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UBS House ViewMonthly Extended July 2017 - Update

Chief Investment Office WM

This publication has been updated as of 3 July 2017 due to the following ad-hoc change in the emergingmarket tactical asset allocation: Closure of the overweight position in Brazilian equities vs MSCI EM. Please notethat only slides related to this change have been updated.

PublishedJul 3 2017

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 content

Section 1 Base slides 3Section 2 Asset class views 18 2.A Equities 19 2.B Bonds 28 2.C Foreign exchange 38 2.D Precious metals & Commodities 42 2.E Alternative investments Hedge funds 46Section 3 Fixed income tactical asset allocation 48Section 4 Tactical asset allocation for global credit portfolio 50Section 5 Emerging market tactical asset allocation 52Section 6 APAC asset allocation 55Appendix Global portfolios 59

2

Section 1

Base slides

3

Head CIO Global Asset Allocation Andreas J Koester, [email protected] or CIO asset class specialist Philipp Schöttler, [email protected]

Financial Market Outlook – short term (6 months) Broad-based earnings recoverysupports equities12m trailing earnings per share, 3mchange in %

0 2 4 6 8

Switzerland

US

UK

Japan

World

Canada

Emerging Markets in $

EMU

Australia

3m change in 12m trailing EPS

Source: Thomson Reuters, UBS, as of June 2017

Canada's growth rebound outpacesAustralia's growthGDP YoY growth in %

(1)

0

1

2

3

4

5

2011 2012 2013 2014 2015 2016 2017

Australia GDP YoY (%) Canada GDP YoY (%)

Source: Macrobond, UBS, as of June 2017

Global Tactical Asset Allocation

• Asset allocationDecent economic growth and moderate inflation pressures have helped the performance of equity and bond markets. As both global growth firmsand the risk of deflation are disappearing, several central banks are taking the opportunity to move further towards a gradual normalization ofmonetary policy. The European Central Bank recently judged risks to the Eurozone economy as broadly balanced and removed any reference tolower interest rates. This shift should pave the way for an announcement in September of an exit from its quantitative easing program next year.The US Federal Reserve hiked US interest rates this month. The Fed is likely to raise rates once more later this year, and start a gradual unwindingof its balance sheet. We expect this environment to continue to be supportive for risk assets and maintain our risk-on stance with an overweightposition in global equities against high-quality bonds.

• EquitiesWe maintain our overweight position in Eurozone equities against UK stocks. We believe consensus expectations for UK corporate earnings growthof 22% this year are too high. The benefit from a weak pound should disappear by 4Q17, while the UK market is less sensitive to global economicgrowth. We expect earnings growth of Eurozone companies to catch up with UK firms, supporting stock prices in the region. We maintain anoverweight position in global equities (and US high grade bonds) against euro high yield (HY) bonds (see below).

• BondsEuro HY spreads have continued to compress, bringing the yield-to-maturity to a new all-time low of 3.4%. We think the asset class is expensive,with an average price of EUR105.5 limiting price upside, and we see better value in a mix of global equities and high grade bonds. We remainoverweight on US HY bonds due to the relatively attractive yield of 6% and improving corporate fundamentals. We expect the US HY trailing 12-month default rate to be stable at around 2.5% over the next 12 months, so that investors in US HY can still benefit from the carry. The recentplunge in oil prices started to weigh on the large energy sector. WTI remaining below USD 45 per barrel for an extended period is a key risk forUS HY, but not our base case.

• Foreign exchangeWe are opening an overweight position in the Canadian dollar against the Australian dollar. Canada's economy is recovering well from the oil-induced weakness, while the Australian economy is still struggling with structural changes and a disinflationary environment. We are overweighton the euro against the US dollar; and the Swedish krona (SEK) against the Swiss franc (CHF). The euro's appreciation against the USD has furtherroom to go, given the euro's undervaluation, and the ongoing "catchup" potential of Eurozone economic growth, monetary policy and investorpositioning. Sweden's Riksbank may become more hawkish, while the good investment backdrop may see the defensive, low-yielding CHF weakenas investors reallocate their CHF holdings to more growth-sensitive currencies.

4

Cross-asset preferences Most preferred Least preferred

Equities

• Global equities

• Eurozone equities

• Eurozone Value opportunities

• US share buybacks and dividends

• US Smart Beta

• UK equities

Bonds• USD high yield

• Corporate hybrids

• US leveraged loans

• Developed market high grade bonds

• Replacing "well-worn" bonds

• Euro high yield

Foreign exchange

• SEK

• EUR

• CAD ( )

• CHF

• USD

• AUD ( )

• The peak of the USD cycle

Hedge Funds • Navigating rising US rates with hedgefunds

Precious Metals& Commodities

Recent upgrades Recent downgrades

Model portfolios (EUR & USD)

Liquidity5% High grade

bonds11%

US TIPS 2%

Inv. gradecorporatebonds 8%

High yieldbonds5%

EM bonds 4%

Equities others5%

Equities EM4%

Equities Europe24%

Equities US12%

Hedge Funds18%

Risk Parity2%

EUR


bonds9%

US TIPS4%

Inv. gradecorporate

bonds8%

High yieldbonds5%

EM bonds4%

Equities others6%

Equities EM5%

Equities Europe13%

Equities US21%

Hedge Funds18%

Risk Parity2%

USD

As of 22 June 2017

Note: Portfolio weightings are for a EUR and a USD modelportfolio, with a balanced risk profile (including TAA). We expectthe EUR balanced portfolio (excluding TAA) to have an averagetotal return of 3.8% p.a. and a volatility of 8.2% p.a. over thenext seven years. We expect the USD balanced portfolio (excl.TAA) to have an average total return of 5.4% p.a. and a volatilityof 8.1% p.a. over the next seven years.

5

Global tactical asset allocationTactical asset allocation deviations from benchmark*

Liquidity

Equities total

Global

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

Duration overlay (USD)

Precious Metals & Commodities

new old

neutral overweightunderweight

Source: UBS, as of 22 June 2017

*Please note that the bar charts show total portfolio preferences, which can be interpreted as therecommended deviation from the relevant portfolio benchmark for any given asset class and sub-asset class.**Positioning includes an underweight in EUR HY and an overweight in USD HY.

Currency allocation

USD

EUR

GBP

JPY

CHF

SEK

NOK

CAD

NZD

AUD

new old

neutralunderweight overweight

6

CIO themes in focus Equities

• Eurozone in style – Value opportunities

Solid economic growth and moderately rising inflation provide a background for Eurozone "value" stocks to outperform the wider market, in our view. This is because value has a cyclicalsector bias, with a heavy weighting in financials. The relative performance of value tends to move in tandem with bond yields. We expect bond yields to move higher, driven by rising USinterest rates and the prospect of the European Central Bank tapering its bond purchases early next year.

• 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 should rewardinvestors in companies that return capital through dividends and share buybacks. These companies offer attractive yields in the current low-interest-rate environment. On average, S&P 500companies returning cash to shareholders via dividends and/or share repurchases offer investors a total yield of about 5% (share buybacks plus dividend yields). Around two-thirds of thisyield come from share buybacks. Good free cash flow generation is a key factor for this theme, and more favorable corporate tax and cash repatriation rules under US President Trump mayboost cash returns to shareholders this year. As buybacks depend on management's discretion, we recommend investing in a diversified basket of stocks.

• US smart beta

Certain stock characteristics (momentum, quality, small capitalization, risk-weighting, value, and yield) have been shown to deliver long-term investment outperformance relative to a marketcapitalization-weighted index. Combining these characteristics, known in the industry as smart beta, makes the investment less cyclical and creates a "passive-plus" solution. Smart beta'scompelling value proposition has resulted in a phenomenal growth in assets. Smart beta ETF assets have increased to over half a trillion USD and are growing at more than 25% a year.

Bonds

• Replacing well-worn bonds

Risk-free yields in most major developed markets are near zero or below. Even if rates remain unchanged, many short- to medium-term bonds would deliver negative total returns. Investorswho avoid negative yields and instead add longer-dated paper at a slightly positive yield often take an even greater risk, as seen in the 4Q16 correction. We think investors can preservewealth by taking profits on assets that will deliver negative total returns (exceeding the costs of switching out) in most likely scenarios. More attractive alternatives can be found on CIO'sbond recommendation lists.

• US loans – Attractive floating yield

US senior loans are an attractive alternative to more traditional fixed income segments, in our view. 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 an increase in US short-term interestrates. The current yield (to a three-year takeout) of roughly 5.4% is attractive. The 12-month trailing default rate is 1.3%, which we expect to trend sideways over the next 12 months. Wethink US loans present an attractive investment opportunity for qualified investors who are comfortable holding less liquid asset classes.

• Yield pickup with corporate hybrids

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

7

CIO themes in focus Liquidity & Foreign exchange

• The peak of the USD cycle

In recent years, the USD has been highly overvalued. US monetary policy was normalizing while ultra-expansionary measures in many other countries were still being introduced. The tideis about to turn, in our view, as the laggard countries pick up the economic pace and close the gap with the US recovery. A re-thinking and eventual tapering of ultra-loose policies in theEurozone, Sweden, Switzerland and the UK should help their currencies regain lost ground against the USD. Oil-producing currencies depreciated markedly in 2014 and 2015, but with theCanadian and the Norwegian economies reviving, we expect the CAD and the NOK to rise against the USD.

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 bonds haveperformed poorly. Investors looking for an alternative to their high grade bond exposure should consider a diversified hedge fund portfolio characterized by low directional exposure to bothfixed income and equities.

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

8

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

CIO longer term investment themes in focus Equities

• Automation and robotics

Smart automation is powering the ongoing industrial revolution, combining the innovation capabilities of industrial and IT processes to fuel global manufacturing productivity gains. Risingwages and challenging demographic developments will push up the costs of emerging market manufacturing companies, driving automation investment, in our view. Artificial intelligenceemployed in machines should take automation to the next level. The smart automation industry's total annual revenue stands around USD 156bn now. We believe that over the cycle, thesector can grow by mid-to-high single digits, with industrial software, robots and the new trends - 3D printing market, artificial intelligence and drones - the clear outperformers.

• Digital data

Due to increased urbanization, the global digital universe is expected to expand 50-fold between 2010 and 2020. Rising global internet penetration from 44% in 2015 to around 66% in2025 and strong data growth in emerging markets is one of the key drivers. From an investment perspective, the theme offers solid long-term growth opportunities as significant investmentis required to deal with the surge in data. Investors can participate by investing in either data enablers or data infrastructure companies.

• Energy efficiency

Energy efficiency covers wide-ranging issues with numerous characteristics and starting points for promising investment opportunities. In general, it is gaining in importance around theworld and increasing sharply thanks to government initiatives. Rising environmental pollution has led to greater worldwide awareness. Energy efficiency covers wide-ranging issues withnumerous characteristics and starting points for promising investment opportunities. The International Energy Agency (IEA) expects the demand for energy-efficient products to grow by 7–8% annually. Investment could reach USD 530bn in 20 years, up from USD 130bn in 2013.

• 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. We think the addressable market is a defensive one that offers attractive growth rates in the mid- to high-single-digits over the next 5-10 years. We estimate its overallsize at around USD 560bn in 2016, and think it will exceed USD 700bn by 2020.

• Emerging market infrastructure

Spending on EM infrastructure will likely grow to USD 5.5trn by 2025 from USD 3trn now, bringing its share of global spending to two-thirds from half currently. Inadequate urban andnationwide infrastructure acts as a bottleneck to economic growth, making infrastructure investment a national priority. A benign macroeconomic outlook for EMs, as well as stable tohigher commodity prices, will further support this spending. In the longer term, income growth driven by urbanization will raise demand for transportation infrastructure through theconsumption of goods like cars and services like aviation and the expansion of megacities.

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

9

US economist Brian Rose, [email protected], European economist Ricardo Garcia, [email protected] or UBS WM Global Chief Economist Paul Donovan, [email protected]

Key financial market driver 1 - Central bank policyKey points• The US Federal Reserve's language suggests a further rate hike, following the increases in March and June (implying a 0.75% increase

in 2017). Rising consumer price inflation means real federal funds rates are current unchanged versus the start of 2016.• Rising inflation and reasonable economic growth have been acknowledged by the European Central Bank (ECB) . There is the

prospect of a further reduction in bond-buying from January 2018.• Changes to quantitative policy appear to be of more interest to investors than changes to monetary policy currently. The Fed has set

out how it intends to reduce the size of its balance sheet, and is expected to begin that process in the second half of 2017.

CIO view (Probability: 75%*) Policies tighten gradually• The Fed has been relatively explicit about its interest rate intentions this year. A further rate increase seems likely in 2H17. The

balance-sheet-to-GDP ratio has been declining "naturally" for some time as GDP has grown faster than the Fed's bond holdingsin nominal terms. The Fed has set out its intention to reduce the size of its balance sheet by not reinvesting all of the proceeds ofmaturing bond holdings. This should begin in 2H17, and markets will look at Fed statements closely to determine the start date.

• The ECB continues to pursue its predetermined quantitative policy path, with bond buying staying at EUR 60bn. Disquietabout the ongoing bond purchases has resulted in a shift in the language of the ECB statement, and an announcement at theSeptember ECB meeting that bond purchases will taper in 2018 seems likely.

• The BoE is expected to leave policy unchanged for now. The impact of sterling's earlier weakness continues to show up inheadline inflation measures, and this has raised concerns for two of the remaining policy makers. The Swiss National Bank (SNB)has held policy steady. The Bank of Japan (BoJ) continues to leave policy unchanged.

Positive scenario (Probability: 10%*) Worsening macro backdrop

• The Fed falls further behind the curve as inflation increases, with real interest rates slipping more rapidly. The ECB launchesadditional policy easing, reversing the language of recent public announcements and signaling a stronger emphasis on thepotential to ease policy further. The BoJ comes under pressure to engineer currency depreciation.

Negative scenario (Probability: 15%*) Macro risks fade

• The inflation effect of US fiscal stimulus leads to a stronger Fed response and a combination of tight monetary policy and loosefiscal policy. Increased labor market costs and some commodity price pressures lead to higher European inflation, generating earlysigns of a more rapid tapering of ECB quantitative easing.

*Scenario probabilities are based on qualitative assessment. Key datesJul 5Jul 6Jul 12

US Federal Reserve minutes releasedEuropean Central Bank minutes releasedUS Federal Reserve Beige Book

European inflation against historyEuropean consumer price measures versus 14-yearaverage

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Headline CPI Constant tax CPI Core CPI Goods CPI Services CPI

14 year average Latest

Source: Haver, UBS, as of 16 June 2017

The beginning of the end for quantitative policy?Central bank balance sheets as a % of GDP

0%

20%

40%

60%

80%

100%

120%

140%

Fed ECB SNB BoJ BoE

2007

High

End 2016


10

Global Chief Economist, UBS WM Paul Donovan, [email protected]

Key financial market driver 2 - Political risksKey points• Political uncertainty can be considered as "unknown unknowns," while political risk relates to "known unknowns." Part of the problem

financial markets have with political uncertainty is that the policy measures and the policy framework are both uncertain. Severalpolitical leaders today are considered "outsiders" or "unconventional", and may defy established political procedures.

