adds uncertainty to the2017 policy outlook. Nonetheless, the lack of spare capacity for skilled and semi-skilled labor is producing increasing labor costpressures, which create price inflation pressures and reinforces the arguments for continued policy tightening. Our base caseof two rate hikes in 2017 with a slow decline in the balance-sheet-to-GDP ratio suggests a Fed tolerant of the rising inflationpressures.

• The ECB has set out its quantitative policy path for 2017, moderately reducing monthly bond buying from EUR 80bn to EUR60bn from April onwards. We do not see economic conditions unfolding that would warrant a reversal of this reduction, andinstead expect a tapering of bond purchases in 2018.

• The Bank of England is expected to leave policy unchanged for the time being as the consequences of the earlier decline insterling continue to percolate through to the real economy. The Swiss National Bank has held its policy steady, and we believeit will continue with its current negative rate position for the next 12 months. The SNB is expected to continue intervening inthe foreign exchange markets when necessary. The Bank of Japan seems content to leave policy unchanged for the time being,albeit the level of the yen is likely to be a particular concern.

Positive scenario (Probability: 25%) Worsening macro backdrop

• The Fed falls further behind the curve as inflation increases, with real interest rates falling (similar to 1971 and Nixon'spresidency).The ECB launches more policy easing than expected by the markets, transmitted by increasing bank credit growth. TheBank of Japan comes under pressure to engineer currency depreciation.

Negative scenario (Probability: 15%) Macro risks fade

• The inflation effect of fiscal stimulus in the US leads to a stronger Fed response and a tight monetary, loose fiscal policycombination (similar to Reagan's presidency). Higher labor market costs and some commodity price pressures lead to higherEuropean inflation rates, generating early signals of a more rapid tapering of ECB quantitative policy.

Key datesJan 1Jan 19Jan 31Feb 1

US Federal Reserve voting membership changes (annual rotation)European Central Bank decisionBank of Japan decisionUS Federal Reserve decision

Has buying bonds changed Eurozone inflation?ECB balance-sheet-to-GDP ratio and core CPI inflationrate

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2007 2009 2011 2013 2015

ECB balance sheet as % GDP Core CPI % yoy (RHS)

Source: Haver, UBS, as of 7 December 2016

Some quantitative policy has peaked, most has notCentral bank balance sheets as a % of GDP

0%

20%

40%

60%

80%

100%

120%

Fed ECB SNB BoJ BoE

2007

High

Latest


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For further information please contact Global Chief Economist, UBS WM Paul Donovan, [email protected]

Key financial market driver 2 - Rising Political UncertaintyKey points• The last quarter century has seen a dramatic decline in the number of people living in poverty. At the same time, certain individuals

within developed economies have been "left behind" by the increase in economic prosperity. The persistence of these economiccircumstances, which have encouraged anti-establishment or "populist" politics, mean that political uncertainty is likely to remain arisk for financial markets.

• The demographic that has been "left behind" by the growth over the past 25 years tends to be older, lower skilled, lower income,and rural. Financial market participants (investors, traders, institutional managers) do not fit this demographic, meaning that theappeal of populism may be underappreciated in markets.

• Populist ideas are more likely to impact trend rates of growth than significantly alter the near-term economic cycle. However,specific companies or sectors of the economy may become political targets and could suffer in the near term.

CIO view (Probability: 70%)• Current income inequality and future economic redistribution associated with the structural changes of the fourth industrial

revolution will fuel discontent among less flexible, lower skilled workers in major economies. Any rise in food and energyprices is likely to exacerbate a perception of declining relative and absolute living standards by this group by adding to inflationinequality.

• The sense of relative decline supports the emergence of scapegoat economics – those seeking to blame an identifiable group forone's economic woes. Scapegoat economics will tend to (inaccurately) focus on foreigners and globalization as the causes of therelative economic decline. The detail of the populist policy response to scapegoat economics is difficult to predict.

• Opinion polls fail to capture the extent of populism accurately; low response rates, inaccurate answers, and "shy voter"syndrome conspire to increase the problems of interpreting opinion polls. Economic big data is likely to exclude those lowerincome groups that are inclined to populism, thereby creating complacency about the economic drivers of inequality and anti-establishment politics.

Positive scenario (Probability: 10%)

• Significantly improving labor market conditions for low skilled workers lead to wage increases, which is either accompanied byimproved credit access or compensates sufficiently for the loss of credit access post-2008; this reduces income and consumptioninequality. Governments and economists successfully communicate the net economic benefits of global trade and diversity.

Negative scenario (Probability: 20%)• Nationalist tendencies are encouraged by single issue politics and social media. Traditional party structures fail to address the

demands of significant sections of the electorate, encouraging populism. Election outcomes are increasingly unpredictableas opinion polls offer less and less guidance. Established parties adopt policies that attempt to appeal to populist supporters,increasing uncertainty about mainstream policy programs. Lower income groups' standards of living are hurt by populist policies,fueling further demands for radical and unpredictable change.

Key datesJan 20Mar 15Apr 23May 7May

Inauguration of Trump as new US PresidentDutch general electionFrench presidential election first roundFrench presidential election second roundNorth Rhine Westphalia (Germany) government elections

Globalization - the unjustified scapegoat ofpolitical populismReal global trade as % real global GDP

10

12

14

16

18

20

22

24

26

28

30

Q180 Q184 Q188 Q192 Q196 Q100 Q104 Q108 Q112


Rising income inequality fuels populism andpolitical uncertaintyGini coefficients – higher rating = more unequal incomedistribution

0.30

0.32

0.34

0.36

0.38

0.40

0.42

0.44

0.46

0.48

0.50

Canada France Germany Italy Japan UnitedKingdom

United States

1990 1995 2005 2012

Source: Euromonitor, UBS, as of 7 December 2016

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For further information please contact CIO analysts Jeremy Zirin, [email protected] or David Lefkowitz, [email protected].

Key financial market driver 3 - US earnings growth mayaccelerate into 2017Key points• US earnings growth has resumed and will likely accelerate into 2017• The incoming Trump administration's policies could boost EPS further• High profit margins are likely to be sustained

CIO view (Probability: 60%) Earnings trend improving, Trump's policies could provide afurther boost

• US third-quarter earnings rose by a better-than-expected 4%, the first quarter of growth in over a year. Growth is poised tocontinue accelerating as the huge drags from poor energy sector results and the strong dollar finally end.

• The improving profit trend is underpinned by solid US consumer spending and a rebound in US manufacturing activity as energyinvestment spending and emerging market demand bottom out.

• The Trump administration's policies could further boost earnings growth through lower taxes (corporate, individual, andrepatriation of overseas cash), greater fiscal spending, less regulation, and a steeper yield curve (which benefits banks). However,many details have yet to be worked out and House Republicans will have to get comfortable with the resulting larger budgetdeficits.

• We maintain our 2016 S&P 500 EPS forecast of USD 120 (+1%). For 2017 we expect a growth rate of 7% to 12%, accountingfor the likelihood that some of the new administration's policies will make it into law by next year. Our 2017 estimate may haveadditional upside but is highly contingent on the outcome of corporate tax reform. We expect growth to remain solid in 2018.

Positive scenario (Probability: 20%) Trump's policies boost earnings more than expected

• The Trump administration's policies, especially corporate tax reform, generate faster profit growth. Higher interest rates andderegulation further boost financial sector earnings. Business and consumer confidence improves and investment spending picksup.

Negative scenario (Probability: 20%) Downturn in sentiment

• Trade and geopolitical tensions flare up as a result of the incoming administration's policy priorities, depressing business andconsumer sentiment. Wage pressures, without improving consumer and business demand, could pressure profit margins andearnings growth rates. Persistently low short-term interest rates and renewed declines in long-term interest rates could pressurefinancial sector earnings.

Key datesJan 9 Fourth-quarter earnings season begins

Earnings are hitting new highsS&P 500 EPS, lighter bars denote UBS estimates, in USD

$20

$40

$60

$80

$100

$120

$140

2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: FactSet, UBS, as of 9 December 2016

3Q was one of the stronger earnings seasons in 4-plus yearsS&P 500 earnings "beat": change in bottom-up S&P500 EPS estimate since quarter-end

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

Source: FactSet, UBS, as of 9 December 2016

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For further information please contact UBS WM Global Chief Economist Paul Donovan, [email protected]

Global economic outlook - SummaryKey points• Political uncertainty is an investor focus. The tweeting of US policy intentions has moved individual equities. Europe's electoral cycle

has increased investor nervousness. The economic cycle has not been disrupted, but trend growth may be affected.• The US Federal Reserve is expected to raise interest rates twice in 2017. The latest extension of quantitative policy in Europe should

represent the last period of policy easing this cycle; we expect a tapering of bond buying in 2018.• Growth momentum in the major economies remains relatively good as the year draws to a close. Labor market indicators have

stayed relatively strong. As a result, underlying inflation pressures continue to build, supplementing oil base effects.

CIO view (Probability: 60%*) Uncertainty increasing

• Global growth is supported at a trend-like level. Trade protectionism increases but is generally specific rather than general inscope.

• Shortages of skilled and semi-skilled labor in the US push up wages, leading to improved consumer spending and strongerdomestic growth. European growth is aided by improving labor market conditions in larger economies, but oil prices and theeuro have a dampening effect. Asia and emerging markets see slow, positive growth in external demand; domestic demand ismixed.

• Headline inflation rates in the developed world gradually rise as oil base effects are removed from the year-on-year calculation.Labor costs add to current increases in the US, fueling local inflation forces.

• The US Federal Reserve raises rates twice in 2017 and continues its very slow quantitative policy tightening (providing lessliquidity relative to the demands of the US economy). Real policy interest rates become more negative (discounted using CPI).The ECB signals its intention to taper its bond buying program in 2018.

Positive scenario (Probability: 15%*) Stimulus dominates

• The US economy grows closer to 3%, spurred by robust consumer spending and the prospect of further fiscal easing. Political risksare contained in the Eurozone and growth and inflation from the European periphery beat forecasts.

• Emerging markets see stable domestic demand and higher commodity prices support exporters. Protectionist threats from theUS recede as political reality overcomes campaign rhetoric.

Negative scenario (Probability: 25%*) Protectionism redux

• US consumers suffer lower real disposable income as domestic inflation pressures increase. Eurozone growth weakens as banklending reverses. Political uncertainty impacts European consumer and investment spending.

• Trade protectionism increases. Global capital flows become disruptive, with capital account protectionism being used inretaliation for current account protectionism.

*Scenario probabilities are based on qualitative assessment. Key datesJan 6Jan 19Jan 20

US employment reportECB meetingTrump's inauguration in the US

Global growth remains around trend

2015 2016F 2017F 2018F 2015 2016FAmericas US 2.6 1.5 2.4 2.5 0.1 1.3

Canada 1.1 1.1 2.3 2.7 1.1 1.5Brazil -3.8 -3.6 1.3 2.6 9.0 8.8

Asia/Pacific Japan 0.6 0.5 0.8 0.9 0.8 -0.3Australia 2.4 2.9 3.0 2.8 1.5 1.2China 6.9 6.7 6.4 6.0 1.4 1.9India 7.6 6.0 8.0 7.8 4.9 4.7

Europe Eurozone 1.9 1.6 1.3 1.2 0.0 0.2Germany 1.5 1.8 1.3 1.3 0.1 0.4France 1.2 1.3 1.3 1.4 0.1 0.3Italy 0.6 0.7 0.8 0.8 0.1 -0.1Spain 3.2 3.2 2.3 1.9 -0.6 -0.4

UK 2.2 2.0 1.0 0.7 0.0 0.7Switzerland 0.8 1.4 1.4 1.6 -1.1 -0.4Russia -3.7 -0.6 1.3 1.7 15.5 7.1

World 3.3 3.0 3.6 3.6 2.6 2.6

Inflation inReal GDP growth in %


In developing the CIO economic forecasts, CIO economistsworked in collaboration with economists employed by UBSInvestment Research. Forecasts and estimates are current only asof the date of this publication, and may change without notice.

Clear signs of a tight US labor market (beforestimulus is applied)Atlanta Fed Wage Tracker index, % y/y growth

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2005 2007 2009 2011 2013 2015


14

For further information please contact US economist Brian Rose, [email protected]

US economy - Moderate growth in the USKey points• We expect the US economy to grow at a moderate pace over the next 12 months.• Inflation should gradually trend higher as the recovery continues.• We expect the Federal Reserve to raise rates by 50 basis points in 2017.

CIO view (Probability: 70%*) Moderate expansion• We expect the US economy to grow at a moderate pace over the next 12 months. The labor market is still improving, with the

unemployment rate below 5% and signs that labor shortages are promoting faster wage growth. Rising household incomeshould enable robust consumer spending.

• Housing starts and home prices should remain on an upward trend, contributing modestly to overall economic growth.

• Energy sector fixed investment appears to be bottoming out following the rebound in oil prices. The manufacturing sector hasshown some improvement but will likely remain restrained by weak global demand and the strong US dollar.

• Personal consumption expenditure (PCE) price inflation has been gradually trending higher as the labor market moves closer tofull employment. We expect this trend to continue in 2017. The forces helping to keep inflation down up until now, includingthe strong US dollar, low energy prices, and smaller-than-usual increases in healthcare costs, are fading.

• Fiscal policy is likely to become looser given the Republican election sweep, with priority given to tax cuts, infrastructure, andmilitary spending. However, it will take some time for legislation to be passed, and the impact on economic growth in 2017should be limited.

• Considerable progress has been made toward fulfilling the Fed's dual mandates of full employment and price stability. Weexpect 25bps rate hikes in June and December 2017.

Positive scenario (Probability: 15%*) Strong expansion

• US real GDP growth is sustained above 2.5%, propelled by accommodative monetary policy, looser fiscal policy, strong householdspending, and subsiding risks overseas. Inflation hits the Fed's 2% target earlier than expected, leading the Fed to raise rates at afaster pace.

Negative scenario (Probability: 15%*) Growth recession

• US growth stumbles. Uncertainty following the election and tighter financial conditions weigh on business investment andconsumer spending. The Fed stays on hold.

*Scenario probabilities are based on qualitative assessment. Key datesDec 16Dec 22Dec 22Jan 3

Housing starts for NovemberPersonal income and spending, PCE price index for NovemberDurable goods orders for NovemberISM manufacturing

PMIs consistent with moderate growthPurchasing managers' indices

30

35

40

45

50

55

60

65

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Manufacturing Non-manufacturing Composite

Source: Bloomberg, UBS, as of 8 December 2016

Inflation should gradually move toward Fed's 2%targetUS headline and core PCE price index, year-on-year in %

(2)

(1)

0

1

2

3

4

5

2006 2008 2010 2012 2014 2016PCE price index y/y Core PCE price index y/y

Source: Bloomberg, UBS, as of 8 December 2016Note: PCE = personal consumption expenditures

15

For further information please contact CIO European economist Ricardo Garcia, [email protected]

Eurozone economy - Resilient growthKey points• We expect economic growth to remain resilient despite political uncertainties in the UK, US, and the Eurozone.• Inflation should continue to quickly rebound, supported by energy base effects.• The ECB is expected to taper its QE program in 2018 following the renewed extension.

CIO view (Probability: 60%*) Resilient growth• We expect the Eurozone economy to weather growth concerns thanks to resilient business and consumer confidence as well

as a strong monetary impulse, allowing it to limit the negative impact of political uncertainty. Inflation is set to continue risingstrongly through early next year. We expect the ECB to taper its QE program following the extension announced on 8 December.We think that the ECB will then taper its QE program very slowly for 9–12 months from January 2018 onwards.

• In Germany, fundamentals such as consumer confidence, construction, and capital-expenditure planning remain robust. Weexpect Angela Merkel to win the elections in 2017. In France, better dynamics in construction and corporate investments arehelping solidify growth. We expect François Fillon to emerge as the winner from the 2017 elections.

• Italian economic growth should consolidate at low rates, supported by a stabilizing construction sector. We expect elections in2H17 or 1Q18. Spain is still posting strong growth, even if the momentum is set to moderate.

Positive scenario (Probability: 20%*) Better-than-expected growth

• The global economy reaccelerates and the euro is weaker than expected. Eurozone loan demand and the economy recover fasterthan envisaged. Political risks fade.

Negative scenario (Probability: 20%*) Deflation spiral

• The Eurozone slips into a deflationary spiral due to a shock, such as Greece leaving the Eurozone, a sharp escalation in the Ukraineconflict, or China suffering a severe economic downturn.

*Scenario probabilities are based on qualitative assessment. Key datesDec 21Jan 4Jan 9Jan 12Jan 19

Consumer confidence (December)CPI estimate (December)Unemployment rate (November)Industrial production (November)ECB press conference

Eurozone growth expected to remain solid

Source: Haver Analytics, UBS, as of December 2016

ECB balance sheet boosted by QE and TLTROsTotal assets in national currency (index: 2007=100)

Source: Haver Analytics, UBS, data as of November 2016 (ECB and SNB, as ofOctober 2016)

16

For further information please contact CIO China economist Yifan Hu, [email protected]

Chinese economy - Orderly decelerationKey points• China is striking a balance between economic stability and mild reforms. GDP growth continues its orderly deceleration.• CPI inflation remains mild, while PPI inflation rose faster than expected in November, improving industrial profits and adding

pressure on interest rates.• Monetary policy focus should become more prudent as there is less concern about economic stability.

