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UBS House ViewMonthly Extended April 2017

Chief Investment Office WM

PublishedMar 23 2017

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

Table of content

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

2

Section 1

Base slides

3

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

Financial Market Outlook – short term (6 months) Leading indicators signal acceleratingeconomic growth globallyManufacturing PMIs

30

35

40

45

50

55

60

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Global Eurozone US China

Contraction

Expansion

Source: Bloomberg, UBS, as of March 2017

We expect a flatter US yield curve andsee value in 10-year TreasuriesYields with forecasts in %

Source: Moody's, BoAML, UBS, as of March 2017

Global Tactical Asset Allocation

• Asset allocationGlobal growth is accelerating due to easy financial conditions, strengthening business sentiment and the fading investment drag from the energysector. We prefer global and US equities over high grade (HG) bonds, as corporate earnings continue to support higher stock prices. The US Fedacknowledged the solid state of the US economy, delivering its third policy rate hike for this cycle, with two more likely before year-end. We thinklong US yields have fully priced in this outlook. Risks around the French elections can cause temporary market weakness, but a French EU exitremains very unlikely, in our view. We are opening an underweight in euro high yield (HY) bonds, which we find overvalued, against global equitiesand US HG bonds. The underweight in euro HY, offering limited upside in our base case, helps mitigate downside, e.g. if Eurozone risks materialize.Underweighting two units of euro HY vs. one unit of global equities and US HG each limits the increase in risk to portfolios.

• EquitiesWe are holding overweight positions in global and US equities against high grade bonds. Corporate earnings are rising in most regions, supportedby strengthening consumer demand, rising company capex and higher commodity prices. Global equity valuations, as measured by price-to-earnings ratio, are slightly above their long-term averages, leaving some scope for further price appreciation driven by rising company earnings. Theoverweight in US equities reflects our belief that the US economy is leading the way in the current recovery. The overweight in global equities shouldbenefit generally from the expected outperformance of "risky assets" (i.e. from exposure to "market beta"). We are adding another overweightposition in global equities (and US high grade bonds), which we expect to outperform euro HY bonds in the next six months (see below).

• BondsWith spreads close to their post-crisis lows and yields below 4%, euro HY bonds do not compensate well for potential risks. But even in the absenceof any downside risks, expected returns of the asset class are low given high average prices. We see better value in global equities. Besides that,we expect long-term USD yields to move sideways and the yield curve to flatten as the US economy, already around full employment, grows andthe Fed gradually raises the policy rate. We therefore see an opportunity to profit from attractive carry and are tactically overweight on US 10-year Treasury bonds vs. cash. We furthermore hold overweight positions in US Treasury inflation-protected bonds (TIPS) and US HY for its carryrelative to high grade bonds.

• Foreign exchangeOver the next six months, the euro is well positioned to appreciate against the US dollar, given its current undervaluation and the "catch-up"potential of Eurozone economic growth and monetary policy to the US. Our six-month forecast for EURUSD is 1.15. Furthermore, we are overweighton the Swedish krona against the Canadian dollar, as the Swedish central bank is likely to strike a more hawkish tone in the coming months giventhe strength of the domestic economy and rising house prices. Swedish inflation just reached a five-year high at 1.8%. Finally, we are holdingonto a basket of EM currencies (BRL, INR, RUB, ZAR) that offer a yield advantage of more than 7% annually relative to select DM currencies(AUD, CAD, SGD).

4

Cross-asset preferences Most preferred Least preferred

Equities

• Global equities ( )

• US equities

• US share buybacks and dividends

• US technology

Bonds

• USD high yield

• Corporate hybrids

• US leveraged loans

• Long US Treasury duration (10yr vs. cash)

• US TIPS

• Developed market high grade bonds ( )

• Replacing "well-worn" bonds

• Euro high yield ( )

Foreign exchange

• SEK

• EUR

• EM FX (BRL, INR, RUB, ZAR)

• CAD

• USD

• DM FX (AUD, CAD, SGD)

• The peak of the USD cycle

Hedge Funds • Navigating rising US rates with hedgefunds

Precious Metals& Commodities

Recent Upgrade Recent Downgrade

Global model portfolios (EUR & USD)

Liquidity5% High grade

bonds11%

US TIPS2%

Inv. gradecorporate

bonds8%

High yieldbonds

5%

EM bonds4%

Equitiesothers

4%Equities EM

4%

EquitiesEurope

24%

Equities US13%

Hedge Funds20%

EUR


bonds11%

US TIPS2%

Inv. gradecorporate

bonds8%

High yieldbonds

5%

EM bonds4%

Equitiesothers

5%Equities EM

6%

EquitiesEurope

13%

Equities US21%

Hedge Funds20%

USD

As of 23 March 2017

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

5

Global tactical asset allocationTactical asset allocation deviations from benchmark*

Liquidity

Equities total

Global

US

Eurozone

UK

Switzerland

Japan

EM

Others

Bonds total

High grade bonds

Corporate bonds (IG)

High yield bonds**

EM sovereign bonds (USD)

EM corporate bonds (USD)

US TIPS

Duration overlay (USD)

Precious Metals & Commodities

new old

neutral overweightunderweight

Source: UBS, as of 23 March 2017

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

Currency allocation

USD

EUR

GBP

JPY

CHF

SEK

NOK

CAD***

NZD

AUD***

EM FX basket***

DM FX basket***

new old

neutralunderweight overweight

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

6

CIO themes in focus Equities

• US technology: Secular growth, on sale

Secular growth drivers (online advertising, cyber security, cloud investments) are likely to propel US technology sector earnings for years. More tactically, we expect the sector to continue tobenefit from resilient business spending and ongoing labor market gains. Relative valuations are near 20-year lows and companies are returning large sums of cash to shareholders withoutincreasing leverage.

• Profit from US share buybacks and dividends

US companies are generally in good shape: they generate high free cash flow, have plenty of cash on their balance sheets and enjoy low financing costs. The stock market has rewardedinvestors in companies that return capital through dividends and share buybacks. These companies offer attractive yields in the current low-growth, low-interest-rate environment. Onaverage, S&P 500 companies returning cash to shareholders via dividends and/or share repurchases offer investors a total yield of about 5% (when combining share buyback and dividendyields). Around two-thirds of this yield comes from share buybacks. Good free cash flow generation is a key factor for this theme, and more favorable corporate tax and cash repatriationrules under the new US president could boost cash returns to shareholders this year. As buybacks are made at management's discretion, we recommend investing in a diversified basket ofstocks.

Bonds

• A tip on TIPS: Benefiting from rising inflation

Consumer price inflation expectations, as measured by the breakeven inflation (BEI) rate, have moved closer to our fair value target over the last six months thanks to a tighter labor marketand stabilizing oil prices. We think these factors will push headline inflation even higher, yet the opportunity remains to take a long position in US Treasury Inflation Protected Securities (TIPS)funded by a short position in nominal US Treasuries. This so-called inflation breakeven trade has delivered about 3% excess return since its inception last April, and we think it still has moderateupside for investors with a minimum investment horizon of six months. The 3-7-year maturity spectrum of the curve is our top "tip." TIPS also diversify portfolios and provide some hedgeagainst a fall in the real value of accumulated capital should inflation climb further.

• Replacing well-worn bonds

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

• US loans – Attractive floating yield

US senior loans are an attractive alternative to more traditional fixed income segments, in our view. Loans provide exposure to the most senior part of a company's capital structure and areoften secured by the company's assets, leading to higher recovery rates than for bonds. Also, loans offer a floating coupon rate, which benefits from an increase in US short-term interestrates. The recent rise in the USD LIBOR rate above 1% supports the investment case. The current yield (to a three-year takeout) of roughly 5.5% is attractive. The 12-month trailing defaultrate is 1.6%, which we expect to trend sideways over the next 12 months. We think US loans represent an attractive investment opportunity for qualified investors who are comfortableholding less liquid asset classes.

• Yield pickup with corporate hybrids

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

7

CIO themes in focus Liquidity & Foreign exchange

• The peak of the USD cycle

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

Alternative investments

• Navigating rising US rates with hedge funds

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

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

8

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

CIO longer term investment themes in focus Equities

• Energy efficiency

Energy efficiency covers wide-ranging issues with numerous characteristics and starting points for promising investment opportunities. In general, it is gaining in importance around theworld and developing increasingly thanks to government initiatives. Rising environmental pollution has led to greater worldwide awareness.

• Digital data

Due to increased urbanization, the global digital universe is expected to expand 50-fold between 2010 and 2020. From an investment perspective, the theme offers solid long-term growthopportunities as significant investment is required to deal with the surge in data. Investors can participate by investing in either data enablers or data infrastructure companies.

• Automation and robotics

Smart automation is powering the ongoing industrial revolution, combining the innovation capabilities of industrial and IT processes to fuel global manufacturing productivity gains. Risingwages and challenging demographic developments will push up the costs of emerging market manufacturing companies, driving automation investment, in our view. Artificial intelligenceemployed in machines should take automation to the next level.

• Frontier markets

We expect the demographic profile of frontier markets (FM) to lift their medium-term growth potential relative to emerging markets. The share of the working-age population in FM is expectedto rise until 2040. In our view, the combination of a growing working-age population and urbanization will boost growth in FM in the next 5–10 years.

• Emerging market infrastructure

Rising urbanization and the prevalence of megacities in emerging markets are increasing demand for infrastructure investment. Bottlenecks mean that emerging countries cannot sustain higheconomic growth rates or remain globally competitive without investing. They are expected to account for almost two-thirds of global infrastructure spending and are in better fiscal shapethan developed markets to expand infrastructure.

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

9

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

Key financial market driver 1 - Central bank policyKey points• The US Federal Reserve seems content with current market expectations for policy, which are focused on two further rate increases

(totaling 0.50%) in the wake of the 0.25% increase in March. Rising inflation means real rates do not rise as much.• Rising inflation and reasonable economic growth will keep the European Central Bank (ECB) on the policy path unveiled in December,

in our view, with the prospect of a further reduction in bond-buying next January. The ECB's language has tilted a little, and there isno immediate prospect of a more aggressive easing bias being expressed.

• Currency volatility has reduced the policy visibility of the Bank of England (BoE), which has nonetheless indicated greater optimismabout the economic outlook. Staff changes seem unlikely to alter the policy outlook.

CIO view (Probability: 70%) Policies tighten gradually• The Fed has tacitly endorsed market expectations for three rate increases over the course of the year. The quarter-point increase

in fed funds in March was accompanied by a statement that remains consistent with a further two increases this year. Discussionabout quantitative policy and managing the Fed balance sheet is underway. The balance-sheet-to-GDP ratio should continue todecline "naturally" as its latter element grows faster than its former in nominal terms.

• The ECB continues to pursue its predetermined quantitative policy path, and will moderately reduce its monthly bond-buyingfrom EUR 80bn to EUR 60bn from April onwards. It seems some members of the ECB Governing Council are concerned aboutthe fact that inflation is above target against such an accommodative policy stance, but, as a base case, we do not expect afurther reduction in bond-buying before January 2018.

• The BoE is expected to leave policy unchanged for now as the consequences of the earlier decline in sterling percolate throughto the real economy with evidence of increasing inflation pressure. The Swiss National Bank (SNB) has held its policy steady, andwe believe it will continue with its current negative rate position for the next 12 months. The Bank of Japan (BoJ) seems contentto leave policy unchanged.

Positive scenario (Probability: 15%) Worsening macro backdrop

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

Negative scenario (Probability: 15%) Macro risks fade

• The inflation effect of US fiscal stimulus leads to a stronger Fed response and a combination of tight monetary and loose fiscalpolicy (similar to what occurred during Ronald Reagan's presidency). Higher labor market costs and some commodity pricepressures lead to higher European inflation, generating early signals of a more rapid tapering of ECB quantitative easing (possiblyas early as this year).

Key datesApr 27May 3May 11

ECB policy decisionUS Federal Reserve policy decisionBank of England policy decision

US inflation exceeds long-term averagesLatest US inflation compared to 20-year average rates,% y/y

1.5

1.7

1.9

2.1

2.3

2.5

2.7

Headline CPI Trimmed Mean CPI Core CPI Core PCE deflator Median CPI Services PCE

20 year average Latest

Source: Haver, UBS, as of March 2017

Some quantitative policies have peaked, most havenotCentral bank balance sheets as a % of GDP

0%

20%

40%

60%

80%

100%

120%

Fed ECB SNB BoJ BoE

2007

High

Latest

Source: Haver, UBS, as of March 2017

10

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

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

financial markets have with political uncertainty is that the potential policy measures and the policy framework are both uncertain.• Political uncertainty is likely to affect trend rates of growth rather than significantly alter the near-term economic cycle. However,

specific companies or sectors may become political targets and could suffer in the near term. Trade protectionism is likely to producea more immediate economic reaction.

• Domestic investors tend to understand local politics better than foreign investors. Market reactions to political risk will thereforedepend on the domestic-foreign mix of investors. The higher the foreign ownership, the greater the risk of overreaction to politicalnoise. For this reason, the US may have more political risk this year than Europe does, despite having fewer political events.