• International politics is adding to the uncertainty, with Syria (and its broader implications) and North Korea both focal points.However, neither is likely to be significant for markets from a global asset perspective unless there is a huge increase in political risk.

• Domestic investors tend to understand local politics better than foreign investors. Market reactions to political risk will thereforedepend on the domestic-foreign mix of investors. The higher the foreign ownership, the greater the risk of overreaction to politicalnoise. However, as recent events have demonstrated, even domestic investors can be surprised by political outcomes.

CIO view (Probability: 70%*)• Political uncertainty still has a high profile in the media, but little impact on financial markets. Investors will react more obviously

to time-specific events (e.g. elections) than they do to ongoing processes (US Congressional investigations, UK exit negotiations).

• US President Trump continues to create uncertainty through an unusual and unconventional style of government. Relations withCongress in the context of ongoing investigations into the administration will dictate progress on fiscal and other legislation.Investor concerns are likely to focus on what tax reform proposals emerge in 2H17.

• Investors will expect French President Macron's large majority in the national assembly to deliver domestic structural reformalthough institutional obstacles should not be underestimated. Macron's ability to lead European reform will be closely watched.German political risk is downplayed by financial markets, with Italian politics and the negotiations around the UK exit the mainpolitical focus.

• The economic causes of anti-estab politics remain. Support for anti-estab politics either as new parties or as policy shifts withinestablished parties may persist. The market may turn complacent about the economic drivers of inequality and anti-estabpolitics.

• Syria and North Korea remain the key international political risks for the near term. North Korea has assumed greaterprominence, but markets are unlikely to attribute any meaningful probability to disaster scenarios for now.

Positive scenario (Probability: 10%*)

• The sharp improvement in labor market conditions for low-skilled workers leads to wage increases that either are accompaniedby better credit access or compensate for the loss of credit access since 2008; this eases income and consumption inequality.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 large sections of the electorate, encouraging populism. Political outcomes are increasingly unpredictable as opinionpolls offer less and less guidance. Established parties adopt populist policies, raising uncertainty about mainstream policy programs.Lower income groups' standards of living are hurt by populist policies and rising food and energy prices, fueling further demandsfor radical and unpredictable change.

*Scenario probabilities are based on qualitative assessment. Key datesJun 24Jul 7

Second round of local elections in ItalyG20 leaders' summit in Hamburg

Military spendingMilitary spending as % GDP, 2015

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Russia US France UK China Italy Germany

Source: SIPRI, as of 13 April 2017

Rising income inequality fuels populism andpolitical uncertaintyGini coefficients – higher rating means more unequalincome distribution

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 May 2017

11

CIO strategists Jeremy Zirin, [email protected] or David Lefkowitz, [email protected].

Key financial market driver 3 - Solid US earnings growthKey points• US earnings growth remains solid• The Trump administration's policies may boost EPS further.• High profit margins are likely to be sustained.

CIO view (Probability: 60%*) Earnings growth reaches "cruising altitude"; Trump policiesmay provide a further boost

• After rising at the fastest pace in six years in 1Q17 (+15%), we expect earnings growth to remain solid although at a slightlyslower pace for the rest of the year. The improving profit trend is underpinned by solid US consumer spending, a rebound inUS manufacturing activity as energy investment spending and emerging market demand bottom out, and a more favorableenvironment for financials. Leading indicators of profit growth, such as bank lending standards, remain supportive.

• The Trump administration's policies may further boost earnings growth through lower taxes (corporate, individual, and therepatriation of overseas cash), infrastructure spending, less regulation, and a steeper yield curve (which benefits banks).However, many details have yet to be worked out and we do not expect any meaningful policy changes until after the summer,at the earliest. Overall, these policies may boost earnings by 5-15% over the next few years, with the bulk of the benefitsstemming from corporate tax reform (~10%).

• We estimate S&P 500 EPS of USD 132.50 (11% growth) for 2017, and USD 145 (9% growth) for 2018. These estimates includeUSD 2.50 (for 2017) and USD 5 (for 2018) in tax reform benefits.

• The prospects for tax reform remain uncertain. Therefore, our estimates include roughly half of the expected benefits from taxreform. If this succeeds, EPS should reach USD 150 by 2018.

• Fears that high profit margins will decline in the near term appear overblown. Margins are not higher than normal excludingthe tech sector. Also, margins typically only decline when the economy enters a recession. Finally, the recent pickup in wages isunlikely to crimp profitability. Labor costs do not have a strong correlation with profit margins.

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. Investment spending picks up.

Negative scenario (Probability: 20%*) Downturn in sentiment

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

*Scenario probabilities are based on qualitative assessment. Key datesJul 10 2Q17 earnings season begins

Profit margins remain strongS&P 500 net profit margin, excluding energy sector

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

1997 2001 2005 2009 2013 2017

Source: FactSet, UBS, as of 15 June 2017

Best earnings revisions in six yearsPercent of forward EPS estimate changes that arepositive / negative for S&P 500 companies

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2006 2008 2010 2012 2014 2016 2018Source: DataStream, UBS, as of 15 June 2017

12

UBS WM Global Chief Economist Paul Donovan, [email protected]

Global economic outlook - SummaryKey points• Global growth remains around trend, with data generally being revised higher after the initial release. Sentiment data is more

positive than economic reality would warrant. There is some evidence of sentiment data starting to converge with reality.• Inflation data has largely completed the oil-induced reversion to long-term trends. Moves in inflation around these long-term norms

now tend to reflect local, technical factors.• The US Fed should raise interest rates once more this year following the two earlier rate increases. There is more interest in the

timing of the central bank balance sheet reduction. The ECB should announce a 2018 tapering of its balance sheet.

CIO view (Probability: 75%*) Global growth remains around trend

• The global economic cycle continues to exhibit broadly trend-like activity. The political uncertainty worldwide does not affectthe near-term economic growth story, in our view (although it does have implications for the trend rate of growth in someeconomies).

• Strong labor markets continue to support the economies of the US and (northern) Europe. Any moderation of sentiment datashould be seen as a normalization after excessive levels, not a signal of economic deterioration.

• Inflation rates are now more visibly being influenced by local, largely technical factors. Seasonal issues, housing and hedonicadjustment are all playing a role at the moment. Central banks are likely to look through this noise to focus on medium-terminflation trends, hence the more hawkish language from the Fed, Bank of England, etc.

• The Fed is expected to raise interest rates once more this year. Real interest rates (adjusted by consumer price inflation) areunchanged from early 2016. The Fed is also expected to implement its preannounced program of balance sheet reduction. TheECB is likely to continue its current pace of quantitative policy (EUR 60bn a month) with negative interest rates, but may use theSeptember policy meeting to signal that further quantitative tightening will start next year.

Positive scenario (Probability: 15%*) Stimulus dominates

• The US economy grows close to 3%, spurred by robust consumer spending and the prospect of fiscal easing as Congress overcomesobstacles to a budget and tax reform agreement. After elections, European politicians focus on structural reform and growth.Inflation speeds up as domestic cost pressures build.

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

Negative scenario (Probability: 10%*) Political damage to growth

• US consumers suffer lower real disposable income as domestic inflation pressures increase via the tax effect of trade protection.Eurozone growth weakens as bank lending reverses.

• Credit growth suffers as capital flows are disrupted and uncertainty undermines normal bank lending.*Scenario probabilities are based on qualitative assessment.

Key datesJul 5Jul 6Jul 7

US Federal Reserve minutesEuropean Central Bank minutesG20 Summit in Hamburg

Trend-like growth, normal inflation

2015 2016F 2017F 2018F 2015 2016F 2017F 2018FAmericas US 2.6 1.6 2.2 2.4 0.1 1.3 2.3 2.0

Canada 1.1 1.1 2.3 2.7 1.1 1.5 1.8 2.0Brazil -3.8 -3.6 1.1 2.5 9.0 8.7 4.1 4.7

Asia/Pacific Japan 1.2 1.0 1.6 1.4 0.8 -0.1 0.6 1.2Australia 2.4 2.5 2.3 2.6 1.5 1.3 2.2 2.0China 6.9 6.7 6.7 6.2 1.4 2.0 1.9 2.0India 8.0 7.1 7.2 7.7 4.9 4.5 3.6 3.8

Europe Eurozone 1.9 1.7 1.7 1.4 0.0 0.2 1.7 1.7Germany 1.5 1.8 1.7 1.4 0.1 0.4 1.8 1.8France 1.2 1.1 1.4 1.6 0.1 0.3 1.2 1.1Italy 0.7 1.0 0.9 0.8 0.1 -0.1 1.7 1.5Spain 3.2 3.2 2.8 2.0 -0.6 -0.3 2.3 1.4

UK 2.2 1.8 1.4 0.7 0.0 0.7 2.6 2.8Switzerland 0.8 1.3 1.4 1.6 -1.1 -0.4 0.4 0.9Russia -2.8 -0.2 1.3 1.7 15.5 7.0 4.0 4.0

World 3.5 3.1 3.7 3.7 2.6 2.6 2.9 2.7

Inflation in %Real GDP growth in %

Source: UBS Investment Research, as of 22 June 2017

Forecasts and estimates are current only as of the date of thispublication, and may change without notice.

US wage growth - evidence of a tighter labormarketFederal Reserve Wage Tracker, % y/y

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2005 2007 2009 2011 2013 2015 2017


13

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 Fed to gradually raise rates and to begin shrinking its balance sheet.

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 at 4.3% and signs that labor shortages are becoming more widespread. Rising household income shouldenable robust consumer spending.

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

• Energy sector fixed investment has bottomed and the manufacturing sector has shown improvement in recent months. Overallinvestment should grow at a moderate pace.

• The most recent data shows inflation slowing, but we expect a gradual upward trend in the quarters ahead. A tight labor marketand rising producer prices will eventually feed through into consumer price inflation.

• Political uncertainty is high and is threatening to become a drag on growth. We expect a fierce fight over the FY18 budgetthis fall. Deregulation should provide some benefit over time. We do not expect the Trump administration to cause any severedisruptions to trade.

• The Fed hiked by 25 basis points on 14 June and we expect another 25bps of tightening by the end of this year. The Fed willalso begin gradually shrinking its balance sheet.

Positive scenario (Probability: 15%*) Strong expansion

• US real GDP growth moves 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 central bank to raiserates at a faster pace.

Negative scenario (Probability: 15%*) Growth recession

• US growth stumbles. Political uncertainty and tighter financial conditions weigh on business investment and consumer spending.The Fed stays on hold.

*Scenario probabilities are based on qualitative assessment. Key datesJun 30Jul 3Jul 6Jul 7

Personal income and spending, PCE price index for MayISM manufacturing for JuneISM nonmanufacturing for JuneLabor report for June

PMIs consistent with moderate growthPurchasing managers' indices (PMIs)

30

40

50

60

2007 2009 2011 2013 2015 2017

Manufacturing Non-manufacturing

Source: Bloomberg, UBS, as of 13 June 2017

Inflation slowdown should be temporaryUS headline and core PCE price index, year-on-year in %

(2)

(1)

0

1

2

3

4

5

2007 2009 2011 2013 2015 2017PCE price index y/y Core PCE price index y/y


PCE = personal consumption expenditures

14

CIO European economist Ricardo Garcia, [email protected]

Eurozone economy - Short-term tailwinds to abateKey points• We expect economic growth to remain resilient, but to lose momentum during the year.• Inflation should consolidate for the remainder of the year.• The ECB is expected to reduce QE bond purchases from January 2018 onwards.

CIO view (Probability: 65%*) Short-term tailwinds to abate• We expect the Eurozone economy to benefit from the strong global industrial backdrop. However, the economy is likely to lose

steam over the course of this year as the euro strengthens, higher oil prices start to bite into consumption and the effectivenessof monetary policy keeps declining. Inflation in turn should consolidate and oscillate relatively close to the ECB's inflation targetof just below 2%. We expect the ECB to announce in September 2017 its intention to wind down the QE program over 6–9months as of January 2018.

• In Germany, fundamentals such as consumer confidence, construction and capital-expenditure planning remain robust, but theanticipated rise of the euro should limit this year's economic growth potential. We see a 60% chance for a grand coalition, anda 70% chance for Merkel to retain the Chancellery. In France, a healthier construction sector and more corporate investment,given the new business-friendlier government, should help accelerate French economic growth in 2017.

• Italian economic growth should consolidate at low rates, supported by a stabilizing construction sector. We expect a generalelection in early 2018. Spain is still posting strong growth, though momentum is set to moderate.

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

• The global economy reaccelerates, and the euro weakens more than expected. Eurozone loan demand and the economy recoverfaster than envisaged. Political risks fade.

Negative scenario (Probability: 15%*) Disinflationary setback

• The Eurozone suffers a disinflationary setback due to Greece leaving the Eurozone, a negative economic shock due to Brexit talksfailing, markets being scared about a potential 5-Star-Movement led government, a sharp escalation in the Ukraine conflict, orChina suffering a severe economic downturn.

*Scenario probabilities are based on qualitative assessment. Key datesJun 23Jun 30Jul 3Jul 12Jul 20

PMI estimate (June)CPI estimate (June)Unemployment rate (May)Industrial production (May)ECB Governing Council Meeting

Eurozone growth expected to top out

Source: Haver Analytics, UBS, as of May 2017

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

Source: Haver Analytics, UBS, as of May 2017 (SNB as of April 2017)

15

CIO China economist Yifan Hu, [email protected] or CIO analyst Kathy Li, [email protected]

Chinese economy - Striking a balance between stability anddeleveragingKey points• China has been striking a balance between stability and deleveraging.• CPI inflation should remain mild; PPI inflation should moderate from the peak in February.• Monetary policy should be more flexible than expected, and fiscal policy should stay supportive.

CIO view (Probability: 80%*) Smooth 1H17, challenging 2H17• China's economy has moderated since April from strong 1Q momentum, and could face more challenges in 2H17 as the

property market slows and infrastructure investment moderates. The possibility of a hard landing is limited given supportivepolicies.

• 2017 CPI inflation should remain mild, while PPI inflation should moderate further in positive territory. May CPI inflationremained as low as 1.5% y/y, as food prices continued falling. PPI inflation further declined to 5.5% y/y from 6.4% in April,weighed by continuous falling commodity prices and moderating manufacturing.

• 2017 investment continues to decelerate, but is buffered by infrastructure investment; retail sales remain resilient. Jan–May fixedasset investment decelerated further to 8.6% y/y ytd from 8.9% in Jan–Apr, dragged by slowing property and infrastructureinvestment. May retail sales remained at 10.7% y/y, with mixed performance across the subcategories.

• 2017 exports should rebound modestly in the coming months on the back of global cyclical growth recovery. May exports grewby 8.9% y/y, up from 8% in April, driven by recovering external demand especially in the US and EU.

• 2017 monetary policy is to be more flexible than expected. Prudent and neutral is the tone set by the PBoC. Multiple financialtightening measures have been implemented this year to push de-leveraging, leading to falling liquidity, rising interest rates andslowing credit. However, we also expect monetary policy to become more accommodative when stability is challenged.