CIO view (Probability: 80%*) Balance between economic stability and mild reforms• China's economy further stabilized in November thanks to the property boom from 3Q16. November manufacturing PMI further

rose to 51.7, a 28-month record high, due to rising product prices and mild inventory expansion.

• November CPI inflation rose to 2.3% y/y from 2.1% y/y in October and PPI inflation surged to 3.3% y/y, the first time sinceMarch 2012 that it has been in positive territory for three consecutive months. We expect CPI inflation to stay below 3% in2017.

• Fixed asset investment (FAI) from January to November grew 8.3% y/y thanks to FAI in infrastructure. But private investmentgrowth, which accounts for over 60% of total FAI and is considered a top risk in China, remained 3.1% y/y in November (10.1%in 2015).

• November retail sales grew 10.8% y/y from 10.0% y/y in October. The monthly increase was mainly driven by robust auto salesdue to the coming expiration (December) of a sales tax cut. Online sales in November continued to surge (up 33.7% y/y), helpedby the record 11/11 shopping festival.

• November FX reserves fell sharply (by USD 69bn) mainly due to revaluation. Following Trump's presidential victory, China's FXreserves shrank by about USD 30bn because of the rise in US interest rates and another USD 30bn was lost due to the USDsurge (USD-denominated assets account for 60% of China's total USD 3trn FX reserves). Thus, capital outflows in Novemberwere about USD 10bn, in line with USD 10–20bn monthly outflows following the implementation of capital controls in January.We expect FX reserves to remain above USD 3trn by end-2016 and USD 2.7trn by end-2017.

• Fiscal policy is likely to remain accommodative. Infrastructure investment by local governments will likely remain an importantbuffer for maintaining economic stability.

• Monetary policy should gradually shift to avoid a credit crunch and maintain economic stability, given the better-than-expectedgrowth data. The PBoC recently instructed banks to improve liquidity management and lessen investment duration mismatch tolower potential risks.

Positive scenario (Probability: 5%*) Growth acceleration

• GDP grows above 7% a year, helped by strong government policy stimulus packages and/or a strong pickup in external demand. Negative scenario (Probability: 15%*) Strong growth downturn

• A strong growth downturn occurs abruptly, defined as sub-6% real GDP growth for more than two quarters, driven by a sharperfall in investment and widespread credit defaults.

* Scenario probabilities are based on qualitative assessment. Key datesDec 27Jan 1Jan 9

Real estate data for NovemberPMI for JanuaryCPI, PPI for December

China's FAI has stabilized due to government-supported infrastructure investment

Source: CEIC, UBS, as of 14 December 2016

November FX reserves dropped sharply mainly dueto revaluation

Source: CEIC, UBS, as of 14 December 2016

17

For further information please contact CIO Swiss economists Alessandro Bee, [email protected] or Sibille Duss, [email protected].

Swiss economy - Broadening of the Swiss recovery in 2017Key points• Switzerland's economic growth is unlikely to accelerate substantially in 2017 compared to 2016, but the upswing is likely to broaden

and may help to achieve a labor market trend reversal. We expect a return to trend growth only in 2018.• Uncertainty stemming from Brexit and from upcoming European elections may hold back Swiss growth in the coming quarters.• If necessary, the SNB will try to prevent a sharp appreciation of the Swiss franc by: 1) intervening in the FX market; and 2) cutting

the target rate if interventions don't suffice.

CIO view (Probability: 60%*) Moderate recovery• The Swiss economy stagnated in 3Q16. We expect the Swiss economy to grow by 1.4% in 2016 on the back of the strong first

half of the year. In 2017, the recovery is likely to broaden but not necessarily accelerate – we foresee GDP growth to stay at1.4%. We expect GDP growth to return to trend (1.8%) only in 2018.

• Employment growth was flat in 3Q16. However, employment may eventually pick up and force a trend reversal in theunemployment rate as we expect the recovery to broaden in the coming quarters.

• The manufacturing PMI continued to trend up in November and points to a rebound of GDP growth in 4Q16.

• CPI inflation remained in negative territory in November. It is expected to turn positive in the coming months as the effects ofthe weaker oil price and the stronger franc fade.

• The main goal of the Swiss National Bank (SNB) in the short term is to prevent the franc from appreciating sharply to safeguardthe Swiss economic recovery. To achieve this, the SNB will likely first intervene in the FX market. Only if interventions do notsuffice would it resort to a further rate cut. A rate hike is not in the cards in the coming quarters. The SNB will not likely raiserates until the ECB has slowed down its QE program significantly.

• The initiative against mass immigration has to be implemented by February 2017. The Swiss parliament plans to implement theinitiative by establishing a "soft" national priority clause. While this implementation may only cause minor problems with the EU,it could trigger a new initiative by the Swiss People's Party, which could also threaten the bilateral agreements.

Positive scenario (Probability: 20%*) Swiss franc shock already digested

• Export growth gathers further momentum as Swiss companies have already fully digested the Swiss franc shock. Negative scenario (Probability: 20%*) Stagnating Swiss economy in coming months

• Populist parties win next year's elections in the EU, triggering fears in financial markets that the Eurozone may break apart. Thesubsequent economic cooling and a strengthening of the Swiss franc stall the Swiss recovery.

* Scenario probabilities are based on qualitative assessment. Key datesDec 20Dec 28Jan 4Jan 5

Trade balance (Nov)UBS Consumption Indicator (Nov)PMI manufacturing (Dec)CPI (Dec)

Swiss PMI has rebounded from Brexit shock

30

35

40

45

50

55

60

65

70

-4

-3

-2

-1

0

1

2

3

4

5

6

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

GDP growth (y/y in %, left hand scale)

Purchasing Manager Index (right hand scale)

Source: procure.ch, UBS, as of 6 December 2016

Swiss GDP growth gradually recoveringSwiss GDP growth (y/y), E: Expectations

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2011 2012 2013 2014 2015 2016 E 2017 E 2018 E

Source: Seco, UBS, as of 6 December 2016

18

Section 2

Asset class views

19

Section 2.A

Asset class views

Equities

20

For further information please contact Strategist Markus Irngartinger, [email protected] or CIO asset class specialist Bert Jansen, [email protected]

Global equities Global equity markets – Key points

• We recommend an overweight allocation to equities. We prefer US stocks to high grade bonds. Within equities, we favoremerging market (EM) equities to Swiss equities due to better earnings dynamics.

• We are overweight on US equities versus high grade bonds. Stocks look poised to benefit from resumed earnings growth as theheadwind from the rout in energy prices begins to fade and consumer spending stays solid. Reflationary policies under a DonaldTrump administration could modestly boost economic growth.

• We are neutral on Canadian stocks. Canadian companies benefit from solid demand in the US, which buys 75% of Canada'sexports. Canadian banks generate stable earnings despite facing modest margin pressure. With crude oil prices hitting newhighs for this year in December, earnings in the energy sector, which constitutes about one-fifth of the market's capitalization,should begin to revive.

• We are neutral on Eurozone equities. Economic growth is well supported by robust domestic demand. Funding costs remain lowas the European Central Bank has extended its bond buying program until end 2017.

• We are neutral on UK equities. The pound's sharp fall since the UK referendum supports the earnings growth of companies inthe FTSE 100 index as they generate about 70% of their revenue abroad. The recent rise in iron ore prices supports earnings ofthe materials sector.

• We are underweight Swiss stocks. Swiss company earnings lag those of other regions due to the Swiss market's defensivesector composition. Healthcare and consumer staples stocks comprise close to 60% of the market capitalization of the MSCISwitzerland index.

• We are neutral on Australian equities. Australian earnings dynamics lag those of other regions. The economy contracted in thethird quarter. Still, the strong advance in iron ore prices in recent months should support earnings in the materials sector.

• We are neutral on Japanese equities. Manufacturing sentiment has continued to improve. The yen's near 10% depreciationversus the US dollar in November should support earnings growth.

• We are overweight EM stocks. Sentiment in the manufacturing sector continues to improve gradually in several EM countries.The recent rise in commodity prices is supportive for corporate earnings of EM companies. We will closely monitor the new USadministration for any signs that it will adopt measures that could weigh on trade.

Global equity sectors – Key points

• Our preferred sectors are energy, financials, healthcare and technology. We are underweight consumer staples, industrials andtelecoms.

• Energy should benefit from improving free cash flows thanks to reduced capex, further cost cutting and higher oil pricesstemming from robust demand and constrained supply.

• Financials are among the beneficiaries of rising US interest rates and ongoing global economic growth. Valuations are generallyattractive.

• In healthcare, ongoing uncertainty surrounding US healthcare reforms may continue to weigh on market sentiment. But valuationsare attractive following the sector's significant derating in the run-up to the US elections.

• We still like technology because of strong cash generation. Trump's protectionist policies - should they be enacted - would affectIT hardware and semiconductor supply chains. But these fears are likely to be counterbalanced by the benefits from promisedcorporate tax cuts and a pickup in enterprise IT spending in the US.

Preferences (six months)

Equities total

USA

Canada

Eurozone

UK

Switzerland

Australia

Hong Kong

Japan

Singapore

Global EM (in USD)

Nor

thA

mer

ica

Euro

peA

PAC

EM

new old


Source: UBS, as of 15 Dec 2016

Note: Preference in hedged terms (excl. currency movements).

Current mostpreferred sectorsEnergyFinancialsHealthcareInformation technology

Current leastpreferred sectors

Consumer staplesIndustrialsTelecoms

Source: UBS, as of 15 Dec 2016

21

US equitiesBenchmark:

S&P 500

Current level:

2,253(14/12/16)

Target level:

2,325

6-month outlook:

Overweight

CIO view• We are overweight US equities. Reflationary policies seem likely under a Trump

administration which could boost corporate profits. This gives us greater confidencein our expectation for improving earnings growth driven by solid consumer spendingand the end of the headwind from the energy bust. Despite its recent strength, the USdollar is likely to be much less of a headwind in 2017 compared to 2016. Equity marketvaluations are higher than average but not stretched and remain attractive versus low-yielding bonds. However, potential trade frictions and the possible US pullback fromglobal security institutions are downside risks.

Positive driversShort-term (6 months)Consumer leads the wayThe combination of increasing labor marketincome and higher consumer confidence shouldresult in sustained growth in consumer spending.Trump reflationTax cuts, increased spending on infrastructure anddefense, and less regulation drive a pickup ineconomic growth and a moderate rise in inflation.Fed remains accommodativeAfter a one-year hiatus, the Fed has resumed raisinginterest rates in December. But with inflation stillbelow the Fed's target, the risk of the central bankturning hawkish is low.

Negative driversShort-term (6 months)Trade frictionThe Trump administration will likely try to make goodon its promise to reopen trade treaties and take a hardline with some nations, raising the risk of destructivetrade wars.Setback in emerging marketsEmerging market growth has stabilized but China inparticular must still navigate through the hangoverfrom the excess investment spending of the boomyears.Geopolitical uncertaintyA shift in the US commitment to global securityinstitutions could increase geopolitical uncertaintyand weigh on business and consumer sentiment.

Long-term (5+ years)Innovation capacityHighly profitable US large-cap companies –particularly in technology and healthcare – continueto invest in research and development to maintaintheir competitive advantage.Structurally high profit marginsTransformational technologies, along with anincreasing profit contribution from higher marginsectors, support structurally higher-than-averagecorporate profit margins.

Long-term (5+ years)Expensive long-term valuationsAbsolute US equity valuations are somewhat highrelative to long-term averages. Multi-year expectedannualized returns are therefore likely to besomewhat below historical norms.Higher public debt burdensTrump's economic policies will likely lead to evenlarger budget deficits and faster debt accumulation.The hope is that faster growth and inflation will easethis burden.

Key dates Key debatesJan 3, ISM manufacturingJan 5, ISM non-manufacturingJan 6, Labor market report

• How long can the business cycle last?• Are US stocks overvalued?

Investor viewFor underexposed* investors

Nervousness that stocks are at "recordhighs" is unwarranted. Record highs arenot the same as market peaks.

For overexposed* investorsAlthough we are positive on US equities,the higher-than-average valuation doeslimit the upside potential over the longerterm.

For in-line* investorsExpensive defensive sectors continue tolook vulnerable if interest rates continue torise.

PreferencesMost preferred

• Energy• Consumer discretionary• Financials, healthcare• Information technology

Least preferred

• Telecom• Utilities• Consumer staples• Industrials

ScenariosPositive scenario

S&P 500: 2,650• Trump's reflation policies are successful,

consumer and business spending accelerates,and risks from Europe and China remaindormant. S&P 500 EPS rises by 17% in 2017and the trailing P/E expands to 20x.

Negative scenarioS&P 500: 1,825

• Trade and geopolitical frictions rise, politicaluncertainty in Europe spikes, and fears ofa China hard-landing intensify. As a result,consumer and business spending slows andearnings stagnate. The trailing P/E falls to15x.

Record highs are not the same as marketpeaksS&P 500 forward total return when buying ata record high or below a record high, monthlydata since 1960

11.6% 11.2%

22.3% 24.4%

38.8% 37.0%

0%

10%

20%

30%

40%

50%

at high belowhigh

at high belowhigh

at high belowhigh

1 year 2 year 3 year

FactSet, UBS, as of 9 December 2016

For further information please contact Strategists Jeremy Zirin, [email protected] or David Lefkowitz, [email protected] see importantdisclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

22

Eurozone equitiesBenchmark:

Euro Stoxx

Current level:

343 (14/12/16)

Target level:

350

6-month outlook:

Neutral

CIO view• We are neutral on Eurozone equities. Solid domestic consumer demand and ongoing

monetary easing continue to support the recovery into 2017. The European CentralBank (ECB) decided to extend by nine months its monthly asset purchases, but toreduce the volume from EUR 80bn to EUR 60bn starting from April 2017. Leadingeconomic indicators for manufacturing activity, as well as the service sector, continuedto advance in expansionary territory. Italy's "No" vote in its referendum keepspolitical uncertainty alive going into 2017 although it hardly affected equity markets.Earnings dynamics remain lackluster. Our most preferred sectors are energy, materials,technology, and utilities.

Positive driversShort-term (6 months)Consumer supportRising employment and domestic consumerdemand holding up well support companies'revenue generation.Manufacturing cycleHaving suffered due to cuts in energy-related investments, global manufacturing activityimproves, which benefits cyclical markets like theEurozone.Ongoing ECB supportThe ECB continues to buy government andcorporate bonds. By providing easy monetaryconditions, it keeps supporting the economy and itsinvestment cycle.

Negative driversShort-term (6 months)Struggling banking sectorBanks comprise about 11% of the MSCIEMU's market capitalization. Eurozone banks' non-performing loans will continue to weigh on thesector's profitability as long as negative rates prevail.Earnings weaknessDespite companies' cost-cutting efforts, earningsdynamics are lackluster.China decelerationThe Eurozone generates around 3–8% of MSCIEMU revenues from China and is thus vulnerableto declining Chinese demand. Uncertainty related toDonald Trump's policies could weigh on China.

Long-term (5+ years)Attractive long-term valuationsEurozone equities are trading close to 16x P/Ebased on 12-month trailing earnings per share,which is somewhat below the long-term averageof 16.5x.Long-term economic outlookUnemployment, especially in peripheral countries,could fall further. Any improvement should supportdomestic consumption.

Long-term (5+ years)Low interest rates for longerThe ECB keeping rates lower for longer to easemonetary conditions will maintain pressure onfinancial institutions; growing net interest income willremain difficult.Low inflationInflation may temporarily turn up due to higher oilprices. But negative sentiment could settle in asinflation remains low in the coming years while theECB struggles to maintain higher prices.

Key dates Key debatesDec 19, German Ifo indicatorJan 2, EMU manufacturing PMIJan 4, EMU services PMIJan 19, ECB policy meeting

• Are risks around financials behind us?• Will political outcomes hold back the

Eurozone's growth outlook for 2017?


The Eurozone offers well-diversified sectorexposure and benefits from its cyclical-oriented stance in an environment whereglobal growth is picking up modestly.

For overexposed* investorsOverexposed investors should be aware thatthe EMU remains a cyclical market exposedto higher volatility. Risks surrounding thebanking sector remain high.

For in-line* investorsInvestors should have a cyclical tilt ina Eurozone portfolio because of animprovement in global nominal GDPgrowth.


