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Investment Strategy Guide

ab

CIO Americas, Wealth Management

US edition

UBS House ViewOctober 2017

Mapping the cycleIn Context: Inflection pointsTop Theme Spotlight: ‘Click here’ to invest in cyber-security

A MESSAGE FROM THE REGIONAL CIO

This report has been prepared by UBS AG, UBS Switzerland AG, and UBS Financial Services Inc.Please see important disclaimers and disclosures at the end of this document.

1 Tactical preferences

2 Feature Mapping the cycle by Mark Haefele

8 In context Inflection points by Jason Draho, David Lefkowitz

10 Preferred investment views

11 At a glance

11 Month in review

12 Top themes What’s new this month? by Laura Kane, Matt DeMichiel

13 Themes universe

14 Global economic outlook

16 Asset classes overview Equities Fixed income Commodities Foreign exchange

22 Key forecasts

23 Detailed asset allocation

30 Performance measurement

32 Appendix

36 Publication details

CONTENTS

Dear reader,T his month’s Feature article ad-

dresses the market cycle, a topic that has garnered an increasing

amount of investor attention. While we have typically seen recessions every five to seven years, on average, the current expansion has been underway for over eight years. While we are seeing eco-nomic acceleration and strong profit growth around the globe, there seems to be growing concern that we are “over-due” for another slowdown. While ac-knowledging that we are likely closer to the end of this cycle than to the begin-ning, we don’t believe that the economic expansion is at risk in the near term.

Monetary policy has been a major source of stability for markets and economies during this expansion, and the extraor-dinary policies undertaken by global central banks appear to be reaching an important inflection point. This month’s In Context article looks at the central banks’ pivot to normalization, inflation potentially inflecting higher, and the prospect of tax relief, while evaluating these factors’ impact on our positioning.

This month’s Top Themes section fo-cuses on cyber-security, which is back in the spotlight this month following a se-ries of high-profile cyber-crimes around

the world. These attacks have demon-strated that cyber-attacks pose an in-creasing risk to companies’ reputations. We analyze these breaches’ implications for the cyber-security industry and con-sider potential investment opportunities in the space.

Stocks should continue to outperform bonds due to solid economic growth, a robust earnings cycle, and an accommo-dative policy mix. But while we elect to retain our overweight to global equities over government bonds, we are paring back the size of this position in order to lock in some of our profits. Within US eq-uities, we also retain an overweight to US large-cap value vs. US large-cap growth, which should benefit from attractive valu-ations and our forecasted improvement in inflation.

Regards,

Mike Ryan, CFAChief Investment Officer Americas, UBS Wealth Management

http://linkedin.com/in/mike-ryan-ubs

October 2017 UBS HOUSE VIEW 1 of 37

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TACTICAL PREFERENCES

We reduce our overweight to global equities vs. US government bonds but still maintain a positive view.

Currencies

We are neutral on the US dollar and lower our preference for the Canadian over Australian dollar.

Equities We continue to overweight global equities and value vs. growth in US large-caps.

Fixed income We decrease our underweight to US government bonds.

Each bar represents a +/- 2% tactical tilt or part thereof (i.e., one bar = 0.5% to 2%, 2 bars = 2.5% to 4%, 3 bars = over 4%). NOTE: TACTICAL TIME HORIZON IS APPROXIMATELY SIX MONTHS

Neutral: Tactical recommen-dation to hold the asset class in line with its weight in the moderate risk strategic asset allocation (see page 23)

Underweight: Tactical recom-mendation to hold less of the asset class than specified in the moderate risk strategic asset allocation (see page 23)

Overweight: Tactical recom-mendation to hold more of the asset class than specified in the moderate risk strategic asset allocation (see page 23)

Asset classesTactical asset allocation

LEGEND

2 of 37 UBS HOUSE VIEW October 2017

The duration of the current bull market in global stocks makes clients around the world ask, “Are we overdue for a bear market?” But bull markets don’t just die of old age. To answer “yes” to this question, we would have to conclude either that valuations are far too high, or that we are likely heading into economic recession. Today I don’t think that either is a clear and present danger to the bull.

Global price-to-earnings ratios at 17.8x are close to the long-term average of 18x. This reduces the scope for significant further upside, and we take some profits by reducing the size of our overweight position in global equities. But valuations remain below the kind of stretched levels that have led to bear markets in the past (for instance global price-to-earnings ratios reached 30.6x in the dotcom era). Ratios in the 18–23x range have historically been consistent with positive returns (6%) over the following six months.

While we are now more than eight years into the current economic expansion, there are few signs to suggest the economy has run out of slack. As I detail further in this letter, the traditional catalysts for a recession – oil price spikes, government austerity, sharply higher rates, a credit crunch, or an exogenous shock – look unlikely to emerge over our six-month investment horizon. As such, we believe it is too early to call the end of the cycle and get overly defensive.

As we look further forward, a downturn will inevitably come. We believe that the most likely cause of a downturn would be a withdrawal of monetary support. If so, the risk this poses to bond prices means that investors will need to think differently about strategic asset allocations. Investors will need to allow for greater flexibility in investment policies and ensure they are diversified across equities, bonds, and alternatives.

Mapping the cycle

Mark HaefeleGlobal Chief Investment OfficerWealth Management

Follow me on LinkedInlinkedin.com/in/markhaefele

Follow me on Twittertwitter.com/UBS_CIO

Cycle maturitySome investors are concerned that eight years of expansion means we must be overdue for a downturn, but signals are mixed.

Potential downturn catalystsWe continue to monitor the risks of a credit crisis, exogenous shocks, and tighter monetary policy.

Stay invested in equitiesWe still see upside for equities and we don’t believe it currently makes sense to sacrifice returns to buy tactical hedges.

Tactical asset allocationWe reduce our overweight to global equities. While economic and earnings growth should allow stocks to continue climbing, the pace of the increase is likely to slow.

FEATURE

http://www.linkedin.com/in/markhaefele

https://twitter.com/UBS_CIO


FEATURE

Where are we in the cycle? Concerns that we might be approaching the end of the economic cycle stem from a number of signs which, if taken in isolation, suggest that the world economy might not have much additional room to grow. US unemployment is just 4.4%. Job openings, at 6.2 million, are the highest since at least 2000 (Fig. 1). We have started to see some central banks shift toward controlling inflation. The Bank of England could now hike rates before year-end. Corporate credit spreads are below long-term averages. And China’s debt growth, which has taken total debt-to-GDP from 140% in 2008 to almost 300% today, will need to slow at some point, potentially reducing global economic demand.

But other signals suggest a more benign picture. Global growth is currently synchronized and generally accelerating. Three-quarters of the 45 countries monitored by the OECD will experience faster economic growth this year than last. The link between a tight labor market, higher wages, and prices is less clear than in the past. In spite of all the job vacancies, US wage growth based on average hourly earnings data was last reported at just 2.5% in the year to August. Average consumer price inflation across the US, Eurozone, and China is still just 1.7% (Fig. 2). Although total debt levels in China have risen, households in the US and Europe have not even begun to increase leverage – debt-

The probability of a recession over the next six months is low and we believe global equities can continue to perform.

Fig. 1: US employment data might suggest we are near the end of the cycleLow unemployment and record-high job openings point to a tight labor market

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Fig. 2: Average headline CPI across regions still remains subduedHeadline CPI in China, US, and Eurozone, in %

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Fig. 3: Current probability of a recession is lowThe Fed’s GDP-Based Recession Indicator Index, in %

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to-GDP has fallen from 79% in 2008 to 69% today, according to data from the Bank for International Settlements (BIS).

Overall, this mixed picture leads us to believe that the probability of a recession over the coming six months is low, and that we are mid-cycle (albeit likely closer to the end of mid-cycle than the beginning). This view corroborates with other recession indicators: the Fed’s GDP-based Recession Indicator shows a recession probability of 8.2% (Fig. 3). Global equities can still perform in a mid-cycle environment. Average global equity performance in the period 6–18 months before a downturn is 19%.

What might end the cycle? The end to cycles has historically been brought about by: Sharp reductions in net government spending (e.g. Eurozone 2011–12), oil price shocks (e.g., US 1973–75, 1990–91), credit crises (e.g., 2007–09), a major exogenous shock (such as a natural disaster e.g., Japan 2011), increases in interest rates (e.g., US 1979–80, 1990–91), or an unwinding of asset price speculation (2000–02, 2007–09).

Today, sharp reductions in net government spending look unlikely given that deficits in the US and Eurozone have already contracted sharply (from 8.7% and 6.3%, respectively, of GDP in 2010, to 2.6% and 1.5% today), and the current policy agendas in the US and Europe both suggest more net government spending. Shale technology has made the global oil supply fundamentally more flexible, reducing the chance of an oil price shock. And valuations are close to their long-term average, not at levels historically consistent with sharp drawdowns.

We see the three most important potential catalysts for a downturn as: a credit crisis, an exogenous shock, or tighter monetary policy.

While the risk of a credit crisis should be reduced by the improvement in bank capital ratios from 7.1% in 2007 to 13.4% today, and the decline in overall developed market household debt-to-GDP from 85% in 2009 to 73% today, according to BIS data, there are low-probability, large potential “known unknowns.” The perennial US debt ceiling debate will resurface in the months ahead, and the difficulty in finding common ground between fiscal conservatives and those in favor of large deficits could threaten Treasuries and the dollar. Meanwhile, the rapid increase in debt, widespread securitization, and lack of transparency over losses in China are cause for concern, even if global exposure to Chinese credit is relatively limited.

A downturn sparked by a sharp fall in net government spending or an oil price shock appears unlikely.

We see the most important risks for a downturn as a credit crisis, an exogenous shock, and tighter monetary policy.

FEATURE


FEATURE

As for exogenous shocks, the Italian election is set for next spring, and we continue to monitor the North Korea situation. For indications of the likelihood of conflict, we will be watching closely for signs of increased North Korean technological development, readiness or preparations for war among North Korea’s neighbors, and developments in economic sanctions. For more see last month’s letter Waldorf Salad.

While low rates of inflation and wage growth mean that central banks can keep monetary policy relatively loose for now, sharp increases in inflation or wage growth, rising debt, or significant increases in net government spending could force their hand. As long as there is uncertainty over the “natural rate of interest” (i.e., the interest rate at which central banks are neither actively constraining or stimulating the economy) the risk of a policy error is higher (Fig. 4).

Don’t just prepare for last timeInvestors need to ensure their strategic asset allocation is prepared for these potential outcomes. One part of this is to diversify across regions – reducing exposure to localized shocks or credit events. Another is to diversify across asset classes – if monetary policy causes the next downturn, bonds are unlikely to be the safe haven they were in the past (Fig. 5).

Fig. 5: Bond yields are at historic lowsUS, German, and Italian 10-year government bond yields, in %

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Fig. 4: Market reaction to ECB president Mario Draghi's Sintra speech shows investor worry about the prospect of central bank tightening

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FEATURE

Removing bonds from a portfolio altogether is unlikely to prove an effective strategy in every scenario (they would likely remain a good source of protection in case of certain geopolitical shocks.) So we diversify our strategic asset allocation across bonds, equities, and alternatives, to help reduce the reliance on any one asset class. Within alternatives, relative value, equity market neutral, and macro/trading strategies could be the most effective uncorrelated sources of return should central banks withdraw support (Fig. 6).

Investors can also consider strategic approaches to protecting their portfolio. They include ensuring that investment policies allow for significant shifts between asset classes, or employing systematic approaches to equity hedging – limiting expenditure on near-to-the-money hedges but protecting against large drawdowns.

Asset allocation We make two changes to our tactical asset allocation position this month.

First, we reduce our overweight to global equities. Although we continue to believe that global stocks can grind higher, underpinned by robust economic growth and increasing earnings, rising valuations are reducing the possibility of significant further upside. Global stocks have climbed 15% year-to-date, about twice our expected long-term return on stocks. We therefore believe it is prudent to take some profit.

Second, in our FX strategy we reduce our overweight position in the Canadian dollar (CAD) versus the Australian dollar (AUD), taking some profit after the strong run of the CAD in recent months following the Bank of Canada’s interest rate hike. This was a non-consensus view when we adopted the trade in June. We still see the CAD outperforming the AUD, since we expect pressure on the Australian economy to intensify as weaker Chinese growth weighs on commodity prices. As a result, we keep half of this position open.

The risk of a downturn on a six-month horizon is low, so don’t sacrifice returns by buying tactical hedges.

We reduce our overweight to global equities, but maintain a moderate risk-on stance.

We reduce our overweight CAD vs. the AUD.

Fig. 6: Volatility of hedge funds is lower than global equitiesDrawdowns of MSCI World Index vs. HFRI Fund Weighted Index

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FEATURE

We are overweight the SEK versus the CHF.

Within Europe we preferEurozone equities over UKstocks.