• 2017 fiscal policy should remain supportive. Infrastructure investment from local governments remains an important buffer formaintaining economic stability.

• China's FX reserves should likely remain around USD 3trn by 2017 year end. May FX reserves rose slightly to USD 3.05trn, up forfour straight months, greatly alleviating market concerns about large capital outflows.

Positive scenario (Probability: 5%*) Growth acceleration

• Chinese GDP growth exceeds 7% this year thanks to government stimulus packages and/or a major pickup in external demand. Negative scenario (Probability: 15%*) Marked growth downturn

• A marked growth downturn, defined as sub-6% real GDP growth for more than two quarters, stems from plunging investmentaccompanied by widespread credit defaults.

* Scenario probabilities are based on qualitative assessments. Key datesJun 27Jun 30Jul 7

Industrial profit for May 2017Manufacturing and service PMI for Jun 2017FX reserve for Jun 2017

CPI to remain mild while PPI moderates further

-10

-5

0

5

10

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

CPI (% y/y) PPI (% y/y)

Source: CEIC, UBS, as of Jun 14, 2017

Investment decelerated on falling property andmoderating infrastructure

5

10

15

20

25

30

10 11 12 13 14 15 16 17

Retail sales (% y/y, ytd) FAI (% y/y, ytd)

Source: CEIC, UBS, as of Jun 14, 2017

16

CIO Swiss economists Alessandro Bee, [email protected] or Sibille Duss, [email protected].

Swiss economy - Hard data does not (yet) live up to soft dataKey points• Switzerland's economic growth may accelerate slightly this year compared to 2016. A broadening of more robust GDP growth

across sectors will help the labor market recover. We expect GDP to return to trend growth in 2018.• Political uncertainty from Donald Trump's and upcoming Italian elections remain a risk, but overall risks have clearly diminished after

the election of Emmanuel Macron as new French president.• After the French elections, pressure on the Swiss franc eased significantly, and the SNB could reduce its FX interventions strongly.

Nonetheless, a rate hike is not on the cards until mid-2018.

CIO view (Probability: 60%*) Moderate recovery• The manufacturing PMI eased slightly in May but remained on an elevated level, indicating a pick-up in economic activity.

• 1Q17 GDP grew by 0.3%, supported by a recovery in foreign trade. However, hard data in Switzerland did not live up (yet) tothe strong soft data from sentiment indicators, nor to upbeat European data points.

• We foresee Swiss GDP to grow by 1.4% in 2017. The economic recovery is likely to broaden, but GDP growth will not acceleratestrongly. Only in 2018 do we expect GDP growth to return to trend (1.6%).

• Employment growth accelerated slightly in 1Q17. The reduction in unemployment also seems to have gained momentum inMay. As the recovery broadens in the coming quarters, the unemployment rate is likely to fall to 3.2% in 2017 from 3.3% lastyear.

• CPI inflation rose by 0.5 % year-on-year in May, but may slow in 2Q as the base effect from oil subsides. However, we expectinflation to average 0.4% in 2017 – supported by a weaker Swiss franc in the second half of the year.

• The Swiss National Bank (SNB) intervened strongly in FX markets since the end of January to prevent a strong appreciationof CHF. However, the SNB could reduce its FX interventions, as the election of Emmanuel Macron as new French presidentreduced risk aversion and in turn stopped further inflows into the Swiss franc. Nonetheless, a rate hike is not on the cards untilmid-2018. The SNB will not raise rates before the ECB has slowed down its QE program.

Positive scenario (Probability: 25%*) Eurozone growth boosts Swiss growth

• A further drop in Eurozone unemployment fuels positive sentiment in the Eurozone, which in turn supports Swiss exports. Also,compared with upbeat European growth, there is clearly some catch-up potential in Switzerland.

Negative scenario (Probability: 15%*) Downturn of Swiss economy

• Protectionist measures from the new US administration trigger a slowing of global trade, which hurts Swiss exports. Furthermore,political risks still exist in Italy, where elections are pending.

* Scenario probabilities are based on qualitative assessment. Key datesJul 3Jul 6Jul 7Jul 20

PMI manufacturing (June)CPI (June)Unemployment rate (June)Trade balance (June)

Soft data outpacing hard dataSwiss manufacturing PMI and GDP growth y/y (in %)

25

30

35

40

45

50

55

60

65

70

-4

-3

-2

-1

0

1

2

3

4

5

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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

Purchasing Manager Index (right hand scale)

Source: procure.ch, UBS, as of 14 June 2017

SNB FX interventions eased after Macron's electionWeekly change in sight deposits of banks at the SNB inCHF m

-3

-2

-1

0

1

2

3

4

5

6

7

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17

Brexit US elections Frenchelections

Source: SNB, UBS as of 14 June 2017

17

Section 2

Asset class views

18

Section 2.A

Asset class views

Equities

19

Strategist Markus Irngartinger, [email protected] or Analyst Bert Jansen, [email protected]

Global equities Global equity markets – Key points

• We recommend an overweight allocation to global equities versus an underweight in high grade bonds. Given the expensivevaluations for euro high yield (HY) bonds, we are also underweight on this asset class versus global equities. Regionally, Eurozoneequities remain an overweight against UK equities.

• Global equities' earnings growth is supported by strong business cycle conditions, such as healthy and healing labor markets,benign liquidity conditions, inflation normalization, and leading indicators that signal solid economic growth ahead.

• We are neutral on US equities. US earnings growth, while strong, is less buoyant than in other regions. At the same time, USequities trade at a premium of about 15% on the P/E multiple versus their 30-year history.

• We are neutral on Canadian stocks. Canadian company earnings are growing at a healthy clip of about 8% y/y. However,weakness in oil prices year-to-date may limit earnings growth in the energy sector, which comprises roughly 20% of overallmarket capitalization.

• We are overweight on Eurozone equities. Eurozone companies are currently in a sweet spot where economic growth exceedstrend growth while the ECB keeps monetary conditions easy despite the prospect of asset purchase tapering at the beginningof 2018. Political uncertainty has eased substantially with reform oriented parties gaining an absolute majority in the Frenchparliamentary elections and the chances for an early election in Italy currently being balanced.

• We are underweight on UK equities. We expect earnings growth to decelerate, pressured by fading pound weakness, weakercommodity prices year-to-date, and slowing domestically generated revenues as a result from diminishing private purchasingpower. While the unexpected parliamentary election outcome led to some pound weakness, the boost from the weak poundshould fade completely in the second half 2017. However, uncertainty over the future path of Brexit negotiations is weighing onthe market.

• We are neutral on Swiss stocks. After falling for two years, corporate earnings should grow again this year. Last year's margincompression in financials and luxury goods, in particular, has set a lower base for this year.

• We are neutral on Australian equities. Earnings growth is likely to be relatively muted compared to other regions for tworeasons. Firstly, slowing credit growth as well as political and margin pressure may hurt banks' profits. Secondly, the extendeddrop in the iron ore price is likely to limit earnings growth for the materials sector.

• We are neutral on Japanese equities. We expect earnings growth for the coming 12 months to be lower than the consensusforecast as a moderate rise in the corporate tax rate and past yen strength will likely hurt earnings growth.

• We are neutral on emerging market (EM) stocks. While the global macroeconomic picture for EMs is supportive of positiveearnings dynamics, stock prices are also showing the strongest advance among regions year-to-date.

Global equity sectors – Key points

• Our preferred sectors are energy, financials and technology. We are underweight on consumer staples and utilities.

• Energy should benefit from improving free cash flows thanks to reduced capex, further cost cutting and unchanged oil pricescompared to a year ago - stemming from robust demand and constrained supply.

• Financials are among the beneficiaries of a pick-up in nominal growth, higher US interest rates and a rise in credit growth.Valuations are generally attractive.

• Despite the sell-off in information technology in early June we continue to like the sector because of above-average earningsgrowth and rising cash distribution. Valuations are not extreme; the sector's single-digit premium rating to the wider market islower than the historical average.

Preferences (six months)


Preference in hedged terms (excl. currency movements).

Current mostpreferred sectorsEnergyFinancialsInformation technology

Current leastpreferred sectors

Consumer staplesUtilities


20

US equitiesBenchmark:

S&P 500

Current level:

2,436(21/06/17)

Target level:

2,475

6-month outlook:

Neutral

CIO view• We expect equities to grind higher globally – including in the US – and are

overweight on global equities over government bonds. Corporate profit growth hasrebounded and is now on solid footing, driven by healthy consumer fundamentalsand a recovery in the industrial sector. Stimulative government policies – tax reform,deregulation, infrastructure spending – have the potential to boost the outlookfurther. If Fed rate increases are gradual and in sync with improving nominal growth,equity markets will likely take them in their stride. Valuations are higher thanaverage, but in line with the macro backdrop (low inflation and durable growth),and attractive versus bonds. Potential trade frictions and the execution of policyinitiatives are downside risks.

Positive driversShort-term (6 months)Pick-up in growthConsumer spending remains well-supported, andthe outlook for the industrial sector continues tobrighten as energy investment spending stabilizesand emerging markets rebound.Trump reflationOptimism about pro-growth policy initiatives,especially de-regulation, tax reform andinfrastructure spending drives a pick-up ineconomic growth and a moderate rise in inflation.Gradual Fed rate hikesThe Fed is moving interest rates fromaccommodative to neutral. But with core inflationbelow the Fed's target, the risk that the central bankmoves to "tight" monetary policy 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 trade andgeopolitical friction.Setback in emerging marketsEmerging market growth has stabilized, but Chinamust still navigate the hangover from excessinvestment spending of the boom years.Execution of fiscal policyAs expectations have risen since the election, theTrump administration will have to deliver on itspolicy initiatives.

Long-term (5+ years)Innovation capacityHighly profitable US large-cap companies –particularly in technology and healthcare – continueto invest in R&D to maintain their competitiveadvantage.Structurally high profit marginsTransformational technologies, along with anincreasing profit contribution from higher marginsectors and business models, support structurallyhigher-than-average corporate profit margins.

Long-term (5+ years)Expensive long-term valuationsAbsolute US equity valuations are somewhat highrelative to long-term averages. Multi-year annualizedreturns are therefore likely to be somewhat belowhistorical 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 debatesJul 3, ISM manufacturingJul 6, ISM non-manufacturingJul 7, 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* investorsHigher-than-average valuation suggestslower-than-normal returns over the longterm.

For in-line* investorsHigher yielding defensive sectors continueto look vulnerable if interest rates rise.

PreferencesMost preferred

• Energy – relative price-to-book-value isnear 40-year lows

• Financials – benefits from reflation,deregulation and tax reform

• Information technology – seculargrowth at a reasonable valuation

Least preferred

• Utilities – limited growth; higher interestrates are a headwind

• Consumer staples – sluggish endmarket demand

ScenariosPositive scenario

S&P 500: 2,800• Trump's reflation policies are successful,

consumer and business spending accelerates,and risks from Europe, China and tradefrictions remain dormant. S&P 500 EPS rises12% this year and next. The trailing P/Eexpands to 21x.

Negative scenarioS&P 500: 2,000

• Trade and geopolitical frictions rise, politicaluncertainty in Europe spikes and fears of aChina hard-landing resurface. As a result,consumer and business spending slows andearnings stagnate. Trailing P/E falls to about16x.

An earnings-driven market rallyS&P 500 and next 12-month EPS, in USD

120

123

126

129

132

135

138

141

1800

1900

2000

2100

2200

2300

2400

2500

2015 2016 2017 2018S&P 500 (left) S&P 500 NTM EPS (right)


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

21

Eurozone equitiesBenchmark:

Euro Stoxx

Current level:

385 (21/06/17)

Target level:

405

6-month outlook:

Overweight

CIO view• We are overweight on Eurozone equities. Eurozone companies are benefiting strongly

from the positive domestic and global macroeconomic backdrop. The combinationof the companies' comparably high gearing to global growth and still easy monetaryconditions, as the ECB keeps monetary conditions loose, should support earningsin coming quarters. Political risks have subsided further as the French parliamentaryelection outcome delivered a clear majority for reform-oriented parties. Our mostpreferred sectors are energy, materials and financials.

Positive driversShort-term (6 months)Company earnings growthEarnings per share (EPS) have finally started toimprove. As a relative laggard with respect to theeconomic cycle, sustained EPS growth is a criticalfactor in continually attracting investors.Manufacturing cycleThe Eurozone is disproportionately geared tothe global manufacturing cycle. High operationalleverage allows revenue growth to affect earningssubstantially.Ongoing ECB supportThe ECB continued its bond-buying programand kept interest rates on hold at the Junemeeting, which supports a stable economic growthenvironment and low refinancing costs.

Negative driversShort-term (6 months)Interest rate environmentBanks comprise about 12% of the MSCI EMU'smarket capitalization. The overall low interest rateenvironment, with relatively flat yield curves, remainsa challenge for financials.Euro strengthThe euro has appreciated in line with an improvingeconomic environment. However, the sensitivity of themarket's performance to the direction of the euro hasfallen sharply.

Long-term (5+ years)Attractive long-term valuationsEurozone equities are trading around 17x P/Ebased on 12-month trailing EPS, which is veryslightly above the long-term average. Valuationsare attractive relative to government bonds.Long-term economic outlookUnemployment, especially in peripheral countries,may fall further. Any improvement should supportdomestic consumption and thereby revenuegrowth.

Long-term (5+ years)Low interest rates for longerThe ECB is keeping rates low for longer to easemonetary conditions; this should maintain pressure onfinancial institutions as growing net interest incomewill remain difficult.Global trade slowdownRenegotiation of, or exit from, trade agreements willweigh on global trade. EMU companies rely stronglyon exports and are a main beneficiary of global trade.

Key dates Key debatesJun 23, Manufacturing PMI (est.)Jun 23, Services PMI (est.)Jul 12, EMU industrial productionJul 20, ECB meeting

• When and to what extent will the ECB startreducing its bond purchases?

• Will the global economic and earningsrecovery proceed?


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

For overexposed* investorsOverexposed investors should be awarethat the Eurozone remains a cyclicalmarket exposed to higher volatility. Riskssurrounding the banking sector remain.

For in-line* investorsInvestors should tactically increase theirexposure to Eurozone equities so as toparticipate in the likely outperformance vs.UK equities ahead.


• Energy – improving cash flows• Financials – attractive value play• Materials – reflation play

Least preferred

• Consumer staples – overvalued• Industrials – fully valued• Real estate – consensus EPS estimates

too ambitious


Euro Stoxx: 450• Economic growth recovers worldwide. The

Eurozone benefits from stronger domesticand international demand. Earnings pick upmarkedly in six months. Euro Stoxx's trailingP/E rises to about 18.5x.

Negative scenarioEuro Stoxx: 315

• A sharp economic slowdown, coupled withrising worries about the euro's future, hurtscompanies. The ECB's willingness to easefurther limits the downside. Earnings retreatover six months and the trailing P/E drops toabout 15x.