CIO view (Probability: 70%)• President Donald Trump continues to create uncertainty around the policy process through an unusual and unconventional

style of government. This uncertainty is compounded by selective disagreements between the administration and Congress(particularly the Senate) over the content and conduct of policy. Disagreement over healthcare reform may slow the legislativeprocess, delaying other measures (especially fiscal policy, which is also controversial).

• The politics of immigration still play an important role in Europe. The Dutch elections, as an event, fade from market focus asgovernment formation takes time. Investors are inclined to extrapolate from the poorer-than-expected performance of the anti-establishment Freedom Party, but it is probably unwise to translate the results of one country into those of another country. TheUK invokes Article 50 to exit the EU. Uncertainty about the UK outlook is compounded by uncertainty about the position ofScotland within the UK.

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

Positive scenario (Probability: 10%)

• The sharp improvement in labor market conditions for low-skilled workers leads to wage increases that either are accompaniedby better credit access or compensate for the loss of credit access since 2008; this eases income and consumption inequality.Governments and economists successfully communicate the net economic benefits of global trade and diversity.

Negative scenario (Probability: 20%)• Nationalist tendencies are encouraged by single-issue politics and social media. Fake news stories are insufficiently countered by

facts. Traditional party structures fail to address the demands of large sections of the electorate, encouraging populism. Electionoutcomes are increasingly unpredictable as opinion polls offer less and less guidance. Established parties adopt policies that appealto populist supporters, raising uncertainty about mainstream policy programs. Lower income groups' standards of living are hurt bypopulist policies and rising food and energy prices, fueling further demands for radical and unpredictable change.

Key datesApr 23May 7

French presidential election – first roundFrench presidential election – second round

Migrant populationsNon-native-born population stock, % total population

0

5

10

15

20

25

30

Australia France Germany Italy Japan Netherlands Spain UK US

Source: IBRD, as of 2015

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

0.30

0.32

0.34

0.36

0.38

0.40

0.42

0.44

0.46

0.48

0.50

Canada France Germany Italy Japan UnitedKingdom

United States

1990 1995 2005 2012

Source: Euromonitor, UBS, as of 7 December 2016

11

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

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

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

• Earnings rose about 6% in 4Q16, the fastest growth in two years. We expect earnings growth to continue to accelerate over thenext few quarters. The improving profit trend is underpinned by solid US consumer spending, a rebound in US manufacturingactivity as energy investment spending and emerging market demand bottom out, and a more favorable environment forfinancials.

• The Trump administration's policies could further boost earnings growth through lower taxes (corporate, individual, and therepatriation of overseas cash), greater fiscal spending, less regulation, and a steeper yield curve (which benefits banks). However,many details have yet to be worked out and Republicans have not reached an agreement about how to pay for lower corporatetax rates. Overall, we believe these policies could boost earnings by 5–15% over the next few years.

• Still, the election may already have had a positive impact on business and consumer sentiment, both of which have notchedstrong gains since the election and have reached post-financial-crisis highs. Greater optimism could unleash faster investmentspending, which would be favorable for earnings growth expectations.

• For this year, we expect growth of 11% as some of the new administration's policies make it into law by the end of the year. Weexpect growth to remain solid next year.

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

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

Negative scenario (Probability: 20%) Downturn in sentiment

• Trade and geopolitical tensions flare up as a result of the new administration's policy priorities, depressing business and consumersentiment. Wage pressures, without improving consumer and business demand, could hurt profit margins and earnings growthrates. Persistently low short-term interest rates and renewed declines in long-term interest rates could pressure financial sectorearnings.

Key datesApr 10 1Q17 earnings season begins in earnest this week

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

20

40

60

80

100

120

140

2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: FactSet, UBS, as of 16 March 2017

Recent surge in business and consumer optimismbodes well for earnings growthNFIB Small Business Optimism Index and the Universityof Michigan Consumer Sentiment Index

50

60

70

80

90

100

110

80

85

90

95

100

105

110

2007 2009 2011 2013 2015 2017NFIB Small Business Optimism Index (lhs)

Univ. of Michigan Consumer Sentiment Index (rhs)

Source: Bloomberg, UBS, as of 16 March 2017

12

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

Global economic outlook - SummaryKey points• Global growth remains broadly around trend with some bias to positive surprises. Sentiment data seems more positive than

economic reality would warrant. Signs of global trade remain relatively positive for now.• The Fed tacitly supported market expectations of two more interest rate increases over the remainder of this year.• The bias is for inflation indicators to come in higher than expected. Central bank language has started to reflect this, and investors

have become more sensitive to the inflation outlook.

CIO view (Probability: 70%*) Global growth remains around trend

• The global economic cycle continues to exhibit broadly trend-like activity. The political uncertainty worldwide does not affectthe near-term economic growth story, in our view (although it does have implications for the trend rate of growth in someeconomies). Consumers are content to spend money where they have good employment prospects and where they perceivetheir real income to be increasing.

• The US and most of northern Europe remain supported by a combination of consumer-income and bank-lending growth in thewider economy.

• Headline inflation in the developed world continues to rise as oil base effects fall away. Some economies are experiencing risingcore inflation pressures from tighter labor markets. Emerging market inflation is likely to be more modest.

• The Fed is expected to raise interest rates twice more this year. The ECB is likely to continue with a slower pace of quantitativepolicy (EUR 60bn a month) with negative interest rates, but may signal after the French elections that further quantitativetightening will commence next year. China continues to use capital controls to limit the yuan's weakening.

Positive scenario (Probability: 15%*) Stimulus dominates

• The US economy grows closer to 3%, spurred by robust consumer spending and the prospect of further fiscal easing. Political risksare contained in the Eurozone, and economic growth and inflation in the European periphery beat forecasts. Inflation speeds upas domestic cost pressures build.

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

Negative scenario (Probability: 15%*) Political damage to growth

• US consumers suffer lower real disposable income as domestic inflation pressures increase via the tax effect of trade protection.Eurozone growth weakens as bank lending reverses. Political uncertainty affects European consumer and investment spending.

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

Key datesMar 31Apr 5Apr 23

US PCE deflator (February)Federal Reserve minutes (March meeting)French presidential election first round

Trend-like growth, rising inflation

2015 2016F 2017F 2018F 2015 2016F 2017F 2018FAmericas US 2.6 1.5 2.4 2.5 0.1 1.3 2.3 2.3

Canada 1.1 1.1 2.3 2.7 1.1 1.5 1.8 2.0Brazil -3.8 -3.6 1.3 2.6 9.0 8.7 4.4 4.6

Asia/Pacific Japan 1.2 0.5 0.8 0.9 0.8 -0.3 0.5 0.6Australia 2.4 2.4 2.7 2.7 1.5 1.3 1.8 1.9China 6.9 6.7 6.4 6.0 1.4 2.0 2.3 1.8India 7.9 6.0 8.0 7.8 4.9 4.7 4.1 4.9

Europe Eurozone 1.9 1.7 1.5 1.2 0.0 0.2 1.8 1.7Germany 1.5 1.8 1.5 1.3 0.1 0.4 1.8 1.7France 1.2 1.1 1.3 1.4 0.1 0.3 1.5 1.5Italy 0.6 1.0 0.9 0.8 0.1 -0.1 1.3 1.8Spain 3.2 3.2 2.5 1.9 -0.6 -0.3 2.8 1.7

UK 2.2 2.0 1.4 0.7 0.0 0.7 2.8 2.8Switzerland 0.8 1.4 1.4 1.6 -1.1 -0.4 0.4 0.9Russia -3.0 -0.6 1.3 1.7 15.5 7.0 4.8 4.2

World 3.4 3.0 3.6 3.6 2.6 2.6 3.0 2.8

Inflation in %Real GDP growth in %


In developing the CIO economic forecasts, CIO economistscollaborated with economists employed by UBS InvestmentResearch. Forecasts and estimates are current only as of the dateof this publication, and may change without notice.

US and Eurozone inflation harmonize higherUS and Eurozone harmonized CPI (like for likecomparison), % y/y

-2%

-1%

0%

1%

2%

3%

4%

5%

2010 2011 2012 2013 2014 2015 2016 2017Euro area HICP US HICP

Source: Haver, UBS, as of 15 March 2017

13

US economist Brian Rose, [email protected]

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

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

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

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

• Energy sector fixed investment appears to have bottomed out following the rebound in oil prices. The manufacturing sector hasshown improvement in recent months and output should grow modestly in 2017.

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

• Political uncertainty is high. It will likely take time for legislation to be passed following the Republican election sweep, and theimpact on economic growth this year should be limited.

• Considerable progress has been made toward fulfilling the Fed's dual mandates of full employment and price stability. The Fedhiked by 25bps on 15 March and we expect an additional 50bps of tightening by the end of this year.

Positive scenario (Probability: 15%*) Strong expansion

• US real GDP growth stays above 2.5%, propelled by accommodative monetary policy, looser fiscal policy, strong householdspending, and subsiding risks overseas. Inflation hits the Fed's 2% target earlier than expected, leading the central bank to raiserates at a faster pace.

Negative scenario (Probability: 15%*) Growth recession

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

*Scenario probabilities are based on qualitative assessment. Key datesMar 31Apr 3Apr 5Apr 7

Personal income and spending, PCE price index for FebruaryISM manufacturing for MarchISM non-manufacturing for MarchLabor report for March

PMIs consistent with moderate growthPurchasing managers' indices (PMIs)

30

40

50

60

2006 2008 2010 2012 2014 2016Manufacturing Non-manufacturing Composite


Inflation near the Fed's 2% targetUS headline and core PCE price index, year-on-year in %

(2)

(1)

0

1

2

3

4

5

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


PCE = personal consumption expenditures

14

CIO European economist Ricardo Garcia, [email protected]

Eurozone economy - Short-term tailwinds to abateKey points• We expect economic growth to remain resilient for now, but to lose momentum during the year.• Inflation should remain close to the ECB's inflation target of just below 2%.• The ECB is expected to reduce QE bond purchases from January 2018 onwards.

CIO view (Probability: 60%*) Short-term tailwinds to abate• We expect the Eurozone economy to benefit early in the year from an accelerating global industrial cycle and the weaker euro.

However, the economy is likely to lose steam over the course of this year as the euro strengthens, higher oil prices start to biteinto consumption and the effectiveness of monetary policy keeps declining. Inflation in turn should move around the ECB'sinflation target of just below 2%. Despite the upside in inflation, we think the ECB will stick to its plan of buying EUR 60bn ofbonds a month until December due to moderating economic momentum. Thereafter, we expect the ECB to wind down the QEprogram over 6–9 months.

• In Germany, fundamentals such as consumer confidence, construction and capital-expenditure planning remain robust, while theanticipated rise in the euro should limit this year's economic growth potential. We expect Angela Merkel to remain chancellorafter the election, though it may be a close call following Martin Schulz's nomination. In France, we believe there is a 60%chance that Marine Le Pen will lose the presidential runoff on 7 May. A healthier construction sector and more corporateinvestment given a business-friendlier government after that election should help raise economic growth.

• Italian economic growth should consolidate at low rates, supported by a stabilizing construction sector. We expect a generalelection in 1Q18. Spain is still posting strong growth, though momentum is set to moderate.

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

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

Negative scenario (Probability: 20%*) Disinflationary setback

• The Eurozone suffers a disinflationary setback due to Greece leaving the Eurozone, a sharp escalation in the Ukraine conflict,Marine Le Pen becoming French president or China suffering a severe economic downturn.

*Scenario probabilities are based on qualitative assessment. Key datesMar 24Mar 31Apr 3Apr 4Apr 11

PMI estimate (March)CPI estimate (March)Unemployment rate (February)Retail sales (February)Industrial production (February)

Eurozone growth expected to top out

-5

-3

-1

1

3

5

70

80

90

100

110

120

97 99 01 03 05 07 09 11 13 15 17

Perc

enta

ge(y

/y)

Inde

x

Consumer Confidence (lhs, re-scaled)Economic Confidence (lhs)Real GDP (rhs)

Source: Haver Analytics, UBS, as of February 2017

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

0

200

400

600

800

07 09 11 13 15 17

Inde

x(J

an20

07=

100)

ECB Fed BoJ SNB

Source: Haver Analytics, UBS, data as of February 2017 (SNB as of January 2017)

15

CIO China economist Yifan Hu, [email protected]

Chinese economy - Orderly decelerationKey points• China is expected to continue its orderly deceleration. Economic stability is the top priority this year.• CPI inflation will likely rise mildly while PPI inflation will likely return.• Monetary policy has become prudent and neutral while fiscal policy remains supportive.

CIO view (Probability: 80%*) Balance between economic stability and mild reforms• China's growth will likely continue to decelerate in an orderly way amid structural reforms and a property downturn. Economic

stability is the top priority as the 19th National Congress nears in October.

• CPI inflation should remain modest while PPI inflation returns. The February CPI rate dropped to 0.8% year-on-year from 2.5%in January due to a sharp fall in food prices after the Chinese New Year, while February PPI inflation surged to 7.8% due to baseeffects and rising commodity prices. We expect CPI inflation to grow mildly while PPI inflation is near its peak.