We also overweight the Swedish krona versus the Swiss franc. In July, Swedishinflation exceeded the Riksbank’s 2% target for the second consecutive month, andunemployment hit its lowest level since 2008. We therefore expect the central bank totighten policy, supporting the krona. In contrast, we expect the Swiss franc to remainunder pressure due to excess franc liquidity after years of intervention by the SwissNational Bank.

Within Europe we prefer Eurozone equities over UK stocks. The Eurozone economyhas gained momentum and growth has broadened out into the periphery, more thanoffsetting headwinds from a stronger euro. We expect earnings growth of around10% for the year. In contrast, the prospect of tighter monetary policy in the UK haspushed sterling almost 5% higher against the US dollar, and 4% against the euro sincethe start of September. With around 75% of FTSE 100 revenues coming from overseas,this currency move should keep UK equities under pressure relative to Eurozone stocks.

Wealth Management

Mark HaefeleGlobal Chief Investment OfficerWealth Managemen

Follow Mark Haefele on Linkedin and Twitter

linkedin.com/in/markhaefele

twitter.com/UBS_CIO

UBS Investor Forum Insights

In this month’s Investor Forum, participants were asked their view on the stage of the market and economic cycle.

• Participants argued that the market cycle was already mature. But most saw no cause for immediate concern. Asset prices, they said, were far from bubb-le levels.

• There was a broad consensus that central banks will play a crucial role in coming months. Participants believe central banks would be the most likely cause of a cyclical turn.

• Currency markets had surprised participants this year, with most having ex-pected the US dollar to appreciate.


IN CONTEXT

It was almost exactly nine years ago that Lehman Brothers filed for bankruptcy, which set in motion the most disruptive phase of the global financial crisis. It took extraordinary policy measures by the US Treasury and the Federal Reserve to ulti-mately stem the crisis. These policies were intended to be temporary, stabilizing the financial system so it could slowly recover. It’s taken nine years, but one of those extraordinary policies – the Fed’s quanti-tative easing (QE) program – is finally be-ing unwound.

This inflection point in US monetary policy is one of the reasons why we decided to reduce our tactical overweight in global equities from 3% to 2% (and lift our underweight in US government bonds from -3% to -2%). However, it isn’t the only inflection point that mattered in this decision. The past six months have been ideal in many ways for equities and risk assets in general. But these conditions are unlikely to stay quite so favorable, though we expect them to remain supportive for stocks.

At the moment, the inflection in mon-etary policy might be more symbolic than practically relevant, but it does have risks. The Fed officially announced at its 20 September FOMC meeting that it will start reducing its balance sheet in Oc-tober. Since it was widely expected and initially modest in scale, the near-term impact of this balance sheet reduction on interest rates and equity markets should be limited. It’s also hard to argue that

David Lefkowitz, CFASenior Equity Strategist Americas, UBS Wealth Management Chief Investment Office

Inflection Points

Jason Draho, PhD Head of Tactical Asset Allocation Americas, UBS Wealth Management Chief Investment Office

policy will become “tight.” But “quan-titative tightening” is an unprecedented policy that could entail some hiccups along the way, which may be exacerbated as other central banks also begin to scale back their own stimulus programs.

Meanwhile, the Goldilocks scenario (not too hot, not too cold) for growth and inflation that has played out over the past six months is likely to change, especially regarding inflation. Over that time con-sensus forecasts for global GDP growth in 2017 and 2018 have been revised higher, while analyst estimates for S&P 500 earnings also went through a lengthy stretch of positive revisions. In contrast, actual and expected inflation in the US fell, which eased pressure on the Fed to tighten more aggressively.

Now inflation trends seem to be revers-ing and the most recent inflation reading was a bit stronger than expected. As slack in the economy continues to diminish, especially in the labor markets, and as oil prices begin to grind higher, inflation-ary pressures are likely to gain a bit more traction. As a result, we forecast core in-flation to reach 2.2% by the end of next year, up from the most recent reading of 1.7% (Fig. 1). Inflation could get a further boost if growth accelerates next year – a distinct possibility if tax reform succeeds. The UBS US Office of Public Policy be-lieves there is a slightly better than 50% chance that tax reform is enacted by early 2018.


IN CONTEXT

These monetary policy and inflation inflections take some sheen off the prevailing Goldilocks scenario. Conse-quently, we think a reduction in our global equity allocation is warranted. However, it’s only a 1% reduction be-cause we don’t expect an aggressive increase in inflation nor do we believe the economic expansion is at risk.

While we are scaling back some of our risk exposure at the asset class level, we still find compelling opportunities with-in US equities. In particular, we retain our preference for value over growth stocks, which we introduced in May. The underperformance of value stocks this year is quite striking. The large-cap Russell 1000 Growth index has gener-ated a total return of 20% whereas the Russell 1000 Value index is only up 7%.

A divergence of this magnitude be-tween growth and value is somewhat unusual. In fact, as we show in Fig. 2 – based on performance over the prior

year – when value underperforms to this extent, it tends to rebound. Partly due to this underperformance, value stocks are looking quite cheap relative to growth stocks. The forward P/E for the Russell 1000 Value index is now at its lowest level in over ten years relative to the Russell 1000 Growth index.

The softening of inflation earlier in the year has likely been one of the drivers of value’s underperformance. Value stocks tend to be more economically sensitive than growth stocks and some-what correlated to inflation develop-ments. This makes sense especially considering that financials and energy comprise over 35% of the Russell Value index. Financials benefit from higher inflation through higher interest rates while energy stocks tend to benefit from higher oil prices, a key driver of inflation. Thus, the potential budding reversal in inflation is good news for value stocks.

The prospect of corporate tax reform should also boost value stocks. They would benefit from any pickup in eco-nomic growth stemming from changes in the tax code. And financials in par-ticular could be key winners due to the sector’s heavy domestic exposure compared to other industries. Overall, we believe that a reasonable tax reform package could boost S&P 500 earnings growth to 15% in 2018. Even without tax reform, growth should remain at a healthy level of 8%.

So while we are modestly reducing our bets at the assets class level, we still see attractive opportunities as central bank policies and inflation start to inflect.


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Fig. 2: Value stock underperformance is extreme, suggesting rebound potentialTrailing 12-month performance of Russell 1000 Value less Russell 1000 Growth, in %

Source: UBS, as of 20 September 2017

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Fig. 1: Core inflation has fallen but is forecasted to recover

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Preferred investment viewsÞ Recent upgradesà Recent downgrades

As of 21 September 2017

Most preferred

Equities• Global equities à• US large-cap value• Eurozone

Bonds

Currencies• SEK• CAD à

Cash

Least preferred

Equities• US large-cap growth • UKmerce

• US government bonds Þ-c

• CHF• AUD Þ



Asset allocationRisk assets remain supported by solid business cycle trends, and have been re-silient despite a number of key threats, including tensions around North Korea, Hurricanes Harvey and Irma, and the US debt ceiling debate. We believe that the global economy remains in mid-cycle and the probability of recession over the coming six months is low. However, after the strong performance of global equi-ties this year, we are reducing our overweight in global equities against US gov-ernment bonds and taking some profits. Earnings growth is expected to remain the key driver leading equities higher. Within our FX strategy, we are lowering our preference for the Canadian dollar (CAD) against the Australian dollar (AUD). The Fed announced it will begin the process of reducing the size of its balance sheet in October. We expect the European Central Bank (ECB) in October to announce an exit from its quantitative easing program next year and the Fed to raise rates once more later this year, still leaving monetary policy broadly accommodative.

EquitiesWithin Europe, we maintain our overweight in Eurozone vs. UK equities. Due to their cyclical sector exposure, Eurozone companies particularly are benefiting from the global pick-up in economic activity this year. While the rapid rise of the euro (EUR) has been a concern for investors, this advance did not continue in Septem-ber. On the other hand, the British pound (GBP) strengthened significantly after the Bank of England signaled an interest rate hike in the coming months. This put pressure on export-oriented UK stocks. We maintain an overweight position on global equities against US government bonds (see below).

Fixed incomeWe think equities provide better risk-adjusted returns than credit at this stage of the business cycle. We don’t see much upside from credit, given current valua-tions. We believe the Fed will hike rates more quickly than the market is pricing, as labor market slack has been substantially used up and financial conditions are rela-tively easy. Consequently, we expect short-term yields to rise as the market adjusts to a more realistic pace of Fed rate hikes.

Foreign exchangeWithin our FX strategy, our CAD overweight against the AUD has performed well, so we are reducing the position to take some profits. We still think further upside remains, so we are not exiting the position entirely. The Bank of Canada (BoC) sur-prised markets this month by increasing its policy rate by 25 basis points (bps) to 1%. We expect the BoC to continue to raise rates over the coming months given robust economic growth. Higher US Treasury yields and moderating Chinese activ-ity should pressure the AUD, and we don’t expect the Reserve Bank of Australia to raise rates until later next year. We remain overweight the Swedish krona (SEK) against the Swiss franc (CHF). We expect Sweden’s Riksbank to become more hawkish in the coming months due to strong growth and firming inflation.

At the 20 September FOMC meet-ing, the Fed announced its plan to begin normalizing its balance sheet in October. Additionally, while the central bank left interest rates un-changed this month, it hinted that a December rate hike is likely. This de-cision is a sign that the Fed is con-fident that economic growth and low unemployment will continue. Stock prices fell modestly after the policy announcement but bounced back by the end of the trading day, while the dollar experienced its best single-day gain for the year.

The FOMC statement also refer-enced Hurricanes Harvey, Irma, and Maria. Despite the level of damage caused by the storms, the Fed ex-pressed that it does not believe the hurricanes will materially impact the economy over the medium term.

These recent natural disasters fed into the US fiscal debate and helped to promote a bipartisan deal to fund the government and extend the debt ceiling for three months. The focus in Washington DC turned to tax reform and healthcare to-ward the end of the month as Re-publicans pushed toward another vote to repeal Obamacare, while also crafting a tentative deal to cre-ate a budget resolution that could pave the way for tax cuts.

In addition, tensions continued to flare on the Korean Peninsula as North Korea detonated a hydrogen bomb and launched yet another mis-sile over Japan, prompting threats from President Trump. This an-nouncement left markets essentially unmoved, reflecting the fact that investors seem to be getting used to the aggressive rhetoric between the two countries. The Nikkei 225 was flat and the VIX index of implied US equity volatility moved lower.

Month in Review

At a Glance


TOP THEMES

Cyber-security – as an industry – has seen remark-able growth recently as digital dependence and ‘big data’ have become increasingly mainstream. Corpo-rations and governments continue to allocate more capital expenditure to prevent unauthorized access to systems in order to protect both proprietary data and personally identifiable information. However, cyber-hackers continue to become more sophis-ticated and breaches inevitably occur. Just in the last few months, high-profile examples include the May WannaCry ransomware attacks, the Equifax data breach, and the intrusion of the Securities and Exchange Commission’s EDGAR filing system. We expect companies and governments to continue to step-up cyber-security spending as as the costs of attacks become more expensive, both from a finan-cial and a reputation basis.

Beyond financial and reputational cost, fallout from cyber-crime is also extending into both the regu-latory and legislative landscapes. For example, in July the Consumer Financial Protection Bureau, or CFPB, issued a new rule banning mandatory arbitra-tion clauses in many consumer financial products such as bank accounts and credit cards, making it easier for consumers to sue firms for wrongdoing or harmful practices. Data breaches could become much more costly for companies if they are found to be, in some degree, at fault or negligent. Further, in response to the Equifax breach, many legislators condemned the attack and the company’s untimely handling of the incident. Senator Brian Schatz from Hawaii even went as far as to make a statement lobbying to reintroduce the 2015 bill Stop Errors in Credit Use and Reporting Act, or SECURE Act, which would amend the Fair Credit Reporting Act (FCRA) so that individuals may bring action in court against consumer credit reporting agencies that engage in willful or negligent non-compliance with respect to consumer credit protection requirements.

By the numbers, the Equifax breach affected 143mn Americans and their personal data including their names, addresses, birth dates, driver’s license numbers, and social security numbers. Another 209,000 credit card numbers were also compro-mised. Further, the WannaCry attack is estimated to have infected over 400,000 machines in 150

countries and included Britain’s National Health Service. According to the FBI’s Internet Crime Com-plaint Center, or IC3, there has been an average of 280,000 cyber-crime complaints per year over the last five years, including nearly 300,000 in 2016. This has translated into an estimated cost of USD 4.63bn since 2012 and USD 1.45bn in 2016 alone.

According to market estimates, the size of the global cyber-security market stood around USD 100bn in 2015 and has had an annual growth rate of 6-8% for the past three years. Further, the growth rate is predicted to accelerate to 8-10% annually by the end of 2020. Although there will always be some cycli-cal variation in spending, in our view, there is limited downside due to the perceived importance by indi-viduals, corporations, and governments.