EMU equities move in tandem with realGDP growthEMU real GDP growth and MSCI EMU priceindex, y/y in %

-60

-40

-20

0

20

40

60

-6

-4

-2

0

2

4

6

Q1 1997 Q1 2001 Q1 2005 Q1 2009 Q1 2013 Q1 2017

EMU real GDP growth, yoy in % MSCI EMU, yoy in % (rhs)

Source: Thomson Reuters, UBS, as of 15 June 2017

Strategist Markus Irngartinger, [email protected] or Analyst Bert Jansen, [email protected] see important disclaimers and disclosures atthe end of the document.* Exposure refers to current positioning relative to the UBS House View.

22

UK equitiesBenchmark:

FTSE100

Current level:

7,448(21/06/17)

Target level:

7,600

6-month outlook:

Underweight

CIO view• We underweight the UK against Eurozone equities. The valuations are about similar

for both markets. We believe the balance of risks for the UK earnings outlook is tothe downside, while it is to the upside for Eurozone earnings. The boost from theweak pound is overestimated and should fade completely by the third or fourthquarter. The majority (nearly three quarters) of the UK earnings growth thereforewill be driven by the earnings recovery in commodities. However, the weak start tothe year for underlying commodity prices puts greater risks around the 2017 profitestimates. The UK economy is expected to slow, holding back the 30% exposure todomestic revenues, and the UK market is less leveraged to global growth than theEurozone market due to its more defensive sector make-up.

Positive driversShort-term (6 months)Weak poundThe pound's weakness boosts the 70% or so ofFTSE 100 revenues generated outside the UK.However, the currency tailwind will fade as theyear progresses.Commodity price impact on earningsCommodity sectors should account for three-quarters of the forecast UK earnings growth thisyear. However, risks are to the downside due to thedrop in underlying commodity prices this year.

Negative driversShort-term (6 months)Heightened political uncertaintyCould weigh on investment appetite for the UK, andon the domestic economySelective UK earnings downgradeAs the economy slows, earnings for the financialand consumer discretionary sectors may weaken.Lower cyclical sector exposureEconomic leading indicators for manufacturing haveimproved globally. The less cyclical UK market mightbenefit less from robust global growth than morecyclical markets like EMU equities.

Long-term (5+ years)International growth exposureThe FTSE 100's international composition offersexposure to higher growth economies outside theUK.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-upThe defensive sector composition of the UK marketmay lead the UK to underperform global equitieswhen the global economy expands at a robust pace.Currency strengthSterling is attractively priced, which, if unlocked overthe long run, could weigh on FTSE 100 earnings.

Key dates Key debatesJul 3, Manufacturing PMIJul 4, Construction PMIJul 5, Services PMIAug 3, BoE monetary policy meeting

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


Maintain an underweight exposure versusEurozone equities.

For overexposed* investorsSell some UK exposure in favor ofEurozone equities.

For in-line* investorsInvest in diversified dividends, across abroad range of sectors


• Diversified dividend strategies –maintain a balance across sectors butbenefit from dividend upside

• In light of the weak pound, inboundtourist stocks should do well vs. domesticconsumer stocks.

Least preferred

• Domestic cyclical segments – may sufferfrom weakening consumer spending;


FTSE100: 8,150• Higher global growth and commodity prices

lead to marked earnings growth. The poundcontinues to weaken, providing an FX boost tothe FTSE 100.

Negative scenarioFTSE100: 6,200

• Slower global growth drags down earnings.The UK's defensive sector structure only helpsit in a relative context versus other equitymarkets.

More downside than upside risk to UKearningsMSCI UK consensus earnings growth forecastsfor 2016-2018e, in %

-8

-4

0

4

8

12

16

20

24

28

Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17

MSCI UK consensus earnings growth forecasts

2016 earnings growth forecast 2017 earnings growth forecast2018 earnings growth forecast

%


Strategist Caroline Simmons, [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

Swiss equitiesBenchmark:

Swiss MarketIndex

Current level:

8,986(21/06/17)

Target level:

9,200

6-month outlook:

Neutral

CIO view• We are neutral on Swiss equities in our global portfolio. After falling for two years,

we expect corporate earnings to grow this year. Consensus expectations may betoo optimistic; we expect mid-single-digit growth this year and next. Due to themarket's defensive sector composition, other regions may benefit more from therobust global economic expansion. Exchange rates are a modest positive this year.Last year's compression in margin and demand growth for financials, as well ascyclical consumer and industrial companies, set a lower base for this year. Thedividend yield is attractive, but we believe the Swiss equity valuation is not verycompelling.

Positive driversShort-term (6 months)Accelerating Swiss sales growthWe expect organic sales growth to re-acceleratemoderately from the low point in 3Q16. Growthslowed in local-currency terms from an average3.6% in 2015 to 2.2% in 2016. 1Q17 was at2.7%.Sustainable dividendsDividends paid have been growing every year since2009. We expect the overall amount of dividendspaid to increase further this year and next.Interest ratesAn additional US Fed rate hike this year couldsustain investor interest for financials, althoughthe banking industry environment remains tough.

Negative driversShort-term (6 months)Slow Swiss earnings growthCorporate profits fell in 2016 for a second year in arow, but are expected to recover in 2017 and 2018.Profit growth may, however, lag that of more cyclicalequity markets.Chinese economic slowdownA likely slowdown in China's economic growth inthe second half of 2017 poses a risk to truly globalSwiss companies; they generate close to a third ofprofits in emerging markets including China.Defensive sector compositionEconomic leading indicators for manufacturingactivity have improved globally. The defensive Swissmarket will benefit less from robust global growththan more cyclical equity markets.

Long-term (5+ years)Well-diversified earnings baseSwiss companies are globally well diversified. Theygenerate around 40% of their operating profitsfrom Western Europe and just under one-thirdeach from emerging markets and North America.Profit growthAfter remaining flat overall in Swiss franc termsfor several years, Swiss corporate profits will nowhead upwards again in the coming years, in ourview.

Long-term (5+ years)Low cyclicalityWith defensive sectors having an above-averageweight, the Swiss market tends to be less sensitiveto the economy and may thus benefit less thanothers from a European and global economicrecovery.Expensive long-term valuationsSwiss corporates currently trade at a 12-monthtrailing P/E ratio, about 15% above their averagesince 1987. The high valuation caps the upside inthe coming years.

Key dates Key debatesJun 30, KOF leading indicatorJul 3, PMI manufacturingJul 28, KOF leading indicatorSep 14, Monetary policy assessment

• What is Europe's economic recovery pace?• What earnings growth is achievable?


Adding high-quality dividend payersshould be considered; a dividend-basedinvestment strategy needs to focus moreon good dividend growth than on highdividend yields this year.

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

For in-line* investorsSwitching to high-quality dividend stocksshould be considered.


• High-quality dividends – attractive yields& growth

• Withholding tax-free distribution payers• Global growth beneficiaries – cyclicals• Companies with strong free cash flow

generation

Least preferred

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


Swiss Market Index: 9,800• Eurozone economic growth rises

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

Negative scenarioSwiss Market Index: 7,500

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

Recovering earnings growthConsensus forecasts for net profits and itsgrowth rate for the Swiss Market Index, inCHF and % respectively

-100%

-50%

0%

50%

100%

150%

200%

0

100

200

300

400

500

600

2005 2007 2009 2011 2013 2015 2017

Profit growth (r.h.scale) Net profits (EPS, l.h.scale)

Source: FactSet, UBS, as of June 2017

Analyst Stefan R Meyer, [email protected] see important disclaimers and disclosures at the end of the document.* Exposure refers to current positioning relative to the UBS House View. 24

Japanese equitiesBenchmark:

TOPIX

Current level:

1,612(21/06/17)

Target level:

1,650

6-month outlook:

Neutral

CIO view• We are neutral on Japanese equities. We forecast 1% earnings growth in FY17

(which ends in March 2018) after earnings grew 7% in FY16. We expect USDJPYto remain largely flat, around 110, for the next 12 months. As such, currencymovements are unlikely to support corporate earnings. That said, we believe thedownside risk for the Japanese equity market is limited by the relatively largepurchases by domestic investors like the Bank of Japan (BoJ). We prefer share-buyback and high-dividend-yield stocks as well as companies that benefit from thetightening labor market.

Positive driversShort-term (6 months)Institutional buying of equitiesIn addition to the BoJ's ETF purchasing programof JPY 6trn a year, government pension funds andcompanies will likely buy JPY 5-6trn of Japaneseequities in the next 12 months.Solid near-term corporate earningsCorporate earnings growth remains positivethrough the first half of FY2017 thanks to low year-on-year base effects.Loose monetary policyThe BoJ continues its easy monetary policy, with afocus on yield curve control.

Negative driversShort-term (6 months)Yen appreciationHigher geopolitical risk due to North Korea,and global political uncertainty may lead to JPYappreciation in the short term.Potential tapering by BoJWe believe the BoJ will gradually downsize JGBpurchases from the current JPY 80trn a year, startingfrom 2H17. This may support the JPY.Trade frictionThere is uncertainty about whether the USadministration will adopt the border adjusted tax forcertain products from Japan that may harm trade andhow such a tax would affect the Japanese economy.

Long-term (5+ years)Service demand increaseJapan's shrinking workforce should drive thedevelopment and adoption of automation androbotics as well as an increase in service demand,offering investment opportunities in this area.Entering inflation phaseWage increases due to a tightening workforce arelikely, which should lead away from prolongeddeflation to moderate inflation in Japan.

Long-term (5+ years)Declining population in JapanAs Japan's population is expected to fall 0.5%annually, domestic consumption may shrink if thebirth rate or women's labor force participation ratefails 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 debatesJun 30, CPI (May)Jun 30, Industrial production (May)Jul 3, BoJ Tankan surveyJul 20, BoJ meeting, outlook report

• 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 Japanesehigh dividend stocks as well as companiesthat benefit from the tightening labormarket.

For overexposed* investorsRisks, including a stronger yen and increasedprotectionism globally, make diversifyingacross regions and asset classes advisable.

For in-line* investorsOptimizing sector exposure by allocatingtoward high dividend yield stocks andservice-oriented stocks, and away fromhighly cyclical and overvalued stocks shouldbe considered.


• Share-buyback and high-dividend-yieldstocks: Benefit from low yield market

• Service sectors: Benefit from higherwomen's labor force participation

• Energy and commodity-related stocks:Benefit from high cash flow and earningsrecovery

Least preferred

• Highly cyclical stocks: Highly sensitive toJPY moves

• Auto stocks: Uncertainty about USprotectionism

• High P/BV domestic stocks: Valuations donot look attractive after the recent rally


TOPIX: 1,770• Stronger global demand, reflation and

yen depreciation lead to more risk taking.Domestic demand rises sharply. Strongearnings spur shareholder returns. Earningsgrow at a double-digit rate in FY17; the Topixtarget is based on about 16.5x trailing P/E.

Negative scenarioTOPIX: 1,300

• Sluggish global economic growth andUS protectionism lead to weak exportsand a stronger yen triggering earningsdisappointments. USDJPY falls below 105.The BoJ's commitment to easy monetarypolicy limits the downside risk to equities.

Service industry is expanding in JapanRatio of service industry as % of GDP

53

59

68

40

45

50

55

60

65

70

1980s 1990s 2010s

Ratio of Service industries as %of GDP

Source: Cabinet Office, UBS, as of June 2017

CIO asset class specialists Toru Ibayashi, [email protected] or Chisa Kobayashi, [email protected] see important disclaimers and disclosuresat the end of the document.* Exposure refers to current positioning relative to the UBS House View.

25

Emerging market equities (Updated03/07/2017)

Benchmark:

MSCI EM

Current level:

1,011(30/06/17)

Target level:

1,035

6-month outlook:

Neutral

CIO viewWe are neutral on emerging market (EM) equities in our global portfolio. EM economicactivity numbers are stabilizing, and manufacturing sentiment is turning more positive.Corporate earnings growth is improving across EM regions. EM equities are tradingat a discount to their developed market counterparts. Geopolitical tensions, potentialtrade friction and USD strength are downside risks. Our most preferred markets areChina, Indonesia, Thailand, Russia and Turkey; our least preferred markets are Taiwan,Malaysia, Philippines and South Africa.

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 gradual tightening path in the US and an easingbias in Europe and Japan should keep the cost offunding low for EM corporations and support EMequities.EM earnings have stabilizedEM earnings have stabilized in local currency termsthanks to revived economic activity. We expectthis trend to continue. With recent weakness,commodity prices are down to the level of a yearago.

Negative driversShort-term (6 months)China hard landing riskChina has significant trade links with other EMs andmakes up about one-quarter of the MSCI EM Index.A sharp economic slowdown of China would hit EMequities directly.US dollar strengthEM equities typically suffer in a strong US dollarenvironment, as EM currencies tend to weaken;capital outflow pressure would rise. Translationlosses would harm the equity index measured inUSD.Commodity prices' volatilityThe rebalancing process in energy and base metalsis not over yet. Short-term setbacks in commodityprices are possible as seen this year, increasing thevolatility in the stock market.

Long-term (5+ years)Attractive long-term valuationsThe MSCI EM Index is trading at about 14.0xtrailing P/E, a discount of 25% to developedmarkets.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 EMEM non-financial corporate debt grew rapidly to101% of GDP in 3Q16, exceeding the level ofdeveloped markets. The eventual deleveraging couldpressure growth and profitability.Global trade slowdownA global shift in sentiment away from globalizationand associated treaty re-negotiations could slowdown trade with EMs.

Key dates Key debatesJul 7, FX reserves China for JuneJul 26, Central bank: Brazil

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


We have a neutral stance on EM equitiesin our global portfolios. Underexposedinvestors should consider building uppositions as EM growth is stabilizing.

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

For in-line* investorsInvestors with in-line exposure should lookat our country preferences. We preferChina, Indonesia, Thailand, Russia andTurkey to Taiwan, Malaysia, Philippines andSouth Africa.


• China, Indonesia, Thailand: earningsrecovery

• Russia: economic recovery and higher oilprices

• Turkey: attractive valuations, strongearnings

Least preferred

• Taiwan: tech sector headwind• Malaysia: macro challenges• South Africa: macro and political

challenges• Philippines: macro challenges


MSCI EM: 1,125• The global economic outlook improves even

further, supporting EM earnings growthand investor confidence. Our target forecastassumes 7% EPS growth over six months.

Negative scenarioMSCI EM: 800

• EM prospects are hit by worsening globalgrowth due to weakness in the Eurozoneand/or the US or a sharp deceleration inChina. Earnings fail to increase.

EM country preferencesAll positions are relative to the 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


Source: UBS, as of 3 July 2017. The EM regional asset allocation (AA)isn't part of the global tactical AA.

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.

26

Listed real estateBenchmark:

RUGL Index

Current level:

4,747(21/06/17)

Target level:

4,600

6-month outlook:

Neutral

CIO viewEarnings may rise by only 4% p.a. (ex. emerging markets) in 2017–18 based oninternal growth opportunities, some positive rental reversion and diminishingrefinancing costs. This growth rate may stagnate around 4% in 2019 as the realestate cycle has gradually abated since mid-2015. Our assumption is, however,that future movements in market yields will not negatively surprise, as a neededacceleration in rental growth is lacking. The 3.7% dividend yield will likely remainthe key performance driver. The listed universe has delivered no capital growth sincethe beginning of 2015. We even expect a gradual de-rating, should the still highdirect property market values erode in coming quarters. The universe is trading at a7.3% discount to net asset value versus 6.5% historically.