• Monetary policy remains prudent and neutral. The PBoC has hiked major money market rates three times to stir deleveraging inthe bond market while continuing to support credit growth in the real economy. There is a limited chance of interest rate hikes,but reserve requirement ratio (RRR) cuts are likely should economic downward pressure emerge. New CNY loans and total socialfinancing remained high in January and February. Fiscal policy remains supportive to reaching the growth target.

• Investment continues to decelerate but is buffered by infrastructure spending while retail sales are rising mildly. Jan–Feb fixedasset investment (FAI) accelerated to 8.9% from 8.1% last year, boosted by record infrastructure investment, while retail salesfell to 9.5% from 10.4% because of slower auto sales.

• The property market, which started to slow late last October under tightening property policies from both the central and localgovernments, will likely become a drag on the economy.

• China's foreign-exchange (FX) reserves are likely to remain above USD 2.7trn this year, down from USD 3trn last year. FebruaryFX reserves increased slightly to USD 3.01trn as strict capital controls relieved market concerns about capital outflows.

Positive scenario (Probability: 5%*) Growth acceleration

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

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

* Scenario probabilities are based on qualitative assessment. Key datesMar 27Mar 31Apr 7

Industrial profits for January and FebruaryManufacturing and non-manufacturing PMI for MarchFX reserves for March

Jan–Feb FAI rose thanks to robust infrastructureinvestment growth

Source: CEIC, UBS, as of 20 March 2017

Jan–Feb credit remained high

Source: CEIC, UBS, as of 20 March 2017

16

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

Swiss economy - A broader Swiss recovery in 2017Key points• Switzerland's economic growth may accelerate slightly this year compared to last year. A broadening of GDP growth is likely to help

the labor market to recover. We expect a return to trend growth in 2018.• Uncertainty stemming from the upcoming French elections is a major risk to Swiss growth this year.• If necessary, the SNB will try to prevent a sharp appreciation of the Swiss franc by intervening in the FX market and cutting the target

rate if interventions do not suffice.

CIO view (Probability: 60%*) Moderate recovery• We forecast Swiss GDP to grow 1.4% this year. The economic recovery is likely to broaden, but GDP growth is not expected to

accelerate strongly. We only expect GDP growth to return to trend (1.6%) in 2018.

• Employment growth was disappointing last year. Nevertheless, the unemployment rate has passed its peak in 2H16. As therecovery broadens in the coming quarters, the unemployment rate is likely to fall to 3.2% this year from 3.3% last year.

• The manufacturing PMI has climbed to the highest level since 2011, pointing to a healthy start of growth into this year.

• CPI inflation year-on-year jumped to 0.6% in February – the highest level since March 2011. We expect inflation to average0.4% this year, supported by the rebound in oil prices and weaker Swiss franc in the second half of the year.

• The Swiss National Bank (SNB) intervened strongly in FX markets in February to prevent strong appreciation of CHF. We expectthe SNB to remain active in FX markets as long as the risk aversion stemming from French elections is at an elevated level. Onlyif interventions do not suffice would the SNB resort to a further rate cut, in our view. We believe a rate hike is not on the cardsuntil mid-2018. The SNB is not expected to raise rates before the ECB has significantly slowed its QE program.

• A major reform of corporate taxes, which would have brought the Swiss tax code in compliance with new OECD standards,was rejected in a public vote in mid-February. The Swiss parliament will come up with a new – probably less – business-friendlyversion of the tax reform. Uncertainty may exert a drag on the Swiss investment climate in the interim.

Positive scenario (Probability: 20%*) Eurozone growth boosts Swiss growth

• A further drop in Eurozone unemployment lifts the sentiment in the European Monetary Union, which in turn supports Swissexports.

Negative scenario (Probability: 20%*) Stagnating Swiss economy in the coming months

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

* Scenario probabilities are based on qualitative assessment. Key datesApr 3Apr 6Apr 7Apr 27

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

Swiss PMI points to healthy growth in early 2017

30

35

40

45

50

55

60

65

70

-4

-3

-2

-1

0

1

2

3

4

5

6

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

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

Purchasing Manager Index (right hand scale)

Source: procure.ch, UBS, as of 15 March 2017

Steady Swiss growth in the coming yearsSwiss GDP growth (y/y), E: Expectations

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2011 2012 2013 2014 2015 2016 2017 E 2018 E

Source: Seco, UBS, as of 15 March 2017

17

Section 2

Asset class views

18

Section 2.A

Asset class views

Equities

19

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

Global equities Global equity markets – Key points

• We recommend an overweight allocation to equities. We prefer global equities and US stocks to high grade bonds. We areadding another overweight position in global equities, which we expect to outperform euro high yield (HY) bonds. This newtrade is not meant to add risk in our global portfolios, but rather shift risk exposure from euro HY bonds to equities. Earnings areimproving in the US and worldwide, which should be the main driver for equities over the course of the year.

• We are overweight global equities over high grade bonds and euro HY bonds. As leading economic indicators are advancingworldwide, economic activity is likely to continue expanding at a solid pace. Growing revenues are expected to swell companyearnings. The earnings advance should lead equity markets higher around the world. Moreover, euro HY bonds are expensive inour view.

• We are overweight US equities versus high grade bonds. Stocks look poised to benefit from accelerating earnings growth. Evenat an above-average trailing P/E multiple of 20x, US stocks have historically advanced over the subsequent six months. The sameholds for the high level of sentiment indicators. A modest roll-over does not imply a setback when looking at the past.

• We are neutral on Canadian stocks. Canadian companies benefit from solid demand in the US, which buys 75% of Canadianexports. Earnings in the energy sector, which constitutes about one-fifth of the market's capitalization, have started to recover asthe oil price drag vanishes. Still, the overall earnings dynamics lag other regions.

• We are neutral on Eurozone equities. Economic growth is well supported by robust domestic demand. Funding costs remain lowas the European Central Bank continues its bond-buying program. Political uncertainty due to the French presidential election inApril and May might cap short-term performance.

• We are neutral on UK equities. We expect a weakening UK economic backdrop this year, which may suppress the earnings ofdomestic cyclical companies. Energy and materials sector earnings are growing due to the commodity price recovery, whichremains a supportive near-term factor.

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

• We are neutral on Australian equities. This year's advance in iron ore prices supports earnings in the materials sector. Financialsare displaying a rather lackluster earnings trend.

• We are neutral on Japanese equities. Manufacturing sentiment continues to improve. Should the current strengthening of theyen continue, earnings would feel the pinch.

• We are neutral on emerging market (EM) stocks. Sentiment in the manufacturing sector is gradually improving in many EMcountries. Recent USD weakness is also supportive as the EM index is measured in USD and benefits from translation. Tradefrictions pose a risk.

Global equity sectors – Key points

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

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

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

• In healthcare, ongoing uncertainty about the US healthcare reform may continue to weigh on market sentiment. But valuationsare attractive following the sector's derating.

• We like technology because of improving cash generation, high profitability and a broad-based recovery in capex.

Preferences (six months)

Equities total

Global

USA

Canada

Eurozone

UK

Switzerland

Australia

Hong Kong

Japan

Singapore

Global EM (in USD)

Nor

thA

mer

ica

Euro

peA

PAC

EM

new old



Preference in hedged terms (excl. currency movements).

Current mostpreferred sectorsEnergyFinancialsHealthcareInformation technology

Current leastpreferred sectors

Consumer staplesIndustrials

Utilities


20

US equitiesBenchmark:

S&P 500

Current level:

2,348(22/03/17)

Target level:

2,450

6-month outlook:

Overweight

CIO view• We are overweight on US equities. Economic and corporate profit growth was

improving even before November's election result, and both have continued to gainsteam so far this year driven by solid consumer spending and a recovery in the industrialsector. Stimulative government policies – tax reform, deregulation, infrastructurespending – have the potential to further boost the outlook. Also, the US dollar islikely to be much less of a headwind this year compared to last year. Equity marketvaluations are higher than average but not stretched and remain attractive versusbonds. However, potential trade and geopolitical frictions and the execution of policyinitiatives are downside risks.

Positive driversShort-term (6 months)Pick-up in growthConsumer spending remains well-supported, andthe outlook for the industrial sector continuesto brighten as energy investment spending andemerging markets bottom out.Trump reflationTax cuts, increased spending on infrastructure anddefense, repatriation of overseas cash, and lessregulation drive a pick-up in economic growth anda moderate rise in inflation.Fed remains accommodativeAfter hiking in December, the Fed hiked againin March. With inflation slightly below the Fed'starget, the risk of the central bank turning hawkishis low.

Negative driversShort-term (6 months)Trade frictionThe Trump administration will likely try to make goodon its promise to reopen trade treaties and take a hardline with some nations, raising the risk of trade andgeopolitical frictions.Setback in emerging marketsEmerging market growth has stabilized but Chinamust still navigate through the hangover from theexcess investment spending of the boom years.Execution of fiscal policyAs expectations have risen since the election, thenew administration will have to deliver on its policyinitiatives.

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

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

Key dates Key debatesApr 3, ISM manufacturingApr 5, ISM non-manufacturingApr 7, Labor market report

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

Investor viewFor underexposed* investors

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

For overexposed* investorsAlthough we are positive on US equities,the higher-than-average valuation doessuggest lower-than-normal returns overthe long term.

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

PreferencesMost preferred

• Energy• Financials• Healthcare• Information technology

Least preferred

• Utilities• Consumer staples• Industrials

ScenariosPositive scenario

S&P 500: 2,750• Trump's reflation policies are successful,

consumer and business spending accelerates,and risks from Europe, China and tradefrictions remain dormant. S&P 500 EPS rise17% this year, and the trailing P/E remains at20x.

Negative scenarioS&P 500: 1,900

• Trade and geopolitical frictions rise, politicaluncertainty in Europe spikes and fears ofa China hard landing intensify. As a result,consumer and business spending slows andearnings stagnate. Trailing P/E falls to about15.5x.

Fed rate hikes usually do not weigh muchon equity marketsAverage S&P 500 performance after a Fed ratehike, since 1971

0%

5%

10%

15%

20%

25%

30%

3mos 6mos 12mos 24mosAfter a Fed rate increase All periods


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

21

Eurozone equitiesBenchmark:

Euro Stoxx

Current level:

365 (22/03/17)

Target level:

380

6-month outlook:

Neutral

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

easy monetary policy will likely continue supporting the recovery in 2017. Leadingeconomic indicators for manufacturing activity and the service sector continue toshow further expansion. Rising revenues should eventually also lead earnings higher inthe coming quarters. Still, uncertainty around the outcome of the French presidentialelection is likely to weigh on EMU equities in the short term. Our most preferred sectorsare energy, materials and technology.

Positive driversShort-term (6 months)Consumer supportRising employment and domestic consumerdemand support companies' revenue generation.Manufacturing cycleEurozone and global manufacturing activity keepsimproving, which benefits cyclical markets like theEurozone.Ongoing ECB supportThe ECB continues to buy government andcorporate bonds, albeit at a slightly reduced amountfrom April onwards, and keeps supporting theeconomy by providing easy monetary conditions.

Negative driversShort-term (6 months)Interest rate environmentBanks comprise about 11% of the MSCI EMU'smarket capitalization. Despite the recent rise ininterest rates globally, the overall still-low interest rateenvironment remains a challenge for financials.Trade frictionThe Trump administration will likely try to make goodon its promise to reopen trade treaties and imposesome form on import tariffs, raising the risk of tradeand geopolitical friction.China decelerationThe Eurozone generates 3-8% of MSCI EMU revenuesfrom China, and is thus vulnerable to decliningChinese demand. A sharp downturn in China'sproperty or manufacturing activity would affect theEMU.

Long-term (5+ years)Attractive long-term valuationsEurozone equities are trading around 16.4x P/Ebased on 12-month trailing EPS, which is in linewith the long-term average. Valuations are notstretched as they are in other regions.Long-term economic outlookUnemployment, especially in peripheral countries,could fall further. Any improvement should supportdomestic consumption.

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

Key dates Key debatesMar 24, PMI manufact. estimateApr 3, PMI manufact., finalApr 5, PMI services, finalApr 11, EMU industrial production

• Are risks around financials behind us?• Will election outcomes affect Eurozone's

growth path?


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

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

For in-line* investorsInvestors should have a cyclical tilt in aEurozone portfolio because global nominalGDP growth is improving, providing supportto above-average earnings growth ofeconomically-sensitive sectors.


• Energy – improving cash flows• Materials – reflation play• Technology – solid growth, high ROEs

Least preferred

• Consumer staples – overvalued• Healthcare - sub-par earnings growth• Industrials – fiscal stimulus fully priced


Euro Stoxx: 425• Economic growth recovers worldwide. The

Eurozone benefits from stronger domesticand international demand. Earnings pick upmarkedly in six months. Euro Stoxx's trailingP/E rises to about 17.5x.

Negative scenarioEuro Stoxx: 285

• A sharp economic slowdown, coupled withrising worries about the euro's future, hurtscompanies. The ECB's willingness to easefurther will limit the downside. Earningsretreat over six months and the trailing P/Edrops to about 14x.