Cyber-security will continue to be a topic of impor-tance as cyber-hackers become more sophisticated and the cost of attacks become more expensive. As such, capital expenditure to combat attacks is poised to increase over the foreseeable future, sup-porting investment. Two of our themes that have exposure to the cyber-security industry are Ben-eficiaries of transformational technologies and our Security and safety longer-term investment.

Themes universe updates for this month:

• Beneficiaries of transformational technologies We reiterate our view that growth in two broad transformational technologies – digital data, and smart automation and robotics – should allow companies involved in these activities to outperform the boarder market.

• Beyond benchmark fixed income investing Amid an uncertain backdrop, keeping balance in a fixed income portfolio remains important. We reiterate our view that having dispersion of sectors gives investors the ability to obtain yield in a risk-controlled way.

• The rising Millennials Given the sheer size of the Millennial generation we believe it is poised to have an out-sized impact on the US economy in the coming years. We reiterate our convic-tion that innovative technology companies, wellness-focused brands, and service-oriented industries stand to benefit.

What’s new this month?

‘Click here’ to invest in cyber-security

Laura Kane, CFA, CPAHead of Investment Themes Americas

Matthew DeMichielThematic Strategist Americas

Cyber-security will continue to be a topic of importance as cyber-hackers become more sophisticated and the cost of attacks become more expensive.


TOP THEMES

TechnologyAutomation and robotics A fourth industrial revolution is underway, which we believe will transform the future of manufacturing.

E-commerce E-commerce is altering the retail landscape and omnichannel companies should lead the way forward.

Mass transit rail Rapid urbanization in Asia will strain mass transit systems, providing opportunities for infrastructure investment over the long term.

Medical devices The medical device industry has matured but opportunities exist for increased penetration in emerging markets (EMs) where affordabil-ity is on the rise.

Oncology Advances in cancer therapeutics will create new multi-billion dollar opportunities for successful drugs.

Security and safety Growing trends such as urbanization, digital data growth, and increased regulation sup-port demand for security and safety.

Transformation technologyDigital data, automation, cyber security, and wireless innovation are disruptive forces that are transforming the economy.

Resources Agricultural yield The world faces a growing food produc-tion crisis as the global population increases. Companies that help to boost agricultural yields stand to benefit.

Clean air and carbon reduction Rising populations and urbanization are fueling the need for clean-air technologies. Solution providers targeting emissions reductions stand to benefit.

Energy efficiency Stricter regulation and corporate competi-tion to improve product efficiency are driving demand for energy-efficiency solutions.

North American energy independence As North America trends toward energy independence, we believe certain energy-related sectors stand to benefit.

Renewables Increasing energy demand from urbaniza-tion and population growth will benefit renewable energy as lower costs drive com-petitiveness with fossil fuels.

Waste management and recycling Low waste treatment rates in EMs offer big catch-up potential that could lead to extraor-dinary growth rates.

Water scarcity Water scarcity is one of the biggest risks to mankind. If limited water resources can be better harnessed, the benefits could be enormous.

Society Baby Boomers As Baby Boomers age and retire, we expect various segments of the economy to benefit disproportionately.

Education services With limits to many governments’ education resources, there is increased opportunity for the private education market.

Emerging market healthcare An aging EM population requires stepped-up investment in healthcare. We believe global healthcare companies can benefit.

Emerging market infrastructure Growing urbanization and high economic growth rates will drive demand for infrastruc-ture investment in EMs.

Generics As healthcare costs grow, government policy and demographics will be important drivers of increased generic drug sales.

Obesity Urbanization and rising per-capita GDP in EMs will contribute to an ever-greater preva-lence of global obesity.

Retirement homes A larger population of seniors and evolving social trends support opportunity in retire-ment homes investment.

Retirement planning Changing demographics are increasing demand for retirement planning, benefiting wealth and asset managers.

The rising Millennials Given Millennials’ sheer size, we believe this demographic will have an outsized impact on the US economy.

Themes universe

KEY

Sustainable longer-term investment theme Longer-term investments = Multi-business cycle Shorter-term investments = Current business cycle

Fixed incomeBeyond benchmarkBy diversifying fixed-income exposure inves-tors can avoid the shortcomings of heavily government-weighted taxable fixed-income benchmarks.

MLP bonds Master limited partnership bonds offer attractive coupon income relative to other investment grade sectors.

Mortgage interest-only securitiesMortgage interest-only securities offer the opportunity to benefit from rising interest rates along with attractive yields and high credit quality.

US senior loansSenior loans offer attractive floating-rate coupons with low correlation to other asset classes and lower volatility than high-yield bonds.

EquityEvent-driven strategiesEquity-driven strategies can represent attractive ways to capitalize on companies’ corporate actions.

Finding value in EMRecovering EM economic growth and higher commodity prices should support EM value outperformance relative to broader EM equities.

Restructuring and turnarounds Certain companies undergoing restructur-ing may outperform the broader market in the coming years.

US technologyThe US technology sector currently trades at attractive valuations given secular growth opportunities within the sector.

Equity–ESGGender lens Evidence suggests that gender-diverse companies are more profitable and tend to outperform their less-diverse peers.

Sustainable value creation in EMIncorporating environmental, social, and corporate governance considerations into EM equity investment decisions may pro-vide a competitive edge.

LONGER-TERM INVESTMENTS SHORTER-TERM INVESTMENTS

For guidance on how to invest in each of the themes on this page, please contact your Financial Advisor.

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/lti-automation-and-robotics-2017-02-03.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/ecommerce-beyond-amazon-2017-06-20.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/lti-mass-transit-rail.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/lti-medical-devices-2017-04-07.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/lti-oncology.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/lti-security-and-safety-2017-01-18.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/us-equities-2017-09-21-transformational-technologies.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/lti-agricultural-yield-2017-03-27.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/lti-clean-air-and-carbon-reduction-2017-04-13.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/lti-energy-efficiency-2016-11-22.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/energy-independence-2017-07-19.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/LTI-renewables.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/lti-waste-management-and-recycling-2017-02-27.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/lti-water-scarcity-2017-04-05.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/us-equities-2017-09-01-golden-years-for-baby-boomers.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/lti-education-services-2017-03-28.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/lti-emerging-market-healthcare-2017-03-28.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/lti-emerging-market-infrastructure-2017-02-18.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/longer-term-investments-genetics.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/lti-obesity-2017-03-13.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/lti-retirement-homes.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/lti-retirement-planning-2017-03-21.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/us-equities-2017-08-31-the-rising-millennials.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/beyond-benchmark.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/corporate-bonds-2017-08-16-mlp-bonds.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/mortgage-ios.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/high-yield-bonds-2017-04-18-us-senior-loans-attractive-floating-yield.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/event-driven-strategies.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/finding-value-in-em.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/theme-2017-07-19-restructuring-and-turnaround.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/us-technology-secular-growth-on-sale.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/sustainable-investing-with-a-gender-lens-2017-06-20.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/sustainable-value-creation-in-em.pdf


Global economic outlookIn most major economies, conditions are stron-ger than at any point since the global financial crisis. While monetary policy remains extremely accommodative globally, more central banks are gradually moving toward normalization even as inflation remains low. In the US, the Federal Reserve announced that it will begin the pro-cess of shrinking its balance sheet in October. The strong labor market will support consumer spending and businesses should increasing in-vestment spending.

Central bank policyBrian Rose, PhD Senior Economist Americas

Ricardo Garcia-SchildknechtEconomist

House viewProbability: 75%

Policies tighten gradually The Fed announced it will begin to reduce the size of its balance sheet in October by not reinvesting all of the proceeds of matur-ing bond holdings. An interest rate increase in December is more likely than not as technical distortions to the headline inflation data have faded.

Þ Positive scenarioProbability: 10%

Additional policy easingThe Fed falls further behind the curve as in-flation surprises higher, with real interest rates slipping more rapidly. The ECB launches additional policy easing, reversing the lan-guage of recent public announcements and signaling a stronger emphasis on the poten-tial to ease policy further. The Bank of Japan comes under pressure to engineer currency depreciation.

à Negative scenarioProbability: 15%

More rapid policy tighteningThe inflation effect of a tighter US labor mar-ket leads to a stronger Fed response and a combination of tight monetary policy and loose fiscal policy. Increased labor market costs and some commodity price pressures lead to higher European inflation, generating early signs of a more rapid tapering of ECB quantitative easing.

KEY FINANCIAL MARKET DRIVERS

Real GDP growth in % Inflation in %2016 2017F 2018F 2016 2017F 2018F

US 1.5 2.1 2.3 1.3 2.2 2.1

Canada 1.5 2.5 2.0 1.4 1.9 2.0Brazil -3.6 0.5 3.1 8.7 3.7 3.9Japan 1.0 1.8 1.8 -0.1 0.5 1.3Australia 2.5 2.3 2.7 1.3 2.0 2.0

China 6.7 6.8 6.4 2.0 1.6 2.0

India 7.1 6.6 7.4 4.5 3.5 4.0Eurozone 1.8 2.0 1.6 0.2 1.5 1.4

Germany 1.9 2.1 1.7 0.4 1.7 1.9 France 1.1 1.7 1.7 0.3 1.1 1.1 Italy 1.0 1.3 1.0 0.0 1.4 1.3 Spain 3.2 3.1 2.3 -0.3 2.0 1.2

UK 1.8 1.4 0.7 0.7 2.6 2.8

Switzerland 1.4 0.8 1.8 -0.4 0.5 0.6

Russia -0.2 1.6 1.7 7.0 3.8 3.8

World 3.1 3.7 3.8 2.6 2.7 2.7

Source: Reuters EcoWin, IMF, UBS, as of 20 September 2017Note: In developing the CIO economic forecasts, CIO economists worked in collab-oration with economists employed by UBS Investment Research. Forecasts and esti-mates are current only as of the date of this publication, and may change without notice.

Global growth in 2017 expected to be 3.7 %


29 September 2017Personal income and spending for AugustIn addition to the important data on income and spending, this re-port includes the personal con-sumption expenditures price index, the inflation measure preferred by the Fed, which should rise by more than it has in recent months.

2 October 2017ISM Manufacturing for SeptemberConditions in the manufacturing sector have improved this year and this has been reflected in the ISM Manufacturing PMI, which has re-mained well above 50 in recent months.

4 October 2017ISM Non-manufacturing for SeptemberThe ISM Non-manufacturing PMI provides a timely snapshot of cur-rent economic conditions. The in-dex rebounded in August and is at a level consistent with moderate economic growth.

6 October 2017Labor report for SeptemberIn addition to the headline-grab-bing data on nonfarm payrolls, it is important to pay attention to measures of labor market tight-ness such as the unemployment rate, the underemployment rate, and average hourly earnings.

11 October 2017NFIB small business optimism for September Small business optimism has been strong in recent months, suggest-ing that small businesses will con-tinue to create jobs and increase investment spending.

Key dates Political risksPaul Donovan Global Chief Economist, WM


Political uncertainty still gets a lot of me-dia coverage but it has a relatively limited impact on financial markets. President Trump’s agreement with the Democrats to temporarily raise the debt ceiling has re-moved this political issue from investors’ focus for now. A possible tax cut is a near-term focus. Retirement announcements by Republican members of congress may be a consideration for longer-term investors. In Europe, investors will consider the coalition negotiations in Germany and any bearing that these may have on European politics.


The sharp improvement in labor market conditions for low-skilled workers leads to wage increases that either are accompa-nied by better credit access or that com-pensate for the loss of credit access since 2008; this eases income and consump-tion inequality. Governments and econo-mists successfully communicate the net economic benefits of global trade and diversity.


Nationalist tendencies are encouraged by single-issue politics and social media. Tra-ditional party structures fail to address the demands of large sections of the elector-ate, encouraging populism. Political out-comes are increasingly unpredictable as opinion polls offer even less guidance. Es-tablished parties adopt populist policies, raising uncertainty about mainstream pol-icy programs. Lower income groups’ stan-dards of living are hurt by populist policies and rising food and energy prices, fueling further demands for radical and unpredict-able change.

Solid US earnings growthJeremy Zirin, CFAHead, Investment Strategy, WMA

David Lefkowitz, CFASenior Equity Strategist


Earnings growth reaches “cruising altitude”The earnings growth outlook remains healthy, driven by solid US consumer spending, a rebound in US manufac-turing activity (as energy investment spending and emerging market demand bottom out), and a more favorable en-vironment for financials. Leading indi-cators of profit growth such as bank lending standards and capital spend-ing intentions, remain supportive. The Trump administration’s policies may further boost earnings growth through lower taxes, infrastructure spending, less regulation, and a steeper yield curve (which benefits banks).


Trump’s policies boost earnings more than expectedThe Trump administration’s policies, es-pecially corporate tax reform, gener-ate faster profit growth. Higher interest rates and deregulation further boost financial sector earnings. Investment spending picks up.