Positive driversShort-term (6 months)Discount tradingListed real estate trades still slightly below its long-term average valuation discount to net asset values.Debt markets are liquidDebt markets continue to display good liquidity,which boosts refinancing activities. Companies arestill able to improve their financial position slightly.Investors have cashInvestors interested in real estate haveconsiderable unspent capital, since findingattractive properties is currently challenging. Still,this potentially supports values, given potentialbuyers.

Negative driversShort-term (6 months)De-rating riskListed real estate remains at risk of de-rating if creditand risk spreads spike again. As prime initial yieldsare at record lows, investors face unprecedented highduration risks in acquiring new properties.Risk of synchronized correctionProperty fundamentals in core markets have nowconverged globally as ultra low interest rates applyalmost globally. A future cyclical correction may occurin sync, with almost no escape.Zero price returnGlobal listed real estate shares have offered zero pricereturn since the beginning of 2015. Performance hasbeen driven solely from the dividend yield.

Long-term (5+ years)Balanced supply and demandThe current mature real estate cycle is characterizedby comparatively slightly better balanced demandand supply figures. We do not expect dramatic pricecorrections soon, at least from this angle.Current cycle to last longerThe upcycle in physical real estate that began in2009 may continue and extend slightly. Amplecentral bank liquidity supports real estate, whichremains an attractive yielding alternative.

Long-term (5+ years)Expensive long-term valuationsCapital appreciation is set to slow or is alreadyreversing. Property transaction volumes, and mergersand acquisitions trades are falling to low levelsglobally. This will potentially hurt values.Rental growth rates have peakedOverall, rental growth rates have peaked or arealready in decline, which will affect property valuesin the foreseeable future, despite the relativeattractiveness of real estate versus bonds.

Key dates Key debatesJul 7, Markit US composite PMIJun 30, Global real estate M&A flowsJun 30, REIT US capitalization ratesJun 30, RCA US transaction volumes

• Are falling transaction volumes heralding thedefinitive end of the cycle?

• Will the US market enter a correction amiddeteriorating fundamentals?


Listed real estate is only fairly valuedto slightly expensive. We recommend re-entering the market only once it experienceshigher price volatility.

For overexposed* investorsProfit should be taken in relatively expensivestocks with below-average balance sheetquality, high leverage and unsustainable,high payout-ratios.

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


• Japanese property companies• UK• US

Least preferred

• Australia• Japanese REITs


RUGL Index: 4,850• Like-for-like rental growth rates exceed

inflation thanks to stable demand and locallyconstrained supply. High property valuesare supported by rents rising slightly further.Wide property yield spreads to financingcosts remain attractive.

Negative scenarioRUGL Index: 4,200

• Widening credit-risk spreads, stemming fromslower-than-expected rental income growth,hurt overvalued asset values. Negative rentalreversion due to a slump in market rents andrising vacancies fail to justify current lowproperty yields.

The outperformance of cyclicals versusreal estate has been stoppedEurozone: relative performance to cyclicalsIndex: 11.03.2015 = 100

85

90

95

100

105

110

115

120

125

Eurozone Listed Real Estate versus cyclicals

Source: MSCI, FTSE EPRA/NAREIT, Bloomberg, UBS, as of 15 June2017

CIO asset class specialist Thomas Veraguth, [email protected] or Real estate analyst Maciej Skoczek, [email protected] see importantdisclaimers and disclosures at the end of the document.* Exposure refers to current positioning relative to the UBS House View.

27

Section 2.B

Asset class views

Bonds

28

CIO asset class specialists Douglas S. Rothstein, [email protected], Philipp Schöttler, [email protected] or Michael Bolliger, [email protected].

Global bonds Bonds – Key points

• We are tactically underweight on high grade (HG) bonds versus global equities and USD high yield (HY) bonds, where we see abetter risk-return outlook.

• Mid- to long-term US Treasury yields drifted lower as inflation readings came in below expectations. We expect long-term USDyields to move slightly higher over the next six months and the yield curve to flatten. The biggest risk to our forecast is continuedbelow-target inflation. Other risks include US political instability and a slowing Chinese economy.

• We are neutral on USD investment grade (IG) bonds with medium maturities (1-10 years). Spreads are at the lower end of ourforecast range and we don't see reasons for further tightening. Returns will likely be driven by yield curve moves and carry. Weexpect negative returns for the very long-maturity segments (10+ years).

• We are overweight on USD HY bonds against HG bonds due to the attractive carry and supportive fundamentals. Corporateearnings are expected to remain robust, financial conditions have improved in recent months, and economic growth remains solid,mitigating default risks. US HY has been resilient to lower oil prices so far as the weakest issuers have defaulted, the remainingissuers have bolstered their balance sheets and efficiency gains have reduced the breakeven oil price. A sustained fall in the oilprice below USD 45/bbl and a spike in Treasury yields remain key risks. Investors with tolerance for less liquid assets should findgood value in US senior loans.

• We are underweight on euro HY bonds against a mix of global equities and USD HG bonds. We find euro HY overvalued currently.The yield to maturity of 3.4% is at a new all-time low and average prices of around EUR 105 limit the upside for the asset class.The likely discussion about ECB tapering later in the year may be a catalyst for wider spreads.

• We advise investors to remain neutral on emerging market (EM) credit in globally diversified portfolios. While current valuationsdon't look very attractive, EM spreads will likely remain supported by improving EM macro fundamentals, gradually recoveringenergy prices, lower EM corporate default rates and, more generally, a still-supportive external backdrop.

Preferences (six months) and duration overlay

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


USDEURCHFGBP

new old

neutralshort duration long duration


29

USD high grade bondsBenchmark:

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

Current level:

2.39 (21/06/17)

Target level:

2.80 (yield)

6-month outlook:

Underweight

CIO view• Yields continued to drift lower as inflation readings came in below expectations. At

the June meeting, the FOMC hiked rates by 25bps and expressed confidence thatinflation will hit the medium-term target. The Fed projects one more hike this year,and confirmed that balance sheet normalization will start this year.

• We expect long-term USD yields to move slightly higher and the yield curve toflatten.

• The biggest risk to our forecast is continued below-target inflation. Other risks includeUS political instability and a slowing Chinese economy. We are underweight on HGbonds versus global equities, US HY bonds and overweight on USD HG bonds versuseuro HY.

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

Negative driversShort-term (6 months)Moderate growth in the USGrowth is running slightly above trend and this willcontribute to upward pressure on inflation, pushingyields higher.Fiscal policyIf President Donald Trump succeeds in implementingexpansionary fiscal policy, this would lead to arepricing 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 debatesJun 30, PCE deflatorJul 7, June payroll reportJul 26, FOMC meeting

• What will be the key policies of the Trumpadministration?

• How many times will the Fed hike rates?


Duration exposure is an important elementof a diversified portfolio, since 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.


• Moderately long duration

Least preferred

• Very long/short duration exposure


USD High Grade: Eurodollar AA+ 5-7yyield: 1.80 (yield)

• The labor market stagnates, growth stallsand inflation falls. Negative internationalnews causes further turbulence, andcommodity prices fall. The Fed is on hold.

Negative scenarioUSD High Grade: Eurodollar AA+ 5-7yyield: 3.20 (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

USDEURCHFGBP

new old



CIO Strategists Douglas S. Rothstein, [email protected], Francesco Mandala, [email protected] or Patrik Ryff, [email protected] important disclaimers and disclosures at the end of the document.* Exposure refers to current positioning relative to the UBS House View.

30

European high grade bondsBenchmark:

EUR High Grade:EuroAgg AA+ 5-7yyield

Current level:

–0.02 (21/06/17)

Target level:

0.20 (yield)

6-month outlook:

Underweight

CIO view• Bund yields dropped following a more dovish ECB meeting than expected. Inflation

expectations were lowered as President Mario Draghi noted that patience is requiredfor labor market conditions to improve. The ECB has maintained guidance that assetpurchases will continue until the end of the year and rates will not rise until after QEends.

• We expect yields in EUR and CHF to rise over our six-month tactical horizon. TheECB will likely further reduce its purchases next year. The rise should be modest asBunds remain supported by the steepness of the curve and demand for risk-freeassets. Swiss rates remain closely tied to EUR rates.

• The ECB reduced the pace of monthly asset purchases to EUR 60bn as of April, buthas kept its balance sheet on a steady growth path.

Positive driversShort-term (6 months)Slow Eurozone growthLow inflation and spare capacity in the Eurozone islikely to keep yields low.Ongoing ECB supportContinued low inflation and the desire to providefiscal leeway to EMU countries have led the ECB toextend its asset purchase program.

Negative driversShort- term (6 months)Monetary policy normalizationThe ECB is changing its very dovish tone asrisks have receded. As a result of the increasedinterconnectedness of global fixed income markets,rising US rates push Bund yields higher.

Long-term (5+ years)Scarcity of high-quality bondsBasel III encourages banks to hold governmentbonds, which, along with ECB asset purchasesand investor demand for high-quality bonds, keepsyields under pressure.Inflation remains below targetCore inflation has been running well below targetsince the financial crisis, supporting bonds' realreturns.

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 debatesJul 3, Eurozone unemploymentJul 18, Eurozone HICP inflationJul 20, ECB meeting

• What will be the impact of Brexit?• When will the ECB taper asset purchases?


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:–0.20 (yield)

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

Negative scenarioEUR High Grade: EuroAgg AA+ 5-7y yield:+0.50 (yield)

• Eurozone growth accelerates, inflationsurprises to the upside and Brexit is wellmanaged so that it has little negative impacton the banking system and funding costs,especially in the periphery. The ECB raisesinterest rates.

Duration preferences within high gradebonds

USDEURCHFGBP

new old



CIO Strategists Francesco Mandala, [email protected], Douglas S. Rothstein, [email protected] or Patrik Ryff, [email protected] important disclaimers and disclosures at the end of the document.* Exposure refers to current positioning relative to the UBS House View.

31

Euro corporate bondsBenchmark:

BloombergBarclays EuroAggCorporate spread

Current level:

106 (21/06/17)

Target level:

105–120

6-month outlook:

Neutral

CIO view• Euro investment grade (IG) bond spreads were slightly wider over the month as

underlying government bond yields decreased. This led to a drop in the average IGyield-to-maturity to 0.8%, the lower end of its recent range.

• The low starting level in terms of yields, and our outlook that the ECB will becomeless accommodative and start the QE taper discussion later this year, limit totalreturns over the next six months.

• We expect rising government bonds yields, which will weigh on returns, whilespreads are currently at the low end of our forecast range. We are tactically neutral.

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 investor demand forassets, providing a decent yield income.

Negative driversShort-term (6 months)Expensive valuationEuro IG bonds, in particular, face the challenge oflow starting yields (currently 0.8%), limiting the totalreturn outlook.Volatility risk in ratesHigh volatility in government bond yields (e.g. dueto aggressive monetary policy tightening or risinginflation) usually weighs on IG bond returns anddemand.ECB taper discussionWe expect the ECB to start discussing the furtherreduction of its bond purchases later in 2017, likelycausing rising government bond yields as well aswider credit spreads.

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 debatesJun 26, Ifo business climate (GER)Jul 20, ECB meeting

• When will the ECB start tapering?• When will Italian elections take place?


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

For overexposed* investorsThe total return outlook for IG bondsis relatively unappealing, with uninspiringaverage yields of less than 1%. Better returnprospects can be found in global equitiesand USD HY bonds.

For in-line* investorsWe keep a neutral position on euro IG.ECB QE is still a supportive factor for theasset class, but the yield of 0.8% limits totalreturns.


• Single issuers as per Bond Top List• Selected non-financial hybrid bonds• Synthetic exposure (e.g. via CDS)

Least preferred

• Single issuers as per Bond Top List


Bloomberg Barclays EuroAgg Corporatespread: 80

• Faster-than-expected global growth leadsto greater spread tightening. But risinggovernment yields and the ECB ending itsbond purchases earlier than expected wouldlikely lead to losses for IG bonds over sixmonths.

Negative scenarioBloomberg Barclays EuroAgg Corporatespread: 250

• Major risks include a sharp global economicslowdown toward 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 13 June 2017

CIO strategists Philipp Schöttler, [email protected] or Carolina Corvalan, [email protected] see important disclaimers and disclosuresat the end of the document.* Exposure refers to current positioning relative to the UBS House View.

32

USD corporate bondsBenchmark:

BloombergBarclays USIntermed. Corp.spread

Current level:

90 (21/06/17)

Target level:

90-110

6-month outlook:

Neutral

CIO view• Investment grade (IG) corporate bond spreads were broadly unchanged over the

month, even as strong primary market activity in May pushed gross issuance to USD593bn this year, a record high.

• The average yield-to-maturity on USD IG bonds remained stable at around 2.7%. Totalreturns were positive due to falling benchmark rates.

• The current spread is at the lower end of our forecast range. We don't see a catalystfor spreads to tighten further from here.

• Total returns will likely be driven by the decent carry and by the expected rise in USTreasury yields, leading to marginally positive returns over the next six months. We aretactically neutral.

Positive driversShort-term (6 months)Slow growthLikely moderate economic growth in the US is thesweet spot for IG bonds. US corporate earnings aregrowing again, which limits immediate credit risks.Loose global monetary policyVery low or even negative interest rates increaseglobal investor demand for assets with a decentyield income, such as US IG bonds.

Negative driversShort-term (6 months)Strong issuanceYear-to-date issuance has set a new record, withalmost USD 600bn of gross issuance so far. Whiledemand has also been strong, a further increase inissuance may start to weigh 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.

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 recentyears, but a catalyst (e.g. a recession) is needed to turnthe credit cycle.

Key dates Key debatesJul 3, ISM manufacturingJul 7, Change in non-farm payrollsJul 26, FOMC meeting

• Will international demand for USD IG bondsremain strong?

• Will the Fed hike more aggressively thanwhat's being priced in?


IG bonds play an important rolein diversifying portfolios. The negativecorrelation between credit spreads andbenchmark yields helps the asset classperform in different scenarios. The currentaverage yield of 2.7% is decent.

For overexposed* investorsFollowing last year's rally, the total returnoutlook for IG bonds has diminished. Betterreturn prospects can be found in globalequities or USD HY bonds.

For in-line* investorsWe are neutral on US IG bonds. US IGspreads are fair, supported by acceleratingUS economic and earnings growth. The yieldpickup versus HG bonds has become lessattractive.


• 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: 80

• Faster-than-expected global growth tightensspreads. But rising government yields leadto negative absolute total returns over sixmonths.