Eurozone earnings likely to improvefurtherEMU manufacturing PMI and 6-month growthof 12m trailing EPS, in level and %

(40)

(30)

(20)

(10)

0

10

20

30

35

40

45

50

55

60

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

EMU PMI manufacturing

EMU 12m trailing EPS, 6m change in % (rhs)

Source: Thomson Reuters, UBS, as of 03 March 2017

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

22

UK equitiesBenchmark:

FTSE100

Current level:

7,325(22/03/17)

Target level:

7,550

6-month outlook:

Neutral

CIO view• We are neutral on the UK. A weaker economic backdrop in the UK in 2017 may

hurt the earnings of domestic cyclical companies. Commodity sectors displayingearnings growth will remain a big near-term driver due to the recovery in commodityprices. Also, the earnings of international companies will benefit from highergrowth elsewhere and from currency gains given the weaker pound. We expect UKcorporate earnings to grow, likely in the mid-teens, this year for the first time since2011. This is already partly reflected in the market's recent strong performance.

Positive driversShort-term (6 months)Weak poundThe pound's weakness boosts the 70% or so ofFTSE 100 revenues generated outside the UK;however, the currency tailwind will fade as theyear progresses.Commodity prices have recoveredThe recovery in crude oil and iron ore pricessupports earnings in the oil and materials sectors.Commodities are expected to account for three-fourths of the forecast UK earnings growth this year.

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

Long-term (5+ years)International growth exposureThe FTSE 100's international composition offersexposure to higher growth economies outside theUK.Attractive dividend yieldA dividend yield of 4% is attractive versus othermarkets, particularly in a lower-for-longer interestrate world.

Long-term (5+ years)Defensive sector make-upThe defensive sector composition of the UK marketmay lead the UK to underperform global equitiesthrough the economic cycle.Currency strengthSterling is attractively priced, which, if unlocked overthe long run, could weigh on FTSE 100 earnings.

Key dates Key debatesApr 3, Manufacturing PMIApr 4, Construction PMIApr 5, Services PMIMay 11, BoE monetary policy meeting

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


Gradually increasing exposure tothe benchmark weighting should beconsidered.

For overexposed* investorsThe recent rally offers an opportunity totrim back to benchmark weighting.

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


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

Least preferred

• Domestic cyclical segments – may sufferfrom weakening consumer spending


FTSE100: 8,250• Higher global growth and commodity prices

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

Negative scenarioFTSE100: 6,200

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

UK earnings growth recovery drivesdividend growthMSCI UK consensus earnings growth anddividend growth forecasts for 2016 and2017e, in %

-10

-5

0

5

10

15

20

25

Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16

2017e earnings growth 2016 earnings growth2016 dividend growth 2017e dividend growth

Source: FactSet, UBS, as of 20 March 2017

Strategist Caroline Simmons, [email protected] see important disclaimers and disclosures at the end of the document.* Exposure refers to current positioning relative to the UBS House View. 23

Swiss equitiesBenchmark:

Swiss MarketIndex

Current level:

8,568(22/03/17)

Target level:

8,825

6-month outlook:

Neutral

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

we expect corporate earnings to grow this year. Consensus expectations may betoo optimistic; we expect mid-single-digit growth this year and next. Due to themarket's defensive sector composition, other regions may benefit more from theexpected global economic re-acceleration. Currency dynamics are not a negativefactor. Last year's margin compression in financials and luxury goods in particularhas set a lower base for this year. The dividend yield is attractive, but the Swissequity valuation is not particularly compelling.

Positive driversShort-term (6 months)Accelerating Swiss sales growthWe expect organic sales growth to re-acceleratemoderately from its low point in 3Q16. Growthslowed in local-currency terms from an average3.6% in 2015 to 2.2% in 2016.Sustainable dividendsDividends paid have been growing every year since2009. We expect the overall amount of dividendspaid to increase further in this year and next.Interest ratesAdditional US Fed rate hikes this year could sustaininvestor interest for financials, although thebanking industry environment remains tough.

Negative driversShort-term (6 months)Slow Swiss earnings growthCorporate profits fell in 2016 for a second year in arow, but are expected to recover in 2017 and 2018.Profit growth may, however, lag that of more cyclicalequity markets.Brexit & European electionsThe UK's vote to leave the EU and various upcomingEuropean elections may temporarily weigh on theEuropean economic recovery pace; one-third ofSwiss profits are generated in Europe ex-Switzerland.Defensive sector compositionEconomic leading indicators for manufacturingactivity have improved globally. The defensive Swissmarket will benefit less from robust global growththan more cyclical equity markets.

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

Long-term (5+ years)Low cyclicalityWith defensive sectors having an above-averageweight, the Swiss market tends to be lesseconomically sensitive and should thus benefit lessthan others from a European and global economicrecovery.Expensive long-term valuationsSwiss corporates currently trade at a 12-monthtrailing P/E ratio about 10% above their averagesince 1987. The slightly high valuation caps theupside in the coming years.

Key dates Key debatesMar 30, KOF leading indicatorApr 3, PMI manufacturingApr 28, KOF leading indicatorJun 15, Monetary policy assessment

• What is Europe's recovery pace? How will itbe affected by 2017 elections?

• What earnings growth is achievable?


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

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

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


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

Least preferred

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


Swiss Market Index: 9,500• Eurozone economic growth rises

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

Negative scenarioSwiss Market Index: 7,300

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

Recovering earnings growthConsensus forecasts for growth in earningsand dividend per share for the Swiss MarketIndex, in %

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

2013 2014 2015 2016 2017 2018

EPS growth DPS growth

Source: FactSet, UBS, as of March 2017

Analyst Stefan R Meyer, [email protected] or Strategist Markus Irngartinger, [email protected] see important disclaimers anddisclosures at the end of the document.* Exposure refers to current positioning relative to the UBS House View.

24

Japanese equitiesBenchmark:

TOPIX

Current level:

1,530(22/03/17)

Target level:

1,600

6-month outlook:

Neutral

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

(which ends in March 2018) and 9% earnings growth in FY16. The JPY hasstrengthened moderately versus the USD this year. We expect some further yenstrength in the next six months to weigh on corporate earnings. That said, webelieve the downside risk for the Japanese equity market is somewhat limited by therelatively large purchases by domestic investors like the Bank of Japan (BoJ). The BoJmay start tapering its Japanese government bond (JGB) purchases this year, in ourview. We prefer share-buyback and high-dividend-yield stocks as well as companiesthat benefit from the tightening labor market.

Positive driversShort-term (6 months)Institutional buying of equitiesIn addition to the BoJ's ETF purchasing programof JPY 6trn a year, government pension funds andcompanies will likely buy JPY 5-6trn of Japaneseequities in the next 12 months.Corporate earnings are bottomingCorporate earnings growth turned positive in3QFY16, as we expected, and likely accelerated in4QFY16 thanks to low year-on-year base effects.Loose monetary policyThe BoJ continues its easy monetary policy, with afocus on yield curve control.

Negative driversShort-term (6 months)Yen appreciationThe yen has strengthened moderately versus theUS dollar so far in 2017. We expect some furtherstrengthening over the next six months to weigh oncorporate earnings.Potential tapering by BoJWe believe the BoJ will gradually downsize JGBpurchases from the current JPY 80trn a year, startingfrom 2H17.Trade frictionThere is uncertainty whether the new USadministration will adopt measures that might harmtrade and how they will affect the Japanese economyand the currency.

Long-term (5+ years)Service demand increaseJapan's shrinking workforce should drive furtherthe development and adoption of automation androbotics as well as an increase in service demand,offering investment opportunities in this area.Narrower deflation gapWage increases due to a tightening workforce arelikely, which should narrow a prolonged deflationgap in Japan.

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

Key dates Key debatesMar 31, Feb. CPIMar 31, Feb. industrial productionApr 3, BoJ TankanApr 3, Nikkei manufact. PMI (Mar.)

• How will future BoJ policies affect Japaneseequities?

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


Although we are neutral on Japaneseequities, we see opportunities in Japanesehigh dividend stocks as well as companiesthat benefit from the tightening labormarket.

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

For in-line* investorsOptimizing sector exposure by allocatingtoward share-buyback and high dividendyield stocks and away from highly cyclicaland overvalued stocks should be considered.


• Share-buyback and high-dividend-yieldstocks

• Stocks that benefit from the tighteninglabor market

• Service stocks• Energy- and commodity-related stocks

Least preferred

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


TOPIX: 1,750• Stronger global demand, reflation and yen

depreciation lead to increased risk-taking.Domestic demand improves sharply. Strongearnings spur share buybacks. Double-digitearnings growth likely in FY17; the Topixtarget is based on about 17x trailing P/E.

Negative scenarioTOPIX: 1,250

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

Double-income households spend moreon servicesRatio of consumption of double-incomehouseholds compared to single-incomehouseholds (%)

126%122% 119%

115%

104%

80%

90%

100%

110%

120%

130%

140%

Education Other services Eating out Clothing /footwear

Recreationservices

Ratio of consumption (Double- income household / Single-incomehousehold, %)

Source: INDB, UBS, as of 28 February 2017

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

25

Emerging market equitiesBenchmark:

MSCI EM

Current level:

967 (22/03/17)

Target level:

1,000

6-month outlook:

Neutral

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

economic activity numbers are stabilizing, and manufacturing sentiment is turningmore positive. Corporate earnings growth is improving across EM regions. EMequities are trading at a discount to their developed market counterparts. Potentialtrade friction and USD strength are downside risks. Our most preferred marketsare China, India, Thailand, Russia, South Africa and Brazil (strong earnings andeconomic recovery); our least preferred markets are Taiwan (tech sector headwind),Malaysia (macro challenges) and Poland (hedge for EU political risks).

Positive driversShort-term (6 months)EM economic growth is stabilizingRecent EM economic data has shown signs ofstabilization. Improving economic activity shouldboost corporate earnings and lift valuationmultiples.Loose monetary policyA gradual tightening path in the US and an easingbias in Europe and Japan should keep the cost offunding low for EM corporates and supportive forEM equities.EM earnings have stabilizedEM earnings have stabilized in local currency termsthanks to revived economic activity and highercommodity prices than last year. We expect thistrend to continue.

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

Long-term (5+ years)Attractive long-term valuationsThe MSCI EM Index is trading at about 14.5xtrailing P/E, a discount of 25% to developedmarkets.Exposure to fast growth marketsEMs contribute about 70% to global growth, andEM real GDP growth is expected to be more thandouble that of developed markets over the nextfive years.

Long-term (5+ years)Buildup of total debt in EMEM non-financial corporate debt grew rapidly to101% of GDP in 3Q16, exceeding the level ofdeveloped markets. The eventual deleveraging couldpressure growth and profitability.Global trade slowdownAs imports of developed markets and China decline,EM export growth would also suffer. Brexit couldfuel a further slowdown in globalization, but it is tooearly to tell.

Key dates Key debatesMar 31, PMI manufac. China, TaiwanApr 3, EM PMIs manufacturingApr 12, Central bank meeting BrazilApr 14, Turkey referendum

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


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

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

For in-line* investorsInvestors with in-line exposure should lookat our country preferences. We preferChina, India, Thailand, Russia, South Africaand Brazil to Malaysia, Taiwan and Poland.


• China, India, Thailand• Russia, South Africa• Brazil

Least preferred

• Taiwan• Malaysia• Poland


MSCI EM: 1,100• The global economic outlook improves,

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

Negative scenarioMSCI EM: 775

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

EM country preferences (relative to MSCIEM Index)

China

India

Indonesia

South Korea

Malaysia

Philippines

Taiwan

Thailand

Brazil

Chile

Colombia

Mexico

Peru

Czech Republic

Hungary

Poland

Russia

South Africa

Turkey

Asi

aLa

tAm

EMEA

new old


Source: UBS, as of 23 March 2017. Note: All positions are relative tothe MSCI EM Index. The EM regional asset allocation is not part of theglobal Tactical Asset Allocation (TAA).

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

26

Listed real estateBenchmark:

RUGL Index

Current level:

4,530(22/03/17)

Target level:

4,450

6-month outlook:

Neutral

CIO view• Earnings should increase by 5% p.a. for 2017-18 based on internal growth

opportunities, some positive rental reversion and attractive refinancing conditions.This growth rate is set to drop below 4% for 2019 due to the lack of externalgrowth opportunities and provided bond yields do not surprise to the upside. Afurther steepening of the interest rate curve would hurt elevated property valuesunless rental growth accelerates. The 3.8% dividend yield will remain the mostimportant performance driver, since we expect a slight stock de-rating as directproperty market values remain high or begin to erode at this late stage of thecycle. The universe is trading at a 9.5% discount to net asset value versus 6.5%historically.

Positive driversShort-term (6 months)Discount tradingListed real estate trades close to its long-termaverage.Debt markets still liquidDebt markets still display good liquidity, whichboosts refinancing activities. Companies will still beable to improve their financial position slightly.Investor interestReal estate investors have a large amount ofunspent capital since finding attractive propertiesis currently challenging. This potentially supportsvalues.