Downturn in sentiment Trade and geopolitical tensions flare up as a result of the Trump administra-tion’s policy priorities, depressing busi-ness and consumer sentiment. Wage pressures, without improving consumer and business demand, may hurt profit margins and earnings’ growth rates. Per-sistently low short-term interest rates and renewed declines in long-term inter-est rates may pressure financial sector earnings.


ASSET CLASSES OVERVIEW

After a summer lull, equity markets have performed strongly over the past month. With solid global economic growth driving higher revenues and earnings, we believe that global equity markets can continue to trend higher. Thus, we remain overweight global equities vs. government bonds. However, with central banks globally pulling back from very accom-modative policies and a potential inflection toward higher inflation, equities could experi-ence increased market volatility, while returns are lower.

Equities

Eurozone overweight

Within Europe, we are overweight Eurozone equities. Euro-zone stocks are supported by a vigorous regional economy, rising corporate earnings after prolonged stagnation, and solid global economic growth due to their cyclical sector ex-posure. Moreover, they are cheap vs. their long-term aver-age. The euro’s recent rapid rise is a concern, but we don’t expect this pace to continue. The ECB hasn’t indicated its plans for bond purchases in 2018, but it should remain sup-portive because stimulus withdrawal is likely to be very cau-tious and gradual. Our most preferred sectors are energy, fi-nancials and telecoms.

UK underweight

Within Europe, we underweight the UK against Eurozone equities. After the Bank of England in mid-September sig-naled the possibility of a rate hike in the coming months, the pound rallied. This leaves the MSCI UK barely benefiting from a currency tailwind. The UK economy is slowing, hold-ing back domestic revenues. The UK earnings growth out-look is stronger than that of the Eurozone but faces more downside risks, in our view. Three-quarters of expected UK earnings growth is likely to be driven by the earnings recov-ery in commodities, which are at risk due to a weak start to the year for commodity prices.

Emerging markets neutral

We are neutral on emerging market (EM) equities in our global portfolio. EM economic activity and manufacturing sentiment are improving. Corporate earnings growth is pick-ing up across EM regions. EM equities are trading at a dis-count to their developed market counterparts. Geopolitical tensions, potential trade friction, rising US bond yields and USD strength are downside risks. Our most preferred markets are China, Indonesia, Thailand, Russia and Turkey; our least preferred markets are Taiwan, Malaysia, the Philippines, and South Africa.

EURO STOXX (index points, current: 383) Six-month target

House view 395

Þ Positive scenario 450

à Negative scenario 315

FTSE 100 (index points, current: 7272) Six-month target

House view 7400



MSCI EM (index points, current: 1112) Six-month target

House view 1135



Japan neutral

We are neutral on Japanese equities. We forecast mid-single-digit earnings growth in FY17 (which ends in March 2018) after earnings growth of 14% in FY16. We expect USDJPY to remain largely flat around 110 for the next 12 months. Cur-rency movements are therefore unlikely to support corporate earnings. However, we believe the downside risk for the Jap-anese equity market is limited by the relatively large equity purchases by domestic investors like the Bank of Japan. We prefer banks, high dividend stocks, and companies that ben-efit from the tightening labor market.

TOPIX (index points, current: 1668) Six-month target

House view 1700



Jeremy Zirin, CFA; David Lefkowitz, CFA; Markus Irngartinger, PhD, CFA

Note: Current values as of 20 September 2017


US equities—styleWe believe that value stocks appear attractively priced relative to growth stocks. Growth dramatically outperformed value during the first five months of 2017 but we anticipate that catalysts are developing to support a rebound in value stocks. Sustained or accelerating global economic growth, rising interest rates, and/or rebounding oil prices all should support fundamentals for value-oriented US market segments.

US equities overview neutral

Sustained economic and corporate profit growth should trans-late into further market gains over the next six months. S&P 500 earnings per share jumped by 12% in the first half of the year and we expect healthy, albeit slower, earnings growth of 8% in the second half of 2017. The 8% decline in the dollar over the last eight months provides an additional tailwind to US corpo-rate profits. While increased valuations and reduced support from central banks may limit the scope of near-term market up-side, we continue to expect US stocks to outperform govern-ment bonds. Our six-month S&P 500 price target is 2,550.

US equities—sectorsRising oil prices over the past few weeks have lifted energy stocks. From their August lows, the energy sector has re-bounded by 8% compared to the 3% gain in the S&P 500. We remain overweight given still-low energy sector valuations and our expectations for further oil price gains. Strong earn-ings growth in large-cap technology stocks supports our mod-erate overweight allocation. We expect financials to benefit from gradually rising short- and long-term interest rates, while utilities and consumer staples (both underweight sectors) face valuation challenges in such an environment.

US equities—sizeSmall-caps have materially lagged large-caps year-to-date but have recently benefited from three developments. First, the three-month debt ceiling extension reduced near-term risk for this high-beta market segment. Interest rates have bounced off their 2017 lows, benefiting small-caps over large-caps. Finally, hopes for tax reform have been somewhat renewed. These near-term positives are offset by still-sluggish profit trends. We remain neutral on both small- and mid-caps.

Source: DataStream, FactSet, UBS, as of 20 September 2017

15

10

5

0

20

2018EPS Growth

2017P/E

Consumer staples

UtilitiesFinancials

Tech

Fig. 2: Tech and Financials: attractively priced growth

Price to earnings (P/E) ratio and consensus 2017 & 2018 EPS growth rates


S&P 500 y/y, right

US leading economic indicators y/y, le

–5

–10

–25

–20

–15

15

10

5

0

20

–10–20

–50–40–30

302010

0

4050

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Fig. 1: Improving economy, healthy markets

S&P 500 and US Leading Economic Indicators, year-over-year (y/y), in %

US equitiesWe expect the bull market in US stocks to continue, although further significant upside appears more limited following the strong year-to-date gains. Corporate profits should re-main healthy in the second half of the year, but earnings growth rates should slow from very high levels. Valuations have increased but remain fair given moderate growth and low inter-est rates. We retain our preference for value over growth stocks. Our preferred sectors are energy, technology, and financials.

S&P 500 (index points, current: 2508) Six-month target

House view 2550






Yields moved higher over recent weeks after reaching a year-to-date low earlier this month. CPI inflation bounced back to 1.9% year-over-year after a recent string of disap-pointing readings. We expect the Fed to hike once more this year. We expect USD yields to move higher and the yield curve to flatten as monetary policy normalization slowly pro-ceeds. The biggest risk to our forecast is continued below-target inflation. Other risks in-clude US political instability, escalation with North Korea, and a slowing Chinese economy.

Bonds

Government bonds underweight

The US 10-year Treasury yield reached a year-to-date low of 2.01% in the beginning of September. Geopolitical concerns, natural disasters, and the overall flight to safety pushed yields lower. This move was short lived, however, as higher inflation data and a hawkish Fed pushed the 10-year yield back to the 2.28% area. We are forecasting a rise in the 10-year Treasury yield to 2.50% by year-end.

Emerging market bonds neutral

EM credit has delivered high-single-digit total returns this year on the back of both tighter spreads and lower Treasury yields. We expect support for EM sovereign debt from ongoing im-provements in fundamentals, recovering energy prices, and a benign external backdrop but anticipate some spread widening in EM corporates given their pricier valuations. Risks associated with US monetary and fiscal policy, global trade, immigration and geopolitics remain sources of concern. We remain neutral on EM credit in globally diversified portfolios and favor select high-yield credits.

US investment grade corporate bonds neutral

IG corporate bond spreads moved slightly tighter over the past month but rising Treasury yields led to negative returns. We think spreads are now close to the bottom for this cycle. On the other hand, a meaningful widening is also unlikely over six months as corporate fundamentals remain solid and global de-mand is still strong. We therefore remain neutral on IG, favor-ing financials (US banks) over non-financials. Although higher spreads are available in longer-maturity bonds, we recommend investors remain within ten years.

US 10-YEAR YIELD (current: 2.3%) Six-month target

House view 2.5%

Þ Positive scenario 1.8-2.0%

à Negative scenario 2.8-3.2%

EMBIG div / CEMBI div SPREAD* (current: 287bps / 264bps)

Six-month target

House view 300bps / 300bps

Þ Positive scenario 270bps / 260bps

à Negative scenario 500bps / 530bps

*JPMorgan Emerging Market Bond Index Global / JPMorgan Corporate Emerging Bond Index

US IG SPREAD (current: 112bps*) Six-month target

House view 120–140bps

Þ Positive scenario 110bps

à Negative scenario 275bps*Data based on BAML IG corporate indexUS high yield corporate bonds

neutral

HY spreads compressed by 30 basis points (bps) over the past month with the rise in rates and increase in oil prices. We are neutral on HY bonds as we see limited potential for further spread compression following the strong rally since early 2016 (total returns are above 30% from the low in February 2016). The trailing 12-month default rate moved to 2% in August, the lowest in over three years. We expect defaults to remain steady over the next 12 months. Senior loans should benefit as the Fed’s continued gradual path of rate hikes gets reflected in higher floating-rate coupons.

USD HY SPREAD (current: 366bps*) Six-month target

House view 380–420bps

Þ Positive scenario 350bps

à Negative scenario 1,100bps

Leslie Falconio; Kathleen McNamara, CFA, CFP; Barry McAlinden, CFA; Philipp Schoettler; Frank Sileo, CFA

*Data based on BAML High Yield indexes



Preferred securitiesWe have a slight underweight view on preferreds. Range-bound interest rates and tighter spreads have supported the sector throughout 2017. Additionally, USD 25 par preferreds have received added support from strong ETF inflows (ETFs mostly invest in USD 25 pars). However, at current levels, pros-pects for further spread tightening are limited and a material drop in rates is unlikely. Monetary policy may contribute to volatility in interest rates, credit spreads, and ETF flows. There-fore, we believe that a pullback is quite possible in the months ahead.

Municipal bonds neutral

Despite powerful hurricanes that dealt a devastating blow to America’s Southern coastline and Caribbean territories, the broad-based muni market has proved resilient. Month-to-date through 19 September 2017, muni returns are flat, as an exam-ple. That said, some ratings are at risk. Net supply is poised to turn positive, representing a minor headwind for the market. All eyes now turn to Washington, as congress begins to de-bate on tax reform. We expect higher price volatility in 4Q17. Current AAA 10-year muni-to-Treasury yield ratio: 85.4% (last month: 85.9%).

Treasury inflation-protected securities (TIPS)The TIPS market has finally broken its six-month losing streak, as the August CPI data was above market expectations. Al-though CIO is neutral on the asset class, we have recom-mended that investors hold, not sell 5-year TIPS. Currently the 5-year break-even inflation rate is 1.78%. Today’s break-even inflation rate is middle of the road vs. the 1.56% June low and 2.06% February high. UBS anticipates inflation to increase to 2.1% in 2018. Although this is well above the current market expectation for future inflation, we await stronger commentary from the Fed. Current 5-year breakeven inflation rate: 1.73% (last month: 1.63%)

Non-US developed fixed income neutral

Over the past month, most non-US developed bond markets have experienced small negative returns as rates have drifted higher. Yields rose on better inflation data and central banks’ increased focus on rising inflation. The US dollar has stabilized against other major currencies and is likely to stay in a range over the next few months. Non-US bond yields remain at very unattractive levels. We do not recommend a strategic asset al-location position on the asset class.

Additional US taxable fixed income (TFI) segments

Source: Bloomberg, Barclays, UBS, as of 20 September 2017

–100

–150

–200

50

–50

0

–40 –30 –20 –10

Business days around Fed QE announcements

0 10 2020 40

Cumulative change in 10-year Treasury yield around Fed QEannouncments10-year UST yield change, in bps and days before/aer announcement (bottom)

Mortgage-backed securities (MBS)MBS remains rich relative to US Treasuries but cheap relative to IG corporates. CIO has been anticipating the start of the “QE exit,” or unwinding of the Fed’s balance sheet that was recently announced. Although the MBS market has already priced in the expectation of an increase in supply in 2018, CIO remains neutral on the asset class. Our expectation is that vol-atility will rise into the end of the year on potential geopoliti-cal uncertainty, the ECB, the debt ceiling, and the unknown impact of the Fed’s path to normalization. We await a bet-ter entry point and prefer the 4% coupon. Current spread is +89bps to the 5-year and 10-year Treasury blend (vs. +90bps last publication)

Agency bondsWe remain underweight agency bonds as we find more value in mortgage-backed securities (MBS) and IG corporates. Agency debt has returned 2.3% year-to-date as the flight to quality in fixed income took center stage recently with in-creased geopolitical risk in North Korea and implications from natural disasters. CIO anticipates a rise in interest rates into year-end, reaching 2.5% in 10-year yield. Given our interest rate outlook, for conservative investors in agency debt, step-up coupons offer the best potential returns. Current spread is +10bps to the 5-year (vs. +13bps last month)


UBS CIO interest rate forecasts

Americas 20-Sep-17 3 mths 6 mths 12 mths

USD 3M Libor 1.3 1.6 1.6 1.9

USD 2Y Treas. 1.4 1.6 1.8 2.0

USD 5Y Treas. 1.8 2.1 2.2 2.3

USD 10Y Treas. 2.2 2.5 2.5 2.5

USD 30Y Treas. 2.8 3.1 3.1 3.1




Broadly diversified commodity indexes have traded on firmer footing in 2H17, supported by higher prices in the industrial, precious metals, and energy sectors. Year-to-date, broadly di-versified commodity indexes are up by around 1.5%. With global growth at or above trend and supply staying largely disciplined, we believe commodity prices can rise further. On a broad index level, we forecast a mid-single-digit increase from current levels toward the end of the year. We think energy prices can rise further in 2H.