• Energy – improving cash flows• Materials – reflation plays• Technology – solid growth, high ROEs• Utilities – attractive yields

Least preferred

• Consumer discretionary – automobilesnear cyclical peak; retail expensive

• Consumer staples – overvalued• Industrials – fiscal stimulus fully priced


Euro Stoxx: 390• Economic growth recovers worldwide. The

Eurozone benefits from stronger global tradeand domestic demand. Earnings pick upmarkedly in six months. Euro Stoxx's trailingP/E rises to 16.5x.

Negative scenarioEuro Stoxx: 275

• A sharp economic slowdown, coupledwith a flare-up of the Eurozone crisis, hurtscompanies there. The downside is limitedby the ECB's willingness to ease further.Earnings retreat over six months and trailingP/E drops to 13.8x.

Eurozone banks index and German 10-year yieldEMU banks price index and German 10-yearBund yield, in level and %

Source: Thomson Reuters, UBS, as of December 2016

For further information please contact Strategists Markus Irngartinger, [email protected] or Nicolas Syz, [email protected]. or Analyst BertJansen, [email protected] see important disclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

23

UK equitiesBenchmark:

FTSE100

Current level:

6,949(14/12/16)

Target level:

7,125

6-month outlook:

Neutral

CIO view• We are neutral on the UK. We expect a weak economic backdrop in the UK

for 2017, which may lead to downgrades in the earnings of domestic cyclicalcompanies. The bigger near-term driver has been and will remain internationalcompanies, whose earnings are being upgraded based on benefits from the weakerpound, and commodity sectors upgraded by the commodity price recovery. Webelieve the FTSE 100 will enjoy a double-digit currency boost to earnings from thepound's decline. While earnings are likely to be flat this year, we expect them toreturn to a double-digit growth rate next year.

Positive driversShort-term (6 months)Weak poundThe pound's weakness, especially after Brexit,boosts the 70% or so of FTSE 100 revenuesgenerated outside the UK.Commodity prices have recoveredHigher crude oil and iron ore prices this year supportearnings in the oil and materials sectors.

Negative driversShort-term (6 months)UK purchasing managers' indicesEvidence of the economy's deterioration will affectthe market's domestic cyclical areas.Selective UK earnings downgradeAs the economy slows, earnings for financials andconsumer discretionary may weaken.

Long-term (5+ years)Structural currency boostA weaker currency helps the companies in theFTSE 100 index with robust international sales byproviding a positive translational impact.Attractive dividend yieldA dividend yield of 4% is attractive versus othermarkets, particularly in a lower-for-longer interestrate world.

Long-term (5+ years)Defensive sector make-upThis may lead the UK to underperform globalequities through the economic cycle.Expensive long-term valuationsUK equities currently trade at a premium of about 5%on a trailing price-to-earnings basis.

Key dates Key debatesJan 3, Manufacturing PMIJan 4, Construction PMIJan 5, Services PMIFeb 2, BoE monetary policy meeting

• How does the UK leave the EU?• Will there be more quantitative easing?


Gradually increasing exposure tothe benchmark weighting should beconsidered.

For overexposed* investorsWe advise taking advantage of the recentrally to trim back to benchmark weighting.

For in-line* investorsWhile a balance across sectors is stilladvisable, we expect dividend stocks tooutperform domestic cyclical stocks.


• Defensive dividend strategies – maintaina balance across sectors but benefitfrom dividend upside

Least preferred

• Domestic cyclical segments – may sufferfrom a weakening consumer into 2017


FTSE100: 7,800• Higher global growth and commodity prices

lead to marked earnings growth. The poundcontinues to weaken, providing an FX boostto the FTSE 100.

Negative scenarioFTSE100: 5,750

• Slower global growth drags down earnings.The UK's defensive sector structure onlyhelps it in a relative context versus otherequity markets.

UK to return to double-digit earningsgrowth in 2017MSCI UK consensus earnings growth forecast,2011–2017e, (%)

-20

-16

-12

-8

-4

0

4

8

12

16

20

Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16

MSCI UK

2013 2014 2015 2016 2017

Source: Factset, UBS, as of 6 December 2016

For further information please contact Strategist Caroline Simmons, [email protected] see important disclaimers and disclosures at the end ofthe document.*Exposure refers to current positioning relative to the UBS House View.

24

Swiss equitiesBenchmark:

Swiss MarketIndex

Current level:

8,140(14/12/16)

Target level:

8,275

6-month outlook:

Underweight

CIO view• We are underweight Swiss equities in our global portfolio. Earnings in Switzerland,

due to the market's defensive sector composition, are benefiting less than otherregions from the broadening economic improvement and the continued expansionin 2017. Despite some bond yield increases lately, the widespread negative interestrate environment remains a challenge for financial sector earnings. Currencydynamics are not currently negative, rather a minor positive. Overall, we expectcorporate profits to retreat modestly in 2016 for the second year in a row, and wesee them rising by a single-digit rate in 2017.

Positive driversShort-term (6 months)Accelerating Swiss sales growthWe expect organic sales growth to reacceleratemoderately from its likely low point in 3Q16.Growth slowed in local-currency terms froman average 3.6% in 2015 to 1.5% in the thirdquarter of 2016.Sustainable dividendsDividends paid in 2016 for the 2015 business yearrose modestly, leaving this component of equityperformance intact. We expect another smallincrease in the overall amount paid out in 2017.Interest ratesFed rate hikes leading to higher interest rates mayspark hope for financials, although the bankingindustry environment remains tough.

Negative driversShort-term (6 months)Slow Swiss earnings growthCorporate profits are likely to have decreased slightlyin 2016 for a second year in a row and are expectedto recover modestly in 2017. Corporate profits thuslag those in other regions.UK's EU exit negotiationsDue to the UK vote to leave the EU, a softerEuropean economic recovery is likely to weigh onSwiss company prospects; one-third of profits aregenerated in Europe ex-Switzerland.Defensive sector compositionEconomic leading indicators for manufacturingactivity have improved globally. The defensive Swissmarket will benefit less from robust global growththan the more cyclical emerging markets.

Long-term (5+ years)Well-diversified earnings baseSwiss companies are globally well-diversifiedand generate one-third of their operating profitsfrom Western Europe, one-third from emergingmarkets, and one-quarter from North America.Profit growthAfter remaining flat in Swiss franc terms for adecade, Swiss corporate profits will improvegradually in the coming years, in our view.

Long-term (5+ years)Low cyclicalityWith defensive sectors having an above-averageweight, the Swiss market tends to be lesseconomically sensitive and will thus benefit lessthan others from a European and global economicrecovery.Expensive long-term valuationsSwiss corporates currently trade at a 12-monthtrailing P/E ratio 5–10% above its average since1987. The slightly high valuation caps upside in thecoming years.

Key dates Key debatesDec 23, KOF leading indicatorJan 4, Manufacturing PMIJan 30, KOF leading indicatorMar 16, Monetary policy assessment

• What's the pace of Europe's recovery?• When and by how much will corporate

earnings growth pick up?


Adding high-quality dividend payers shouldbe considered (attractive yield and dividendgrowth).

For overexposed* investorsReducing exposure to the most expensiveparts of the market is advisable.

For in-line* investorsSwitching to high-quality dividend andmid-cap stocks should be considered.


• High-quality dividend payers• Mid-caps• Withholding tax-free distribution payers• Global growth beneficiaries

Least preferred

• Unattractively valued stocks• Industries facing tough conditions• Companies with low profitability


Swiss Market Index: 9,000• Eurozone economic growth rises

considerably, boosting Swiss cyclicals andfinancials. Defensive sectors are left behind ina global stock market rally.

Negative scenarioSwiss Market Index: 7,000

• The global economy slides into recession.Despite their less-cyclical product profile,Swiss companies suffer a drop in globaldemand.

Weak earnings dynamics12m trailing earnings per share (EPS) for MSCISwitzerland, in CHF

0

10

20

30

40

50

60

70

80

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

MSCI Switzerland I/B/E/S trailing EPS

Source: Thomson Reuters, UBS, as of end of November 2016

For further information please contact Analyst Stefan R Meyer, [email protected] or Strategist Markus Irngartinger, [email protected] important disclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

25

Japanese equitiesBenchmark:

TOPIX

Current level:

1,539(14/12/16)

Target level:

1,550

6-month outlook:

Neutral

CIO view• We are neutral on Japanese equities. We expect 4% earnings growth in FY16 (which

ends in March 2017) and zero growth in FY17. While the yen has weakened bymore than 10% since the US election in November and Japanese equities have risenaccordingly, we believe the trend is not sustainable and expect a stronger yen in thenext six months. However, we believe downside risk for the Japanese equity marketis somewhat limited by the relatively large purchases by domestic investors like theBank of Japan (BoJ) and the government pension funds. The BoJ may start taperingin 2017, in our view. We prefer share-buyback and high-dividend-yield stocks.

Positive driversShort-term (6 months)Downside is somewhat supportedIn addition to the BoJ's ETF purchasing programof JPY 6trn a year, government pension funds andcorporates will likely buy JPY 6–8trn of Japaneseequities in the next 12 months.Corporate earnings are bottomingWhile corporate earnings fell by 1% y/y in 2QFY16due to a stronger yen, we believe they will turnpositive from 2H16 thanks to low year-on-year baseeffects.Loose monetary policyThe BoJ continues its easy monetary policy, with anew focus on yield curve control.

Negative driversShort-term (6 months)Yen appreciationAs the breakeven USDJPY rate for Japanesecorporates is 103, their earnings would suffer if theUSDJPY consistently moves below this level.Potential tapering by BoJWe believe the BoJ will gradually downsize JGBpurchases from the current JPY 80trn a year in thenear future.US protectionismThere is uncertainty how US protectionism will affectthe Japanese economy, including trade and thecurrency.

Long-term (5+ years)Innovation capacityJapan's shrinking workforce should drive furtherthe development and adoption of automation androbotics, offering investment opportunities in thisarea.Narrower deflation gapWage increases due to a declining workforce arelikely in the long term, which should narrow aprolonged deflation gap in Japan.

Long-term (5+ years)Declining population in JapanAs Japan's population is expected to fall 3%in the next decade, the workforce and domesticconsumption may shrink if the birth rate or women'slabor-force participation rate fails to rise.Long-term deflation riskIf the Abe administration fails to lift the nation outof deflation, Japan will be at risk of falling into adeflationary spiral again.

Key dates Key debatesDec 19, November trade balanceDec 20, BoJ policy meetingDec 27, CPI (November)Dec 28, Industrial production (Nov)

• How will future BoJ policies affect Japaneseequities?

• How will the BoJ achieve its 2% inflationtarget by FY18?


Although we are neutral on Japaneseequities, we see opportunities in Japaneseshare-buyback stocks.

For overexposed* investorsRisks, including a stronger yen and slowerUS economic growth, make diversifyingacross regions and asset classes advisable.

For in-line* investorsOptimizing sector exposure by allocatingtoward share-buyback and high-dividend-yield stocks and away from highly cyclicalstocks should be considered.


• Japan share-buyback stocks• High yield stocks• Financial stocks• Energy-related stocks

Least preferred

• Highly cyclical stocks• Utilities• High P/BV stocks


TOPIX: 1,650• Stronger global demand, reflation, and yen

depreciation lead to increased risk-taking.Domestic demand improves markedly. Strongearnings spur additional share buybacks.Double-digit earnings growth in FY17; theTopix target is based on 16.3x trailing P/E.

Negative scenarioTOPIX: 1,150

• Sluggish global economic growth andUS protectionism lead to weak exportsand a stronger yen, triggering earningsdisappointments. USDJPY falls below 100.The BoJ's commitment to easy monetarypolicy limits the downside risk to equities.

Japanese companies are buying backmore sharesShare-buyback value and y/y growth trend

-100%

-50%

0%

50%

100%

150%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Value of annouced buyback (JPYbn) y-y (%)

Source: Bloomberg, companies, UBS, as of early December 2016.Note: Data excludes NTT Group

For further information please contact CIO asset class specialists Toru Ibayashi, [email protected] or Chisa Kobayashi, [email protected] important disclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

26

Emerging market equitiesBenchmark:

MSCI EM

Current level:

873 (14/12/16)

Target level:

900

6-month outlook:

Overweight

CIO view• We are overweight emerging market (EM) equities in our global portfolio. EM

economic activity numbers are stabilizing, and manufacturing sentiment is turningmore positive from low levels. Corporate earnings growth is improving, especiallycompared with several developed markets. The recent rise in commodity pricesis encouraging, and the global liquidity backdrop remains supportive. Also, EMequities are trading at a discount to their developed market counterparts. Ourmost preferred markets are China and South Africa (valuation), and India and Brazil(strong earnings); our least preferred markets are Taiwan (headwinds for the techsector) and the Philippines (valuation and earnings).

Positive driversShort-term (6 months)EM economic growth is stabilizingRecent EM economic data has shown signs ofstabilization. Improving economic activity shouldboost corporate earnings and lift valuationmultiples.Loose monetary policyA very gradual tightening path in the US andan easing bias in Europe and Japan should keepthe cost of funding low for EM corporates andsupportive for EM equities.EM earnings have stabilizedEM earnings have stabilized thanks to the year-to-date improvement in commodity prices. Led by thematerials sector, the picture has improved across theboard.

Negative driversShort-term (6 months)China hard landing riskChina has significant trade links with other EMs andmakes up about a quarter of the MSCI EM index. Ahard landing would hit EM equities directly.US dollar strengthEM equities typically suffer in a strong US dollarenvironment as EM currencies tend to weaken.Capital outflow pressure would rise and commodityprices would likely drop.Commodity prices remain volatileThe rebalancing process in energy and base metalsis not over yet. Short-term setbacks in commodityprices are possible, which would be negative for EMgrowth and equity performance.

Long-term (5+ years)Attractive long-term valuationsThe MSCI EM index is trading at about 13.7xtrailing P/E, a discount of around 25% todeveloped markets.Exposure to fast growth marketsEMs contribute about 70% to global growth, andEM real GDP growth is expected to be more thandouble that of developed markets over the nextfive years.

Long-term (5+ years)Buildup of total debt in EMsEM non-financial corporate debt grew rapidly to103% of GDP in 1Q16, exceeding the level ofdeveloped markets. The eventual deleveraging couldpressure growth and profitability.Global trade slowdownAs the growth of imports into developed marketsand China slows down, EM export growth willalso suffer. Brexit could fuel a further slowdown inglobalization, but it is too early to tell.

Key dates Key debatesJan 2, PMI manufacturingJan 7, China FX reservesJan 11, Brazil central bank meeting

• Will US interest rates go much higher?• Is China's growth slowing sharply?


We have an overweight stance on EMequities in our global portfolios. Investorsunderexposed to EM equities shouldconsider building up positions as EMgrowth is stabilizing.

For overexposed* investorsInvestors overexposed to EM equitiesshould recognize the higher volatility andlook at our country preferences, givenpotential near-term setbacks in commodityprices and renewed US dollar strength.

For in-line* investorsInvestors with in-line exposure should lookat our country preferences. We preferChina, Brazil, India, and South Africa to thePhilippines and Taiwan.


• China• India• Brazil• South Africa

Least preferred

• Taiwan• Philippines


MSCI EM: 1,025• The global economic outlook improves,

supporting EM earnings growth and investorconfidence. Our target forecast assumes 7%earnings growth over six months.

Negative scenarioMSCI EM: 725

• EM prospects are hit by deteriorating globalgrowth due to weakness in the Eurozoneand/or the US or by a sharp decelerationin the Chinese economy. Earnings declineconsiderably over the next six months.

Country preferences within emergingmarkets (relative to MSCI EM index)

China

India

Indonesia

South Korea*

Malaysia

Philippines

Taiwan

Thailand

Brazil

Chile

Colombia

Mexico

Peru

Czech Republic

Hungary

Poland

Russia

South Africa

Turkey

Asi

aLa

tAm

EMEA

new old



Note: All positions are relative to the MSCI EM index.The EM regional asset allocation is not part of theGlobal Tactical Asset Allocation (TAA).

For further information please contact CIO Emerging Markets Jorge Mariscal, [email protected], Equity Strategist Soledad Lopez,[email protected] or Strategist Lucy Qiu, [email protected] see important disclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

27

Listed real estateBenchmark:

RUGL Index

Current level:

4,405(14/12/16)

Target level:

4,300

6-month outlook:

Neutral

CIO view• Overall earnings growth should reach 4–5% p.a. for 2017–18, provided overall bond

yields do not surprise to the upside amid weak economic growth and financingconditions remain attractive. With a 4.0% dividend yield, an 8% full-year returnappears feasible. But property market values are still high at this late stage of thecycle and soft demand is expected to face increasing supply. The recent steepeningin the interest curve has erased the current year's outperformance versus equities,but investors still appear optimistic regarding future rental growth. Though listedreal estate trades at an 11.5% discount to net asset value, compared to 6.4%historically, the contraction of spreads between property and bond yields amid risinginterest rates presents risks to elevated property values.

Positive driversShort-term (6 months)Discount tradingListed real estate currently trades at a discounthigher than the long-term average, which givessome support to listed prices.Debt markets still liquidDebt markets display good but slightly decliningliquidity, which is becoming less supportive ofrefinancing activities, but quality companies arecurrently not hampered at all.Investor interestReal estate investors have a significant amount ofunspent capital as finding attractive properties iscurrently challenging. This supports values.