Negative driversShort-term (6 months)De-rating riskReal estate remains at risk of a de-rating if credit andrisk spreads spike again. Initial yields are at historicallows, which subjects investors to unprecedentedlyhigh duration risks.Divergences in fundamentalsProperty market fundamentals have increasinglydiverged but low interest rates apply everywhere. Yetcyclical correction risks are higher in Asia ex-Japandespite money printing stabilizing markets.No price returnGlobal real estate shares have offered no pricereturns for the past 24 months; their performancehas stemmed strictly from the dividend yield.

Long-term (5+ years)Balanced supply and demandThe current mature real estate cycle is characterizedby comparatively well-balanced demand andsupply. We do not expect dramatic price correctionsin a historical context.Cycle to last longerThe upcycle that began in 2009 may continue thisyear and extend slightly longer. Ample central bankliquidity still supports real estate, which remains ayield alternative to bonds.

Long-term (5+ years)Expensive long-term valuationsCapital appreciation is set to slow or is alreadyreversing. Volumes of property transactions andmergers and acquisitions are falling. This potentiallyhurts values.Rental growth rates have peakedOverall, rental growth rates have peaked and are indecline, which could affect property values despite therelative attractiveness of real estate.

Key dates Key debatesMar 30, Markit US Composite PMIMar 30, Global M&AMar 30, REIT capitalization ratesMar 30, RCA transaction values

• Will the fall in transaction volumes accelerateamid investment scarcity?

• Will the US market be able to postpone adownturn in rents and values?


Listed real estate is fairly valued after itsrecent weakness. Yet we recommend re-entering the market only after it experienceshigher price volatility.

For overexposed* investorsGains can be taken in expensive stocks withbelow-average balance sheet quality.

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


• Continental Europe• Hong Kong REITs• Japanese property companies• US

Least preferred

• Japanese REITs• Singapore property companies


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

inflation thanks to improving demandand constrained supply. Portfolio valuesare supported by rents rising faster thananticipated. Wide property yield spreads tofinancing costs stay attractive.

Negative scenarioRUGL Index: 4,050

• Widening credit-risk spreads, stemming fromslower-than-expected rental income growth,hurt values. Negative rental reversion due toa slump in market rents and rising vacanciesfail to justify current low prime yields.

Ongoing value erosion unless rentalincome growth acceleratesTotal versus price performanceIndex: 01.01.2015 = 100

85

90

95

100

105

110

115

01.15 01.16 01.17Total Return Price Return

Source: Global Property Research, Bloomberg, UBS, as of 15 March

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

27

Section 2.B

Asset class views

Bonds

28

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

Global bonds Bonds – Key points

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

• We expect long-term USD yields to move sideways and the yield curve to flatten as the US economy, already around fullemployment, grows and as the US Federal Reserve responds by gradually raising the policy rate. We therefore see an opportunityto profit from attractive carry and recommend a tactical overweight in US 10-year Treasury bonds versus cash.

• We hold an overweight position in US Treasury inflation-protected securities (TIPS) against HG bonds. While inflationexpectations have caught up with the reality of rising prices, limiting the prospects for near-term outperformance of the position,TIPS continue to offer portfolio protection against a possible overshooting of inflation rates.

• We are neutral on USD investment grade (IG) bonds with medium maturities (1-10 years). We expect spreads to trend sidewaysover the next six months. We recommend avoiding bonds with very long maturities (15 years or more) due to their high interestrate sensitivity.

• We are overweight on US HY bonds against HG bonds due to the attractive carry and improving fundamentals. Corporate earningsare expected to remain robust, financial conditions have improved in recent months and economic growth remains solid, mitigatingdefault risks. Investors with tolerance for less liquid assets should find good value in US senior loans.

• We are opening an underweight in euro HY bonds against a mix of global equities and US HG bonds. We find euro HY overvaluedat current levels. The current low yield-to-maturity of 3.8% and average prices of around EUR 104 limit the upside for the assetclass, even in the absence of any risks. At the same time, the underweight helps mitigate downside risks; for example, from anunexpected French election outcome.

• We expect emerging market (EM) sovereign and corporate credit spreads to be supported by further stabilization in EM macrofundamentals, the oil price recovery, an expected reduction in the EM corporate default rate and, more generally, a still-supportiveexternal backdrop. We advise investors to remain neutral on EM credit in globally diversified portfolios.

Preferences (six months) and duration overlay

Bonds total

High grade bonds

USD corporate bonds (IG)

EUR corporate bonds (IG)

USD high yield bonds

EUR high yield bonds



US TIPS

new old


USDEURCHFGBP

new old

neutralshort duration long duration


29

US high grade bondsBenchmark:

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

Current level:

2.63 (22/03/17)

Target level:

2.90 (yield)

6-month outlook:

Underweight

CIO view• Yields rose abruptly after the election of Donald Trump, but have since remained in a

tight range. The new president is expected to enact expansionary fiscal policies andinstitute regulatory reform, but these changes will take time to have an impact.

• We expect long-term USD yields to move sideways and the yield curve to flatten asthe US economy, already around full employment, grows and as the Fed respondsby gradually raising the policy rate. We recommend a tactical overweight position in10-year US Treasury bonds versus USD to profit from attractive carry.

• Risks include market disruptions due to the implementation of Brexit or a slowingChinese economy. We are underweight on HG bonds versus US and global equities,US TIPS and US HY bonds and overweight HG bonds versus Euro HY.

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

Negative driversShort-term (6 months)Moderate growth in the USGrowth is running slightly above trend and this willcontribute to upward pressure on inflation, pushingyields higher.Fiscal policyThe likelihood that President Trump will favorexpansionary fiscal policy has led to a repricing ofinflation expectations.

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

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

Key dates Key debatesApr 7, March payroll reportMar 31, PCE inflation dataMay 3, FOMC meeting

• What will be the key policies of the Trumpadministration?

• How many times will the Fed hike rates?


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

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

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


• Moderately long duration

Least preferred

• Very long/short duration exposure


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

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

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

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

Duration preferences

USD

EUR

CHF

GBP

new old



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

30

European high grade bondsBenchmark:

EUR High Grade:EuroAgg AA+ 5-7yyield

Current level:

0.17 (22/03/17)

Target level:

0.30 (yield)

6-month outlook:

Underweight

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

still low. Bond term premiums remain depressed due to strong demand - includingdemand from the European Central Bank's (ECB) quantitative easing program - forhigh-quality bonds.

• We expect yields in EUR and CHF to rise slowly over our six-month tactical horizonas ECB tapering is likely next year. Swiss rates, given the Swiss National Bank'sconcerns over the strong Swiss franc, are closely tied to EUR rates.

• The ECB, at its 9 March meeting, left its policy rates and its asset purchase programunchanged. As previously decided, the pace of monthly purchases will be reducedfrom EUR 80bn to EUR 60bn from April 2017.

Positive driversShort-term (6 months)Slow Eurozone growthWeak economic growth in the Eurozone, especiallyin core countries, is likely to keep yields low.Ongoing ECB supportContinued low inflation and the desire to providefiscal space to EMU countries has led the ECB toextend its asset purchase program.Political uncertainty in the EUThe main upcoming risk event is the Frenchpresidential election.

Negative driversShort- term (6 months)Short-term inflation increasesOil prices have risen over the past year, drivingheadline inflation higher, and in turn hurting returnsfor bond-holders.Monetary policy normalizationAs a result of the increased interconnectedness ofglobal fixed income markets, rising US rates pushBund yields higher.

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

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

Key dates Key debatesApr 19, Eurozone HICP inflationApr 27, ECB meeting

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


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

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

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


• Duration close to benchmark

Least preferred

• Very long/short duration exposure


EUR High Grade: EuroAgg AA+ 5-7y yield:-0.20 (yield)

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

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

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

Duration preferences within high gradebonds

USD

EUR

CHF

GBP

new old



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

31

Euro corporate bondsBenchmark:

BloombergBarclays EuroAggCorporate spread

Current level:

119 (22/03/17)

Target level:

105-120

6-month outlook:

Neutral

CIO view• Euro investment grade (IG) spreads have tightened slightly over the past month,

while underlying government yields have risen. Total returns were mildly negative.We are tactically neutral on euro IG bonds and expect the highest return on bondswith maturities of around 5 years.

• While the asset class remains technically supported by the ECB's non-financialcorporate bond purchases (averaging about EUR 7bn a month since the programbegan in June 2016), the total return outlook is muted, given the very low averagestarting yields of 1%. Roughly one-third of EUR-denominated corporate bonds arecurrently showing negative yields.

• France's presidential election may cause higher volatility in the asset class in the nearterm. About 20% of outstanding euro IG bonds are by French issuers.

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

Negative driversShort-term (6 months)Low bond yieldsEuro IG bonds, in particular, face the challenge oflow starting yields (currently 1.0%), limiting the totalreturn outlook.Volatility risk in ratesHigh volatility in government bond yields (e.g. due toaggressive monetary policy tightening) usually weighson IG bond returns and demand. The risk of strongmonetary tightening is currently low.Rising political uncertaintyThe upcoming elections in the Eurozone could lead tohigher market volatility and wider credit spreads, atleast in the near term.

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

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

Key dates Key debatesMar 27, Ifo business climate (GER)Apr 23, 1st round of French electionApr 27, ECB meeting

• When will the ECB start tapering?• How will the French election impact financial

markets?


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

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

For in-line* investorsWe keep a neutral position on euro IG. ECBQE continues to be a supportive factor forthe asset class, but the yield of 1% limitstotal returns.


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

Least preferred

• Single issuers as per Bond Top List


Bloomberg Barclays EuroAgg Corporatespread: 80

• Faster-than-expected global growth leadsto greater spread tightening. But risinggovernment yields and the ECB ending itsbond purchases earlier than expected maylead to negative total returns for IG bondsover six months.

Negative scenarioBloomberg Barclays EuroAgg Corporatespread: 250

• Major risks include a sharp global economicslowdown towards recessionary levels. EuroIG faces the risk of senior bank bond bail-ins, which we find unlikely for now. Anunexpected French election outcome couldcause a milder sell-off.

Yield spreads over government bonds(bps)

50

100

150

200

250

300

350

400

2010 2011 2012 2013 2014 2015 2016

EUR investment grade

Bloomberg, UBS, as of 22 March 2017

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

32

US corporate bondsBenchmark:

BloombergBarclays USIntermed. Corp.spread

Current level:

96 (22/03/17)

Target level:

90-110

6-month outlook:

Neutral

CIO view• USD investment grade (IG) corporate bond spreads have continued their trend tighter

over the past month and remain below 100bps. We don't think spreads will materiallytighten over the next six months. Thus, swings in the underlying Treasury yields willlikely be a key driver of volatility in the coming months.

• Total returns will likely be fueled by coupons. The current average yield-to-maturity of2.9% provides decent income, in our view, in particular as credit risks are mitigatedby the strong US economic recovery.

• Global demand for USD IG bonds remained robust as European and Japanese investorscontinued to search for yield.

• Tactically, we have a neutral stance on the asset class, and expect the highest 6-monthreturns for bonds with maturities of 7-10 years.

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

Negative driversShort-term (6 months)Strong issuanceIssuance last year overtook 2015's record pace, andJanuary was the second-strongest month on record.While demand has also been strong, a further increasein issuance may start to weigh on the asset class.Volatility risk in ratesHigh volatility in government bond yields (e.g. due toaggressive monetary policy tightening) usually weighson IG bond returns and demand. The risk of markedmonetary tightening is currently low.

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

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

Key dates Key debatesApr 3, ISM manufacturingApr 7, Change in non-farm payrollsMay 5, FOMC meeting

• Will international demand for USD IG bondsremain strong?

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


IG bonds play an important rolein diversifying portfolios. The negativecorrelation between credit spreads andbenchmark yields helps the asset classperform in different scenarios. The currentaverage yield of close to 3% is decent.

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

For in-line* investorsWe are neutral on US IG bonds. USIG spreads are "fair," supported byaccelerating US economic and earningsgrowth. The yield pickup versus HG bondshas become less attractive.


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

Least preferred

• Single issuers as per Bond Top List


Bloomberg Barclays US Intermed. Corp.spread: 80

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

Negative scenarioBloomberg Barclays US Intermed. Corp.spread: 250

• A sharp global economic slowdown sendsprices toward recessionary levels. A renewedslump in commodity prices hurts US IG.

Yield spreads over government bonds(bps)

50

100

150

200

250

300

2010 2011 2012 2013 2014 2015 2016

US investment grade intermediate

Bloomberg, UBS, as of 22 March 2017


33

US high yield bondsBenchmark:

BoAML US highyield spread

Current level:

416 (22/03/17)

Target level:

380-420

6-month outlook:

Overweight

CIO view• US high yield (HY) spreads have widened over the past month as some risks we

pointed out before came to the fore (e.g. quickly rising Treasury rates causing HYfund outflows, and falling oil prices). We think weakness will be temporary andsubside as soon as US rates and oil prices stabilize, as the avg. yield of 6.4% isattractive.

• We are overweight on US HY bonds against high grade bonds due to the attractivecarry. Corporate earnings are expected to remain robust, financial conditions haveimproved in recent months and economic growth remains solid, mitigating defaultrisks. The trailing 12-month default rate fell further to 4.5% in February, and weexpect it to trend down to 2.5% in 12 months.