Commodities and other asset classes

Commodities neutral

Precious metals We have argued that gold provides insur-ance value by helping investors protect against flare-ups in geopolitics or any sharp gyrations in equity market volatility. Once again this approach has proven its worth this year. Since we expect the Fed to hike interest rates in December, we be-lieve this will prompt the gold price to again fall under USD 1,300/oz over the coming months. As we continue to believe that gold remains an attractive insurance asset, price setbacks over the coming months could be used to add exposure to the yellow metal.

GOLD (current: USD 1,301/oz) Six-month target

House view USD 1,250/oz

Þ Positive scenario USD 1,400/oz

à Negative scenario USD 1,100/oz

Crude oil Hurricane Harvey has caused substantial disrup-tions to crude production and refineries in the US Gulf Coast. This means greater near-term volatility in weekly US oil inven-tory data and, potentially, prices. Our positive price outlook for crude oil is intact and we still target prices to reach USD 55-60/bbl in 4Q17. The final shifts to supply and demand induced by Hurricanes Harvey and Irma have not moved the needle. As such, we believe the market will be undersupplied by more than 0.5mbpd in 4Q17. The key risk to our positive view is a breakdown in the OPEC deal. We assign a 20-30% probability to such an outcome, which could translate into a short-term price drop to USD 30-35/bbl.

BRENT (current: USD 56.3/bbl) Six-month target

House view USD 60/bbl

Þ Positive scenario USD 65-70/bbl

à Negative scenario USD 35-40/bbl

Dominic Schnider, CFA, CAIA; Giovanni Staunovo; Thomas Veraguth; Wayne Gordon

Agriculture In agriculture, grains have again been under pressure as US weather concerns have abated and the USDA confirmed solid yields in the 2017/18 season. While a weaker US dollar has been supportive of US exports, we still expect surpluses to build this year. Likewise, soft commodities are also expected to see a lift in inventories. In livestock, hurri-canes were supportive of US cattle prices due to animal losses in Texas. We believe these losses have been overstated, and new processing capacity in the US should favor lean hogs over cattle into year-end.

Other asset classesListed real estate Earnings growth for listed real estate com-panies may fall below 5% p.a. (ex. emerging markets) in 2017, 2018, and 2019 due to a lack of external growth despite inter-nal growth opportunities, some positive rental revision and still-diminishing refinancing costs. The real estate cycle has matured since peaking in mid-2015. We do not expect a re-acceleration in property fundamentals amid meager demand prospects. So, rising financing costs may hurt if they are not met with acceler-ating rental growth. The dividend yield of about 4% remains the key driver. Stocks have delivered no price returns for 33 months. A gradual de-rating is possible if high direct property market val-ues erode.

RUGL Index (current: USD 4,837) Six-month target

House view USD 4,650

Þ Positive scenario USD 4,900

à Negative scenario USD 4,200


Base metals Fueled by firmer Chinese economic activity, sup-ply-side measures and a weaker USD, base metal indexes have rallied 12% so far in 3Q17 and 21% year-to-date. While broad-based momentum may push prices even higher in the short term, we believe most metals will find it difficult to sustain higher prices over the next 6-12 months. We advise investors to curb exposure to metals like zinc, lead, or nickel. Existing long positions in copper can be kept for now. Increasing expo-sure to tin or aluminum is still attractive, in our view.


USD neutral We believe the downside from current levels is

limited over our six-month tactical horizon. A bipartisan deal to extend government funding and suspend the debt ceiling until 8 December reduces near-term political risks. The Fed’s clear hint at a December rate hike in its Summary of Economic Projections helped to strengthen the USD after several weeks of weakness.

EUR neutral Many investors continue to run above-average USD

positions and should therefore continue to unwind the USD on dips towards 1.15. Also, we are waiting for the ECB to an-nounce its tapering plans—most likely on 26 October – and it will be interesting to see how soft or hard the ECB will orches-trate the end of QE. We think EURUSD rising above 1.20 will be politically sensitive. We expect it to stabilize in the 1.15-1.20 range over the coming six months.

GBP neutral UK economic data has weakened only slightly, sup-

ported by a highly undervalued pound. We still expect Brexit negotiations to eventually agree to terms that prevent a “cliff” situation when leaving the EU. However, there can be short-term spikes in risk sentiment if negotiations stall, which could weaken the pound. Rising chances of a BoE rate hike should keep GBPUSD above 1.30.

CHF underweight The Swiss National Bank (SNB) will likely try to

stabilize the combined value of USDCHF and EURCHF. Safe-haven flows have started to leave Switzerland since the French election. We expect USDCHF to remain in a 0.95-1.00 range. We retain an overweight position in the SEK vs. the CHF.

Foreign exchangeThomas Flury, Strategist

After a strong run in the CAD over recent months, we have decided to cut in half our over-weight position in the CAD against the AUD to take some profit. However, we still see the CAD outperforming the AUD. We also retain an overweight position in the SEK vs. the CHF. With Swedish inflation expectations at the highest level since 2012 and business activity ac-celerating, we expect the Riksbank to tighten policy in December.

UBS CIO FX forecasts

3M 6M 12M PPP*

EURUSD 1.18 1.18 1.20 1.27

USDJPY 113 113 110 77

USDCAD 1.18 1.20 1.20 1.20

AUDUSD 0.78 0.76 0.76 0.70

GBPUSD 1.32 1.32 1.36 1.58

NZDUSD 0.71 0.71 0.71 0.57

USDCHF 0.97 0.97 0.97 0.97

EURCHF 1.14 1.14 1.16 1.22

GBPCHF 1.28 1.28 1.31 1.52

EURJPY 133 133 132 97

EURGBP 0.89 0.89 0.88 0.80

EURSEK 9.30 9.00 8.80 9.26

EURNOK 9.50 9.60 9.80 9.85

Source: Thomson Reuters, UBS, as of 21 September 2017 Note: Past performance is not an indication of future returns.*PPP = Purchasing Power Parity

JPY neutral The Bank of Japan (BoJ) is likely to stay with its expan-

sionary monetary policy and not follow the Fed or the ECB on their path to normalization. The rise in global yields has pushed Japanese 10-year yields above zero, and a further increase could force the BoJ to step up its bond purchases to keep Japanese yields fixed. We expect the BoJ to eventually lift the target for the 10-year yield and for the JPY to strengthen moderately vs. the USD while weakening relative to the euro.

Other developed market currencies overweight After a strong run in the CAD, we have decided

to cut in half our overweight position in the CAD against the AUD. However, we decided not to close this position com-pletely, as we still see the CAD outperforming the AUD. Recent comments by the Bank of Canada led to a change in market expectations. From the initial expectation that only the 50bps of rate cuts from early 2016 would be undone, we and most market watchers now expect a normal hiking cycle.


Overweight

Neutral

Underweight

Key forecastsAs of 20 September 2017

6-month forecast

Asset class TAA1 Change Benchmark Value m/m perf.

in %2 House View Positive

scenarioNegative scenario

EQUITIES à

US – S&P 500 2508 3.4% 2550 2875 2050

Eurozone – Euro Stoxx 383 2.1% 395 450 315

UK – FTSE 100 7272 -0.7% 7400 8150 6200

Japan – Topix 1668 4.4% 1700 1850 1350

Switzerland – SMI 9096 2.5% 9200 9800 7500

Emerging Markets – MSCI EM 1112 5.0% 1135 1275 950

BONDS Þ

US Government bonds Þ 10yr Treasury yield 2.3% -0.3% 2.50% 1.80-2.0% 2.8-3.2%

US Corporate bonds – BAML IG spread 112 bps 0.1% 120-140 bps 110 bps 275 bps

US High yield bonds – BAML US HY spread 366 bps 1.3% 380-420 bps 350 bps 1100 bps

EM Sovereign – EMBI Diversified spread 287 bps 0.8% 300 bps 270 bps 500 bps

EM Corporate – CEMBI Diversified spread 264 bps 2.5% 300 bps 260 bps 530 bps

OTHER ASSET CLASSES

Gold – Spot price 1301 /oz. 1.3% 1250 1400 1100

Brent crude oil – Spot price 56.29 /bbl. 6.8% 60 /bbl. 65-70 /bbl. 35-40 /bbl.

Listed real estate – RUGL Index 4837 2.0% 4650 4900 4200

CURRENCIES Currency pair

USD – NA NA NA NA NA

EUR – EURUSD 1.19 1.1% 1.18 NA NA

GBP – GBPUSD 1.35 4.9% 1.36 NA NA

JPY – USDJPY 112 2.8% 113 NA NA

CHF – USDCHF 0.97 0.5% 0.97 NA NA

Source: Bloomberg, UBS1 TAA = Tactical asset allocation, 2 Month over monthNote: Current values as of 20 September 2017. Currency values as of 21 September 2017.Past performance is no indication of future performance. Forecasts are not a reliable indicator of future performance.



DETAILED ASSET ALLOCATION

Detailed asset allocation taxable with non-traditional assets

Investor risk profile

Conservative Moderately conservative

Moderate Moderately aggressive

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Cash 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0

p Fixed Income 69.0 –1.0 +1.0 68.0 50.0 –1.5 +1.0 48.5 33.0 –2.0 +1.0 31.0 17.0 –2.0 +1.0 15.0 5.0 –2.0 +1.0 3.0

p US Fixed Income 67.0 –1.0 +1.0 66.0 48.0 –1.5 +1.0 46.5 31.0 –2.0 +1.0 29.0 15.0 –2.0 +1.0 13.0 5.0 –2.0 +1.0 3.0

US Gov’t 17.0 –1.0 +1.0 16.0 2.0 –1.5 +0.5 0.5 2.0 –2.0 0.0 2.0 –2.0 0.0 2.0 –2.0 0.0

p US Municipal 46.0 +0.0 46.0 42.0 +0.0 +0.5 42.0 27.0 +0.0 +1.0 27.0 11.0 +0.0 +1.0 11.0 3.0 +0.0 +1.0 3.0

US IG Corp 4.0 +0.0 4.0 2.0 +0.0 2.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

US HY Corp 0.0 +0.0 0.0 2.0 +0.0 2.0 2.0 +0.0 2.0 2.0 +0.0 2.0 0.0 +0.0 0.0

Int’l Fixed Income 2.0 +0.0 2.0 2.0 +0.0 2.0 2.0 +0.0 2.0 2.0 +0.0 2.0 0.0 +0.0 0.0

Int’l Developed Markets 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Emerging Markets 2.0 +0.0 2.0 2.0 +0.0 2.0 2.0 +0.0 2.0 2.0 +0.0 2.0 0.0 +0.0 0.0

q Equity 13.0 +1.0 –1.0 14.0 27.0 +1.5 –1.0 28.5 44.0 +2.0 –1.0 46.0 64.0 +2.0 –1.0 66.0 85.0 +2.0 –1.0 87.0

q Global Equity3 0.0 +1.0 –1.0 1.0 0.0 +1.5 –1.0 1.5 0.0 +2.0 –1.0 2.0 0.0 +2.0 –1.0 2.0 0.0 +2.0 –1.0 2.0

US Equity 8.0 +0.0 8.0 16.0 +0.0 16.0 25.0 +0.0 25.0 37.0 +0.0 37.0 46.0 +0.0 46.0

US Large cap Growth 2.5 –0.5 2.0 5.5 –1.0 4.5 8.5 –1.0 7.5 13.0 –1.0 12.0 16.0 –1.0 15.0

US Large cap Value 2.5 +0.5 3.0 5.5 +1.0 6.5 8.5 +1.0 9.5 13.0 +1.0 14.0 16.0 +1.0 17.0

US Mid cap 2.0 +0.0 2.0 3.0 +0.0 3.0 5.0 +0.0 5.0 7.0 +0.0 7.0 9.0 +0.0 9.0

US Small cap 1.0 +0.0 1.0 2.0 +0.0 2.0 3.0 +0.0 3.0 4.0 +0.0 4.0 5.0 +0.0 5.0

International Equity 5.0 +0.0 5.0 11.0 +0.0 11.0 19.0 +0.0 19.0 27.0 +0.0 27.0 39.0 +0.0 39.0



Commodities 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Non-traditional 13.0 +0.0 13.0 18.0 +0.0 18.0 18.0 +0.0 18.0 14.0 +0.0 14.0 5.0 +0.0 5.0

Hedge Funds 13.0 +0.0 13.0 18.0 +0.0 18.0 18.0 +0.0 18.0 14.0 +0.0 14.0 5.0 +0.0 5.0

Private Equity 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Private Real Estate 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Tactical deviation legend: Overweight Underweight Neutral. Change legend: p Upgrade q Downgrade 1 Change is the difference between the tactical deviation column in the previous month and the current month.2 The current allocation column is the sum of the strategic asset allocation and the tactical deviation columns.3 The MSCI All Country World Index is used as the benchmark for global equity.Source: WMA AAC, UBS, As of 21 September 2017. See appendix for information regarding sources of strategic asset allocations and their suitability, investor risk profiles, and the interpretation of the suggested tactical deviations from the strategic asset allocations.