Negative driversShort-term (6 months)De-rating riskReal estate remains at risk of de-rating if creditand risk spreads spike again. This is especially so asproperty yields are historically low, which suggestsunprecedented high duration risks to investors.Divergences in fundamentalsProperty market fundamentals are increasinglydiverging. They remain slightly supportive in Europebut less so in the UK, US, and Asia ex-Japan, wherecyclical correction risks are high.No price returnGlobal real estate share prices show an absenceof any price returns for the past 24 months as theperformance came only from the dividend yield.

Long-term (5+ years)Balanced supply and demandThe current cycle is characterized by relatively well-balanced demand and supply levels, so we do notexpect dramatic price corrections in a historicalcontext despite a maturing real estate cycle.Cycle to last longerThe real estate upcycle that began in 2009 maycontinue until next year or slightly longer. Amplecentral bank liquidity still supports real estate, whichremains a yielding alternative to bonds.

Long-term (5+ years)Expensive long-term valuationsCapital appreciation is set to slow or is alreadyreversing in Hong Kong and Singapore. Volumes ofproperty transactions and mergers and acquisitionsare decreasing. This hurts values.Rental growth rates have peakedOverall, rental growth rates have already peakedand may decline, potentially affecting property valuesdespite the relative attractiveness of real estate.

Key dates Key debatesDec 30, RCA transaction valuesDec 30, Global M&ADec 16, US Credit Managers' IndexDec 30, REIS capitalization rates

• Will transaction volumes accelerate their fallamid higher interest rates?

• Is the US market leading a global downturnin rents and values?


Listed real estate is now fairly priced afterthe recent weakness. But we recommend re-entering the market only after higher pricevolatility.

For overexposed* investorsExposure to still-expensive but low-growthstocks should be reduced.

For in-line* investorsThe focus should be on companies withhigh-quality portfolios that invest inproperties with high barriers of entrythrough moderate leverage.


• Continental Europe• Australia• Singapore REITs• Japanese property companies

Least preferred

• US REITs• Japanese REITs• UK


RUGL Index: 4,800• Like-for-like rental growth rates increase to

above inflation levels due to stable demandbut constrained supply. Values are supportedby rental growth growing faster thancapitalization rates. Comfortable propertyyield spreads make real estate attractive.

Negative scenarioRUGL Index: 4,000

• Widening credit spreads amid higher riskpremiums due to more sluggish incomegrowth than expected hurt values, whichappear overvalued at these levels. Negativerental reversion and higher vacancy risksmake low prime yields unjustified.

2016 ends with a weak performance forlisted real estateIn %

YTD: 1.9% YOY: 2.7%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

200

6

200

4

200

3

201

2

200

9

201

4

200

5

201

0

201

3

201

5

200

1

201

6

200

2

201

1

200

7

Global RE historical YtD performance

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

200

6

200

4

200

9

200

3

201

2

200

5

201

4

201

0

201

3

200

1

201

5

200

2

201

6

201

1

200

7

Global RE historical YoY performance

Source: Global Property Research, Bloomberg, UBS, as of 30November 2016

For further information please contact CIO asset class specialist Thomas Veraguth, [email protected] or Real Estate Analyst Maciej Skoczek,[email protected] see important disclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

28

Section 2.B

Asset class views

Bonds

29

For further information please contact CIO asset class specialists Douglas S. Rothstein, [email protected], Philipp Schöttler, [email protected] or Michael Bolliger,[email protected].

Global bonds Bonds – Key points

• High grade (HG) bonds remain an important portfolio diversifier. We remain tactically underweight on HG bonds versus USequities, where we see a better risk-return outlook. A neutral duration stance within HG bonds is recommended.

• We also hold an overweight position in US Treasury inflation-protected securities (TIPS) against HG bonds. This position offers alow-risk way to protect against a potential further rise in inflation rates, as US wage pressure persists and President-elect DonaldTrump's policy measures could add to price pressure.

• We are neutral on USD investment grade (IG) bonds with medium maturities (1-10 years). We expect spreads to moderatelytighten towards 100bps over the next six months. We recommend avoiding bonds with very long maturities (15 years or more)due to their high interest rate sensitivity.

• Our 6-month spread target for US high yield (HY) is 500bps, which is based on stable to improving corporate fundamentals. Weexpect the default rate to decline to 3-4% in 12 months from 5.5% currently. Corporate earnings are expected to continue toimprove and interest rate coverage ratios to remain solid, mitigating default risks, while issuance has become more conservative.We think US HY is fairly valued given current valuations, so we maintain our neutral position.

• We recently introduced an overweight position in euro HY bonds against HG bonds. EUR HY spreads have widened since theUS election due to rising political concerns and fears about ECB tapering and the stability of the European banking sector.Supported by continued ECB QE, we expect spreads to continue to reverse the recent widening and tighten towards 370bps insix months. Exposure to the Italian banks going through a recapitalization process is only 2.5% of the index (1.9% in Unicredit,0.6% in Monte dei Paschi).

• Investors with tolerance for less liquid assets should find good value in US senior loans

• We expect emerging market (EM) sovereign credit spreads to tighten and EM corporate credit spreads to trend sideways overthe next six months given improving EM fundamentals, gradually recovering energy prices and a benign external backdrop. TheUS election outcome raises risks associated with US monetary and fiscal policy, global trade, immigration and geopolitics butwe think these risks are contained on an asset class level. We advise investors to remain neutral on EM corporate and sovereigncredit in globally diversified portfolios.


Bonds total

High grade bonds

USD corporate bonds (IG)

EUR corporate bonds (IG)

USD high yield bonds

EUR high yield bonds



US TIPS

new old



30

US high grade bondsBenchmark:

USD High-Grade:Eurodollar AA+5-7y yield

Current level:

2.67 (14/12/16)

Target level:

2.38 (yield)

6-month outlook:

Underweight

CIO view• Yields rose in response to the expected expansionary policies of President-elect

Donald Trump. The rise was comprised of a repricing of inflation expectations drivingthe term premium higher.

• We expect USD yields to move sideways as the US economy grows and approachesfull employment and as the Federal Reserve responds by gradually raising thepolicy rate. A healthy labor market and steady consumer spending suggest that theeconomy is in good shape, and inflation seems on the way to reaching the Fed'starget.

• Risks include market disruptions due to the implementation of Brexit or a slowingChinese economy. We are underweight on high grade bonds versus US equities, USTIPS and euro HY bonds.

Positive driversShort-term (6 months)Fed remains accommodativeWe project a slow path of future Fed rate hikes. Thisis roughly consistent with market pricing.Supportive credit environmentStable credit spreads contribute to positive carry.

Negative driversShort-term (6 months)Moderate growth in the USGrowth was below trend in the first half of theyear but has since re-accelerated. Growth moderatelyabove trend will contribute to upward pressure oninflation, pushing yields higher.Fiscal policyThe likelihood that President-elect Donald Trump willfavor expansionary fiscal policy has led to an ongoingrepricing of inflation expectations.

Long-term (5+ years)Long-term economic outlookThe US economy's growth potential is lower than inthe previous decade, keeping yields low.

Long-term (5+ years)Expensive long-term valuationsThe excess yield of long-term over short-term bondshas historically been much higher than it is now. Aslow reversion to this regime will hurt returns of bondswith long maturities.Long-term inflation acceleratesAn accommodative Fed willing to let the economy runhot should lead to at least a temporary overshoot ofinflation, putting downward pressure on returns.

Key dates Key debatesDec 22, November PCE deflatorJan 6, December payroll reportJan 20, Trump takes office

• What will the key policies of the Trumpadministration be?


Duration exposure is an important elementof a diversified portfolio as it tends toperform well when most needed, i.e. whenrisky assets are under pressure.

For overexposed* investorsRisks, including a sudden increase in ratescaused by higher-than-expected inflationand stronger-than-expected growth data,must be kept in mind.

For in-line* investorsDiversification across yield curves should bea consideration.


• Duration close to benchmark

Least preferred

• Very long/short duration exposure


USD High-Grade: Eurodollar AA+ 5-7yyield: 1.60 (yield)

• The labor market stagnates, growth stallsand inflation falls. Negative internationalnews causes further turbulence, andcommodity prices resume their falls. The Fedis on hold.

Negative scenarioUSD High-Grade: Eurodollar AA+ 5-7yyield: 2.80 (yield)

• US domestic demand accelerates andinflation surprises to the upside as shortagesbegin to appear in the labor market. The Fedprojects a faster path of rate hikes.

Duration preferences within high gradebonds


For further information please contact CIO Strategists Douglas S. Rothstein, [email protected] or Francesco Mandalà,[email protected] see important disclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

31

European high grade bondsBenchmark:

EUR High-Grade:EuroAgg AA+ 5-7yyield

Current level:

0.01 (14/12/16)

Target level:

0.00 (yield)

6-month outlook:

Underweight

CIO view• Although the 10-year Bund yield has risen from its all-time low, European yields

remain low. Due to high demand for high-quality bonds, not least due to theEuropean Central Bank's (ECB) quantitative easing, bond term premiums remaindepressed.

• We expect yields in EUR and CHF to remain steady over our six-month tacticalhorizon, rising only gradually thereafter. Swiss rates, given the Swiss National Bank'sconcerns over the strong Swiss franc, are closely tied to EUR rates.

• The ECB, at its 8 December meeting, decided to extend its asset purchase programuntil the end of 2017. Starting in April 2017, the pace of purchases will be reducedfrom EUR 80bn to EUR 60bn.

Positive driversShort-term (6 months)Slow Eurozone growthWeak economic growth in the Eurozone, especiallyin core countries, is likely to keep yields low.Ongoing ECB supportContinued low inflation and the desire to providefiscal space to EMU countries has led the ECB toextend its asset purchase program.Political uncertainty in the EUUpcoming risk events include elections in Germany,France and the Netherlands.

Negative driversShort- term (6 months)Short-term inflation increasesOil prices have risen this year, which will result inhigher headline inflation, hurting returns for bondholders.Monetary policy normalizationAs a result of the increased interconnectedness ofglobal fixed income markets, rising US rates pushBund yields higher.

Long-term (5+ years)Scarcity of high-quality bondsBasel III incentivizes banks to hold governmentbonds, which, along with ECB asset purchasesand investor demand for high-quality bonds, keepsyields under pressure.Inflation remains below targetInflation has been stable at the lower end of therange since the financial crisis, supporting bonds'real returns.

Long-term (5+ years)Long-term economic outlookIncreasing capacity utilization will eventually result inhigher rates.ECB halts asset purchasesThe ECB halts bond purchases as the output gapcloses, causing Bund yields to rise.

Key dates Key debatesDec 16, Eurozone HICP inflationJan 19, ECB meeting

• What will the impact of Brexit be?• When will the ECB start tapering?


Duration exposure is an important elementof a diversified portfolio as it tends toperform well when risky assets are underpressure.

For overexposed* investorsRisks such as the potential for a sudden risein rates, which could be caused by diversefactors like higher-than-expected inflation,should be kept in mind.

For in-line* investorsDiversification across yield curves should bea consideration.


• Duration close to benchmark

Least preferred

• Very long/short duration exposure


EUR High-Grade: EuroAgg AA+ 5-7y yield:-0.40 (yield)

• Poor economic growth in the Eurozone,especially in core countries, and weakinflation combine with Brexit's impact on theperiphery and the banking system to forcethe ECB into taking further easing measures.

Negative scenarioEUR High-Grade: EuroAgg AA+ 5-7y yield:+0.30 (yield)

• Eurozone growth accelerates, inflationsurprises to the upside and Brexit is wellmanaged so that it has minimal negativeimpact on the banking system and fundingcosts, especially in the periphery. The ECBdoes not extend asset purchases.

Duration preferences within high gradebonds


For further information please contact CIO Strategists Francesco Mandalà, [email protected] or Douglas S. Rothstein,[email protected] see important disclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

32

US corporate bondsBenchmark:

BloombergBarclays USIntermed. Corp.spread

Current level:

104 (14/12/16)

Target level:

100

6-month outlook:

Neutral

CIO view• The continued rise in Treasury yields weighed on total returns for the asset class over

the month. US IG bonds with intermediate maturities (1-10 years) outperformedlonger-duration US IG bonds.

• We remain neutral on US investment grade bonds. We expect spreads to tightentowards 100bps in the next six months, supported by improving US economicgrowth and earnings, and continued global investor demand.

Positive driversShort-term (6 months)Slow growthModerate economic growth, as expected in theUS, is the sweet spot for IG bonds. US corporateearnings are growing again, which limits immediatecredit risks.Loose global monetary policyVery low or even negative interest rates increaseglobal investors' demand for assets providing adecent yield income, such as US IG bonds.

Negative driversShort-term (6 months)Strong issuanceIssuance this year has overtaken last year's record-setting pace. While demand has also been strong,further increases in the pace of issuance could start toweigh on the asset class.Volatility risk in ratesHigh volatility in government bond yields (e.g. due toaggressive monetary policy tightening) usually weighson IG bond returns and demand. The risk of strongmonetary tightening is currently low.

Long-term (5+ years)Low interest rates for longerInterest rates are unlikely to reach previous cyclepeaks anytime soon, buoying demand for corporatebonds with decent yields. At the same time,corporate funding costs remain low.AgingThe aging of Western populations keeps thestructural demand for relatively safe fixed incomeassets high (from pension funds, corporate pensionplans, private investors).

Long-term (5+ years)Maturing credit cyclesUS companies have used easy funding conditions tore-leverage. Credit risks are higher than in the pastfew years, but a catalyst (e.g. recession) is needed toturn the credit cycle.

Key dates Key debatesJan 3, ISM manufacturingFeb 1, FOMC meeting

• Will growth in US issuance continue to pickup next year?


IG bonds play an important rolein diversifying portfolios. The negativecorrelation between credit spreads andbenchmark yields helps the asset classperform in different scenarios.

For overexposed* investorsFollowing the strong rally this year, the totalreturn outlook for IG bonds has diminished.Better return prospects can be found in USequities or euro HY bonds.

For in-line* investorsWe are neutral on US IG bonds. USIG spreads are close to "fair," supportedby accelerating US economic growth andearnings growth turning positive again.However, the yield pickup vs. HG bonds hasbecome less attractive recently.


• Single issuers as per Bond Top List• Selected non-financial hybrid bonds

Least preferred

• Single issuers as per Bond Top List


Bloomberg Barclays US Intermed. Corp.spread: 90

• Faster-than-expected global growth leadsto stronger spread tightening. But risinggovernment yields lead to flat absolutetotal returns over six months. IG bondsoutperform HG (with similar durations).

Negative scenarioBloomberg Barclays US Intermed. Corp.spread: 250

• Major risks include a sharp global economicslowdown towards recessionary levels. Arenewed slump in commodity prices is a riskfor US IG.

Yield spreads over government bonds(bps)

50

100

150

200

250

300

2010 2011 2012 2013 2014 2015 2016

US investment grade intermediate

Bloomberg, UBS, as of 14 December 2016

For further information please contact CIO strategists Philipp Schöttler, [email protected] or Carolina Corvalan, [email protected] seeimportant disclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

33

Euro corporate bondsBenchmark:

BloombergBarclays EuroAggCorporate spread

Current level:

123 (14/12/16)

Target level:

100

6-month outlook:

Neutral

CIO view• Euro IG spreads widened over the month on concerns of ECB tapering and rising

political risks. We think euro IG non-bank bonds should remain well-supported bycontinued ECB QE, including the ECB's corporate bond purchase program. So far,the ECB has bought more than EUR 48bn of corporate bonds. Euro IG yields haveincreased slightly recently but are still relatively low at 0.9% on average, limitingthe total return outlook and making euro IG relatively unappealing despite relativelyhealthy fundamentals. We remain tactically neutral on euro IG bonds.

Positive driversShort-term (6 months)Slow growthLikely moderate economic growth in Europe is thesweet spot for IG bonds. It keeps a lid on credit risks,while preventing overly aggressive re-leveraging.Loose monetary policyNegative interest rates increase investors' demandfor assets, providing a decent yield income.The ECB's non-financial corporate bond purchaseprogram is a direct positive.

Negative driversShort-term (6 months)Low bond yieldsEuro IG bonds, in particular, face the challenge oflow starting yields (currently 0.9%), limiting the totalreturn outlook.Volatility risk in ratesHigh volatility in government bond yields (e.g. due toaggressive monetary policy tightening) usually weighson IG bond returns and demand. The risk of strongmonetary tightening is currently low.

Long-term (5+ years)Low interest rates for longerInterest rates are unlikely to reach previous cyclepeak levels anytime soon, buoying demand forcorporate bonds with decent yields. At the sametime, corporate funding costs remain low.AgingThe aging of Western populations keeps thestructural demand for relatively safe fixed incomeassets high (from pension funds, corporate pensionplans and private investors).