• A renewed fall in oil prices below USD 45/bbl and a spike in Treasury yields remainkey risks.

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

Negative driversShort-term (6 months)Commodity prices remain volatileThe energy sector remains the largest one in the USHY index, and the correlation to oil prices could risefurther if oil prices (WTI) fall towards USD 45/bbl orlower.Spike in US Treasury yieldsA spike in Treasury yields (e.g. due to inflation fearsand increasing Fed rate hike expectations), with theUST 10-year rising above 3%, could cause strong USHY fund outflows.

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

Long-term (5+ years)Elevated corporate leverageUS corporate leverage has risen over the last fewyears; leverage ex-commodities is currently at 4.4x(net debt/LTM EBITDA) versus its long-term averageof 4.0x.Limited market liquidityInvestors in the asset class should be aware of thelower market liquidity relative to equities, which canresult in large price swings in times of market distressand illiquidity.

Key dates Key debatesApr 3, ISM manufacturingApr 7, Change in non-farm payrollsMay 3, FOMC rate decision

• How will Trump's policies influence the USeconomy?

• What could trigger the end of the currentcredit cycle?


HY is an attractive asset class to enhancereturns in the fixed income part of aportfolio. We recommend a tacticaloverweight in US HY for its attractivecarry of 6.2%, supported by improvingeconomic and credit fundamentals.

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

For in-line* investorsUS HY offers an attractive yield pick-upover other fixed income assets and issupported by improving economic andcredit fundamentals. Compensation forcurrent default risks is roughly fair.


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

Least preferred

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


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

economic growth. Meanwhile, risingbenchmark rates dampen total returns.

Negative scenarioBoAML US high yield spread: 1,100

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

US HY spreads over government bonds (inbps)

200

300

400

500

600

700

800

900

1'000

2012 2013 2014 2015 2016 2017

US high yield

Source: BoAML, UBS, as of 22 March 2017

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

34

Euro high yield bondsBenchmark:

BoAML Euro HighYield Index spread

Current level:

354 (22/03/17)

Target level:

340-380

6-month outlook:

Underweight

CIO view• We are opening a tactical underweight in euro high yield (HY) bonds against global

equities and US high grade bonds as we find the asset class overvalued. The yield-to-maturity of currently 3.8% is close to its all-time low. Average prices around EUR104 limit the upside, even in the absence of any risks.

• While defaults will likely remain below 2% over 12 months and spreads shouldmove broadly sideways, we don't see much upside in the asset class in our basecase. We expect a mix of global equities and US high grade bonds to outperform.

• Meanwhile, the underweight in euro HY helps mitigate downside in risk scenarios(e.g. around the French election), especially given the sizeable index exposure toperipheral issuers (~40% including France) and banks (~20%).

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

Negative driversShort-term (6 months)Struggling banking sectorConcerns about individual European banks couldresurface if recapitalizations fall short of expectationsand call into question the sustainability of the sectorat large. Euro HY would suffer given the 20% indexexposure to financials.Low yield levelThe current average yield of 3.8% is a low startingpoint that limits six-month total returns.Rising political risk in EuropeSpreads could widen ahead of a number ofEuropean elections in 1H17 (notably France),reflecting rising political risk.

Long-term (5+ years)Good credit fundamentalsCurrent average corporate leverage among euro HYissuers (2.9x) is well below its long-term average,while the interest coverage ratio is high at 5.8x,suggesting good credit quality.

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

Key dates Key debatesMar 27, Ifo business climate (GER)Apr 23, 1st round French electionApr 27, ECB meeting

• When will the ECB start tapering?• How will the French election impact

financial markets?


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

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

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


• Single issuers as per HY Top List

Least preferred

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


BoAML Euro High Yield Index spread: 300• A stronger-than-expected economic recovery

would lead spreads back to post-crisislows. A broad-based recapitalization ofthe European banking sector would be anunexpected positive for euro HY.

Negative scenarioBoAML Euro High Yield Index spread:1,200

• Economic growth decelerating torecessionary levels would push defaultsand spreads much higher. A milder sell-offcould be caused by fears about the politicalfuture of the Eurozone, e.g. in case of anunexpected French election outcome.

Euro HY spreads over government bonds(bps)

200

300

400

500

600

700

800

900

1'000

2012 2013 2014 2015 2016 2017

EUR high yield

Source: Bloomberg, BoAML, UBS, as of 22 March 2017


35

Emerging market sovereign bonds in USDBenchmark:

EMBI Diversified

Current level:

312 (22/03/17)

Target level:

300

6-month outlook:

Neutral

CIO view• Emerging market (EM) sovereign credit has delivered a return rate in the low mid-

single digits this year on the back of lower spreads and sideways trading US Treasuryyields. Our base case calls for credit spreads being supported around current levelsby improving EM fundamentals, gradually recovering energy prices and a benignexternal backdrop. That said, the new administration in the US raises risks associatedwith US monetary and fiscal policies, global trade, immigration and geopolitics. Weadvise investors to remain neutral on EM credit in globally diversified portfolios. Inour model portfolio, we favor sovereign and select high yield credits and maintainoverweight positions in Brazil, Argentina, Colombia, Peru, Indonesia, and Qatar.

Positive driversShort-term (6 months)EM economic growth improvingEM fundamentals are improving. High frequencyindicators are pointing to a moderate expansion ofactivity. Accommodative global monetary policiesare also supportive.Still low global bond yieldsDespite their recent move higher, still-low interestrates in developed markets (DMs) will continueto push yield-hungry investors to look foropportunities in EM sovereign credit.Commodity prices have recoveredCommodity prices have recovered some of theground they lost last year. While we do not rule outsetbacks, we expect the recovery to continue andto support EM sovereign fundamentals.

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

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

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

Key dates Key debatesApr 23, France's pres. electionApr 27, ECB announcementApr 27, BoJ announcement

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

• What is next for commodity prices?


Some exposure to EM sovereign bondsis warranted. US economic resilience,stabilizing EM fundamentals and anattractive EM yield pickup are reasons forunder-allocated investors to rebalance.

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

For in-line* investorsInvestors with in-line exposure can optimizetheir allocation by picking individual bondsfrom our EM bond list. They should takea close look at our recently launched EMmodel portfolio.


• High yield• Brazil, Argentina• Colombia, Peru• Indonesia, Qatar

Least preferred

• Investment grade• Poland, Hungary, Venezuela• Malaysia, Philippines, China• Singapore, UAE


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

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

Negative scenarioEMBI Diversified: 500bps

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

Tighter EM sovereign credit spreadsCredit spreads in basis points

0

100

200

300

400

500

600

700

800

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

Mar

-16

Sep-

16

EMBI Div IG EMBI Div HY


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

36

Emerging market corporate bonds in USDBenchmark:

CEMBI Diversified

Current level:

287 bps(22/03/17)

Target level:

300 bps

6-month outlook:

Neutral

CIO view• Emerging market (EM) corporate credit started the year with a low single-digit

return on the back of lower spreads and sideways trading US Treasury yields.Over the next six months, we expect spreads to trend moderately higher givensomewhat less appealing valuations and global uncertainties. However, spreads willlikely remain supported by further stabilization in EM macro fundamentals, the oilprice recovery, an expected reduction in the EM corporate default rate and, moregenerally, a still-supportive external backdrop. We advise investors to remain neutralon EM credit in globally diversified portfolios and be selective as reflected by theallocation of our model portfolio. We also have a relative preference for sovereignbonds over corporate bonds in the EM bond universe.

Positive driversShort-term (6 months)Corporate default rate to moderateCredit ratings and default trends will likely improveamid a bottoming EM business cycle, recoveringoil prices, stronger EM currencies and successfulliability management exercises.Technicals still supportiveWe expect global monetary policy to remainaccommodative overall. EM corporate spreads stilloffer some yield pick-up to investors, while netcorporate issuance should be matched by demand.

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

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

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

Key dates Key debatesApr 23, France 1st round electionApr 27, ECB announcementApr 27, BoJ announcement

• What impact will Trump policies have onEMs?

• When will EM corporate net leverage taperoff?


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

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

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


• Quasi-sovereigns• Select LatAm corporates• Select oil & gas and bank bonds• Select mining issuers, including gold

miners

Least preferred

• GCC corporates• Asian bonds


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

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

Negative scenarioCEMBI Diversified: 530bps

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

Credit spreads have tightened further thisyearCredit spreads in basis points

100

300

500

700

900

Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16

CEMBI Div IG CEMBI Div HY


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

37

Section2.C

Asset class views

Foreign exchange

38

Head FX Strategy Thomas Flury, [email protected], Asian Currency Strategy Teck Leng Tan, [email protected] or CIO asset class specialist Michael Bolliger, [email protected]

Foreign exchange overview G10 currencies – Key pointsIn our global tactical asset allocation, we maintain an overweight position in the euro, financed with an underweight in the US dollar.As the EUR has been undervalued against the USD for years, we expect a correction. The Eurozone economy has recovered in recentyears and the economic divergence between the north and the south of the continent has eased. The EUR is supported by a constantlygrowing current account surplus, while the US has to finance a sizable current account deficit. Meanwhile, the European Central Bank(ECB) is gradually stepping away from its very accommodative monetary policy; discussions about ending asset purchases have startedand should intensify this year. In contrast, investors are already USD rich as the currency has appreciated strongly. But as the US FederalReserve hikes interest rates only gradually, the USD should weaken from strongly overvalued values to less overvalued levels.

We also maintain an overweight call on the Swedish krona (SEK), financed with an underweight on the Canadian dollar (CAD). Sweden'sRiksbank is likely to turn more hawkish on its monetary policy in the next few months, while the Bank of Canada (BoC) should keepa firm neutral stance for the rest of the year, in our view. A sharp easing of monetary policy in Sweden in recent years led to robusteconomic growth, a stronger labor market and increasing inflation. We therefore expect the Riksbank to finish its quantitative easingprogram in June and potentially hike interest rates in 2H17. We expect a gradual economic recovery in Canada, but it may not be asstrong as in Sweden. We see the lackluster growth, inflation and labor markets keeping the BoC safely on hold and making it hard forthe CAD to regain strength. Global risk factors, such as a strong risk-off environment or major oil price moves, should have a limitedimpact on this trade as both currencies are highly risk-sensitive and should be affected similarly in such environments.

In our tactical asset allocation, we also recommend an overweight position in a basket of emerging market (EM) currencies (Brazilianreal, Indian rupee, Russian ruble, South African rand) against an underweight in developed market (DM) currencies (Australian dollar,Canadian dollar, Singapore dollar). We think the recent stabilization in EM data provides a supportive backdrop for harvesting theattractive interest rate carry of the EM currency basket. We only use currencies in the DM currency basket that have a relatively closecorrelation to our selected EM currencies. With this, larger moves on the back of risk-off sentiment or larger commodity price movescan be mitigated. EM currencies – Key pointsA range of global factors, from a softer US dollar to contained upward pressure on global rates due to accommodative monetary policyand the ongoing "hunt for yield," should support EM currencies. Also, stable-to-higher commodity prices seem realistic and benefitexporters. Given their improving fundamentals and fair-to-attractive valuations, selected EM currencies, especially those with a highinterest rate carry, should do well in this environment, in our view. But volatility will persist and setbacks in risk sentiment cannot beruled out due to uncertainty about the new US administration's policy, upcoming elections in some European countries, volatility incommodity prices and lingering concerns about China's outlook.

Preferences (six months)

USD

EUR

GBP

JPY

CHF

SEK

NOK

CAD**

NZD

AUD**

EM FX basket**

DM FX basket**

new old


Source: UBS, as of 23 February 2017

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

39

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

G10 currencies G10 foreign exchange viewsEURUSD: The start of a longer-term recovery. The US Federal Reserve hiked its policy rate in March, but made clear that it will tightenits policy only very gradually. On the other hand, the European Central Bank (ECB) seems to have started discussing the end of its easingmeasures, which should support a longer-term EUR rebound. The ECB could move sooner than markets currently anticipate. This, thesolid global economic growth and the strong undervaluation likely mean that the euro will eventually appreciate.

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

USDCAD: BoC on hold as Canada recovers. The Canadian recovery disappointed last year despite higher oil prices and the US havingstabilized. Stronger growth is likely this year, but the large output gap remains and the divergence between oil-related areas and thebig cities will keep the Bank of Canada (BoC) on hold for longer. USDCAD is unlikely to move significantly in either direction.

AUDUSD: RBA to remain somewhat dovish. With the Fed raising rates and coal and iron ore prices likely to fall on rising supply,we expect the AUD to stay under pressure. In light of low Australian inflation, Reserve Bank of Australia (RBA) policy could turn dovishagain if the housing market weakens. But the AUD's attractive carry should keep AUDUSD supported around the mid-to-upper 70sover the next 12 months.

GBPUSD: Dust to settle after Article 50 is triggered. UK economic data has remained resilient, while the pound is highly undervalued.British Prime Minister Theresa May is likely to finally trigger Article 50 by end-March. We expect the transition out of the EU to takeyears, which should prevent a "cliff" situation. So we see the GBP potentially rebounding against the USD over the next 12 months,but also expect bouts of volatility stemming from political discussions in the meantime.