Detailed asset allocationtaxable without non-traditional assets




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Cash 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0

p Fixed Income 79.0 –1.0 +1.0 78.0 63.0 –1.5 +1.0 61.5 46.0 –2.0 +1.0 44.0 27.0 –2.0 +1.0 25.0 10.0 –2.0 +1.0 8.0

p US Fixed Income 77.0 –1.0 +1.0 76.0 61.0 –1.5 +1.0 59.5 44.0 –2.0 +1.0 42.0 25.0 –2.0 +1.0 23.0 10.0 –2.0 +1.0 8.0

US Gov’t 17.0 –1.0 +1.0 16.0 2.0 –1.5 +0.5 0.5 2.0 –2.0 0.0 2.0 –2.0 0.0 5.0 –2.0 +1.0 3.0

p US Municipal 56.0 +0.0 56.0 55.0 +0.0 +0.5 55.0 40.0 +0.0 +1.0 40.0 21.0 +0.0 +1.0 21.0 5.0 +0.0 5.0

US IG Corp 4.0 +0.0 4.0 2.0 +0.0 2.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

US HY Corp 0.0 +0.0 0.0 2.0 +0.0 2.0 2.0 +0.0 2.0 2.0 +0.0 2.0 0.0 +0.0 0.0




q Equity 16.0 +1.0 –1.0 17.0 32.0 +1.5 –1.0 33.5 49.0 +2.0 –1.0 51.0 68.0 +2.0 –1.0 70.0 85.0 +2.0 –1.0 87.0

q Global Equity3 0.0 +1.0 –1.0 1.0 0.0 +1.5 –1.0 1.5 0.0 +2.0 –1.0 2.0 0.0 +2.0 –1.0 2.0 0.0 +2.0 –1.0 2.0

US Equity 10.0 +0.0 10.0 20.0 +0.0 20.0 28.0 +0.0 28.0 40.0 +0.0 40.0 46.0 +0.0 46.0



US Mid cap 2.0 +0.0 2.0 4.0 +0.0 4.0 5.0 +0.0 5.0 8.0 +0.0 8.0 9.0 +0.0 9.0

US Small cap 1.0 +0.0 1.0 2.0 +0.0 2.0 3.0 +0.0 3.0 4.0 +0.0 4.0 5.0 +0.0 5.0




Commodities 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0




Detailed asset allocation non-taxable with non-traditional assets




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Cash 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0

p Fixed Income 69.0 –1.0 +1.0 68.0 50.0 –1.5 +1.0 48.5 33.0 –2.0 +1.0 31.0 17.0 –2.0 +1.0 15.0 5.0 –2.0 +1.0 3.0

p US Fixed Income 64.0 –1.0 +1.0 63.0 45.0 –1.5 +1.0 43.5 29.0 –2.0 +1.0 27.0 14.0 –2.0 +1.0 12.0 5.0 –2.0 +1.0 3.0

p US Gov't 35.0 –1.0 +1.0 34.0 25.0 –1.5 +1.0 23.5 16.0 –2.0 +1.0 14.0 7.0 –2.0 +1.0 5.0 5.0 –2.0 +1.0 3.0

US Municipal 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

US IG Corp 24.0 +0.0 24.0 15.0 +0.0 15.0 8.0 +0.0 8.0 2.0 +0.0 2.0 0.0 +0.0 0.0

US HY Corp 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0 0.0 +0.0 0.0

Int'l Fixed Income 5.0 +0.0 5.0 5.0 +0.0 5.0 4.0 +0.0 4.0 3.0 +0.0 3.0 0.0 +0.0 0.0



q Equity 10.0 +1.0 –1.0 11.0 25.0 +1.5 –1.0 26.5 42.0 +2.0 –1.0 44.0 62.0 +2.0 –1.0 64.0 85.0 +2.0 –1.0 87.0

q Global Equity3 0.0 +1.0 –1.0 1.0 0.0 +1.5 –1.0 1.5 0.0 +2.0 –1.0 2.0 0.0 +2.0 –1.0 2.0 0.0 +2.0 –1.0 2.0

US Equity 6.0 +0.0 6.0 14.0 +0.0 14.0 22.0 +0.0 22.0 33.0 +0.0 33.0 45.0 +0.0 45.0



US Mid cap 1.0 +0.0 1.0 3.0 +0.0 3.0 4.0 +0.0 4.0 6.0 +0.0 6.0 8.0 +0.0 8.0

US Small cap 1.0 +0.0 1.0 1.0 +0.0 1.0 2.0 +0.0 2.0 3.0 +0.0 3.0 5.0 +0.0 5.0




Commodities 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Non-traditional 16.0 +0.0 16.0 20.0 +0.0 20.0 20.0 +0.0 20.0 16.0 +0.0 16.0 5.0 +0.0 5.0

Hedge Funds 16.0 +0.0 16.0 20.0 +0.0 20.0 20.0 +0.0 20.0 16.0 +0.0 16.0 5.0 +0.0 5.0

Private Equity 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Private Real Estate 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0




Detailed asset allocation non-taxable without non-traditional assets




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Cash 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0

p Fixed Income 79.0 –1.0 +1.0 78.0 63.0 –1.5 +1.0 61.5 46.0 –2.0 +1.0 44.0 27.0 –2.0 +1.0 25.0 10.0 –2.0 +1.0 8.0

p US Fixed Income 74.0 –1.0 +1.0 73.0 58.0 –1.5 +1.0 56.5 42.0 –2.0 +1.0 40.0 24.0 –2.0 +1.0 22.0 10.0 –2.0 +1.0 8.0

p US Gov't 35.0 –1.0 +1.0 34.0 25.0 –1.5 +1.0 23.5 16.0 –2.0 +1.0 14.0 7.0 –2.0 +1.0 5.0 5.0 –2.0 +1.0 3.0

US Municipal 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

US IG Corp 34.0 +0.0 34.0 28.0 +0.0 28.0 21.0 +0.0 21.0 12.0 +0.0 12.0 5.0 +0.0 5.0

US HY Corp 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0 0.0 +0.0 0.0




q Equity 16.0 +1.0 –1.0 17.0 32.0 +1.5 –1.0 33.5 49.0 +2.0 –1.0 51.0 68.0 +2.0 –1.0 70.0 85.0 +2.0 –1.0 87.0

q Global Equity3 0.0 +1.0 –1.0 1.0 0.0 +1.5 –1.0 1.5 0.0 +2.0 –1.0 2.0 0.0 +2.0 –1.0 2.0 0.0 +2.0 –1.0 2.0

US Equity 10.0 +0.0 10.0 18.0 +0.0 18.0 26.0 +0.0 26.0 35.0 +0.0 35.0 45.0 +0.0 45.0



US Mid cap 2.0 +0.0 2.0 3.0 +0.0 3.0 5.0 +0.0 5.0 7.0 +0.0 7.0 8.0 +0.0 8.0

US Small cap 1.0 +0.0 1.0 2.0 +0.0 2.0 3.0 +0.0 3.0 4.0 +0.0 4.0 5.0 +0.0 5.0




Commodities 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0




Detailed asset allocation all equity and all fixed income models

Publication note The All Equity and All Fixed Income portfo-lios complement our balanced portfolios and offer more granular implementation of our House View. While we generally do not rec-ommend that investors hold portfolios con-sisting of only stocks or only bonds, the All Equity and All Fixed Income portfolios can be used by investors who want to complement their existing holdings.

In the All Equity portfolio, tactical tilts will be based on the corresponding tilts to the Equity asset classes in our balanced portfolio (mod-erate risk profile, taxable without alternative investments). The amount of cash in the All Equity portfolio will vary one-for-one with the overall overweight/underweight on equi-ties in the balanced portfolio, subject to a 3% maximum tilt from the 5% cash allocation. This allows us to use the cash allocation to express a tactical preference between stocks and fixed income. A special feature of the All Equity portfolio is that it includes “carve-outs”: 3% allocations to our preferred sectors within US large-caps as well as our preferred countries within both international developed markets and the emerging markets. A maxi-mum of two sectors/countries of each type may be selected for carve-outs. The All Fixed Income portfolios include both taxable and non-taxable versions. In addi-tion to the fixed income asset classes in the balanced portfolios, the non-taxable version incorporates an additional allocation to Mort-gage Backed Securities. Tactical tilts will be based on the corresponding tilts to the Fixed Income asset classes in our balanced portfo-lios (moderate risk profile without alternative investments, taxable or non-taxable respec-tively), but only when there is a preference between the fixed income asset classes. For example, an overweight on high yield cor-porate bonds offset by an underweight on government bonds in the balanced portfo-lio would be applied to the All Fixed Income portfolios. However, an overweight on US eq-uities versus US government bonds in the bal-anced portfolio would not be reflected in the All Fixed Income portfolios. Further, the tilts in the All Fixed Income portfolios will typically be scaled up to twice the size of the tilts in the balanced portfolio.

All equity All fixed income, taxable

All fixed income, non-taxable

All figures in % S

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Cash 5.0 –2.0 +1.0 3.0 5.0 +0.0 5.0 5.0 +0.0 5.0

Fixed Income 0.0 +0.0 0.0 95.0 +0.0 95.0 95.0 +0.0 95.0

US Fixed Income 0.0 +0.0 0.0 92.5 +0.0 92.5 89.0 +0.0 89.0

US Gov't 0.0 +0.0 0.0 19.0 +0.0 19.0 33.0 +0.0 33.0

US MBS 0.0 +0.0 0.0 0.0 +0.0 0.0 9.0 +0.0 9.0

US Municipal 0.0 +0.0 0.0 71.0 +0.0 71.0 0.0 +0.0 0.0

US IG Corp 0.0 +0.0 0.0 0.0 +0.0 0.0 41.0 +0.0 41.0

US HY Corp 0.0 +0.0 0.0 2.5 +0.0 2.5 6.0 +0.0 6.0

Int’l Fixed Income 0.0 +0.0 0.0 2.5 +0.0 2.5 6.0 +0.0 6.0

Int'l Developed Markets 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Emerging Markets 0.0 +0.0 0.0 2.5 +0.0 2.5 6.0 +0.0 6.0

Equity 95.0 +2.0 –1.0 97.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Global Equity3 0.0 +2.0 –1.0 2.0 0.0 +0.0 0.0 0.0 +0.0 0.0

US Equity 53.0 +0.0 53.0 0.0 +0.0 0.0 0.0 +0.0 0.0

US Large cap Growth 7.0 –1.0 6.0 0.0 +0.0 0.0 0.0 +0.0 0.0

US Large cap Value 7.0 +1.0 8.0 0.0 +0.0 0.0 0.0 +0.0 0.0

US Large-cap total market 23.0 –3.0 20.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Energy Sector 0.0 +3.0 3.0 0.0 +0.0 0.0 0.0 +0.0 0.0

US Mid cap 10.0 +0.0 10.0 0.0 +0.0 0.0 0.0 +0.0 0.0

US Small cap 6.0 +0.0 6.0 0.0 +0.0 0.0 0.0 +0.0 0.0

International Equity 42.0 +0.0 42.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Int'l Developed Markets 30.0 +0.0 30.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Emerging Markets 12.0 –6.0 6.0 0.0 +0.0 0.0 0.0 +0.0 0.0

China 0.0 +3.0 3.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Russia 0.0 +3.0 3.0 0.0 +0.0 0.0 0.0 +0.0 0.0



In order to create the analysis shown, the rates of return for each asset class are combined in the same proportion as the asset allocations illustrated (e.g., if the asset allocation indi-cates 40% equities, then 40% of the results shown for the al-location will be based upon the estimated hypothetical return and standard deviation assumptions shown below).

You should understand that the analysis shown and assump-tions used are hypothetical estimates provided for your gen-eral information. The results are not guarantees and pertain to the asset allocation and/or asset class in general, not the performance of specific securities or investments. Your actual results may vary significantly from the results shown in this report, as can the performance of any individual security or investment.