Long-term (5+ years)Credit cycle dynamicsEuropean issuers currently benefit from relativelylow leverage and high interest coverage ratios.Credit quality is higher than in the US. A turn in thebusiness cycle still poses a long-term risk.

Key dates Key debatesJan 4, Eurozone PMIJan 19, ECB meeting

• When will the ECB start tapering?• Will rate volatility pick up again?


IG bonds play an important rolein diversifying portfolios. The negativecorrelation between credit spreads andbenchmark yields helps the asset classperform in different scenarios.

For overexposed* investorsFollowing the strong rally year-to-date, thetotal return outlook for IG bonds hasdiminished. Euro IG, in particular, offersuninspiring yields of 0.9%. Better returnprospects can be found in US equities andeuro HY bonds.

For in-line* investorsWe keep a neutral position on euro IG. Weexpect spreads to tighten towards 100bps insix months, supported by continued ECB QE.


• Single issuers as per Bond Top List• Selected non-financial hybrid bonds

Least preferred

• Single issuers as per Bond Top List


Bloomberg Barclays EuroAgg Corporatespread: 80

• Faster-than-expected global growth leads tostronger spread tightening. However, risinggovernment yields lead to slightly negativeabsolute total returns over six months. ButIG bonds outperform high grade ones (withsimilar durations).

Negative scenarioBloomberg Barclays EuroAgg Corporatespread: 250

• Major risks include a sharp global economicslowdown towards recessionary levels. EuroIG faces the risk of senior bank bond bail-ins,which we find unlikely for now.

Yield spreads over government bonds(bps)

50

100

150

200

250

300

350

400

2010 2011 2012 2013 2014 2015 2016

EUR investment grade

Bloomberg, UBS, as of 14 December 2016


34

US high yield bondsBenchmark:

BoAML US highyield spread

Current level:

412 (14/12/16)

Target level:

500

6-month outlook:

Neutral

CIO view• US HY spreads tightened by 100bps over the month due to rising optimism on

US economic growth and higher energy prices. Corporate earnings are expectedto continue to improve and interest rate coverage ratios remain solid, mitigatingdefault risks, while issuance has become more conservative. The trailing 12-monthdefault rate was stable at 5.4% in November, and we expect it to trend down to3-4% in 12 months. Given current valuations, we think US high yield (HY) is fairlyvalued and maintain our neutral position. A renewed fall in oil prices towards USD40/bbl and a US recession are key risks.

Positive driversShort-term (6 months)Fed remains accommodativeThe Fed remains accommodative and is expectedto hike rates only very gradually, supporting riskassets.Moderate growth in the USA moderately positive US growth environment issupportive for US HY. US economic growth wasestimated at 3.2% in 3Q16 and is expected toremain solid due to solid private consumption.

Negative driversShort-term (6 months)Tightening bank lending standardsThe Fed's 4Q16 Senior Loan Officer Survey indicateda marginal net tightening of lending standards tolarge and medium-sized firms.Commodity prices remain volatileThe energy sector remains the largest one in the USHY index, and the correlation to oil prices could riseagain if oil prices (WTI) fall towards USD 40/bbl orlower.

Long-term (5+ years)High interest coverageCorporates have taken advantage of the lowinterest rate environment to refinance at lowerrates, supporting their interest coverage ratio.

Long-term (5+ years)High corporate leverageUS corporate leverage has risen over the last fewyears; leverage ex-commodities is currently at 4.6x(net debt/LTM EBITDA) versus its long-term averageof 4.0x.Limited market liquidityInvestors in the asset class should be aware of thelower market liquidity relative to equities, which canresult in large price swings in times of market distressand illiquidity.

Key dates Key debatesJan 3, US ISM manufacturingJan 6, December payroll reportJan 20, Trump takes office

• Will defaults outside the energy sector risesoon?

• How would US HY cope with rising rates?


HY is an attractive asset class to enhancereturns in the fixed income part of aportfolio. We recommend maintaining astrategic allocation in US high yield for itsattractive risk-return characteristics.

For overexposed* investorsThe US credit cycle is at a relativelylate stage and leverage has increasedsignificantly in the last few quarters. Wethus recommend reducing US high yieldexposure to the strategic portfolio weight.

For in-line* investorsUS high yield remains an important partof a well-diversified portfolio as it offersan attractive yield pick-up over other fixedincome assets, and compensation forcurrent default risks is roughly fair.


• Well-diversified exposure• Single issuers as per HY Bond List

Least preferred

• Concentrated single bond holdings• Single issuers as per HY Bond List


BoAML US high yield spread: 350• Spreads tighten further on strongly improving

economic growth. Meanwhile, risingbenchmark rates will dampen total returns.

Negative scenarioBoAML US high yield spread: 1,100

• A US recession causes spreads to widen torecessionary levels and defaults to soar. Oilprices (WTI) resume their fall, causing moreUS energy companies to default and pushingup total US HY default rates to 7-8%.

US HY spreads over government bonds (inbps)

200

300

400

500

600

700

800

900

1'000

2011 2012 2013 2014 2015 2016

US high yield

Source: BoAML, UBS, as of 14 December 2016

For further information please contact Credit strategists Philipp Schöttler, [email protected] or Carolina Corvalan, [email protected] important disclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

35

Euro high yield bondsBenchmark:

BoAML Euro HighYield Index spread

Current level:

379 (14/12/16)

Target level:

370

6-month outlook:

Overweight

CIO view• We recently opened an overweight position in euro high yield (HY) bonds against

high grade (HG) bonds. Against the global trend in risk assets, EUR HY spreadshad widened since the US election due to rising political concerns, fears aboutECB tapering and about the stability of the European banking sector. We expectspreads to continue to reverse the recent widening and tighten towards 370bps insix months, supported by continued ECB QE. The index exposure to Italian banksgoing through a recapitalization process is limited at 2.5% (1.9% Unicredit, 0.6%Monte Dei Paschi). Defaults are expected to remain low (likely 2% in 12 monthsversus 1% currently). Risks of another systemic financial crisis are low given theECB's strong commitment.

Positive driversShort-term (6 months)Moderate Eurozone growthModerate but positive economic growth in theEurozone supports companies and keeps defaultrates low. We expect defaults to gradually risetowards 2% in 12 months.Ongoing ECB supportECB corporate bond purchases make investorsreach further down the credit curve and buy HYbonds. Low interest rates are another incentive toreach for yield, while keeping corp. funding costsdown.

Negative driversShort-term (6 months)Struggling banking sectorConcerns about individual European banks couldresurface if recapitalizations fall short of expectationsand call into question the sustainability of the sectorat large. Euro HY would suffer given the 20% indexexposure to financials.

Long-term (5+ years)Attractive long-term valuationsCompared to ultra-low or even negative yields oncash and higher-rated bonds, HY will continue tooffer relatively attractive yields and benefit frominvestor demand.Good credit fundamentalsCurrent average corporate leverage among EuroHY issuers (2.9x) is significantly below its long-termaverage, while the interest coverage ratio is high at5.8x, suggesting good credit quality.

Long-term (5+ years)Limited market liquidityInvestors in the asset class should be aware of thelower market liquidity relative to equities, whichcan result in large price swings in times of marketdistress and illiquidity.

Key dates Key debatesJan 4, Eurozone PMIJan 19, ECB meeting

• Can Italy's banks be recapitalized?• When will the ECB start tapering?


HY bonds exhibit an appealing risk-returnprofile and should be part of every well-diversified portfolio. We suggest addingexposure to euro HY bonds, which benefitfrom low default rates, attractive yields andstrong ECB support.

For overexposed* investorsOverexposed investors should be consciousof the risks (including subordinatedfinancials exposure, lower liquiditycompared to equities) and diversify acrossasset classes.

For in-line* investorsHY bonds continue to offer an attractiveyield pick-up versus higher-rated bondsand we think spreads should tighten fromcurrent levels, supported by continued ECBQE.


• Well-diversified exposure• Single issuers as per HY Top List

Least preferred

• Concentrated single bond holdings• Bonds with high near-term call risk• Single issuers as per HY Top List


BoAML Euro High Yield Index spread: 325• A stronger-than-expected economic recovery

would lead to tighter spreads. A broad-basedrecapitalization of the European bankingsector would be an unexpected positive foreuro HY.

Negative scenarioBoAML Euro High Yield Index spread:1,200

• Concerns about Italian banks triggeringa systemic financial crisis in Europe are akey risk as the financial sector has a 20%index weight. Economic growth deceleratingto recessionary levels would push defaultshigher.

Euro HY spreads over government bonds(bps)

200

400

600

800

1'000

1'200

1'400

2012 2013 2014 2015 2016

Euro HY Euro HY Financials Euro HY Non-Financials

Source: Bloomberg, BoAML, UBS, as of 14 December 2016


36

Emerging market sovereign bonds in USDBenchmark:

EMBI Diversified

Current level:

337 (14/12/16)

Target level:

320

6-month outlook:

Neutral

CIO view• Emerging market (EM) credit has been negatively affected by the unexpected

Trump victory amid rising US Treasury yields and wider spreads. In our base case,we expect credit spreads to tighten over the next six months given improving EMfundamentals, gradually recovering energy prices and a benign external backdrop.That said, the US election outcome raises risks associated with US monetary andfiscal policy, global trade, immigration and geopolitics. We advise investors to remainneutral on EM credit in globally diversified portfolios. In our model portfolio, wecontinue to favor select high yield credits and maintain overweight positions inArgentina, Brazil, Turkey, Russia and Indonesia.

Positive driversShort-term (6 months)EM economic growth is stabilizingEM fundamentals have stabilized. High frequencyindicators are pointing to a moderate expansion ofactivity. Accommodative global monetary policiesare also supportive.Still low global bond yieldsGiven still-low interest rates in the developed world,yield-hungry investors globally will continue to lookfor opportunities in EM sovereign credit.Commodity prices have recoveredCommodity prices recovered some of their lostground in 2016. While we would not rule outsetbacks, we expect the recovery to continue into2017, supporting EM sovereign fundamentals.

Negative driversShort-term (6 months)US policy uncertaintyThe outlook for US fiscal and monetary policiesunder Trump remains unclear. Unfavorable outcomesfor EMs cannot be ruled out.Global macro risksRenewed commodity weakness, fresh China concernsand more hawkish global central banks could lead toa setback in EM asset prices.Record bond issuanceExternal bond issuance by EM sovereigns looks set toreach record levels in 2016 and remain high in 2017,presenting a technical headwind.

Long-term (5+ years)EM economic reform momentumThe end of the commodity super-cycle is pushingEM governments to consider economic reforms.Some countries, like India, China and Brazil, arealready reforming and others could follow suit.Long-term economic outlookAlthough the growth gap between EMs and DMshas shrunk in recent years, it remains positive.We expect it to widen moderately, which shouldhelp EMs continue down the path of economicconvergence.

Long-term (5+ years)Buildup of total debt in EMsThe significant build-up in private sector debt in EMsover the past few years will remain a headwind togrowth and sovereign creditworthiness.Rising political uncertaintyThe rise of populist policies in Western countries isa threat to globalization and the existing geopoliticalconsensus.

Key dates Key debatesDec 20, BoJ announcementDec 25, China Economic WorkConferenceJan 19, ECB announcementJan 20, Trump's inauguration

• What will the US fiscal and monetary stancebe under Trump?

• What is next for commodity prices?


Some exposure to EM sovereign bondsis warranted. US economic resilience,stabilization in EM fundamentals and anattractive EM yield pick-up are reasons forunder-allocated investors to rebalance.

For overexposed* investorsOverexposed investors should be aware ofthe risks and diversify across asset classes.

For in-line* investorsInvestors with in-line exposure can optimizetheir allocation by picking individual bondsfrom our EM bond list and should takea close look at our recently-launchedemerging markets model portfolio.


• High yield• Brazil, Argentina, Indonesia• Turkey, Russia

Least preferred

• Investment grade• Poland, Venezuela• Malaysia, the Philippines


EMBI Diversified: 280 bps• Stronger-than-expected EM economic data

and improved sentiment toward EM bondsprovide a favorable backdrop for spreads.Issuers of lower credit quality fare better.

Negative scenarioEMBI Diversified: 500 bps

• An environment of greater global riskaversion, deteriorating EM funding markets,weakening global growth prospects andlower commodity prices hurt EM credit.Issuers of higher credit quality fare better.

Credit spreads have widened recentlyCredit spreads in basis points

0

100

200

300

400

500

600

700

800

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16

EMBI Div IG EMBI Div HY


For further information please contact Analysts Michael Bolliger, [email protected] or Jérôme Audran, [email protected]. or Strategist AlejoCzerwonko, [email protected] see important disclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

37

Emerging market corporate bonds in USDBenchmark:

CEMBI Diversified

Current level:

301 bps(14/12/16)

Target level:

320 bps

6-month outlook:

Neutral

CIO view• Emerging markets (EM) credit has been impacted by the unexpected Trump victory,

recording a negative return amid rising US Treasury yields. We expect credit spreadsto trend sideways over the next six months given improving fundamentals in EMs,gradually recovering energy prices and a still supportive external backdrop. TheUS election outcome raises risks associated with global trade, immigration andglobal geopolitics, but we think they are contained at an asset class level. Weadvise investors to remain neutral on EM credit in globally diversified portfolios. Inour model portfolio, we continue to favor select high yield credits and maintainoverweight positions in Argentina, Brazil, Turkey, Russia and Indonesia.

Positive driversShort-term (6 months)EM economic growth to pick upEM fundamentals have improved moderately,commodity prices are now higher and ratingmigration rates have bottomed out. We expectcorporate earnings growth to rise and net leverageto stabilize.Supportive technicalsAccommodative global monetary policies in thedeveloped world and contained corporate issuancein the coming months should support valuations.

Negative driversShort-term (6 months)Global macro risksA lower risk premium and uncertainty related to theUS election outcome and global monetary policiesmight limit room for further sharp spread tighteningand could lead to a setback in EM asset prices.(Geo)political risksPolitical and geopolitical uncertainties in large EMs,such as South Africa, Russia or Turkey, and the riseof populist policies in Western countries could alsoweigh on the asset class.

Long-term (5+ years)EM economic reform momentumThe end of the commodity super-cycle is pushinggovernments to consider economic reforms. Ifsuccessful, the reforms should lead to productivitygains for EM corporates in the long run.Long-term economic outlookThe growth gap between emerging anddeveloped markets has been shrinking in recentyears. We expect it to widen again moderately,which should help EMs continue down the path ofeconomic convergence.

Long-term (5+ years)Buildup of total debt in EMsThe significant build-up in total debt in EMs overthe past few years remains a key headwind for thecorporate sector that has yet to be addressed.Monetary policy normalizationRising interest rates and tightening liquiditymeasures globally will likely reduce access to fundingand increase funding costs for EM corporates.

Key dates Key debatesDec 20, BoJ announcementDec 25, China Economic WorkConferenceJan 19, ECB announcementJan 20, Trump's inauguration

• What impact will Trump policies have onEMs?

• When will EM corporate net leverage taperoff?


Some exposure to EM corporate bondsis warranted. US economic resilience,stabilization in EM fundamentals and theattractive yield pick-up in EMs are reasonsfor under-allocated investors to rebalance.

For overexposed* investorsOverexposed investors should be awareof global macro and EM-specific risks andshould diversify across asset classes.

For in-line* investorsInvestors with in-line exposure canoptimize their allocation by pickingindividual bonds from our weekly EmergingMarkets Bond List and should take aclose look at our recently-launched modelportfolio.


• High yield, especially Bs and BBs• Quasi-sovereigns• Select LatAm corporates• Select oil & gas and bank bonds, select

mining issuers

Least preferred

• Investment grade• GCC corporates• Asian bonds


CEMBI Diversified: 280 bps• Stronger-than-expected EM economic data

and improved sentiment toward EM bondsprovide a favorable backdrop for spreads.Issuers of lower credit quality fare better.

Negative scenarioCEMBI Diversified: 530 bps

• An environment of greater global riskaversion, deteriorating EM funding markets,weakening global growth prospects andlower commodity prices hurt EM credit.Issuers of higher credit quality fare better.

Credit spreads have tightenedmeaningfully this yearCredit spreads in basis points

100

300

500

700

900

Dec-14 Jun-15 Dec-15 Jun-16CEMBI Div IG CEMBI Div HY


For further information please contact CIO analysts Michael Bolliger, [email protected], Jérôme Audran, [email protected] or Sebastian Petric,[email protected] see important disclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

38

Section 2.C

Asset class views

Foreign exchange

39

For further information please contact Head FX Strategy Thomas Flury, [email protected], EM FX Strategy Jonas David, [email protected] or Asian Currency Strategy Teck Leng Tan, [email protected]

Foreign exchange overview G10 currencies – Key pointsIn our global tactical asset allocation, we maintain an overweight position in the euro, financed with an underweight in the US dollar.After years of strong undervaluation of the EUR against the USD, we believe that a correction is due. The Eurozone economy hasrecovered over recent years and the economic divergence between the north and the south of Europe has eased. The EUR is supportedby a constantly growing current account surplus, while the US has to finance a sizeable current account deficit. On the central bankside, we think the ECB acknowledged an improvement of the European economy by reducing the monthly bond purchase program.Discussions concerning the end of asset purchases should start in 2017. The US Federal Reserve, on the other hand, is likely to hikeinterest rates only slowly and let inflation overshoot, which should hurt the USD.