USDCHF: USD to top out. The Swiss National Bank (SNB) will likely try to stabilize the combined value of USDCHF and EURCHF. Marketforces, however, will try to strengthen the CHF independently as it is considered a perfect safe haven. Safe-haven flows will most likelyleave Switzerland only after the French elections are over. We expect USDCHF to eventually stabilize below parity.

EURCHF: Should rise eventually due to stronger Europe. The SNB continues to defend any appreciation pressure caused by safe-haven trades. This year, we expect the ECB to discuss the end of its quantitative easing (QE) program, which should lift the EUR anddrive EURCHF above 1.10. Most likely, this will only happen after the French elections.

EURNOK: Carry carries the NOK. The NOK remains attractive due to its higher interest rates and the European economic recovery.However, an only moderate Norwegian economic recovery and falling inflation limit its appreciation potential against the EUR. Thecoming four months should decide if the inflation problem grows and if the Norges Bank has to cut rates again.

EURSEK: Robust SEK appreciation ahead. We forecast robust SEK appreciation as Sweden's monetary policy should be close to takinga hawkish turn. Strong growth, nearly full employment and inflation at target are setting the scene for an end to QE, and potentiallyrate hikes later this year. Solid global economic sentiment should further underpin SEK strength.

Currency forecast table

23-03-17 3M 6M 12M PPPEURUSD 1.079 1.12 1.15 1.20 1.25USDJPY 110.7 112 110 105 76USDCAD 1.334 1.32 1.32 1.25 1.21AUDUSD 0.763 0.74 0.76 0.78 0.71GBPUSD 1.251 1.25 1.28 1.36 1.60NZDUSD 0.705 0.68 0.71 0.73 0.61USDCHF 0.992 0.96 0.97 0.97 0.96EURCHF 1.070 1.08 1.12 1.16 1.20GBPCHF 1.242 1.21 1.25 1.31 1.54EURJPY 119.4 125 127 126 95EURGBP 0.862 0.90 0.90 0.88 0.78EURSEK 9.499 9.20 9.00 8.80 9.11EURNOK 9.144 8.90 8.90 8.90 9.81


PPP = purchasing power parity

40

Emerging market currencies & money marketBenchmark:

ELMI+

Current level:

3.7% (22/03/17)

Target level:

exp. totalreturn: 1%

CIO viewA range of global factors, from a softer US dollar to contained upward pressureon global rates due to accommodative monetary policy and the ongoing "huntfor yield," should support EM currencies. Also, stable-to-higher commodity pricesseem realistic and benefit exporters. Given their improving fundamentals and fair toattractive valuations, selected EM currencies, especially those with a high interest ratecarry, should do well in this environment, in our view. But volatility will persist andsetbacks in risk sentiment cannot be ruled out due to uncertainty about the new USadministration's policy, upcoming elections in some European countries, volatility incommodity prices and lingering concerns about China's outlook.

Positive driversShort-term (6 months)Supportive global monetary policyThe still accommodative global monetary policyshould act as a backstop for negative risk sentimentand support EM currencies, especially those with anattractive interest rate carry.EM economic growth is improvingAfter initial signs of recovery last year, graduallyimproving economic activity should brighten the EMoutlook in 2017, especially in Russia and Brazil.Further capital inflowsBased on the improvement in the domesticoutlook and supportive global conditions, emergingmarkets should continue to attract capital inflows.

Negative driversShort-term (6 months)Ongoing policy uncertaintyUncertainties linger with regard to policies of the newUS administration and politics in Europe (elections inFrance and Germany, implications of Brexit). Setbacksin risk sentiment cannot be ruled out.Sharp moves in benchmark yieldsThe ongoing volatility in benchmark yields, especiallyUS Treasuries, could become an obstacle forfundamentally weaker emerging markets if we seerenewed increases in rates.China's FX policyChina's economic rebalancing should continue. ThePBoC is expected to allow a gradual weakening ofthe Chinese yuan. Sharp moves remain a tail risk andcould weigh on markets beyond China.

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

Long-term (5+ years)Monetary policy normalizationWhile expectations of the hiking path arecontinuously reassessed, the US Fed will tightenmonetary policy further. Also, the ECB is expected toshift to a less accommodative policy stance.Buildup of private debt in EMElevated levels of private sector debt imply a needto contain leverage in some EM economies, includingChina, and weigh on structural growth prospects.

Key dates Key debatesMar 24, Policy rate, RussiaMar 30, Policy rate, MexicoApr 12, Policy rate, BrazilMay 3, Policy rate, US Fed

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

• Will emerging markets attract further capitalinflows?


Some tactical exposure in selected EMcurrencies is warranted, especially tothose with an attractive interest rate andimproving fundamentals.

For overexposed* investorsLook for opportunities to lock in someprofits but maintain some tactical exposurein selected EM currencies.

For in-line* investorsMaintain some tactical exposure in selectedEM currencies.

PreferencesMost Preferred

• BRL (against USD)• MXN and IDR (against SGD)• CZK (against EUR)

Least Preferred

• HUF and PLN (against EUR)• SGD


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

Negative scenarioELMI+: expected total return of -3.5%Trade protectionism and deteriorating risk sentimentweigh on EM growth prospects and lead to adepreciation of EM currencies amid capital outflows.Some central banks have to tighten their monetarypolicy to stabilize exchange rates.

UBS CIO EM FX forecasts

Current 3-month 6-month 12-monthLatamUSDBRL 3.09 3.10 3.00 2.90USDMXN 19.1 19.0 18.5 18.0EMEAEURPLN 4.28 4.35 4.30 4.30EURHUF 309 310 312 315EURCZK 27.0 26.2 26.2 26.0USDTRY 3.64 3.80 3.45 3.60USDZAR 12.7 13.5 13.5 12.5USDRUB 57.7 60.0 60.0 58.0AsiaUSDCNY 6.89 7.10 7.20 7.20USDIDR 13,336 13,750 13,750 13,750USDINR 65.3 69.0 69.0 69.0USDKRW 1,126 1,245 1,170 1,100USDMYR 4.43 4.60 4.25 4.10USDPHP 50.3 51.0 48.5 47.0USDSGD 1.40 1.46 1.42 1.38USDTHB 34.8 36.5 35.0 35.0USDTWD 30.5 32.5 32.0 31.0


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

41

Section 2.D

Asset class views

Precious metals & Commodities

42

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

Precious metals & commodities overview Commodities – Key points

• Commodity prices have been on a weaker footing in recent weeks, particularly industrial metals and crude oil. On a broad indexlevel, total returns have now slipped into negative territory. Still, we believe performance can rebound as crude oil marketstighten, global growth stays robust, and industrial activity strengthens.

• Aside from firming demand, supply-side discipline should also play its part. We see corporates staying focused on debt reductionrather than new capital expenditure. A weaker US dollar and higher energy prices should see production costs edge higher.Broad USD weakness should also bolster investment demand for commodities, particularly for precious metals. In agriculture, asweather risk premiums across row crops are moderate, any disappointment may drive a greater re-pricing.

• Broad-based commodity indices should deliver mid- to high-single-digit total returns this year, mostly in 1H17. We believe energyand precious metals have the highest return profile, followed by industrial metals and agriculture.

• Higher-than-expected US crude inventory builds and concerns of a sharp increase in US shale oil production have weighed onoil prices in March. We still believe inventories will be drawn down in the months ahead as a result of an oil production cut deal,which should push up prices to USD 60–65/bbl over 3–6 months. Toward the year-end, price headwinds should intensify, spurredby higher OPEC and rising US shale production.

• We expect political and policy uncertainty, together with negative real interest rates, to remain the main driver of gold in thecoming months. A decline in US real interest rates and the weaker US dollar should allow gold to trade around USD 1,300/oz insix months. Meanwhile, greater industrial activity globally should support the platinum group metals (PGMs) and silver.

• We believe increased industrial production worldwide should spur stronger demand growth for base metals and higher pricesthis year. However, the year-on-year price rally for metals like zinc and tin should incentivize additional supply, capping theseprice gains. Constrained supply response due to idiosyncratic factors in copper, nickel, and lead should offer investors moreinteresting investment opportunities. Ramping up Chinese aluminum supply is expected to limit upside, but policy shifts in Chinacould tighten market balances toward year-end. Considering the elections in Europe and President Trump's protectionist rhetoric,a flexible investment mindset will be required throughout the year.

• Grain market fundamentals are tightening incrementally, but we still believe the maximum pain on farmers' margins will likely befelt in 2H17. Global weather trends so far look relatively benign, but markets should not be complacent about regional weatherrisks. Policy risks are more elevated, and agriculture has historically been a good portfolio diversifier. We think this makes therisk-reward attractive. Over 3–6 months, we prefer broad long exposure to agriculture over livestock.

Broad-based commodity indices have started theyear on the firm sideBloomberg Commodity Index and UBS BloombergCMCI Total Return Index; indices are standardized to100

50

60

70

80

90

100

110

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

UBS Bloomberg CMCI Index Bloomberg Commodity Index


Current mostpreferredcommoditiesCrude oilPGMsNickelSoybean meal

Current leastpreferred

commoditiesThermal coal

ZincAluminum

LivestockSource: UBS, as of 23 March 2017

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

43

GoldBenchmark:

Gold (6 months)

Current level:

USD 1,249/oz(22/03/17)

Target level:

USD 1,300/oz

CIO view• We expect political and policy uncertainty to remain in focus over the coming

months and short-term US real interest rates to go even more negative, both ofwhich are bullish factors for gold.

• Our call for a weaker US dollar this year is also supportive for gold in 2017.

• Unexpected US Federal Reserve interest rate hikes are a risk for gold in the shortterm; outside this risk, we see the backdrop as favorable for prices, which maystrengthen to USD 1,300/oz over six months.

Positive driversShort-term (6 months)Fed remains accommodativeWe expect the Fed to hike only twice more in2017 and Trump's policies to lift inflation andpressure real rates lower, which have historicallybeen supportive of the gold price.Rising political uncertaintyPolitical risks should remain elevated in the comingmonths.

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

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

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

Key dates Key debatesApr 7, US payrollsApr 23, French election (1st round)May 15, WGC 1Q17 gold report

• Is inflation positive for gold?• Is Trump good or bad for gold?


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

For overexposed* investorsWe recommend investors to hold ontotheir gold exposure. Once gold pricesapproach our six-month view, this shouldbe used as an opportunity to rebalanceportfolios.

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


• Direct gold investment as a hedge

Least Preferred


Gold (6 months): USD 1,450/oz• The Fed does not hike again this year and/or

reverses recent hikes, thereby lowering yieldsand reviving investment demand for gold.

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

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

Real rate proxies in negative territory andweaker USD are gold supportive5-year UST TIPS (rhs, %) and USD index (lhs)

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.690

92

94

96

98

100

102

104

Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17

DXY Index 5-year UST TIPS (rhs)

Source: Bloomberg, UBS, as of 13 February 2017

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

44

Crude oilBenchmark:

Brent crude oil (6months)

Current level:

USD 50.6/bbl(22/03/17)

Target level:

USD 60/bbl

CIO view• Higher-than-expected US crude inventory builds and concerns of a sharp increase in

US shale oil production have weighed on oil prices in March.

• We still believe that inventories will be draw down in the months ahead as a result ofthe oil production cut deal, which should push up prices to USD 60-65/bbl over 3-6months. Towards the year-end, price headwinds should intensify, spurred by higherOPEC and rising US shale production.

• We recommend being outright long crude oil (a view we've held for three months),and price setbacks should be treated as an opportunity to add greater exposure. Wewould incrementally book profits if prices move above USD 60/bbl, particularly aftermid-year.

Positive driversShort-term (6 months)Muted global supply growthOil production has fallen by more than 1mbpdsince December due to the oil production cut deal.With the deal expected to stay in place at leastuntil mid-year, supply growth should be muted in2017.

Negative driversShort-term (6 months)Rising US supplyUS production increases are likely to put a ceilingon price gains but are unlikely to upset the market'smove towards a supply-demand balance.

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

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

Key dates Key debatesMar 31, US Dec supply/demand dataApr 11, EIA STEO reportApr 13, IEA oil market reportMay 25, OPEC ordinary meeting

• Will OPEC nations adhere to the productioncut deal terms?

• How fast and strong will US supply increasein 2017?


Oil price setbacks are an opportunityto build direct long oil or energy equityexposure.

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

For in-line* investorsOil price setbacks are an opportunityto build direct long oil or energy equityexposure.


• Using price setbacks to add direct longexposure

• Energy equities

Least Preferred


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

regions, like Venezuela, Nigeria and theMiddle East, trigger a sharp supply drop. Astrictly implemented OPEC deal could triggerlarger oil inventory drawdowns.

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

• The oil market remains oversuppliedbecause of a sharp decline in unplannedoil production outages, weak adherence tothe OPEC supply deal and/or less demandgrowth in emerging Asia due to an economicslowdown.