Portfolio analyticsThe portfolio analytics shown for each risk profile’s bench-mark allocations are based on estimated forward-looking return and standard deviation assumptions (capital market as-sumptions), which are based on UBS proprietary research. The development process includes a review of a variety of factors, including the return, risk, correlations and historical perfor-mance of various asset classes, inflation and risk premium. These capital market assumptions do not assume any particu-lar investment time horizon. Please note that these assump-tions are not guarantees and are subject to change. UBS has changed its risk and return assumptions in the past and may do so in the future. Neither UBS nor your Financial Advisor is required to provide you with an updated analysis based upon changes to these or other underlying assumptions.

Risk Profile ==>> Conservative

Moderately conservative

Moderate

Moderately aggressive

Aggressive

Taxable with non-traditional assets

Estimated Return 3.2% 4.3% 5.4% 6.5% 7.4%

Estimated Risk 3.9% 6.1% 8.6% 11.3% 13.9%

Taxable without non-traditional assets


Estimated Risk 4.0% 6.1% 8.5% 11.2% 13.6%

Non-taxable with non-traditional assets


Estimated Risk 4.2% 6.1% 8.6% 11.3% 13.8%

Non-taxable without non-traditional assets


Estimated Risk 4.5% 6.5% 8.8% 11.6% 13.6%

Asset Class Capital Market Assumptions

Annual total return Annual risk

US Cash 2.1% 0.5%

US Government Fixed Income 1.9% 4.0%

US Municipal Fixed Income 1.8% 4.1%

US Corporate Investment Grade Fixed Income 2.8% 5.0%

US Corporate High Yield Fixed Income 4.8% 9.2%

International Developed Markets Fixed Income 1.8% 7.9%

Emerging Markets Fixed Income 4.2% 10.5%

US Large-cap Equity 7.1% 15.7%

US Mid-cap Equity 7.6% 18.3%

US Small-cap Equity 7.8% 20.1%

International Developed Markets Equity 9.4% 16.5%

Emerging Markets Equity 8.8% 24.1%

Commodities 4.4% 19.2%

Hedge Funds 5.5% 6.7%

Private Equity 12.0% 12.7%

Private Real Estate 9.8% 10.5%



Additional asset allocation models

International developed markets (non-US) fixed income module, in %

Benchmark CIO Americas, WM tactical deviation2 Current allocation3

allocation1 Previous Current

EMU / Eurozone 42.0 +0.0 +0.0 42.0

UK 9.0 +0.0 +0.0 9.0

Japan 32.0 +0.0 +0.0 32.0

Other 17.0 +0.0 +0.0 17.0


Footnotes1 For the first table on this page, the benchmark allocation is based on S&P 500 weights. For the second and third tables on this page, the benchmark allocation refers to a moderate risk profile and represents the relative market capitalization weights of each country or region.

2 See “Deviations from strategic asset allocation or benchmark allocation” in the appendix for an explanation regarding the interpretation of the suggested tactical de-viations from benchmark. The “current” column refers to the tactical deviation that applies as of the date of this publication. The “previous” column refers to the tacti-cal deviation that was in place at the date of the previous edition of UBS House View or the last UBS House View Update.

3 The current allocation column is the sum of the CIO Americas, WM tactical deviation columns and (the S&P 500 benchmark allocation for the first table on this page) (the benchmark allocation for the second and third tables on this page).

US equity sector allocation, in %

For US equity subsector recommendations please see the “Equity Preference List” for each sector. These reports are published on a monthly basis and can be found on the Online Services website in the Research > Equities section.

S&P 500 CIO Americas, WM tactical deviation2 CurrentBenchmark Numeric Symbol allocation3

allocation1 Previous Current Previous Current

Consumer Discretionary 11.8 +0.0 +0.0 n n 11.8

Consumer Staples 8.4 -2.0 -2.0 – – – – 6.4

Energy 6.0 +2.0 +2.0 ++ ++ 8.0

Financials 14.4 +1.0 +1.0 + + 15.4

Healthcare 14.6 +0.0 +0.0 n n 14.6

Industrials 10.2 +0.0 +0.0 n n 10.2

Information Technology 23.2 +1.0 +1.0 + + 24.2

Materials 3.0 +0.0 +0.0 n n 3.0

Real Estate 3.0 +0.0 +0.0 n n 3.0

Telecom 2.2 +0.0 +0.0 n n 2.2

Utilities 3.2 -2.0 -2.0 – – – – 1.2

NOTE: The benchmark allocations, as well as the tactical deviations, are intended to be applicable to the US equity portion of a portfolio across investor risk profiles.Source: UBS, as of 21 September 2017

International developed markets (non-US) equity module, in %

Benchmark CIO Americas, WM tactical deviation2 Current allocation3

allocation1 Previous Current

EMU / Eurozone 28.0 +10.0 +10.0 38.0

UK 17.0 -10.0 -10.0 7.0

Japan 22.0 +0.0 +0.0 22.0

Australia 7.0 +0.0 +0.0 7.0

Canada 9.0 +0.0 +0.0 9.0

Switzerland 8.0 +0.0 +0.0 8.0

Other 9.0 +0.0 +0.0 9.0


Asset Class Capital Market Assumptions

Annual total return Annual risk

US Cash 2.1% 0.5%

US Government Fixed Income 1.9% 4.0%

US Municipal Fixed Income 1.8% 4.1%

US Corporate Investment Grade Fixed Income 2.8% 5.0%

US Corporate High Yield Fixed Income 4.8% 9.2%

International Developed Markets Fixed Income 1.8% 7.9%

Emerging Markets Fixed Income 4.2% 10.5%

US Large-cap Equity 7.1% 15.7%

US Mid-cap Equity 7.6% 18.3%

US Small-cap Equity 7.8% 20.1%

International Developed Markets Equity 9.4% 16.5%

Emerging Markets Equity 8.8% 24.1%

Commodities 4.4% 19.2%

Hedge Funds 5.5% 6.7%

Private Equity 12.0% 12.7%

Private Real Estate 9.8% 10.5%


The performance calculations shown in Table A commence on 25 January 2013, the first date upon which the Investment Strategy Guide was published following the release of the new UBS WMA strategic asset allocation (SAA) models. The performance is based on the SAA without non-traditional assets for a moderate risk profile investor, and the SAA with the tactical shift (see detailed asset allocation tables where the SAA with the tactical shift is re-ferred to as “current allocation”). Performance is calculated utiliz-ing the returns of the indices identified in Table B as applied to the respective allocations in the SAA and the SAA with the tactical shift. For example, if US mid cap equity is allocated 10% in the SAA and 12% in the SAA with the tactical shift, the US mid cap equity index respectively contributed to 10% and 12% of the re-sults shown. Prior to 25 January 2013, CIO Wealth Management published tactical asset allocation recommendations in the In-vestment Strategy Guide using a different set of asset classes and sectors. The performance of these tactical recommendations is reflected in Table C of the February 2017 House View Investment Strategy Guide.

The performance attributable to the CIO Americas, WM tactical deviations is reflected in the column in Table A labeled “Excess

Tactical asset allocation performance measurement

return,” which shows the difference between the performance of the SAA and the performance of the SAA with the tactical shift. The “Information ratio” is a risk-adjusted performance measure, which adjusts the excess returns for the tracking error risk of the tactical deviations. Specifically the information ratio is calculated as the ratio of the annualized excess return over a given time pe-riod and the annualized standard deviation of daily excess returns over the same period. Additional background information regard-ing the computation of the information ratio figures provided be-low are available upon request.

The calculations assume that the portfolios are rebalanced upon publication of the models in the CIO Letter or House View Up-date. The computations assume portfolio rebalancing upon such intra-month changes as well. Performance shown is based on to-tal returns, but does not include transaction costs, such as com-missions, fees, margin interest, and interest charges. Actual to-tal returns adjusted for such transaction costs will be reduced. A complete record of all the recommendations upon which this per-formance report is based is available from UBS Financial Services Inc. upon written request. Past performance is not an indication of future results.

Table A: Moderate risk profile performance measurement (25 January 2013 to present)—See NOTE next page

SAA SAA withtactical shift

Excessreturn

Information ratio

(annualized)

Russell 3000stock index

(total return)

Barclays CapitalUS Aggregate bondindex (total return)

25 January 2013 to 31 March 2013 0.79% 0.83% 0.04% 0.9 5.59% 0.11%

2Q 2013 -2.18% -2.14% 0.04% 0.3 2.69% -2.33%

3Q 2013 3.60% 3.86% 0.26% 2.4 6.35% 0.57%

4Q 2013 3.05% 3.23% 0.18% 2.9 10.10% -0.14%

1Q 2014 2.56% 2.53% -0.03% -0.2 1.97% 1.84%

2Q 2014 3.44% 3.49% 0.05% 0.3 4.87% 2.04%

3Q 2014 -1.54% -1.71% -0.16% -1.2 0.01% 0.17%

4Q 2014 0.47% 0.73% 0.26% 1.3 5.24% 1.79%

1Q 2015 1.38% 1.69% 0.31% 2.1 1.80% 1.61%

2Q 2015 -0.18% -0.19% -0.01% -0.1 0.14% -1.68%

3Q 2015 -4.67% -5.08% -0.41% -2.4 -7.25% 1.23%

4Q 2015 1.61% 1.67% 0.06% 0.5 6.27% -0.57%

1Q 2016 2.11% 1.72% -0.39% -3.7 0.97% 3.03%

2Q 2016 2.81% 2.88% 0.08% 1.1 2.63% 2.21%

3Q 2016 2.50% 2.60% 0.10% 1.5 4.40% 0.46%

4Q 2016 -1.33% -1.13% 0.21% 3.4 4.21% -2.98%

1Q 2017 3.93% 4.02% 0.10% 2.4 5.74% 0.82%

2Q 2017 3.01% 3.03% 0.01% 0.6 3.02% 1.45%

2017 year to date 10.43% 10.51% 0.08% 1 13.10% 3.14%

Since inception (25 January 2013) 26.94% 27.71% 0.78% 0.4 83.08% 10.77%

Source: UBS, as of 20 September 2017 Note: Performance after 27 February 2017 based on updated SAA weights as shown in Table B

PERFORMANCE MEASUREMENT


PERFORMANCE MEASUREMENT

Table B: SAA for moderate risk profile investor, and underlying indices (all figures in %)

25 Jan 2013 to presentPrevious SAA weights(25 Jan 2013—27 Feb 2017)

New SAA weights(27 Feb 2017 onward)

US cash (Barclays Capital US Treasury—Bills [1–3 M]) 0.0 5.0

US Large Cap Growth (Russell 1000 Growth) 7.0 10.0

US Large Cap Value (Russell 1000 Value) 7.0 10.0

US Mid Cap (Russell Mid Cap) 6.0 5.0

US Small Cap (Russell 2000) 3.0 3.0

International Dev. Equities (MSCI EAFE) 10.0 15.0

Emerging Markets Equities (MSCI EMF) 7.5 6.0

US Government Fixed Income (BarCap US Agg Government) 5.0 2.0

US Municipal Fixed Income (BarCap Municipal Bond) 35.0 40.0

US Investment Grade Fixed Income (BarCap US Agg Credit) 3.0 0.0

US Corporate High Yield Fixed Income (BarCap US Agg Corp HY) 4.0 2.0

International Dev. Fixed Income (BarCap Global Agg xUS) 4.0 0.0

Emerging Markets Fixed Income (50% BarCap EM Gov and 50% BarCap Global EM (USD)) 3.5 2.0

Commodities (Dow Jones-UBS Commodity Index) 5.0 0.0

Tactical asset allocation performance measurement

Note: The performance of our tactical overweight on TIPS will be measured by the Bloomberg Barclays US Inflation Linked Bonds 1 to 10 Year Total Return Index, and the tactical overweight on Global Equity by the MSCI All Country World Index.Source: UBS

Table A NOTE Historical performance measurement

Prior to 25 January 2013, CIO Americas, WM published tactical asset allocation recommendations in the Invest-ment Strategy Guide using a different set of asset classes and sectors. The performance of these tactical recommen-dations is reflected in Table C of the February 2017 House View Investment Strategy Guide. You can obtain a copy of the February 2017 House View from Online Services, or from your UBSFS financial advisor.


APPENDIX

Global Investment Process and Committee descriptionThe UBS investment process is designed to achieve replica-ble, high-quality results through applying intellectual rigor, strong process governance, clear responsibility, and a culture of challenge.

Based on the analyses and assessments conducted and vet-ted throughout the investment process, the Chief Investment Officer (CIO) formulates the UBS Wealth Management Invest-ment House View (e.g., overweight, neutral, underweight stances for asset classes and market segments relative to their benchmark allocation) at the Global Investment Committee (GIC). Senior investment professionals from across UBS, com-plemented by selected external experts, debate and rigorously challenge the investment strategy to ensure consistency and risk control.