Negative scenarioBloomberg Barclays US Intermed. Corp.spread: 250

• A sharp global economic slowdown sendsprices toward recessionary levels. A renewedslump in commodity prices hurts 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 13 June 2017


33

USD high yield bondsBenchmark:

BoAML US highyield spread

Current level:

385 (21/06/17)

Target level:

380–420

6-month outlook:

Overweight

CIO view• USD high yield (HY) spreads continued to grind tighter on the back of continued low

market volatility and limited new issuance, before widening very recently as oil pricesdropped.

• We are overweight on USD HY bonds against high grade bonds due to the attractivecarry. Corporate earnings are expected to remain robust, lending standards arebenign and economic growth remains solid, mitigating default risks. Price upside islimited, in our view, as spreads are close to the lower end of our forecast range.

• The trailing 12-month default rate dropped to 2.2% in May, as the impact of thecommodity-related default cycle is fading. We expect the default rate to remainsteady over the next 12 months.

• A sustained oil price level below USD 45/bbl and a spike in Treasury yields remainkey risks.

Positive driversShort-term (6 months)Fed remains accommodativeThe Fed remains accommodative and is expectedto hike rates only gradually, supporting risk assets.Moderate growth in the USA moderately positive US growth environmentis supportive for USD HY. US economic growthis expected to remain solid due to robust privateconsumption.Reach for yieldGlobal investors continue to look for relativelyattractive yields, and USD HY remains one of thehighest-yielding asset classes.

Negative driversShort-term (6 months)Commodity prices remain volatileThe energy sector remains the largest one in theUSD HY index, and the correlation to oil prices couldrise further if oil prices (WTI) remain below USD 45/bbl for longer.ValuationWhile still attractive vs. higher-rated bonds, absoluteyield levels are low in a historical context, limitingthe price upside from current levels and providinglittle buffer against setbacks.

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

Long-term (5+ years)Elevated corporate leverageUS corporate leverage has slightly risen over the lastfew years; leverage ex-commodities is currently 4.2x(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 debatesJul 3, ISM manufacturingJul 7, Change in non-farm payrollsJul 26, FOMC rate decision

• How will Trump's policies influence the USeconomy?

• What could trigger the end of the currentcredit cycle?


HY is an attractive asset class to enhancereturns in the fixed income part of aportfolio. We recommend a tacticaloverweight in USD HY for its attractivecarry of 6%, supported by improvingeconomic and credit fundamentals.

For overexposed* investorsOverexposed investors should be aware ofthe risks (including elevated leverage andlower liquidity compared to equities) anddiversify across asset classes.

For in-line* investorsUSD HY offers an attractive yield pick-up over other fixed income assets and issupported by improving economic andcredit fundamentals. 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 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 USenergy companies to default and pushing upthe total USD HY default rate to 7–8%.

USD HY spreads over government bonds(in bps)

200

300

400

500

600

700

800

900

1'000

2012 2013 2014 2015 2016 2017

US high yield

Source: BoAML, UBS, as of 13 June 2017

Credit strategists Philipp Schöttler, [email protected] or Carolina Corvalan, [email protected] see important disclaimers anddisclosures at the end of the document.* Exposure refers to current positioning relative to the UBS House View.

34

Euro high yield bondsBenchmark:

BoAML Euro HighYield Index spread

Current level:

282 (21/06/17)

Target level:

340-380

6-month outlook:

Underweight

CIO view• Euro high yield (HY) spreads further tightened over the month as political risks in

Europe continue to fade and new issuance remains limited. Spreads have reachedtheir post-crisis low, pushing the yield to a new all-time low of 3.4%. We don't seemuch upside from current valuations and remain underweight on euro HY bondsagainst global equities and US high grade bonds.

• The trailing 12-month default rate was stable at the low level of 1.0% in May.Defaults will likely remain below 2% over 12 months.

• The underweight position on euro HY helps mitigate the downside in risk scenarios,especially given the sizeable index exposure to peripheral issuers (~30%) and banks(~20%).

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.Low funding costsThe low interest-rate environment and the searchfor yield are benefiting European corporates, whichare able to refinance their debt at lower yields.

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.Unattractive valuationEuro HY spreads have tightened to their post-crisislow, while the current average yield of only 3.4%limits six-month total returns.Start of ECB tapering discussionsECB QE is a strong support to the asset class. Anannouncement of ECB tapering its asset purchases, orECB communication pointing in this direction, couldlead to a repricing of euro HY bonds.

Long-term (5+ years)Good credit fundamentalsCurrent average corporate leverage among euro HYissuers (2.9x) is well below its long-term average,while the interest coverage ratio is high at 5.8x,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 debatesJun 23, Eurozone PMIJul 20, ECB meeting

• When will the ECB start tapering?


In a well-diversified portfolio, werecommend not holding any euro HY bonds,given their unappealing return outlook andasymmetric risk-return profile.

For overexposed* investorsOverexposed investors should be aware ofthe risks (including subordinated financialsexposure and lower liquidity comparedto equities). We recommend reducingexposure and using the proceeds to buyglobal equities and USD high grade bonds.

For in-line* investorsWhile we are not concerned aboutcorporate fundamentals, we think euro HYbonds will underperform a mix of globalequities and US high grade bonds in the nextsix months.


• Single issuers as per HY Top List

Least preferred

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


BoAML Euro High Yield Index spread: 270• A stronger-than-expected economic recovery

would lead to further spread compression. Abroad-based recapitalization of the Europeanbanking sector would be an unexpectedpositive for euro HY.

Negative scenarioBoAML Euro High Yield Index spread:1,200

• Economic growth decelerating torecessionary levels would push defaults andspreads much higher. A milder sell-off couldbe caused by fears about the Eurozone'spolitical future.

Euro HY spreads over government bonds(bps)

200

300

400

500

600

700

800

900

2012 2013 2014 2015 2016 2017

EUR high yield

Source: Bloomberg, BoAML, UBS, as of 13 June 2017


35

Emerging market sovereign bonds in USDBenchmark:

EMBI Diversified

Current level:

314 (21/06/17)

Target level:

300

6-month outlook:

Neutral

CIO view• Emerging market (EM) sovereign credit has delivered a mid-single-digit return

this year based on tighter spreads and lower US Treasury yields. Our base casecalls for credit spreads being supported around current levels by improving EMfundamentals, gradually recovering energy prices and a benign external backdrop.That said, the administration in the US raises risks associated with US monetaryand fiscal policies, global trade, immigration and geopolitics. We advise investors toremain neutral on EM credit in globally diversified portfolios. We favor sovereign andselect high yield credits, such as Brazil, Argentina, Indonesia, Kazakhstan, Turkey andQatar. We also added exposure to Venezuela on the increased likelihood of a regimechange.

Positive driversShort-term (6 months)EM economic growth improvingEM fundamentals are improving. High frequencyindicators are pointing to a moderate expansion ofactivity. Accommodative global monetary policiesare also supportive.Still low global bond yieldsStill-low interest rates in developed markets (DM)will continue to push yield-hungry investors to lookfor opportunities in EM sovereign credit.Commodity prices have recoveredCommodity prices have recovered some ground lostlast year. Despite recent setbacks, we expect therecovery to continue and to support EM sovereignfundamentals.

Negative driversShort-term (6 months)US policy uncertaintyThe outlook for US fiscal and monetary policiesunder President Donald Trump remains unclear.Unfavorable outcomes for EM cannot be ruled out.Global macro risksRenewed commodity weakness, fresh China concernsand more hawkish global central banks may lead to asetback in EM asset prices.Record bond issuanceLast year's external bond issuance by EM sovereignsmay have set records. Issuance should remain high thisyear, presenting a technical obstacle.

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 may soon follow suit.Long-term economic outlookAlthough the growth gap between EM and DM hasshrunk in recent years, it remains. We expect it towiden moderately, which should help EM continuedown the path of economic convergence.

Long-term (5+ years)Buildup of total debt in EMThe significant build-up in EM private sector debt overthe past few years will continue to hinder growth andsovereign creditworthiness.Rising political uncertaintyThe rise of populist policies in Western countriesthreatens globalization and the existing geopoliticalconsensus.

Key dates Key debatesJul 20, ECB announcementJul 20, BoJ announcementJul 26, Fed announcement

• 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,stabilizing EM fundamentals and anattractive EM yield pickup 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. They should takea close look at our recently launched EMmodel portfolio.


• High yield• Brazil, Argentina• Turkey, Qatar, Kazakhstan• Indonesia

Least preferred

• Investment grade• Poland, Romania• Malaysia, Philippines, China• Singapore, UAE


EMBI Diversified: 280bps• 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: 500bps

• 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.

Tighter EM sovereign credit spreadsCredit spreads in basis points

0

100

200

300

400

500

600

700

800

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16

Dec

-16

EMBI Div IG EMBI Div HY


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

36

Emerging market corporate bonds in USDBenchmark:

CEMBI Diversified

Current level:

291 bps(21/06/17)

Target level:

300 bps

6-month outlook:

Neutral

CIO view• Emerging market (EM) corporate credit has delivered a mid-single-digit return

so far this year on tighter spreads and lower US Treasury yields. Over the nextsix months, we expect spreads to trend moderately higher given less appealingvaluations. However, spreads will likely remain supported by improving EM macrofundamentals, higher oil prices, lower EM corporate default rates and, moregenerally, a still-supportive external backdrop. We advise investors to remain neutralon EM credit in globally diversified portfolios and to be selective, as reflected in ourmodel portfolio allocation and segments highlighted in the preferences section.

Positive driversShort-term (6 months)Corporate default rate to moderateCredit ratings and default trends will likely improveamid a bottoming EM business cycle, higher oilprices, stronger EM currencies and successfulliability management exercises.Technicals still supportiveWe expect monetary policies globally to tighten onlygradually. EM corporate bonds still offer some yieldpick-up to investors, while net corporate issuanceshould be matched by demand.

Negative driversShort-term (6 months)US policy uncertaintyThe uncertainty surrounding the new USadministration's policies will limit the potential forfurther sharp spread tightening. It could also lead tosetbacks in EM asset prices.(Geo)political risksPolitical and geopolitical risks in large EMs, such asSouth Africa, Turkey, and Russia, populist policies inWestern countries, and tensions around North Koreamay weigh on the asset class.

Long-term (5+ years)EM corporate default rate to moderateThe 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 EMThe significant build-up in total debt in EMs overthe past few years remains a key hindrance 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 debatesJul 20, ECB announcementJul 20, BoJ announcementJul 26, Fed announcement

• What impact will Trump's policies have onEMs?

• What is next for commodity prices?


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 aware ofglobal macro and EM-specific risks amidtight valuations and should diversify acrossasset classes.

For in-line* investorsInvestors with in-line exposure canoptimize their allocation by pickingindividual bonds from our weekly EmergingMarkets Bond List and should take a closelook at our model portfolio.


• Quasi-sovereigns• Select LatAm corporates• Select oil & gas and EMEA bonds

Least preferred

• GCC corporates• Asian bonds


CEMBI Diversified: 250bps• Stronger-than-expected EM economic data

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

Negative scenarioCEMBI Diversified: 530bps

• 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 tightened further thisyearCredit spreads in basis points

100

300

500

700

900

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

CEMBI Div IG CEMBI Div HY


CIO analysts Michael Bolliger, [email protected] or Jérôme Audran, [email protected]. or CIO strategist Carolina Corvalan,[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

Section 2.C

Asset class views

Foreign exchange

38

Head FX Strategy Thomas Flury, [email protected], Asian Currency Strategy Teck Leng Tan, [email protected] or EM FX Strategy Jonas David, [email protected]

Foreign exchange overview G10 currencies – Key pointsIn our global tactical asset allocation, we are adding an overweight position in the Canadian dollar (CAD), financed with an underweightin the Australian dollar (AUD). At an AUDCAD exchange rate of above parity, the CAD is greatly undervalued against the AUD. Overthe last few years, the AUDCAD exchange rate has traded in a range between 0.92 and 1.03, and we expect this pattern to repeat.We expect the current strong growth rebound in Canada to push the Bank of Canada toward tighter monetary policy. In Australia wedon't expect a similar move toward tighter monetary policy anytime soon. The AUDCAD exchange rate should move back into thelower 0.90's over the next six months.

We maintain an overweight position on the euro, financed with an underweight in the US dollar. The EUR has been undervalued againstthe USD for years, and we expect a correction to less undervalued territory. The Eurozone economy has recovered to a stage at which theEuropean Central Bank (ECB) is gradually stepping away from its very accommodative monetary policy; talks on ending asset purchaseshave started and should intensify in the coming months. This should continue to support the EUR. In contrast, investors are already USDrich as the currency has strengthened over recent years. As the US Federal Reserve is likely to hike interest rates only gradually, the USDshould descend from strongly overvalued levels. We expect EURUSD to move higher.

We also maintain an overweight on the Swedish krona (SEK). This is financed by an underweight in the Swiss franc (CHF). We expectSweden's Riksbank to turn more hawkish on its monetary policy throughout the year, as the economy is improving steadily and inflationis rising gradually. We introduced the short CHF position after the tail risk of French elections vanished. The Swiss National Bank (SNB)intervened with large amounts ahead of the elections, and we think that there is quite a strong CHF money overhang now that thetail risk of a new populist government in France gone. The CHF has become increasingly attractive to finance carry trades, given thatthe money market offers the lowest yields worldwide. The valuation gap for CHFSEK, measured by purchasing power and interest rateparity, is among the largest within the G10 parings. We expect the heavy overvaluation of the CHF and undervaluation of the SEK tocorrect when the ECB normalizes its monetary policy stance. EM currencies – Key pointsEM currencies are supported by benign global conditions, including a softer US dollar and contained upward pressure on global ratesdue to accommodative monetary policy. Meanwhile, economic activity is on an improving trend. Also, stable-to-higher commodity pricesseem realistic and benefit exporters. Given their improving fundamentals and attractive interest rate carry, currencies like the BRL, MXNand IDR should do well. Also, the TRY should outperform the ZAR.

Still, volatility will likely persist and setbacks in risk sentiment cannot be ruled out due to uncertainty about the US administration'spolicy, next steps by major central banks, commodity prices, lingering concerns about China's outlook, and geopolitical tensions.

Preferences (six months)

USD

EUR

GBP

JPY

CHF

SEK

NOK

CAD

NZD

AUD

new old



39

Head foreign exchange strategy Thomas Flury, [email protected] or Foreign exchange strategists Daniel Trum, [email protected] or Wayne Gordon, [email protected].

G10 currencies G10 foreign exchange viewsEURUSD: The start of a long-term recovery. The US Federal Reserve hiked its policy rate in March and in June. The Fed should furthertighten policy only very gradually, given continued weak inflation. The European Central Bank (ECB) seems to have started discussingthe end of its easing measures, which should support a long-term EUR rebound. The solid global economic growth and the strongundervaluation should help the euro to appreciate. Political tensions of the Trump administration are adding to a negative USD sentiment.

USDJPY: Fixed JPY yield curve. The Bank of Japan (BoJ) fixed the yield curve by setting the target for the 10-year rate at around zeroand keeping the policy rate at negative 10 basis points. The rise in global yields has pushed Japanese 10-year yields above zero, and afurther increase could force the BoJ to step up its bond purchases to keep Japanese yields fixed. We expect the BoJ to eventually lift thetarget for the 10-year yield and for the JPY to strengthen moderately versus the USD while weakening relative to the euro.