Inventory drawdowns to boost pricesHistorically, declines in OECD oil inventorieshave been price supportive

-15%

-10%

-5%

0%

5%

10%

15%-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Jan-01 Jan-04 Jan-07 Jan-10 Jan-13 Jan-16

Change in Brent price in %, y/y (lhs)

Change in OECD stocks in %, y/y (inverted - rhs)

Source: IEA, Bloomberg Finance LP, UBS, as of 14 March 2017

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

45

Section 2.E

Asset class views

Alternative investments Hedge funds

46

Hedge fundsBenchmark:

HFRI FundWeighted

Current level:

13,241(28/02/17)

Target level:

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

especially during market volatility. Their superior risk-return characteristics and accessto uncorrelated investment opportunities provide both downside protection anddiversification benefits within a multi-asset portfolio. This year is set to be a goodone for hedge funds. Heightened stock dispersion, low cross-asset correlation, risingrates, moderately higher volatility, and/or diverging monetary and economic policiesshould support performance. We anticipate returns of 4–6% this year for the assetclass as a whole.

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

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

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

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

Key dates Key debatesApr 3, US: ISM manufacturingApr 7, US: Non-farm payrollApr 7, Provisional HFR data

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


Hedge funds play a key role within amulti-asset class portfolio. Attractive risk-adjusted returns, downside protectionand diversification benefits are reasons forunder-allocated investors to rebalance.

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

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


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

Least preferred

• High beta managers

ScenariosPositive scenario• Robust economies and equity markets boost

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

Negative scenario• Tighter financial conditions, crises in

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

Hedge fund performance this yearAll strategies are up

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

Strategist Karim Cherif, [email protected] see important disclaimers and disclosures at the end of the document.* Exposure refers to current positioning relative to the UBS House View. 47

Section 3

Fixed income tactical asset allocation

48

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

Liquidity

High grade bonds


EUR corporate bonds (IG)





US TIPS


new old



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

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

Tactical asset allocation deviations from benchmark: FX*

USD

EUR

GBP

JPY

CHF

SEK

NOK

CAD**

NZD

AUD**

EM FX basket**

DM FX basket**

new old


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

49

Section 4

Tactical asset allocation for global credit portfolio

50

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

Liquidity

Credit total

US corporate bonds

Euro Sub Financial

US high yield short duration

US high yield bonds

Euro high yield bonds

US senior loans

Euro senior loans



Asian credit (USD)


new old



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

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

Reference portfolio (including tactical allocation)

Liquidity5% USD corporate

bonds12%

EURsubordinated

financialbonds

5%

USD seniorloans15%

EUR seniorloans10%

USD HY bonds(short

duration)5%

USD high yieldbonds13%

EUR high yieldbonds

7%

EM sovereignbonds13%

EM corporatebonds10%

Asia credit5%

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

51

Section 5

Emerging market tactical asset allocation

52

Emerging market investment strategyTactical asset allocation deviations from benchmark*


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

Investment preferences within asset classes*


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

53

Emerging market bonds in local currenciesBenchmark:

GBI-EM GD /EMTIL yields

Current level:

6.6% (nom.) /3.3% (real)(22/03/17)

Target level:

6.5% /3.3%

CIO view• While EM economic conditions have improved, shifting expectations about the

US Federal Reserve's policy outlook and fragile global risk sentiment toward theasset class may trigger renewed bouts of weakness. However, in the medium term,the still-accommodative monetary policy and low yields in advanced economiesshould support the asset class amid the ongoing "hunt for yield." Among the majormarkets, Brazil and Russia have room to further ease monetary policy. Inflationarypressure should remain contained on average. Given improving fundamentals andattractive valuations, we think EM can attract further capital inflows as long asglobal conditions remain benign.

Positive driversShort-term (6 months)Supportive global monetary policyThe still-accommodative global monetary policyshould act as a backstop for negative risk sentimentand limit upward pressure on EM interest rates.Also, it supports EM currencies.Sound growth-inflation dynamicsAfter initial signs of recovery last year, gradualimprovement in economic activity should brightenthe EM outlook in 2017. Meanwhile, inflationarypressure is contained on average.Renewed capital inflowsBased on the improvement in the domesticoutlook and supportive global conditions, emergingmarkets should continue to attract capital inflows.

Negative driversShort-term (6 months)Sharp moves in benchmark yieldsThe ongoing volatility in benchmark yields, especiallyUS Treasuries, could become an obstacle for localcurrency bonds in emerging markets if we seerenewed increases.Ongoing policy uncertaintyUncertainties linger about the new USadministration's policies and European politics(elections in France and Germany, implications ofBrexit). Setbacks in risk sentiment cannot be ruled out.China's FX policyChina's economic rebalancing should continue. ThePBoC is expected to allow a gradual weakening ofthe Chinese yuan. Sharp moves remain a tail risk andcould weigh on markets beyond China.

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

Long-term (5+ years)Monetary policy normalizationThe US Fed will tighten monetary policy further. Also,the ECB is expected to shift to a less accommodativepolicy stance. This should also result in some upwardpressure on EM interest rates.Buildup of private debt in EMElevated levels of private sector debt imply a needto contain leverage in some EM economies, includingChina, and weigh on structural growth prospects.

Key dates Key debatesMar 30, Policy rate, MexicoApr 12, Policy rate, BrazilApr 26, Policy rate, TurkeyMay 3, Policy rate, US Fed

• How quickly will global interest ratesincrease?

• Will emerging markets attract further capitalinflows?


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

For overexposed* investorsAfter the recent rally, take some profit butmaintain a strategic allocation in the assetclass.

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


• Brazilian local fixed income assets

Least preferred

• -


GBI-EM GD / EMTIL yields: 6.4% / 3.1%• Improving global growth, including sound

trade dynamics, support emerging markets.At the same time, rising US interest rateslimit EM interest rates' move lower. Arecovery in commodity prices benefitsexporters.

Negative scenarioGBI-EM GD / EMTIL yields: 7.0% / 3.5%

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

EM yields look elevated compared torecent historyYields of local currency bond indices (nominaland real), in %

2.0

2.5

3.0

3.5

4.0

4.0

5.0

6.0

7.0

8.0

Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17

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

Source: JP Morgan, Bloomberg, UBS, as of 16 March 2017

CIO asset class specialist Michael Bolliger, [email protected] see important disclaimers and disclosures at the end of the document.* Exposure refers to current positioning relative to the UBS House View. 54

Section 6

APAC asset allocation

55

APAC tactical asset allocationTactical asset allocation deviations from benchmark*

Liquidity

Equities total

Global

US

Eurozone

UK

Switzerland

Japan

Asia ex Japan

EM

Others

Bonds total

USD high grade bonds




Asian investment grade bonds (USD)

Asian high yield bonds (USD)



EM bonds (local currencies)

US TIPS


Precious Metals & Commodities

new old


Source: UBS, as of 23 March

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

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

China

Hong Kong

India

Indonesia

South Korea

Malaysia

Philippines

Singapore

Taiwan

Thailand

new old


56

Asian bonds in USDBenchmark:

JACI IG / HY

Current level:

175/427(22/03/17)

Target level:

190/450

6-month outlook:

Underweight

CIO view• US Treasury yields retreated across the tenors after the Fed's expected March hike

due to the lack of any hawkish future guidance from Yellen, who confirmed thestrong macro backdrop in the US and potential tolerance if inflation goes beyond2%.

• Credit spreads of Asia IG and HY bonds have been widening over the past twoweeks, with benchmark Treasury yields trading in the upper side of the recent rangeand supply kicking in. That said, the absolute levels of Asia USD bond spreadsremain in a historical low range.

• Our pro-risk trade of overweight on CEMBI versus underweight on JACI hasbenefited from the continuation of macro recovery in the EM region and supportiverisk sentiment last month. We believe the fundamental and valuation drivers are stillvalid for this trade.

Positive driversShort-term (6 months)Short-term economic outlookAsia has witnessed a pick-up in export growth andwe expect the momentum to continue amid betterglobal growth. China data continues its recoverypath, with early signs of improving domesticdemand.Corporate fundamental outlookRising inflation across Asia is positive for corporateprofitability, and lower real interest rates becomemore supportive of banks' asset quality outlook.

Negative driversShort-term (6 months)Rising volatility of US TreasuriesRising volatility of long-end US Treasury yields maycause outflows from the fixed income space.Increasing push for supplyChina issuance may increase due to the policy pushfor more USD proceeds returning to China amidshrinking FX reserves.

Long-term (5+ years)Long-term economic outlookAsia is the global growth engine and will attractmore investment in the long run. So demand forAsian bonds is set to increase.Index inclusionChina will likely be added to global bond indicesas it opens up. As a result, more institutionalinvestors are expected to buy Chinese credits.

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

Key dates Key debatesMar 31, US core PCE inflationApr 3, China manufacturing PMI

• How strong and sustainable is the macroimprovement?

• How many times will the Fed hike this year?


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

For overexposed* investorsConsider reducing exposure given the risein the volatility of US Treasuries and tightAsia credit spreads.

For in-line* investorsWithin Asian credit, we prefer BBB and BBbonds, particularly Chinese shorter-datedBBB bonds.


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

Least preferred

• Industrials from SOEs• Longer-dated bonds


JACI IG / HY: JACI spread for IG/HY (6-month target):150bps/400bps

• Trump's pro-growth fiscal spending rhetorictranslates into actual policies, while punitiveUS trade measures are not issued on maintrading partners. Meanwhile, China'sproperty market surprises the market on theupside. HY bonds fare better than IG bonds.

Negative scenarioJACI IG / HY: 210bps/520bps

• The US issues broad protectionist tradepolicies on China. Long-end US Treasuryyields rise sharply, triggering outflows fromthe fixed income space. China tightensmonetary stance faster-than-expected ifcapital outflow accelerates again.

Equity yield over Asian bondsin %

0

2

4

6

8

10

12

14

16

Mrz06

Mrz07

Mrz08

Mrz09

Mrz10

Mrz11

Mrz12

Mrz13

Mrz14

Mrz15

Mrz16

Mrz17

3-5yr JACI YTM AxJ Equity Yield


Head Asset Allocation APAC Adrian Zuercher, [email protected], Head Asian Credit Timothy Tay, [email protected] or Asset Allocation strategistCrystal Zhao, [email protected] see important disclaimers and disclosures at the end of the document.* Exposure refers to current positioning relative to the UBS House View.

57

Asian equities (ex-Japan)Benchmark:

MSCI Asia ex-Japan

Current level:

583 (22/03/17)

Target level:

610

6-month outlook:

Neutral

CIO viewAsia ex-Japan equities have traded sideways in the past month. Our longer-termbullish view is intact - based on reasonable valuations, undervalued currencies, goodmacroeconomic fundamentals, fewer tail risks from the Chinese debt cycle, and anexpected surge of free cash flow. However, we believe volatility is about to pick upin the short term given the steep increase in risk sentiment, the peak in positiveeconomic surprises in China, and the rapid ascent in Asian equities this year. Butwe keep a cyclical exposure in the intra-equity space by overweighting the energy-sensitive Thailand market versus the defensive Malaysian market. Further, we remainoverweight on China due to expanding corporate profit margins and on India givena strong pick-up in activity.

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

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

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

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

Key dates Key debatesMar 31, China PMI manufacturingApr 3, US ISM manufacturingApr 13, China exports (March)

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


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

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

For in-line* investorsMarket preferences should be considered.


• China• India• Thailand

Least preferred

• Malaysia• Taiwan


MSCI Asia ex-Japan: 665• More supportive monetary and fiscal policies,

sustained demand and an improving globalgrowth backdrop support Asian equities.

Negative scenarioMSCI Asia ex-Japan: 465

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

Asia ex-Japan equity strategy

China

Hong Kong

India

Indonesia

Korea

Malaysia

Philippines

Singapore

Taiwan

Thailand

Old New

Underweight Neutral Overweight


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

58

Appendix

Global portfolios

59

Global model portfolios (for a balanced risk profile)

EUR


bonds11%

US TIPS2%

Inv. gradecorporate

bonds8%

High yieldbonds

5%

EM bonds4%

Equitiesothers

4%Equities EM

4%

EquitiesEurope

24%

Equities US13%

Hedge Funds20%

EUR

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


USD


bonds11%

US TIPS2%

Inv. gradecorporate

bonds8%

High yieldbonds

5%

EM bonds4%

Equitiesothers

5%Equities EM

6%

EquitiesEurope

13%

Equities US21%

Hedge Funds20%

USD

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

CHF


bonds11%

US TIPS2%

Inv. gradecorporate

bonds8%

High yieldbonds

5%

EM bonds4%

Equitiesothers11%

Equities EM4%

EquitiesSwitzerland

17%

Equities US13%

Hedge Funds20%

CHF

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

60

Contact List Global Chief Investment Officer WM

Mark [email protected]

UBS CIO WM Global Investment Office

Global Asset AllocationAndreas [email protected]

Regional Asset AllocationMark [email protected]

UHNW & Alternatives IOSimon [email protected]

Investment ThemesPhilippe G. Mü[email protected]

UBS CIO WM Regional Chief Investment Offices

USMike [email protected]

APACMin Lan [email protected]

EuropeThemis [email protected]

SwitzerlandDaniel [email protected]

Emerging MarketsJorge [email protected]

61

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

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

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