In our tactical asset allocation, we also recommend an overweight position in a basket of emerging market (EM) currencies (Brazilianreal, Indian rupee, Russian ruble, South African rand) against an underweight in developed market (DM) currencies (Australian dollar,Canadian dollar, Swedish krona) as we think the recent stabilization in EM data provides a supportive backdrop for harvesting theattractive interest rate carry. We use only G10 currencies that tend to have a relatively close correlation to our selected EM currenciesto finance this position.

The events in the upcoming months are crucial for the USD. The US election is over, but markets still have to learn and understandthe new direction of policy under a Trump presidency. The checks and balances in US politics is likely to slow down the Trump policyinnovations much more than many investors think. We expect both the new President and the Fed decisions to expose the greenback tolarger swings. Eventually, the USD will have to fall as the increased deficit spending by the US government and a larger current accountdeficit will weigh on the currency.

Sometime in the next few months, we expect the ECB to discuss the exit strategy for its current quantitative easing (QE) program. Weare not surprised that it was too early in December. Too many open questions concerning Brexit, the US election consequences andother risk factors are impacting markets. However, once the ECB announces any plans to taper or end its QE, we would expect the euroto appreciate even more. This should be very similar to the US dollar's appreciation when the Fed tapered its own QE program. EM currencies – Key pointsEmerging market (EM) currencies sold off after Donald Trump's victory in the US election, but have stabilized since and some have ralliedlately. In our view, 2017 will be another year of differentiation in EM currencies. Looking at global conditions, a range of factors shouldbe supportive of emerging markets, including our expectations for a softer US dollar and contained upward pressure on global rates dueto a still accommodative monetary policy and the ongoing "hunt for yield". Also, stable to higher commodity prices seem realistic andsupport exporters. Given the improving fundamentals and attractive valuations, we think the environment remains supportive of selectedcurrencies with a high interest rate carry. On the other hand, we expect the Singapore dollar and the Chinese yuan to underperform.Lastly, elevated volatility and fragile risk sentiment toward EM currencies will likely stay with us for longer due to uncertainties about thenew US administration's policy, volatility in commodity prices, and lingering concerns about China's outlook.


USD

EUR

GBP

JPY

CHF

SEK**

NOK

CAD**

NZD

AUD**

EM FX basket**

DM FX basket**

new old



**The EM FX basket consists of the Brazilian real, the Indianrupee, the Russian ruble, and the South African rand. The DMFX basket consists of the Australian dollar, the Canadian dollar,and the Swedish krona (all with equal weights).

40

For further information please contact Head Foreign exchange Strategy Thomas Flury, [email protected] or Foreign exchange strategists Daniel Trum, [email protected] or WayneGordon, [email protected].

G10 currencies G10 foreign exchange viewsEURUSD: The start of a longer-term recovery. The Fed is likely to follow a very gradual tightening path in 2017, most likely lettinginflation rise more than rates. Sometime in the next few quarters, the ECB is likely to discuss the end of its current easing measures,which would also support a longer-term rebound of the EUR. We expect moves by the Fed and by the ECB to be closer than marketscurrently anticipate; that and solid European economic growth likely mean the euro will eventually appreciate.

USDJPY: Fixed JPY yield curve increasing asset purchases so far this year. The Bank of Japan fixed the yield curve by setting thetarget for the 10-year rate close to zero and keeping the policy rate at negative 10 basis points. The rise of US yields led to a strongincrease in asset purchases. Eventually, the BoJ has to decide on its priorities - does it want to contain the growth of the balance sheetor does it want to maintain a certain yield? Our forecast for a stronger JPY assumes that the BoJ will enventually try to reduce assetpurchases.

USDCAD: Higher oil prices help CAD. Canadian economic growth disappointed in the first half of 2016. Since then, oil prices haverisen, US growth has stabilized further and fears about a worsening of US-Mexican ties help Canada's economic outlook. StrongerCanadian growth in 2H16 and 2017 should turn the BoC's easing bias into a tightening stance and push USDCAD toward 1.25.

AUDUSD: RBA to remain somewhat dovish. With the Fed raising rates and coal and iron ore prices likely to fall on rising supply, weexpect the AUD to weaken. In light of low Australian inflation, Reserve Bank of Australia (RBA) policy should remain on a dovish tilt.However, the AUD's attractive carry should keep AUDUSD around 0.74 over the next 12 months.

GBPUSD: Brexit has not even started. The UK is preparing for exit negotiations. The prime minister has announced her intention totrigger Article 50 by March 2017. By then, we would expect more clarity about Brexit's impact on the British economy. The pound is sostrongly undervalued currently that we see some rebound potential against the USD over the next 12 months.

USDCHF: Safe havens re-balanced. The uncertainty after the policy U-turn in the US should support the CHF and weaken the USD.The Swiss National Bank (SNB) will likely try to reduce intervention activity as quickly as possible, leading USDCHF lower. Both the USDand the CHF should weaken against the EUR when the ECB comes closer to reducing its monetary easiness.

EURCHF: Protected by intervention. The SNB has defended any appreciation pressure lately and is likely to continue to do so. In 2017,we expect the ECB to discuss the end of its quantitative easing program, which should support the EUR versus the CHF.

EURNOK: Continued downtrend with Norway's recovery. A combination of a growth rebound and high inflation rates in Norwayis likely to lead to a tighter policy by the Norges Bank relative to the ECB. This and the near-term support from rising oil prices shouldstrengthen the NOK against the EUR over the coming three months.

EURSEK: Peak should be behind us. The Swedish krona has recovered recently on the back of generally improved risk sentimentacross financial markets. Over the next 12 months, we forecast more SEK appreciation as Sweden is closer to full employment than theEurozone. However, the Riksbank will likely try to slow down the appreciation path by following ECB monetary policy steps.

Currency forecast table

UBS, as of 15 December 2016

PPP = purchasing power parity

41

For further information please contact CIO asset class specialists Jonas David, [email protected], Teck Leng Tan, [email protected] or Michael Bolliger, [email protected].

Emerging market currencies & money market EM money market (ELMI+) yield (14 December 2016): 3.7% (last publication: 4.8%)ELMI+ expected total returns (6 months): 3%

CIO view• Emerging market (EM) currencies sold off after Donald Trump's victory in the US election, but have stabilized since then, with somerallying lately. We believe 2017 will be another year of differentiation in EM currencies. Looking at global conditions, a range of factorsshould support emerging market FX, including our expectation for a softer US dollar and contained upward pressure on global rates dueto still accommodative monetary policy and the ongoing "hunt for yield." Also, stable to higher commodity prices seem realistic andsupport exporters. Given the improving fundamentals and attractive valuations, we think the environment remains supportive of somecurrencies with a high interest rate carry. On the other hand, we expect the Singapore dollar and the Chinese yuan to underperform.Elevated volatility and fragile risk sentiment toward EM currencies will stay with us for longer due to uncertainty about the new USadministration's policy, volatility in commodity prices, and lingering concerns about China's outlook.

• Latin America: Though further volatility looks likely in the near term, the Brazilian real (BRL) appears attractive due to its high interestrate carry, the country’s improving growth-inflation dynamics and the positive adjustment in its external balance. The Mexican peso(MXN) faces more weakness next year as it is the most exposed to the policies of the next US administration and will likely act as ashock-absorber. Although long-term valuations look attractive, we still think it is too early to enter tactical MXN positions.

• EMEA: The Russian ruble (RUB) remains among our preferred EM currencies due to its attractive interest rate carry, Russia's prudentmonetary policy, a strong external balance, and improving growth-inflation dynamics. Also, we think stable to higher oil prices arerealistic and should support the ruble. Pressure on the Turkish lira (TRY) has been rising, and we maintain a cautious view on it dueto external vulnerabilities and policy uncertainty. We expect the South African rand (ZAR) to continue trending sideways amid highvolatility; near-term risks are skewed toward some weakness, but the valuation implies long-term appreciation potential. The Polish zloty(PLN) should strengthen gradually against the euro in 2017, but uncertainty about domestic politics and the impact of Brexit linger. Wesee the EURCZK floor staying in place until at least 2Q17, and the Hungarian forint (HUF) weakening gradually.

• Asia: We favor the Indian rupee (INR) and the Indonesian rupiah (IDR), and we dislike the Singapore dollar (SGD) and the Chineseyuan (CNY). The INR and the IDR offer attractive yields of around 6-7% p.a., in an environment of very gradual Fed rate hikes. Onthe other hand, we expect the SGD and the CNY to underperform. The Monetary Authority of Singapore is capping currency strengthdue to sluggish domestic growth prospects, while ongoing capital outflows from China are likely to keep the CNY on a moderateweakening path.

• Positive scenario:ELMI+ expected total returns (6 months): 5.0%Improving global growth, including favorable trade dynamics and better prospects in emerging markets support EM currencies. Butrising US interest rates should limit their upside. A recovery in commodity prices benefits exporters.• Negative scenario:ELMI+ expected total returns (6 months): -4.5%Trade protectionism increases and risk sentiment deteriorates, weighing on EM growth prospects and leading to a depreciation of EMcurrencies amid capital outflows. Some central banks have to tighten their monetary policy to stabilize exchange rates.

Key dates• US Fed meetings: 1 Feb, 15 Mar• EM policy rate decisions: 16 Dec (Russia), 20 Dec (Turkey), 22 Dec (Philippines and Taiwan), 11 Jan (Brazil), 24 Jan (South Africa)

UBS CIO EM FX forecasts

Current 3-month 6-month 12-month

Latin AmericaUSDBRL 3.39 3.30 3.00 3.00USDMXN 20.4 19.5 19.0 18.0

EMEAEURPLN 4.45 4.30 4.30 4.30EURHUF 315 315 320 320EURCZK 27.0 27.0 27.0 26.2USDTRY 3.45 3.10 3.20 3.25USDZAR 13.7 14.5 14.5 13.0USDRUB 63.4 64.0 62.0 60.0

AsiaUSDCNY 6.89 6.85 7.00 7.00USDIDR 13,287 13,250 13,250 13,250USDINR 67.4 68.0 68.0 68.0USDKRW 1,159 1,170 1,140 1,100USDMYR 4.42 4.25 4.10 3.90USDPHP 49.7 49.0 48.5 48.5USDSGD 1.42 1.41 1.38 1.38USDTHB 35.6 36.5 36.0 36.0USDTWD 31.7 32.5 32.0 31.5


42

Section 2.D

Asset class views

Precious metals & Commodities

43

For further information please contact CIO asset class specialists Dominic Schnider, [email protected], Giovanni Staunovo, [email protected] or Wayne Gordon,[email protected].

Precious metals & commodities overview Commodities – Key points

• Since Donald Trump's surprise US presidential election win, broadly diversified commodity indices have risen, along with volatility.Industrial metals have soared on stronger demand expectations, while gold and silver have suffered the brunt of 10-year yields inthe US shooting higher.

• The rise in prices and volatility is due not only to Trump but also to commodity-specific factors. OPEC vowed to cut productionby 1.2mbpd or 1.2% of annual supply. Volatility in commodities should stay elevated. Trump's political agenda remains unclearand the political backdrop in Europe is filled with potential speed bumps for the economy.

• Despite these sources of risk, we believe commodity prices will rise further. From a bottom-up perspective, our expected spotmove for the UBS CMCI Commodity Index over 12 months stands at 7%. Expected roll-yield costs of less than 3% needto be considered as well. This leaves the expected return profile in mid-single digits percentage-wise. The key contributingsectors behind the higher prices are energy and precious metals. The strong performance of base metals since Trump's win hasdampened the expected return profile for the sector.

• OPEC reached a historic accord in late November, vowing to cut crude production by 1.2mbpd to 32.5mbpd, effective fromJanuary 2017. Even if OPEC only partially adheres to the terms of the deal, we expect the rebalancing of global oil supplyand demand to accelerate. We believe the announced production cuts will trigger inventory draws during 1H17, sooner thanpreviously expected. Lower output is likely to lift Brent oil prices further over the coming months, with Brent expected to tradebetween USD 55/bbl and 60/bbl in six to 12 months.

• We expect precious metal prices to bottom out in the coming weeks, and for gold to trade at USD 1,300/oz in 6-12 months. Aweaker US dollar and real US short-term interest rates turning more negative favor higher gold prices next year.

• Accelerating economic activity globally, particularly industrial production, sets the stage for tighter market balances across thebase metal sector. Firmer base metal demand from the US should support tighter balances; but the incremental demand willbe small (US accounts for only 7-13% of global demand), and the impact will materialize in 2H17 or 2018 at the earliest. Thus,a too-sharp price rally based on expectations might run out of steam in 1H17. Overall, we feel comfortable being long nickelversus short copper and aluminum. In the case of the nickel-copper pair trade, nickel supply from the Philippines is at risk, whichfavors our call. However, we believe copper prices have climbed too high, leaving scope for them to underperform.

• Agriculture prices remain challenged by record US crop harvests and the absence of near-term weather risks. Grains and oilseedshave found some support from tightening vegetable oil fundamentals, while soft commodities have started to unwind some oftheir outperformance this year. We believe livestock has bottomed; cattle and hog prices are likely to rise moderately next year asdemand continues to increase. Weather risks are largely not reflected in current market prices; these, despite comfortable grainsupplies, will need to be watched carefully as we enter 2017.

Broad-based commodity indices have gainedground since Trump's surprise winBloomberg Commodity Index and UBS BloombergCMCI Total Return Index; indices are standardized to100

50

60

70

80

90

100

110

Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16Bloomberg Commodity Index UBS Bloomberg CMCI Index


Current mostpreferredcommoditiesPGMsNickelSoybean meal

Current leastpreferred

commoditiesSoybean oil

Thermal coal


For a more detailed overview, please see our monthly commodity update.

44

GoldBenchmark:

Gold (6 months)

Current level:

USD 1,143/oz(14/12/16)

Target level:

USD 1,300/oz

CIO view• Recently, gold price gains have been pared back as investors responded to US

dollar strength and a sharp rise in US government bond yields. Also, Asian physicalmarkets have been disappointing, and India's and China's policy views on goldremain uncertain.

• We expect precious metal prices to bottom out in the coming weeks, and for gold totrade at USD 1,300/oz in 6-12 months.

• A weaker US dollar and real US short-term interest rates turning more negative favorhigher gold prices next year.

Positive driversShort-term (6 months)Fed remains accommodativeWe expect the Fed to hike rates twice in 2017;Trump's policies lift inflation and pressure realrates lower, which has historically supported thegold price.Rising political uncertaintyPolitical risks will remain high in 2017.

Negative driversShort-term (6 months)Improving US economic dataA material improvement in US economic data couldstrengthen the USD and increase yields, triggeringinvestor outflows (ETFs and futures).Physical demand weaknessHigher gold prices and weaker currencies couldcontinue to weigh on jewelry demand in Asia in theshort term.

Long-term (5+ years)Growing demand from Asia, incl. CBsAsian demand was lackluster in 2016; we expectbetter growth as wealth in the region increases andinvestor affinity for the metal rises. Central bankpurchases should continue.Contracting mine supplyMine supply growth is likely to remain subduedover time despite higher prices. Decliningmine grades and aging gold mines need to beconsidered as well.

Long-term (5+ years)Monetary policy normalizationA faster pace of interest rate normalization in theUS means real rates would turn positive earlier thanexpected, which has historically hurt gold.

Key dates Key debatesJan 6, US payrollsJan 30, PCE US core inflationFeb 15, WGC 2016 gold report

• What would hard Brexit look like?• Is Trump good or bad for growth?


Investors who can bear gold's volatility maystill find its hedging properties attractivedespite our cautious near-term view. Wesee gold prices higher over six months and12 months.

For overexposed* investorsWe recommend investors to hold ontotheir gold exposure as we think gold isnearing the bottom of our range. Oncegold prices approach our six-month view,this should be used as an opportunity torebalance portfolios.

For in-line* investorsWe recommend retaining a gold allocationwithin a balanced portfolio given themetal's hedging characteristics; financialmarket volatility is likely in the comingmonths.

PreferencesMost Preferred

• Direct gold investment as a hedge

Least Preferred


Gold (6 months): USD 1,450/oz• The Fed expands its balance sheet, thereby

weakening the USD, lowering yields andreviving investment demand for gold.

Negative scenarioGold (6 months): USD 1,100/oz

• The Fed turns more hawkish than expected inan effort to be ahead of the curve as inflationpicks up, labor data remains strong andTrump's policies lift inflation expectationsmaterially.