Global Investment Committee compositionThe GIC is comprised of 10 members, representing top market and investment expertise from across all divisions of UBS:

• Mark Haefele (Chair)• Mark Andersen• Jorge Mariscal• Mike Ryan• Simon Smiles• Tan Min Lan• Themis Themistocleous• Paul Donovan• Bruno Marxer (*)• Andreas Koester

Investment committeeWMA Asset Allocation Committee descriptionWe recognize that a globally derived house view is most ef-fective when complemented by local perspective and applica-tion. As such, UBS has formed a Wealth Management Ameri-cas Asset Allocation Committee (WMA AAC). WMA AAC is responsible for the development and monitoring of UBS WMA’s strategic asset allocation models and capital market assumptions. The WMA AAC sets parameters for the CIO Americas, WM Investment Strategy Group to follow during the translation process of the GIC’s House Views and the in-corporation of US-specific asset class views into the US-spe-cific tactical asset allocation models.

WMA Asset Allocation Committee compositionThe WMA Asset Allocation Committee is comprised of five members:

• Mike Ryan • Michael Crook • Richard Hollmann (*) • Brian Rose• Jeremy Zirin

(*) Business areas distinct from Chief Investment Office Amer-icas, Wealth Management

This report contains statements that constitute “forward-looking state-ments,” including but not limited to statements relating to the current and expected state of the securities market and capital market assump tions. While these forward-looking statements represent our judg ments and fu-ture expectations concerning the matters discussed in this document, a number of risks, uncertainties, changes in the market, and other impor-tant factors could cause actual developments and results to differ materi-ally from our expectations. These factors include, but are not limited to (1) the extent and nature of future developments in the US market and in other market segments; (2) other market and macro-economic develop-

ments, including movements in local and international securities markets, credit spreads, currency exchange rates and interest rates, whether or not arising directly or indirectly from the current mar ket crisis; (3) the impact of these developments on other markets and asset classes. UBS is not under any obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events, or otherwise.

Cautionary statement regarding forward-looking statements


APPENDIX

Explanations about asset classes

Scale for tactical deviation charts

Symbol Description/Definition Symbol Description/Definition Symbol Description/Definition

+ moderate overweight vs. benchmark – moderate underweight vs. benchmark n neutral, i.e., on benchmark

++ overweight vs. benchmark – – underweight vs. benchmark n/a not applicable

+++ strong overweight vs. benchmark –—– strong underweight vs. benchmark

Source: UBS

Sources of strategic asset allocations and investor risk profilesStrategic asset allocations represent the longer-term allocation of assets that is deemed suitable for a particular investor. The strategic asset alloca-tion models discussed in this publication, and the capital market assump-tions used for the strategic asset allocations, were developed and ap-proved by the WMA AAC.

The strategic asset allocations are provided for illustrative purposes only and were designed by the WMA AAC for hypothetical US investors with a total return objective under five different Investor Risk Profiles ranging from conservative to aggressive. In general, strategic asset allocations will differ among investors according to their individual circumstances, risk tolerance, return objectives and time horizon. Therefore, the strategic as-set allocations in this publication may not be suitable for all investors or investment goals and should not be used as the sole basis of any invest-ment decision. Minimum net worth requirements may apply to allocations to non-traditional assets. As always, please consult your UBS Financial Advisor to see how these weightings should be applied or modified ac-cording to your individual profile and investment goals.

The process by which the strategic asset allocations were derived is de-scribed in detail in the publication entitled “Strategic Asset Allocation (SAA) Methodology and Portfolios.” Your Financial Advisor can provide you with a copy.

Deviations from strategic asset allocation or benchmark allocationThe recommended tactical deviations from the strategic asset allocation or benchmark allocation are provided by the Global Investment Committee and the Investment Strategy Group within CIO Americas, Wealth Management. They reflect the short- to medium-term assessment of market opportunities and risks in the respective asset classes and market segments. Positive/zero/negative tactical deviations correspond to an overweight/neutral/under-weight stance for each respective asset class and market segment relative to their strategic allocation. The current allocation is the sum of the strategic asset allocation and the tactical deviation.

Note that the regional allocations on the Equities and Bonds pages in UBS House View are provided on an unhedged basis (i.e., it is assumed that in-vestors carry the underlying currency risk of such investments) unless other-wise stated. Thus, the deviations from the strategic asset allocation reflect the views of the underlying equity and bond markets in combination with the assessment of the associated currencies. The detailed asset allocation tables integrate the country preferences within each asset class with the asset class preferences in UBS House View.

Asset allocation does not assure profits or prevent against losses from an investment portfolio or accounts in a declining market.

Statement of riskEquities - Stock market returns are difficult to forecast because of fluctua-tions in the economy, investor psychology, geopolitical conditions and other important variables.

Fixed income - Bond market returns are difficult to forecast because of fluctuations in the economy, investor psychology, geopolitical conditions and other important variables. Corporate bonds are subject to a number of risks, including credit risk, interest rate risk, liquidity risk, and event risk. Though historical default rates are low on investment grade corporate bonds, perceived adverse changes in the credit quality of an issuer may negatively affect the market value of securities. As interest rates rise, the value of a fixed coupon security will likely decline. Bonds are subject to market value fluctuations, given changes in the level of risk-free interest rates. Not all bonds can be sold quickly or easily on the open market. Prospective investors should consult their tax advisors concerning the fed-eral, state, local, and non-U.S. tax consequences of owning any securities referenced in this report.

Preferred securities - Prospective investors should consult their tax advi-sors concerning the federal, state, local, and non-U.S. tax consequences of owning preferred stocks. Preferred stocks are subject to market value

fluctuations, given changes in the level of interest rates. For example, if interest rates rise, the value of these securities could decline. If preferred stocks are sold prior to maturity, price and yield may vary. Adverse chang-es in the credit quality of the issuer may negatively affect the market value of the securities. Most preferred securities may be redeemed at par after five years. If this occurs, holders of the securities may be faced with a re-investment decision at lower future rates. Preferred stocks are also subject to other risks, including illiquidity and certain special redemption provi-sions.

Municipal bonds - Although historical default rates are very low, all mu-nicipal bonds carry credit risk, with the degree of risk largely following the particular bond’s sector. Additionally, all municipal bonds feature valua-tion, return, and liquidity risk. Valuation tends to follow internal and exter-nal factors, including the level of interest rates, bond ratings, supply fac-tors, and media reporting. These can be difficult or impossible to project accurately. Also, most municipal bonds are callable and/or subject to ear-lier than expected redemption, which can reduce an investor’s total re-turn. Because of the large number of municipal issuers and credit struc-tures, not all bonds can be easily or quickly sold on the open market.


APPENDIX

Nontraditional AssetsNontraditional asset classes are alternative investments that include hedge funds, private equity, real estate, and man-aged futures (collectively, alternative investments). Interests of alternative investment funds are sold only to qualified investors, and only by means of offering documents that include information about the risks, performance and expenses of alternative invest-ment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund is speculative and involves significant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same regulatory requirements as mutual funds; (2) may have per-formance that is volatile, and investors may lose all or a substantial amount of their investment; (3) may engage in leverage and other speculative investment practices that may increase the risk of in-vestment loss; (4) are long-term, illiquid investments; there is gen-erally no secondary market for the interests of a fund, and none is expected to develop; (5) interests of alternative investment funds typically will be illiquid and subject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation infor-mation to investors; (7) generally involve complex tax strategies and

AppendixEmerging Market InvestmentsInvestors should be aware that Emerging Market assets are subject to, among others, potential risks linked to currency volatility, abrupt changes in the cost of capital and the economic growth outlook, as well as regulatory and sociopolitical risk, interest rate risk and higher credit risk. Assets can sometimes be very illiquid and liquidity con-ditions can abruptly worsen. CIO Americas, WM generally recom-mends only those securities it believes have been registered under Federal US registration rules (Section 12 of the Securities Exchange Act of 1934) and individual State registration rules (commonly known as “Blue Sky” laws). Prospective investors should be aware that to the extent permitted under US law, CIO Americas, WM may from time to time recommend bonds that are not registered under US or State securities laws. These bonds may be issued in jurisdictions where the level of required disclosures to be made by issuers is not as frequent or complete as that required by US laws.

For more background on emerging markets generally, see the CIO Americas, WM Education Notes “Investing in Emerging Markets (Part 1): Equities,” 27 August 2007, “Emerging Market Bonds: Under-standing Emerging Market Bonds,” 12 August 2009 and “Emerging Markets Bonds: Understanding Sovereign Risk,” 17 December 2009.

Investors interested in holding bonds for a longer period are advised to select the bonds of those sovereigns with the highest credit rat-ings (in the investment-grade band). Such an approach should de-crease the risk that an investor could end up holding bonds on which the sovereign has defaulted. Subinvestment-grade bonds are recom-mended only for clients with a higher risk tolerance and who seek to hold higher-yielding bonds for shorter periods only.

there may be delays in distributing tax information to investors; (8) are subject to high fees, including management fees and other fees and expenses, all of which will reduce profits.

Interests in alternative investment funds are not deposits or obliga-tions of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Prospective investors should understand these risks and have the financial ability and willingness to accept them for an extended period of time before making an investment in an alternative investment fund, and should consider an alternative investment fund as a supplement to an overall investment program.

In addition to the risks that apply to alternative investments gener-ally, the following are additional risks related to an investment in these strategies:

• Hedge Fund Risk: There are risks specifically associated with investing in hedge funds, which may include risks associated with investing in short sales, options, small-cap stocks, “junk bonds,” derivatives, distressed securities, non-US securities and illiquid investments.

• Managed Futures: There are risks specifically associated with investing in managed futures programs. For example, not all managers focus on all strategies at all times, and managed fu-tures strategies may have material directional elements.

• Real Estate: There are risks specifically associated with investing in real estate products and real estate investment trusts. They involve risks associated with debt, adverse changes in general economic or local market conditions, changes in governmental, tax, real estate and zoning laws or regulations, risks associated with capital calls and, for some real estate products, the risks associated with the ability to qualify for favorable treatment un-der the federal tax laws.

• Private Equity: There are risks specifically associated with in-vesting in private equity. Capital calls can be made on short no-tice, and the failure to meet capital calls can result in significant adverse consequences including, but not limited to, a total loss of investment.

• Foreign Exchange/Currency Risk: Investors in securities of is-suers located outside of the United States should be aware that even for securities denominated in US dollars, changes in the exchange rate between the US dollar and the issuer’s “home” currency can have unexpected effects on the market value and liquidity of those securities. Those securities may also be affected by other risks (such as political, economic or regulatory changes) that may not be readily known to a US investor.


APPENDIX

Research publications from Chief Investment Office Americas, Wealth Management, formerly known as CIO Wealth Manage-ment Research, are published by UBS Wealth Management and UBS Wealth Management Americas, Business Divisions of UBS AG or an affiliate thereof (collectively, UBS). In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Different assumptions could result in ma-terially different results. We recommend that you obtain financial and/or tax advice as to the implications (including tax) of investing in the manner described or in any of the products mentioned herein. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS). All information and opinions as well as any prices indicated are current only as of the dateof this re-port, and are subject to change without notice. Opinions expressed herein may differ or be contrary to thoseexpressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria. At any time, investment decisions (including whether to buy, sell or hold securities) made by UBS and its employees may differ from or be contrary to the opinions expressed in UBS research publications. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the in-vestment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and op-tions trading is considered risky. Past performance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or income of an investment. This report is for distribution only under such circumstances as may be permitted by applicable law.

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Version as per September 2017.

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Publication detailsPublisherUBS Financial Services Inc. CIO Americas, Wealth Management 1285 Avenue of the Americas, 20th Floor New York, NY 10019

This report was published on 22 September 2017

Lead authors Mark HaefeleMike Ryan

Authors (in alphabetical order)Paul DonovanJason DrahoLeslie FalconioThomas FluryRicardo Garcia-SchildknechtWayne GordonMarkus IrngartingerLaura KaneDavid LefkowitzBarry McAlindenKathleen McNamaraBrian RoseDominic SchniderPhilipp SchoettlerFrank SileoGiovanni StaunovoThomas VeraguthJustin WaringJeremy Zirin

EditorKate Hazelwood

Project Management Paul LeemingJohn Collura Matt Siegel

Desktop PublishingCognizant Group—Basavaraj Gudihal, Srinivas Addugula, Pavan Mekala and Virender Negi

October 2017 UBS HOUSE VIEW 37 of 37ab

©2017 UBS Financial Services Inc. All rights reserved. Member SIPC. All other trademarks, registered trademarks, service marks and registered service marks are of their respective companies.

UBS Financial Services Inc.www.ubs.com/financialservicesinc

UBS Financial Services Inc. is a subsidiary of UBS AG.

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