USDCAD: CAD to outperform now. The Canadian recovery has gained speed in recent months and is likely to continue throughoutthis year. We expected the Bank of Canada (BoC) to become more hawkish later in the year. But, in a speech in early June, both theGovernor and Deputy Governor have opened the door for earlier rate hikes. We therefore expect USDCAD to move quicker below 1.30than initially expected and see it falling towards 1.25 over the medium term.

AUDUSD: RBA to remain somewhat dovish. With the Fed raising rates, and coal and iron ore prices likely to fall on rising supply,we expect the AUD to stay under pressure. In light of comparably low Australian inflation, Reserve Bank of Australia (RBA) policy couldturn dovish again if the housing market weakens. Further US rate hikes eat into the AUD's attractive carry and should therefore preventthe AUDUSD exchange rate from moving higher.

GBPUSD: Uncertainty around Brexit remains. UK economic data has weakened only slightly, while the pound is highly undervalued.British Prime Minister Theresa May lost her majority in the snap elections. But we still expect Brexit negotiations to start and eventuallyagree to terms to prevent a "cliff" situation when leaving the EU. We expect GBPUSD to remain range bound around 1.28.

USDCHF: Stabilization just below parity. The Swiss National Bank (SNB) will likely try to stabilize the combined value of USDCHF andEURCHF. Safe-haven flows have started to leave Switzerland after the French elections. We expect USDCHF to stabilize below parity.

EURCHF: Should rise due to a stronger Europe. The SNB continues to defend any appreciation pressure caused by safe-haven trades.This year, we expect the ECB to plan the end of its quantitative easing (QE) program, which should lift the EUR and drive EURCHF above1.10 and toward 1.14. With tail risks of French elections gone, the CHF becomes increasingly attractive for carry trades.

EURNOK: Cautiously looking for downside. ECB tapering and the risk of a Norges Bank rate cut should keep EURNOK above 9.00over the next six months despite a likely oil price rally. Norway's economy remains torn between solid growth and plummeting inflation.Over 12 months, we expect Norway's attractive interest rate levels to pull EURNOK down to 8.90.

EURSEK: Cheap SEK entry levels. Sweden is economically ahead of the Eurozone. Growth is enviable and inflation is on a long-termuptrend. A less-easy ECB should enable the Riksbank to raise interest rates within the next 12 months, which in turn should lead to arebound of the undervalued SEK against the EUR.

Currency forecast table

22-06-17 3M 6M 12M PPPEURUSD 1.118 1.14 1.16 1.20 1.26USDJPY 111.1 110 110 110 76USDCAD 1.332 1.30 1.28 1.25 1.22AUDUSD 0.755 0.74 0.74 0.72 0.70GBPUSD 1.268 1.28 1.30 1.36 1.60NZDUSD 0.725 0.71 0.71 0.71 0.57USDCHF 0.971 0.96 0.98 0.97 0.96EURCHF 1.086 1.10 1.14 1.16 1.21GBPCHF 1.232 1.24 1.28 1.31 1.54EURJPY 124.2 125 128 132 96EURGBP 0.881 0.89 0.89 0.88 0.79EURSEK 9.763 9.30 9.00 8.80 9.07EURNOK 9.509 9.10 9.10 8.90 9.82

Source: UBS, as of 22.June 2017

PPP = purchasing power parity

40

Emerging market currencies & money marketBenchmark:

ELMI+ (indexlevel)

Current level:

360 (21/06/17)

Target level:

1% (totalreturn)

CIO viewEM currencies are supported by benign global conditions, including a softer US dollarand contained upward pressure on global rates due to accommodative monetarypolicy. Meanwhile, economic activity is on an improving trend. Also, stable-to-higher commodity prices seem realistic and benefit exporters. Given their improvingfundamentals and attractive interest rate carry, currencies like the BRL, MXN and IDRshould do well. Also, the TRY should outperform the ZAR.

Still, volatility will likely persist and setbacks in risk sentiment cannot be ruledout due to uncertainty about the US administration's policy, next steps by majorcentral banks, commodity prices, lingering concerns about China's outlook, andgeopolitical tensions.

Positive driversShort-term (6 months)Supportive global monetary policyThe still accommodative global monetary policyshould support EM currencies and act as a backstopfor negative risk sentiment.EM economic growth is improvingAfter initial signs of recovery last year, furtherimproving economic activity should brighten the EMoutlook in 2017.Further capital inflowsBased on the improvement in the domesticoutlook and supportive global conditions, emergingmarkets should continue to attract capital inflows.

Negative driversShort-term (6 months)Ongoing policy uncertaintyUncertainties linger with regard to US administrationpolicies, politics in Europe (e.g. implications of Brexit),and geopolitics.Sharp moves in benchmark yieldsThe ongoing volatility in benchmark yields, especiallyUS Treasuries, could become an obstacle forfundamentally weaker emerging markets if we seerenewed increases in rates.China's FX policyChina's economic rebalancing should continue. ThePBoC is expected to allow a gradual weakening ofthe Chinese yuan. Sharp moves remain a tail risk andcould weigh on markets beyond China.

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 of the hiking path arecontinuously reassessed, the US Fed will tightenmonetary policy further. Also, the ECB is expected toshift to a less accommodative policy stance.Buildup of private debt in EMElevated levels of private sector debt imply a needto contain leverage in some EM economies, includingChina, and might weigh on structural growthprospects.

Key dates Key debatesJul 26, Policy rate, US FedJul 26, Policy rate, BrazilJul 27, Policy rate, TurkeyJul 28, Policy rate, Russia

• How will the policy of the new USadministration impact markets?

• Will emerging markets attract further capitalinflows?


For dedicated EM investors, tacticalopportunities exist in selected EMcurrencies, especially in those withimproving fundamentals and an attractiveinterest rate.

For overexposed* investorsLock in some profits after the recent rally. Fordedicated EM investors, attractive tacticalopportunities still exist in selected EMcurrencies.

For in-line* investorsDedicated EM investors should continue tolook for attractive tactical opportunities inselected EM currencies.

PreferencesMost Preferred

• MXN and IDR (against SGD)• BRL (against USD)• PHP (against THB)• TRY (against ZAR), CZK (against EUR)

Least Preferred

• SGD• THB• ZAR


ELMI+ (index level): Total return of 3%Improving global growth, including sound tradedynamics, support EM currencies. But rising USinterest rates limit their upside. A recovery incommodity prices benefits exporters.

Negative scenarioELMI+ (index level): Total return of –4.5%Trade protectionism and deteriorating risk sentimentweigh on EM growth prospects and lead to adepreciation of EM currencies amid capital outflows.Some central banks have to tighten monetary policy.

UBS CIO EM FX forecasts

Current 3-month 6-month 12-monthLatamUSDBRL 3.33 3.25 3.15 3.05USDMXN 18.2 18.5 18.0 18.0EMEAEURPLN 4.24 4.15 4.10 4.10EURHUF 309 310 312 315EURCZK 26.3 26.0 26.0 25.7USDTRY 3.53 3.50 3.60 3.80USDZAR 13.0 13.5 13.5 14.5USDRUB 59.5 58.0 58.0 55.0AsiaUSDCNY 6.83 6.90 7.00 7.10USDIDR 13,318 13,500 13,500 13,500USDINR 64.5 66.0 66.0 66.0USDKRW 1,144 1,100 1,100 1,080USDMYR 4.29 4.25 4.25 4.10USDPHP 50.4 48.0 48.0 47.0USDSGD 1.39 1.40 1.40 1.38USDTHB 34.0 34.0 33.5 33.5USDTWD 30.5 30.0 29.5 29.5


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

41

Section 2.D

Asset class views

Precious metals & Commodities

42

CIO asset class specialists Dominic Schnider, [email protected], Giovanni Staunovo, [email protected] or Wayne Gordon, [email protected].

Precious metals & commodities overview Commodities – Key points

• Concerns over stronger commodity supply and weaker purchasing managers' indices (PMI) continue to weigh on commodities;livestock and select agricultural commodities have been exceptions. Broadly diversified commodity indices are down 7% year-to-date, led by the energy sector.

• PMIs disappointed market expectations last month, although they dropped from very elevated levels in most cases. Softness inUS and Chinese car sales and market participants questioning US President Donald Trump's ability to stimulate the US economyalso weighed on sentiment; base metals have benefited from Trump's election win in late 4Q16. Furthermore, China's longer-term growth outlook still calls for a slowdown. While activity was strong in 1Q17, the general perception is that China's policymeasures will weigh on credit growth and economic activity in 2H17.

• Nonetheless, we don't think the market should be worried for two reasons. First, we expect favorable developments for priceson the supply and demand side in the coming months. And second, elevated speculative positions in the futures market havemade it easy for supply and demand concerns and chart-technical factors to pressure prices lower. The most aggressive net longpositions in the futures market have moderated, so the negative impact of these short-term flows on prices should diminish.

• Considering our outlook for firmer economic activity amid disciplined supply, we believe the odds are in favor of highercommodity prices. Historically, the strongest return periods for commodities are during the later stages of an economic upswing.We therefore feel comfortable in our guidance for a 10% appreciation in broadly diversified indices like the BloombergCommodity (BCOM) or the UBS Bloomberg CMCI Composite (CMCI) index over the next 3–6 months. We favor long exposureto crude oil and select base metals.

• Despite oil production cuts by OPEC and Russia this year, oil inventories in OECD countries have only moderately declined.Meanwhile, a steady rise in US drilling activity is raising concerns of a strong comeback of shale oil supply in 2H17. We continueto see larger oil inventory drawdowns, including in the US, in the months to come due to capped OPEC/Russia supply andseasonally improving oil demand. Thus, we expect prices to recover towards USD 60/bbl over the coming months.

• Industrial metal prices have been struggling to hold ground, with economic news flows failing to meet market expectations,particularly in the last two months. As a result, elevated speculative positions in base metal futures have been reduced on abroad basis. We believe supply constraints should remain price supportive for copper and aluminum in 2H17.

• We expect gold prices to trade at around USD 1,250/oz over the coming moths, which is slightly lower versus the current spotprices. Financial market players are underpricing the possibility of a third Federal Reserve rate hike later this year, which could cutthe net length of futures held by speculative accounts. That said, rising US real interest rates should be offset by a weaker USdollar and better Asian gold demand.

• Grain markets remain highly sensitive to US weather news, soft commodities are responding to more idiosyncratic factors,and strong processor margins are driving livestock outperformance. Speculators are holding large short position in agriculturalmarkets, which means it wouldn't take much to spark price rallies, particularly in grains, if US crop conditions were todeteriorate in the coming weeks.

Commodity prices have been broadly underpressureBloomberg Commodity Index and UBS BloombergCMCI Total Return Index; indices standardized to 100

50

60

70

80

90

100

110

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


Current mostpreferredcommoditiesCrude oilCopperAluminium

Current leastpreferred

commoditiesThermal coal

CottonLive cattle


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

43

GoldBenchmark:

Gold (6 months)

Current level:

USD 1,246/oz(21/06/17)

Target level:

USD 1,250/oz

CIO view• We expect gold prices to trade at around USD 1,250/oz over the coming months,

which is slightly lower than current spot prices.

• Financial market players are underpricing the possibility of a third Federal Reserverate hike later this year, which could cut the net length of futures held by speculativeaccounts.

• That said, rising US real interest rates should be offset by a weaker US dollar andbetter Asian gold demand.

Positive driversShort-term (6 months)Ongoing political uncertaintyPolitical risks should remain elevated in the comingmonths, supporting demand for safe-haven assets.

Negative driversShort-term (6 months)Improving US economic dataA rapid improvement in US economic data, enoughto strengthen the USD and increase yields, maytrigger outflows in the form of ETFs and futures.Physical demand weaknessHigher gold prices, policy intervention or weakerdomestic currencies may continue to weigh on jewelryand bar demand in Asia.

Long-term (5+ years)Growing demand from Asia, incl. CBsAsian demand for gold was lackluster in 2016. Weexpect better growth in 2017 as wealth in theregion increases and investor affinity for the metalrises. Central bank purchases should continue.Contracting mine supplyMine supply growth is likely to remain subdued,despite higher prices. Declining mine grades andaging gold mines need to be considered as well.

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

Key dates Key debatesJul 7, US job market reportJul 14, US CPI inflationJul 26, FOMC meetingAug 15, WGC 2Q17 gold report

• Is inflation positive for gold?• Is physical demand improving?


Investors who can bear gold's volatility maystill find its hedging properties attractive.We see higher gold prices over six months.

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

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


• Direct gold investment as a hedge

Least Preferred


Gold (6 months): USD 1,400/oz• The Fed reverses recent hikes, thereby

lowering yields and reviving investmentdemand for gold.

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

• The Fed turns more hawkish than expectedin an effort to be ahead of the curve asinflation picks up, labor data remains strongand Trump's policies materially lift inflationexpectations.

Gold remains highly correlated to US realinterest rates5-year US TIPS (inverted in %, rhs) and goldprice (in USD/oz, lhs)

-2.5%

-1.5%

-0.5%

0.5%

1.5%

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Gold price (lhs) TIPS 5-year (inverted, rhs)


CIO asset class specialists Wayne Gordon, [email protected], Giovanni Staunovo, [email protected] or Dominic 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.

44

Crude oilBenchmark:

Brent crude oil (6months)

Current level:

USD 44.8/bbl(21/06/17)

Target level:

USD 60/bbl

CIO view• OPEC's efforts to cut oil inventories and support prices have been stymied as prices

trade below USD 50/bbl, the lowest level since last November.

• This recent sell-off was triggered by frustration on the part of investors over the slowpace of US oil inventory adjustments.

• Our base case is unchanged: we continue to see larger oil inventory drawdowns,including in the US, in the months to come due to capped OPEC/Russia supply andseasonally improving oil demand. Thus, we expect prices to recover towards USD 60/bbl over the coming months.

Positive driversShort-term (6 months)Muted global supply growthOil production fell nearly 1.7mbpd during Jan-May from 4Q16 due to the oil production cutdeal. With the deal expected to stay in place until1Q18, supply growth should be muted this year.

Negative driversShort-term (6 months)Rising US supplyUS production increases are likely to put a ceiling onprice gains, but are unlikely to upset the market'smove toward a deficit market.

Long-term (5+ years)Capital expenditure cutsThe substantial capital expenditure cuts by energycompanies should 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 from ongoingimprovement in energy efficiency and batterytechnology developments, with electric carseventually capping oil demand.

Key dates Key debatesJun 30, US oil supply/demand dataJul 11, EIA STEO reportJul 13, IEA oil market reportNov 30, OPEC ordinary meeting

• Will OPEC nations adhere to the productioncut deal terms?

• How fast and strong will US supply increasein 2017?


Outright long exposure to crude oil orenergy equity exposure.

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

For in-line* investorsOutright long exposure to crude oil orenergy equity exposure.