US TIPS should head back into negativeterritory in 2017, helping goldGold prices (USD/oz) and 5-year TIPS (inverted,%, rhs)

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2009 2010 2011 2012 2013 2014 2015 2016Gold price (lhs) US 5-year TIPS (inverted, rhs)


For further information please contact CIO asset class specialists Wayne Gordon, [email protected], Giovanni Staunovo, [email protected] orDominic Schnider, [email protected] see important disclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

45

Crude oilBenchmark:

Brent crude oil (6months)

Current level:

USD 53.9/bbl(14/12/16)

Target level:

USD 55/bbl

CIO view• OPEC reached a historic accord in late November, vowing to cut crude production by

1.2mbpd to 32.5mbpd, effective from January 2017. The group surprised marketsby communicating how it intends to spread the cuts among its members. OPEC alsosaid that it has received pledges from key non-OPEC producers for additional cuts.

• Even if OPEC only partially adheres to the deal terms, we expect the rebalancing ofglobal oil supply and demand to accelerate. We believe the announced productioncuts will trigger inventory draws during 1H17, sooner than previously expected.

• Lower output is likely to lift Brent oil prices further over the coming months, withBrent expected to trade between USD 55/bbl and 60/bbl in six to 12 months.

Positive driversShort-term (6 months)Muted global supply growthAs a result of capital spending cuts in 2015 (25%)and 2016 (likely 24%) and the OPEC productiondeal, oil supply should expand by 0.4mbpd in2017, similar to 2016.

Negative driversShort-term (6 months)Rising US supplyUS production increases could put a ceiling on pricegains, but are unlikely to upset the market's moveback toward supply-demand balance.

Long-term (5+ years)Capital expenditure cutsThe substantial capital expenditure cuts by energycompanies will constrain supply growth in thecoming years, resulting in a relatively tight marketbalance.Demand growth in emerging AsiaEmerging Asia will continue to fuel oil demandgrowth. Roughly half of the world’s population livesin emerging Asia, but the region accounts for justone-quarter of worldwide oil demand.

Long-term (5+ years)Energy efficiencyA negative factor for crude oil comes fromongoing improvements in energy efficiency anddevelopments in battery technology, with electriccars eventually capping oil demand.

Key dates Key debatesDec 30, US Oct supply/demand dataJan 10, EIA STEO reportJan 19, IEA oil market reportMay 25, OPEC ordinary meeting

• Will OPEC nations adhere to the productioncut deal terms?

• At which price level will US shale producersincrease drilling activity?


Oil price setbacks are an opportunity tobuild direct long oil or energy equitiesexposure.

For overexposed* investorsTo de-risk exposure, we favor switchingfrom direct long oil positions to energyequities.

For in-line* investorsOil price setbacks are an opportunity tobuild direct long oil or energy equitiesexposure.

PreferencesMost Preferred

• Energy equities

Least Preferred


Brent crude oil (6 months): USD 70/bbl• Destabilizing political events in oil-producing

countries, like Venezuela, Nigeria and theMiddle East, trigger a sharp supply drop.Faster contraction in US oil production and/or a strictly implemented OPEC deal couldaccelerate the rebalancing process.

Negative scenarioBrent crude oil (6 months): USD 40-45/bbl

• The oil market remains oversupplied becauseof a sharp decline in unplanned crudeproduction outages, weak adherence tothe OPEC supply deal and/or less demandgrowth in emerging Asia due to an economicslowdown.

How OPEC intends to split cuts amongmembersValues are in thousand barrels per day

(500)

(400)

(300)

(200)

(100)

0

100

Alg

eria

An

gola

Ecua

dor

Gab

on

Iran

Iraq

Kuw

ait

Liby

a

Nig

eria

Qat

ar

Sau

diA

rabi

a

UA

E

Ven

ezue

la

Indo

nesi

a

Source: OPEC, UBS, as of 7 December 2016

For further information please contact CIO asset class specialists Giovanni Staunovo, [email protected], Dominic Schnider,[email protected] or Wayne Gordon, [email protected] see important disclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

46

Section 2.E

Asset class views

Alternative investments: Hedge funds

47

Hedge fundsBenchmark:

HFRI FundWeighted

Current level:

12,842(30/11/16)

Target level:

CIO view• Hedge funds are a useful source of return and stability in an investor portfolio,

especially during market volatility. Their superior risk-return characteristics and accessto uncorrelated investment opportunities provide both downside protection anddiversification benefits within a multi-asset portfolio. Currently, we recommend aneutral positioning across all four hedge fund styles as we believe diversificationis more important than ever. In terms of sub-strategies, we think opportunisticmanagers running low beta portfolios should perform best.

Positive driversShort- term (6 months)Improving HFN readingThe UBS Hedge Fund Navigator (HFN) - ourproprietary indicator to assess hedge fund risks -indicates a safe environment although crowdingremains a concern.Higher stock dispersionStock fundamentals are becoming more importantfor price performance. This gives managers moreopportunities to generate alpha on both equitylongs and shorts.Monetary policy normalizationHedge fund strategies have historically performedvery well during interest rate hike periods. CIOexpects two rate hikes by the Fed in 2017.

Negative driversShort-term (6 months)Concentration risk and crowdingManagers currently hold significant portions of theirassets in similar securities. This can be a problemduring risk-off scenarios when liquidity dries up andmanagers have to unwind positions.Equity factor rotationHedge funds typically seek to earn premiums fromstyle factors such as momentum or value. Sharprotations within these factors can cause somestrategies, such as quant strategies, to break down.Whipsawing marketsCertain strategies require clear trending markets toperform. Whipsawing markets can limit returns oreven be harmful for some of these funds.

Long-term (5+ years)Long-term economic outlookMacroeconomic shifts, such as monetary policynormalization in the US, monetary easing inEurope and Japan, and/or falling Chinese demand,should create many trading themes.Normalizing volatilityNormalizing volatility toward long-term averagescreates opportunities that managers can capture.

Long-term (5+ years)Regulatory changesTougher regulations on hedge funds and the waythey trade are a risk to their competitive advantage.Industry growthAlpha generation, especially in more popular andless niche strategies, is becoming increasinglydifficult as more managers enter the industry.

Key dates Key debatesJan 5, ECB reportJan 6, US: Non-farm payrollJan 9, Provisional HFR data

• Why invest in hedge funds?• Are hedge funds too expensive?


Hedge funds play a key role within amulti-asset class portfolio. Attractive risk-adjusted returns, downside protection anddiversification benefits are some of thereasons for under-allocated investors torebalance.

For overexposed* investorsOverexposed investors should be awareof the risks associated with hedgefunds, including liquidity, leverage andconcentration risks.

For in-line* investorsInvestors with in-line exposure shouldensure that they are well-diversified acrossall strategies and regions.


• Low beta tactical managers• Merger arbitrage, Special situation• Quant equity, equity market neutral

Least preferred

• High beta equity managers


HFRI Fund Weighted:• Robust economies and equity markets

should boost the market beta contributionto hedge fund returns. This should benefitfundamental equity-oriented strategies,including equity hedge and, to an extent,event-driven.

Negative scenarioHFRI Fund Weighted:

• Tighter financial conditions, crises inemerging markets or the Eurozone, orintensifying disinflationary trends shouldresult in the outperformance of lesscorrelated liquid strategies like macro/trading.

Hedge fund performance this yearAll major HFRI indices are positive for the year

Source: Bloomberg, HFR, UBS, as of November 2016

For further information please contact Strategists Karim Cherif, [email protected] or Alec Zimmermann, [email protected] see importantdisclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

48

Section 3

Fixed income tactical asset allocation

49

Fixed Income Strategy - tactical asset allocationTactical asset allocation deviations from benchmark*

Liquidity

High grade bonds


EUR corporate bonds (IG)





US TIPS

new old



* Please note that the bar charts show relative portfolio preferences and can be interpreted as therecommended deviation from the benchmark in the context of a fixed-income-only portfolio.

The active positions in the fixed-income-only allocation will typically deviate from the corresponding activepositions of a portfolio that also includes equities. For example, a higher overweight position in high yieldor investment grade bonds could be used to compensate for not having an equity overweight position inthe fixed-income-only portfolio.

Tactical asset allocation deviations from benchmark: FX*

USD

EUR

GBP

JPY

CHF

SEK**

NOK

CAD**

NZD

AUD**

EM FX basket**

DM FX basket**

new old


**The EM FX basket consists of the Brazilian real, the Indian rupee, the Russian ruble and the SouthAfrican rand. The DM FX basket consists of the Australian dollar, the Canadian dollar and the Swedishkrona (all with equal weights).

50

Section 4

Tactical asset allocation for global credit portfolio

51

Tactical asset allocation for global credit portfolioTactical asset allocation deviations from benchmark*

Liquidity

Credit bonds total

US corporate bonds

Euro Sub Financial

US high yield short duration

US high yield bonds

Euro high yield bonds

US senior loans

Euro senior loans



Asian credit (USD)

Hedge Funds

new old



*Please note that the bar charts show relative portfolio preferences and can be interpreted as therecommended deviation from the benchmark in the context of a global credit portfolio.

A global credit portfolio offers exposure to traditionally illiquid asset classes, which are particularly commonin credit markets. It constitutes an alternative benchmark portfolio. We define the liquidity premium as theadditional return investors require to hold assets that cannot be as readily bought and sold as commonsecurities.

Reference portfolio (including tactical allocation)

Liquidity5%

USD corporatebonds12%

EURsubordinated

financialbonds

5%

USD seniorloans15%

EUR seniorloans10%

USD HY bonds(short

duration)5%

USD high yieldbonds13%

EUR high yieldbonds13%

EM sovereignbonds10%

EM corporatebonds10%

Asia credit2%

For further information, please also refer to our "Quarterly Credit Outlook".

52

Section 5

Emerging market asset allocation

53

Emerging market investment strategyTactical asset allocation deviations from benchmark*

EM equities total

EM Asia

EM LatAm

EM EMEA


EM sovereign bonds IG (USD)

EM sovereign bonds HY (USD)


EM corporate bonds IG (USD)

EM corporate bonds HY (USD)

EM currencies / money market

EM government bonds

EM inflation-linked bonds

Equ

itie

sB

on

ds

inU

SDLo

calc

urr

ency

inst

rum

ents

new old



*Please note that the bar charts show total portfolio preferences and thus can be interpreted as therecommended deviation from the relevant portfolio benchmark for any given asset class and sub-asset class.

Tactical asset allocation deviations from benchmark*


54

Emerging market bonds in local currenciesBenchmark:

GBI-EM GD /EMTIL yields

Current level:

6.8% (nom.) /3.5% (real)(14/12/16)

Target level:

6.5% /3.3%

CIO view• Emerging market (EM) local currency bonds sold off sharply in the aftermath of

Trump's victory and the subsequent rise in US government bond yields, but havestabilized lately. While economic conditions in emerging markets have improved,shifting expectations about the US Federal Reserve's policy outlook and fragileglobal risk sentiment toward the asset class in the near term may trigger furtherbouts of weakness. However, in the medium term, the overall accommodativemonetary policy and still-low yields in advanced economies should support andattract renewed capital inflows.

Positive driversShort-term (6 months)Loose monetary policy globallyStill-accommodative global monetary policy shouldact as a backstop for negative risk sentiment andcontain upward pressure on EM interest rates in thecoming months.EM economic growth is improvingAfter some green shoots this year, further gradualimprovement in economic activity should brightenthe outlook for emerging markets in 2017, withinflationary pressure staying subdued on average.Renewed capital inflowsBased on the improvement in the domesticoutlook and supportive global conditions, emergingmarkets should attract further capital inflows.

Negative driversShort-term (6 months)Ongoing policy uncertaintyRisk sentiment will remain fragile due to theuncertainty around the policy of the next USadministration and lingering wariness about theeconomic implications of Brexit.Sharp moves in benchmark ratesRecent upward pressure and ongoing volatility inbenchmark yields, especially US Treasuries, are aheadwind for local-currency bonds in emergingmarkets.Lower growth in ChinaChina's economic rebalancing and structural growthslowdown should continue. The CNY will likelycontinue to weaken gradually; sharp moves couldweigh on markets.

Long-term (5+ years)External rebalancingAfter years of depreciation, exchange rates havestarted to facilitate some external rebalancing,especially in fundamentally weaker economies - thisis positive and should continue.EM economic reform momentumSubdued growth is pushing emerging markets toimplement economic reforms. If successful, thereforms should lead to productivity gains and bettergrowth prospects.

Long-term (5+ years)Monetary policy normalizationWhile expectations for the Fed hiking path arecontinuously reassessed, the Fed should still tightenmonetary policy further. This should also result insome upward pressure on EM interest rates.Buildup of private debt in EMElevated levels of private sector debt imply a needfor deleveraging in some emerging markets, weighingon structural growth prospects. Financial crisis inemerging markets remains a tail risk.

Key dates Key debatesDec 16, Policy rate, RussiaDec 20, Policy rate, TurkeyJan 11, Policy rate, BrazilJan 24, Policy rate, South Africa

• How will the policy of the next USadministration impact financial markets?

• Will emerging markets attract renewedcapital inflows?


Despite recent weakness, some exposureto local currency bonds is warranted fordedicated EM investors, especially in thecurrent environment of still-low interestrates in advanced economies.

For overexposed* investorsIn light of lingering uncertainty, take someprofit after this year's strong performance,but maintain a strategic allocation in theasset class.

For in-line* investorsMaintain a strategic allocation in localcurrency bonds in emerging markets.


• Brazilian local fixed income assets

Least Preferred


GBI-EM GD / EMTIL yields: 6.3% / 3.1%• Improving global growth, including favorable

trade dynamics and better prospects inemerging markets, are supportive. At thesame time, rising US interest rates limit EMinterest rates' move lower. A recovery incommodity prices benefits exporters.

Negative scenarioGBI-EM GD / EMTIL yields: 7.0% / 3.6%

• Trade protectionism increases and risksentiment deteriorates, weighing onemerging markets and triggering capitaloutflows. Some central banks have to tightenmonetary policy to stabilize exchange rates.EM interest rates rise sharply.

EM yields have spiked since Trump's victoryYields of local currency bond indices (nominaland real), in %

2.0

2.5

3.0

3.5

4.0

4.0

5.0

6.0

7.0

8.0

Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16

GBI-EM GD yield (nominal) EMTIL yield (real), rhs

Source: JP Morgan, Barclays, UBS, as of 8 December 2016

For further information please contact CIO asset class specialists Jonas David, [email protected] or Michael Bolliger, [email protected] seeimportant disclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

55

Section 6

APAC asset allocation

56

APAC tactical asset allocationTactical asset allocation deviations from benchmark*

Liquidity

Equities total

US

Eurozone

UK

Switzerland

Japan

Asia ex Japan

EM

Others

Bonds total

USD high grade bonds




Asian investment grade bonds (USD)

Asian high yield bonds (USD)



EM bonds (local currencies)

US TIPS

Precious Metals & Commodities

new old



*Please note that the bar charts show total portfolio preferences and thus can be interpreted as therecommended deviation from the relevant portfolio benchmark for any given asset class and sub-asset class.

Asia ex-Japan equity strategy (relative to MSCI Asia ex-Japan)

China

Hong Kong

India

Indonesia

South Korea

Malaysia

Philippines

Singapore

Taiwan

Thailand

new old


57

Asian equities (ex-Japan)Benchmark:

MSCI Asia ex-Japan

Current level:

527 (14/12/16)

Target level:

550

6-month outlook:

Overweight

CIO view• We increase our overweight position in Asia ex-Japan equities as we expect the

region to catch up with global peers after lagging in the recent equity rally. Onthe macro front, we think Asia will continue its improving trajectory given furtherstabilization in China and better pricing. On the corporate front, we are likely tosee higher earnings growth in 2017 than this year, given the reflation theme set byrebounding commodity prices (as reflected in the rising PPI). Regionally, we remainoverweight China and India, financed by an underweight position on the Philippinesand Taiwan.

Positive driversShort-term (6 months)Short-term economic outlookGlobal business cycle indicators are improving andcentral banks remain supportive. This fundamentalenvironment favors equities over fixed income.Asian earnings are bottomingDeflationary pressure is about to abate and mayresult in a better earnings environment for Asiancompanies. This is confirmed by China's latest PPIreading, which rose further.Attractive short-term valuationsAsia is trading at a large discount to globalequities. Further, Asian equities look inexpensiveversus Asian credit given the low interest rates inthe fixed income space.

Negative driversShort-term (6 months)Slow export recoveryThe export recovery could be delayed due todeteriorating global trade relations initiated by thenew US administration, which would weigh onAsian markets.China hard landing riskA "hard landing" in China due to a sharp downturnin property and manufacturing would cause a risk-off environment.Short-term inflation riskStimulative fiscal policy by the incoming USpresident bears the risk of a sudden increase ininflation. A jump in interest rates could lead tocapital repatriation back to the US.

Long-term (5+ years)Long-term economic outlookAsia is experiencing a highly structural growthrate, which should support domestic equities.Attractive long-term valuationsAsian equities are relatively inexpensive.Historically low valuations have led to higher long-term returns.