• Outright long exposure to crude oil• Energy equities

Least Preferred


Brent crude oil (6 months): USD 65-70/bbl• Destabilizing political events in oil-producing

regions, like Libya, Venezuela, Nigeria andthe Middle East, trigger a sharp supply drop.

Negative scenarioBrent crude oil (6 months): USD 35-40/bbl

• Downside price risks come from a weakadherence to the OPEC supply deal, noextension of the oil production deal in lateMay, a sharp increase in US crude productionand/or less demand growth in emerging Asiadue to an economic slowdown.

Greater oil inventory drawdownsexpected over the coming quartersValues are in million barrels per day

(3)

(2)

(1)

0

1

2

3

75777981838587899193959799

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

Jan-

16

Jan-

17

Implied stock change (rhs) Demand (lhs) Supply (lhs)

Source: IEA, UBS, as of 15 June 2017

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.

45

Section 2.E

Asset class views

Alternative investments Hedge funds

46

Hedge fundsBenchmark:

HFRI FundWeighted

Current level:

13,406(31/05/17)

Target level:

CIO viewHedge funds are a useful source of return and stability in a multi-asset portfolio,especially during market volatility. They offer superior risk-return characteristics andaccess to uncorrelated investment opportunities, which provides downside protectionand diversification benefits. They have been performing well this year. Heightenedstock dispersion, low cross-asset correlation, rising interest rates, moderately highervolatility, and diverging monetary and economic policies are supporting performance.We anticipate returns of 4–6% for the asset class as a whole.

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 long andshort equity positions.Monetary policy normalizationHedge fund strategies have historically performedvery well during interest rate hike periods. CIOexpects one more rate hike by the Federal Reservethis year.

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 clearly trending markets toperform. Whipsawing markets can limit returns orbe harmful to some of these funds.

Long-term (5+ years)Long-term economic outlookMacroeconomic shifts, such as monetary policynormalization in the US vs. still easy monetarypolicy in Europe and Japan, and/or falling Chinesedemand, 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 how theytrade jeopardize 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 debatesJul 3, US: ISM manufacturingJul 7, US: Non-farm payrollJul 10, 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 protectionand diversification benefits are reasons forunder-allocated investors to rebalance.

For overexposed* investorsOverexposed investors should be aware ofliquidity, leverage and concentration risksassociated with hedge funds.

For in-line* investorsInvestors with in-line exposure shouldensure they are well-diversified across allstrategies and regions.


• Low beta tactical equity managers• Fixed income arbitrage• Merger arbitrage, special situations• Macro/trading

Least preferred

• High beta managers• Distressed debt

ScenariosPositive scenario• Robust economies and equity markets boost

the market beta contribution to hedge fundreturns. This typically benefits fundamentalequity-oriented strategies, including equityhedge and, to an extent, event-driven.

Negative scenario• Tighter financial conditions, crises in

emerging markets, China or the Eurozone, orintensifying disinflationary trends lead to theoutperformance of less correlated and moreliquid strategies like macro/trading.

Year-to-date hedge fund performanceStrong start to the year for hedge funds

0.52%

2.57%

2.80%

3.54%

3.89%

5.23%

0% 1% 2% 3% 4% 5% 6%

Macro / Trading

Relative Value

HFRI Asset Wgt

HFRI Fund Wgt

Event Driven

Equity Hedge

Source: Bloomberg, HFR, UBS, as of May 2017

Strategists Karim Cherif, [email protected] or Georg Weidlich, [email protected] see important disclaimers and disclosures at the end of thedocument.* Exposure refers to current positioning relative to the UBS House View.

47

Section 3

Fixed income tactical asset allocation

48

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

new old


49

Section 4

Tactical asset allocation for global credit portfolio

50

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

Liquidity

Credit total

US corporate bonds

Euro subordinated financial

US high yield short duration


Euro high yield bonds

US senior loans

Euro senior loans



Asian credit (USD)


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

financial bonds5%

USD senior loans15%

EUR senior loans10%USD HY bonds

(short duration)5%

USD high yieldbonds13%

EUR high yieldbonds7%

EM sovereignbonds13%

EM corporatebonds10%

Asia credit5%

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

51

Section 5

Emerging market tactical asset allocation

52

Emerging market investment strategy (Updated 03/07/2017)Tactical asset allocation deviations from benchmark*

Source: UBS, as of 3 July 2017

*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.

Investment preferences within asset classes*

Source: UBS, as of 3 July 2017

Green/red arrows indicate new upgrades/downgrades. Grey up/down arrows indicate increase/reduction to existing positions.

53

Emerging market bonds in local currenciesBenchmark:

GBI-EM GD /EMTIL yields

Current level:

6.2% (nom.) /3.2% (real)(21/06/17)

Target level:

6.5% /3.2%yields

CIO viewThe asset class is supported by benign global conditions, including a softer US dollarand contained upward pressure on global rates due to accommodative monetarypolicy. Meanwhile, economic activity in emerging markets (EM) has improved, withinflationary pressure still contained on average. Among the major markets, Braziland Russia have room to ease monetary policy further in the coming months. Givenimproving fundamentals and attractive valuations, we think emerging markets canattract further capital inflows as long as global conditions remain benign. Whileconditions have improved, shifting expectations about the US Federal Reserve's policyoutlook and fragile global risk sentiment toward the asset class may trigger renewedbouts of weakness.

Positive driversShort-term (6 months)Supportive global monetary policyThe still-accommodative global monetary policyshould limit upward pressure on EM interest rates,support EM currencies and act as a backstop fornegative risk sentiment.Sound growth-inflation dynamicsAfter initial signs of recovery last year, furtherimproving economic activity should brighten the EMoutlook in 2017. Meanwhile, inflationary pressureis contained on average.Further capital inflowsBased on the improvement in the domestic outlookand supportive global conditions, EM shouldcontinue to attract capital inflows.

Negative driversShort-term (6 months)Sharp moves in benchmark yieldsVolatility in benchmark yields, especially US Treasuries,could become an obstacle for EM local currency bondsif we see sharp increases again.Ongoing policy uncertaintyUncertainties linger about the US administration'spolicies, European politics (e.g. implications of Brexit)and geopolitics.Commodity price volatilitySetbacks in commodity prices may weigh on exportersand result in currency weakness.

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 EM to implementeconomic reforms. If successful, the reforms shouldlead to productivity gains and better growthprospects.

Long-term (5+ years)Monetary policy normalizationThe Fed will likely tighten monetary policy further.Also, the ECB is expected to shift to a lessaccommodative policy stance. This should also resultin some upward pressure on EM interest rates.Buildup of private debt in EMElevated levels of private sector debt imply a need tocontain leverage in some EM, including China, andcould weigh on structural growth prospects.

Key dates Key debatesJul 26, Policy rate, US FedJul 26, Policy rate, BrazilJul 27, Policy rate, TurkeyJul 28, Policy rate, Russia

• How quickly will global interest ratesincrease?

• Will emerging markets attract further capitalinflows?


Some exposure to local currency bondsis warranted for dedicated EM investors,especially in the current environment of still-low interest rates in advanced economies.

For overexposed* investorsTake some profit after the recent rally, but asa dedicated EM investor, maintain a strategicallocation in the asset class.

For in-line* investorsAs a dedicated EM investor, maintain astrategic allocation in local currency bondsin emerging markets.


Least Preferred


GBI-EM GD / EMTIL yields: 6.0% / 3.0%• Improving global growth, including sound

trade dynamics, support emerging markets.At the same time, rising US interest rates willlimit the room for lower EM interest rates.Higher commodity prices benefit exporters.

Negative scenarioGBI-EM GD / EMTIL yields: 6.8% / 3.4%

• Trade protectionism and deteriorating risksentiment weigh on emerging markets andlead to capital outflows. Some central bankshave to tighten monetary policy to stabilizeexchange rates. EM interest rates rise.

EM yields trended lower in recent monthsYields 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

Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17

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

Source: JP Morgan, Bloomberg, UBS, as of 15 June 2017

CIO asset class specialists Jonas David, [email protected] or Michael Bolliger, [email protected] see important disclaimers and disclosures atthe end of the document.* Exposure refers to current positioning relative to the UBS House View.

54

Section 6

APAC asset allocation

55

APAC tactical asset allocationTactical asset allocation deviations from benchmark*

Liquidity

Equities total

Global

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


Source: UBS, as of 22 June

*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


56

Asian bonds in USDBenchmark:

JACI IG / HY

Current level:

175/454(21/06/17)

Target level:

190/470

6-month outlook:

Underweight

CIO view• The Asian credit market has taken the anticipated June Fed hike calmly as the Fed's

outlook on rates path was left broadly unchanged, despite the recent weak inflationreadings. Fed Chair Yellen still expects a tighter labor market to eventually inducefaster inflation.

• China credits were resilient amid Moody's downgrade of the sovereign rating. TheCNY even started to strengthen against the USD afterwards as the PBOC introduceda revised USDCNY onshore fixing mechanism. But high yield spreads widened dueto idiosyncratic events on Noble and Reliance Communication, whose bond pricesdropped by 30 to 60 points.

• We remain overweight on CEMBI vs. JACI IG bonds as general risk sentimentremains supportive of EM credit.

Positive driversShort-term (6 months)Short-term economic outlookAlthough the macro economic surprise index isstarting to roll over, the levels are still supportiveof risk sentiment amid continuous recovery on theeconomic front.Corporate fundamental outlookThe credit quality of Asian USD bond issuers hasreached the trough with few downgrades, as seenby the improvement in profitability.

Negative driversShort-term (6 months)Geopolitical riskAny military strike conducted on North Korea, ordeterioration between Qatar and GCC members,would dampen global sentiment. As a result, Asianspreads will widen, although the gain in Treasurieswould likely mitigate the total loss.Increasing push for supplyChina issuance may increase due to the policy pushfor more USD proceeds returning to China amidglobal worries on FX reserves. Also, China domesticfunding costs have been rising.

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 is set to increase.Index inclusionChina will likely be added to global bond indicesas it opens up. As a result, more institutionalinvestors are expected to 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 debatesJun 30, US PCE CoreJun 30, China official manufacturingPMI

• Is inflation in the US gaining momentum?• How much will China's PMI roll over?


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 thepotential for a rise in the volatility of USTreasuries and tight Asia credit spreads.

For in-line* investorsWithin Asian credit, we prefer BBB and BBbonds, particularly 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):150bps/400bps

• Trump's pro-growth fiscal spending rhetorictranslates into actual policies, reachingmutual agreement with China on trade.Political noise in the US and EM settles down.Meanwhile, China's macro slowdown ismilder than market expectation.

Negative scenarioJACI IG / HY: 210bps/520bps

• A military strike is conducted on North Korea,or the situation between Qatar and GCCmembers deteriorates, dampening global risksentiment. Alternatively, Treasury yields spikeif US inflation surprises the market on theupside.

Equity yield over Asian bondsin %

0

2

4

6

8

10

12

14

16

May

-06

May

-07

May

-08

May

-09

May

-10

May

-11

May

-12

May

-13

May

-14

May

-15

May

-16

May

-17

3-5yr JACI YTM AxJ Equity Yield

Source: Bloomberg, UBS, as of 21 June, 2017

Head Asset Allocation APAC Adrian Zuercher, [email protected], Head Asian Credit Timothy Tay, [email protected] or Asset Allocation strategistCrystal 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.

57

Asian equities (ex-Japan)Benchmark:

MSCI Asia ex-Japan

Current level:

625 (21/06/17)

Target level:

640

6-month outlook:

Neutral

CIO viewAsian assets have outperformed global peers since the beginning of the year, andwe remain positive on the region. Still, we believe a well-diversified multi assetportfolio is needed to mitigate any possible temporary drawdowns. Regionally, weare adding a new underweight position on the Philippines, as its macro momentumhas softened, by reducing our underweight position on Malaysia by one notch. Weremain overweight on China and on Indonesia due to expanding corporate profitmargins.

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 has abated and indicates abetter earnings environment for Asian companies.This is confirmed by China's PPI reading, whichadvanced by 5.5% y/y in May.Attractive short-term valuationsAsia is trading at a large discount to globalequities, and Asian equities look inexpensiveversus Asian credit given the low interest rates inthe fixed income space.

Negative driversShort-term (6 months)Trade frictionEconomic indicators could start to roll over assome investments are delayed due to deterioratingglobal trade relations initiated by the new USadministration, which would weigh on Asianmarkets.China hard-landing riskThe China Economic Surprise Index is rolling overfrom its near five-year high in January. This maycause some short-term profit taking. A China hardlanding could trigger a risk-off investment mode.Short-term inflation riskStimulative fiscal policy by the new USadministration may lead to a sudden increase ininflation. A jump in US interest rates could lead tocapital repatriation to the US.

Long-term (5+ years)Long-term economic outlookAsia is experiencing a high structural growth rate,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 growthWith Asian emerging markets becoming moremature and China targeting slower economicgrowth, revenue growth may slow as well.Long-term inflation riskA structural increase in inflation could put pressureon central banks to raise interest rates moreaggressively, leading to higher capital costs, whichwould weigh on future earnings.

Key dates Key debatesJul 1, China PMI manufacturingJul 3, US ISM manufacturing

• 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• Indonesia• Thailand

Least preferred

• Malaysia• Taiwan• Philippines


MSCI Asia ex-Japan: 700• More supportive monetary and fiscal policies,

sustained demand and an improving globalgrowth backdrop support Asian equities.

Negative scenarioMSCI Asia ex-Japan: 500

• China's economy decelerates sharply. The EUand/or the US economy falls into recession.

Asia ex-Japan equity strategy

China

Hong Kong

India

Indonesia

Korea

Malaysia

Philippines

Singapore

Taiwan

Thailand

Old New

Underweight Neutral Overweight


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

58

Appendix

Global portfolios

59

Model portfolios (for a balanced risk profile)

EUR


bonds11%

US TIPS 2%

Inv. gradecorporatebonds 8%

High yieldbonds5%

EM bonds 4%

Equities others5%

Equities EM4%

Equities Europe24%

Equities US12%

Hedge Funds18%

Risk Parity2%

EUR

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 3.8% p.a. and a volatility of 8.2% p.a. overthe next seven years.


USD


bonds9%

US TIPS4%

Inv. gradecorporate

bonds8%

High yieldbonds5%

EM bonds4%

Equities others6%

Equities EM5%

Equities Europe13%

Equities US21%

Hedge Funds18%

Risk Parity2%

USD

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 5.4% p.a. and a volatility of 8.1% p.a. over thenext seven years.

CHF

Liquidity5%

High gradebonds11%

US TIPS 2%Inv. gradecorporate

bonds8%

High yieldbonds5%

EM bonds4%

Equitiesothers12%Equities EM

4%

EquitiesSwitzerland

17%

Equities US12%

Hedge Funds18%

Risk Parity2%

CHF

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 3.3%p.a. and a volatility of 7.9% p.a. over the next seven years.

60

Contact List Global Chief Investment Officer WM

Mark [email protected]

UBS CIO WM Global Investment Office

Global Asset AllocationAndreas [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]

61

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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 been

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Disclaimersubmitted 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 othersecurities 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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