Long-term (5+ years)Slow growthEquity returns could fall short of expectations ifeconomic growth in the region cools more thanexpected.Long-term inflation riskA structural increase in inflation could put pressureon central banks to increase interest rates moreaggressively, leading to higher capital costs, whichwould weigh on future earnings.

Key dates Key debatesJan 1, China PMI manufacturingJan 3, US ISM manufacturingJan 8, China export data

• How fast will the Fed hike?• How healthy is China's economy?


Building up exposure due to attractivetactical and strategic return potential isadvised.

For overexposed* investorsRisks should be evaluated, leading todiversification across regions and/or assetclasses.

For in-line* investorsMarket preferences should be considered.


• China• India

Least preferred

• Taiwan• Philippines


MSCI Asia ex-Japan: 625• More supportive monetary and fiscal policies,

sustained demand, and an improving globalgrowth backdrop.

Negative scenarioMSCI Asia ex-Japan: 450

• A sharp deceleration of China's economy.The EU and/or the US economy falls intorecession.

Asia ex-Japan equity strategy

China

Hong Kong

India

Indonesia

Korea

Malaysia

Philippines

Singapore

Taiwan

Thailand

Old New

Underweight Neutral Overweight


For further information please contact Head Asset Allocation APAC Adrian Zuercher, [email protected] or Asset Allocation Strategist Crystal Zhao,[email protected] see important disclaimers and disclosures at the end of the document.*Exposure refers to current positioning relative to the UBS House View.

58

Asian bonds in USDBenchmark:

JACI IG / HY

Current level:

186/456(14/12/16)

Target level:

220/520

6-month outlook:

Underweight

CIO view• The 10-year US Treasury yield has risen by 75bps since the US election amid

increasing inflation expectations due to Trumponomics. This led to negative totalreturns for both JACI IG and HY for the first time since September 2014. But Asianspreads are yet to widen due to the strong technical support.

• However, we expect less technical support going forward given the increasinglystricter capital controls from China and the rising supply pressure from localgovernment financing vehicles. Once the technical tailwind erodes, creditfundamentals may finally play out on bond pricing.

Positive driversShort-term (6 months)Short-term economic outlookAsian macroeconomic leading indicators continueto stabilize. The high frequency data from Chinacontinues to offer support.Constructive outlook on commoditiesThe production-cut agreement reached by OPECand non-OPEC members in early December offerssupply-side support for commodity prices in 2017

Negative driversShort-term (6 months)Rising volatility of US TreasuriesRising volatility of long-end US Treasury yields causesoutflows from the fixed income space.Weakening credit fundamentalsAsia issuers to face more downgrade pressure onthe rising costs of capital in hard currencies and latecredit cycle domestically

Long-term (5+ years)Long-term economic outlookAsia is the global growth engine and will attractmore investment in the long run. So demand forAsian bonds will increase.Index inclusionChina will be added to global bond indices as itopens up. As a result, more institutional investorswill buy Chinese credits.

Long-term (5+ years)Expensive long-term valuationsThe current average spread is lower than the 25thpercentile, limiting long-term return upside.

Key dates Key debatesJan 1, China manufacturing PMIJan 3, US ISM manufacturing

• How strong and sustainable is the macroimprovement?


Some exposure to the regional fixedincome market is usually warranted. Asiais relatively defensive within emergingmarkets, and therefore it makes sense todiversify into the region.

For overexposed* investorsConsider reducing exposure given therising US Treasury yields and tight Asiacredit spreads.

For in-line* investorsWe keep our tactical underweight callon JACI IG versus Asia ex-Japan equities.Within Asian credit, we prefer BBB and BBbonds, in particular Chinese shorter-datedBBB bonds.


• Best value in BBB and BB• Chinese shorter-dated BBB bonds

Least preferred

• Industrials from SOEs• Longer-dated bonds


JACI IG / HY: JACI spread for IG/HY (6-month target):160bps/450bps

• Trump's pro-growth rhetoric on infrastructurespending lifts commodity prices furtherand supports risk sentiment. Meanwhile,concerns of an abrupt growth slowdown inChina continue to abate. High yield bondsfare better than investment grade bonds.

Negative scenarioJACI IG / HY: 280bps/650bps

• Further USD strength undermines sentimenton EM currencies, especially those withcurrent account deficits; this will likely spillover into bonds. Long-end US Treasury yieldsrise sharply, triggering outflows from thefixed income space.

Equity yield over Asian bondsin %

0

2

4

6

8

10

12

14

16

Nov05

Nov06

Nov07

Nov08

Nov09

Nov10

Nov11

Nov12

Nov13

Nov14

Nov15

Nov16

3-5yr JACI YTM AxJ Equity Yield


For further information please contact Head Asset Allocation APAC Adrian Zuercher, [email protected], Head Asian Credit Timothy Tay,[email protected] or Asset Allocation strategist Crystal Zhao, [email protected] see important disclaimers and disclosures at the end of thedocument.*Exposure refers to current positioning relative to the UBS House View.

59

Appendix

Global portfolios

60

Global model portfolios (for a balanced risk profile)

EUR


bonds11%

US TIPS2%

Inv. gradecorporate

bonds8%

High yieldbonds

7%

EM bonds4%

Equitiesothers

2%

Equities EM5%

EquitiesEurope

23%

Equities US13%

Hedge Funds20%

Note: Portfolio weightings are for an EUR model portfoliowith a balanced risk profile (including TAA). We expecta balanced portfolio (excluding TAA) to have an averagetotal return of 4.2% p.a. and a volatility of 8.2% p.a. overthe next five years.


USD


bonds11%

US TIPS2%

Inv. gradecorporate

bonds8%

High yieldbonds

7%

EM bonds4%

Equitiesothers

3%

Equities EM7%

EquitiesEurope

12%

Equities US21%

Hedge Funds20%

Note: Portfolio weightings are for a USD model portfoliowith a balanced risk profile (incl. TAA). We expect abalanced portfolio (excl. TAA) to have an average totalreturn of 5.6% p.a. and a volatility of 8.1% p.a. over thenext five years.

CHF


bonds11%

US TIPS2%

Inv. gradecorporate

bonds8%

High yieldbonds

7%

EM bonds4%

Equitiesothers

9%Equities EM

5%

EquitiesSwitzerland

16%

Equities US13%

Hedge Funds20%

Note: Portfolio weightings are for a CHF model portfolio witha balanced risk profile (incl. TAA). We expect a balancedportfolio (excl. TAA) to have an average total return of 3.6%p.a. and a volatility of 7.9% p.a. over the next five years.

61

Contact list Global Chief Investment Officer WM

Mark [email protected]

UBS CIO WM Global Investment Office

Regional Asset AllocationMark [email protected]

Global Asset AllocationMads [email protected]

UHNW & Alternatives IOSimon [email protected]

Investment ThemesPhilippe G. Mü[email protected]

UBS CIO WM Regional Chief Investment Offices

USMike [email protected]

APACMin Lan [email protected]

EuropeThemis [email protected]

SwitzerlandDaniel [email protected]

Emerging MarketsJorge [email protected]

62

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Denmark: This publication is not intended to constitute a public offer under Danish law, but might be distributed by UBS EuropeSE, Denmark Branch, filial af UBS Europe SE, with place of business at Sankt Annae Plads 13, 1250 Copenhagen, Denmark, registered with the Danish Commerce and Companies Agency, under the No. 38 17 24 33. UBS Europe SE, Denmark Branch, filial af UBS Europe SE is abranch of UBS Europe SE, a credit institution constituted under German Law in the form of a Societas Europaea, duly authorized by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). UBS Europe SE, Denmark Branch, filialaf UBS Europe SE is subject to the joint supervision of the BaFin, the central bank of Germany (Deutsche Bundesbank) and the Danish Financial Supervisory Authority (DFSA) (Finanstilsynet), to which this document has not been submitted for approval. France: This publication isdistributed by UBS (France) S.A., French "société anonyme" with share capital of € 125.726.944, 69, boulevard Haussmann F-75008 Paris, R.C.S. Paris B 421 255 670, to its clients and prospects. UBS (France) S.A. is a provider of investment services duly authorized according tothe terms of the "Code Monétaire et Financier", regulated by French banking and financial authorities as the "Autorité de Contrôle Prudentiel et de Résolution". Germany: The issuer under German Law is UBS Europe SE, Bockenheimer Landstrasse 2-4, 60306 Frankfurt am Main.UBS Europe SE is authorized and regulated by the "Bundesanstalt für Finanzdienstleistungsaufsicht". Hong Kong: This publication is distributed to clients of UBS AG Hong Kong Branch by UBS AG Hong Kong Branch, a licensed bank under the Hong Kong Banking Ordinanceand a registered institution under the Securities and Futures Ordinance. India: Distributed by UBS Securities India Private Ltd. 2/F, 2 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra (East), Mumbai (India) 400051. Phone: +912261556000. SEBI Registration Numbers:NSE (Capital Market Segment): INB230951431, NSE (F&O Segment) INF230951431, BSE (Capital Market Segment) INB010951437. Indonesia: This research or publication is not intended and not prepared for purposes of public offering of securities under the Indonesian CapitalMarket Law and its implementing regulations. Securities mentioned in this material have not been, and will not be, registered under the Indonesian Capital Market Law and Regulations. Israel: UBS Switzerland AG is registered as a Foreign Dealer in cooperation with UBS WealthManagement Israel Ltd, a wholly owned UBS subsidiary. UBS Wealth Management Israel Ltd is a licensed Portfolio Manager which engages also in Investment Marketing and is regulated by the Israel Securities Authority. This publication shall not replace any investment advice and/or investment marketing provided by a relevant licensee which is adjusted to your personal needs. Italy: This publication is distributed to the clients of UBS Europe SE, Succursale Italia, Via del Vecchio Politecnico, 3 - 20121 Milano, the branch of a German bank duly authorizedby the “Bundesanstalt für Finanzdienstleistungsaufsicht” to the provision of financial services and supervised by "Consob". Jersey: UBS AG, Jersey Branch, is regulated and authorized by the Jersey Financial Services Commission for the conduct of banking, funds and investmentbusiness. Where services are provided from outside Jersey, they will not be covered by the Jersey regulatory regime. UBS AG, Jersey Branch is a branch of UBS AG a public company limited by shares, incorporated in Switzerland whose registered offices are at Aeschenvorstadt 1,CH-4051 Basel and Bahnhofstrasse 45, CH 8001 Zurich. UBS AG, Jersey Branch's principal place business is P.O. Box 350, 24 Union Street, St Helier, Jersey JE4 8UJ. Luxembourg: This publication is not intended to constitute a public offer under Luxembourg law, but might bemade available for information purposes to clients of UBS Europe SE, Luxembourg Branch, with place of business at 33A, Avenue J. F. Kennedy, L-1855 Luxembourg. UBS Europe SE, Luxembourg Branch is a branch of UBS Europe SE, a credit institution constituted under GermanLaw in the form of a Societas Europaea, duly authorized by the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin), and is subject to the joint supervision of BaFin, the central bank of Germany (Deutsche Bundesbank), aswell as of the Luxembourg supervisory authority, the Commission de Surveillance du Secteur Financier (the "CSSF"), to which this publication has not been submitted for approval. Mexico: This document has been distributed by UBS Asesores México, S.A. de C.V., a company whichis not part of UBS Grupo Financiero, S.A. de C.V. or of any other Mexican financial group and whose obligations are not guaranteed by any third party. UBS Asesores México, S.A. de C.V. does not guarantee any yield whatsoever. Netherlands: This publication is not intended toconstitute a public offering or a comparable solicitation under Dutch law, but might be made available for information purposes to clients of UBS Europe SE, Netherlands branch, a branch of a German bank duly authorized by the “Bundesanstalt für Finanzdienstleistungsaufsicht”for the provision of financial services and supervised by "Autoriteit Financiële Markten” (AFM) in the Netherlands , to which this publication has not been submitted for approval. New Zealand: This notice is distributed to clients of UBS Wealth Management Australia LimitedABN 50 005 311 937 (Holder of Australian Financial Services Licence No. 231127), Chifley Tower, 2 Chifley Square, Sydney, New South Wales, NSW 2000, by UBS Wealth Management Australia Ltd. You are being provided with this UBS publication or material because you haveindicated to UBS that you are a client certified as a wholesale investor and/or an eligible investor ("Certified Client") located in New Zealand. This publication or material is not intended for clients who are not Certified Clients ("Non-Certified Clients"), and if you are a Non-CertifiedClient you must not rely on this publication or material. If despite this warning you nevertheless rely on this publication or material, you hereby (i) acknowledge that you may not rely on the content of this publication or material and that any recommendations or opinions in thispublication or material are not made or provided to you, and (ii) to the maximum extent permitted by law (a) indemnify UBS and its associates or related entities (and their respective directors, officers, agents and advisers (each a "Relevant Person") for any loss, damage, liabilityor claim any of them may incur or suffer as a result of, or in connection with, your unauthorised reliance on this publication or material and (b) waive any rights or remedies you may have against any Relevant Person for (or in respect of) any loss, damage, liability or claim youmay incur or suffer as a result of, or in connection with, your unauthorised reliance on this publication or material. Saudi Arabia: This publication has been approved by UBS Saudi Arabia (a subsidiary of UBS AG), a Saudi Arabian closed joint stock company incorporated in theKingdom of Saudi Arabia under commercial register number 1010257812 having its registered office at Tatweer Towers, P.O. Box 75724, Riyadh 11588, Kingdom of Saudi Arabia. UBS Saudi Arabia is authorized and regulated by the Capital Market Authority of Saudi Arabia.Singapore: Please contact UBS AG Singapore branch, an exempt financial adviser under the Singapore Financial Advisers Act (Cap. 110) and a wholesale bank licensed under the Singapore Banking Act (Cap. 19) regulated by the Monetary Authority of Singapore, in respectof any matters arising from, or in connection with, the analysis or report. Spain: This publication is distributed to its clients by UBS Europe SE, Sucursal en España, with registered office at Calle María de Molina 4, C.P. 28006, Madrid, entity supervised by Banco de España andthe Bundesanstalt für Finanzdienstleistungsaufsicht. UBS Europe SE, Sucursal en España is a branch of UBS Europe SE, a credit institution constituted in the form of a Societas Europaea authorized and regulated by the Bundesanstalt für Finanzdienstleistungsaufsich. Sweden:This publication is not intended to constitute a public offer under Swedish law, but might be distributed by UBS Europe SE, Sweden Bankfilial with place of business at Regeringsgatan 38, 11153 Stockholm, Sweden, registered with the Swedish Companies Registration Officeunder the Reg. No 516406-1011. UBS Europe SE, Sweden Bankfilial is a branch of UBS Europe SE, a credit institution constituted under German Law in the form of a Societas Europaea, duly authorized by the German Federal Financial Supervisory Authority (Bundesanstalt fürFinanzdienstleistungsaufsicht, BaFin). UBS Europe SE, Sweden Bankfilial is subject to the joint supervision of the BaFin, the central bank of Germany (Deutsche Bundesbank) and the Swedish financial supervisory authority (Finansinspektionen), to which this document has not beensubmitted for approval. Taiwan: This material is provided by UBS AG, Taipei Branch in accordance with laws of Taiwan, in agreement with or at the request of clients/prospects. UAE: This research report is not intended to constitute an offer, sale or delivery of shares or other

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Disclaimersecurities under the laws of the United Arab Emirates (UAE). The contents of this report have not been and will not be approved by any authority in the United Arab Emirates including the UAE Central Bank or Dubai Financial Authorities, the Emirates Securities and CommoditiesAuthority, the Dubai Financial Market, the Abu Dhabi Securities market or any other UAE exchange. This material is intended for professional clients only. UBS AG Dubai Branch is regulated by the DFSA in the DIFC. UBS AG/UBS Switzerland AG is not licensed to provide bankingservices in the UAE by the Central Bank of the UAE nor is it licensed by the UAE Securities and Commodities Authority. The UBS AG Representative Office in Abu Dhabi is licensed by the Central Bank of the UAE to operate a representative office. UK: Approved by UBS AG,authorised and regulated by the Financial Market Supervisory Authority in Switzerland. In the United Kingdom, UBS AG is authorised by the Prudential Regulation Authority and subject to regulation by the Financial Conduct Authority and limited regulation by the PrudentialRegulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. A member of the London Stock Exchange. This publication is distributed to private clients of UBS London in the UK. Where products orservices are provided from outside the UK, they will not be covered by the UK regulatory regime or the Financial Services Compensation Scheme. USA: This document is not intended for distribution into the US, to US persons, or by US-based UBS personnel. UBS Securities LLCis a subsidiary of UBS AG and an affiliate of UBS Financial Services Inc., UBS Financial Services Inc. is a subsidiary of UBS AG.

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UBS House View - Black Oak Family Office SA · 2017-08-17 · UBS House View Monthly Extended...

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