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Investor’s Guide

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GlobalChief Investment Office WM

UBS House ViewNovember 2015

Focus and diversify p. 4

Contents

03 Tactical Preferences

04 Monthly Letter

10 Preferred investment views

11 At a glance

12 Key financial market drivers

14 Asset class overview Equities Bonds Commodities and alternative investments Currencies

20 Key forecasts

21 In memoriam Missing postcards

23 Investment Ideas

27 Disclaimer

If you wish to subscribe, please contact your UBS client advisor.

This report has been prepared by UBS AG, UBS Switzerland AG and UBS Financial Services Inc.

Please see important disclaimer at the end of the document.

UBS House View Mark Haefele, Global Chief Investment Officer WM

Product managementMarianne Bolt, Joscelin [email protected]

Desktop publishingCIO Digital & Print PublishingUBS Switzerland AG

Cover pictureCorbis Images

3UBS House View Investor’s Guide — November 2015

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ASSET CLASSESTactical asset allocation

Strategic Asset Allocation

Tactical Asset Allocation

Changes this month

Tactical preferences

Overweight: Tactical recommendation to hold more of the asset class than specified in the strategic asset allocation

Neutral: Tactical recommendation to hold the asset class in line with its weight in the strategic asset allocation

Underweight: Tactical recommendati-on to hold less of the asset class than specified in the strategic asset allocation

This month

We have moved our underweight position in emerging market equities to neutral. We believe valuations are low and there is scope for upside sur-prise.

We remain overweight Eurozone equities. Earnings growth and loose monetary policy should boost equities in the region.

In bonds, we prefer investment grade and European high yield credit to high grade bonds.

Equities in the Eurozone and Japan as well as Euro high yield bonds are our most preferred asset classes. Supportive global monetary policy and moderate economic growth keep our outlook constructive.

4 UBS House View Investor’s Guide — November 2015

Focus and diversify

Mark HaefeleGlobal Chief Investment OfficerWealth Management

DiversificationThe recent steep falls in Volkswagen and Glencore shares are a reminder of single stock risk.

Risks aheadDespite a rebound in October, markets have remained volatile, with uncertainty focused around the Chinese economy, the outlook for US policy, and third quarter earnings.

Global economyThe recent growth slow-down looks like a mid-cycle lull, rather than the onset of recession. China’s economy shows signs of stabilizing, while consump-tion remains positive in the US and Eurozone.

Emerging marketsWe are shifting our under-weight position in emerging market equities to neutral. Depressed valuations mean that it will only require moderately good news to boost the market.

In last year’s CIO Year Ahead: A Diverg-ing World, we detailed why investors were likely to face lower returns and higher volatility in 2015. But it is one thing to make a forecast, and another to live through such challenging times.

While developed market equities have delivered positive total returns over the past 12 months, the third quarter of 2015 brought us the sharpest quar-terly decline in equities and weakest performance for diversified portfolios since 2011, and the biggest spike in volatility since 2008. Markets have since rebounded, but I believe higher volatility and more modest returns are here to stay. Our world is in the process of transition in many areas – from central bank policy in the US, to a shift in drivers of growth in emerg-ing markets.

Corporate capitalism is also in transi-tion: government and regulatory toler-ance for corporate failure has plum-meted. Some listed companies have shown the concentrated risks that investors assume when they over-allo-cate money to single stocks. At a min-imum, the deep sell-offs in Volkswagen and Glencore should make every investor double (and triple) check their conviction in individual positions.

In the face of all this, investors will need to: a) maintain a long-term focus to avoid getting caught up in month-to-month moves, and b) avoid overex-posure to single company risks, which are arguably higher than ever.

In our tactical asset allocation this month, we are shifting our under-weight in emerging markets to neu-

With the exception of the 1998 tobacco settlement, financial penalties for companies in the US hit a record last year.

Fig. 1: Corporate fines and settlements have risen dramatically

Source: Jon Morse, UBS, as of 21 October 2015

Total US corporate fines and settlements (USD bn)

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Monthly Letter — November 2015

tral. We believe that while the fundamental situation remains challenging, much bad news has now been priced in, and the potential for positive surprises from China has risen.

Corporate capitalism in transition Financial theorists have long extolled the virtues of a widely diversified portfolio of individual stocks, to avoid overexposure to single company risks. But I believe the political and legal environment today makes this more crucial than ever. Laissez-faire capitalism is out. Regulatory and public intolerance for corporate misbehavior or mishaps increases the threat of permanent value destruction for global companies.

Some of you may remember the Ford Pinto, a small car made of compressed rust that had a fuel tank prone to exploding. The company was shown to be aware of the fuel tank defects, which were linked to over 20 deaths, but failed to fix the problem. After all was revealed, around 1977, Ford paid punitive damages of USD 3.5 million, less than 0.01% of the company’s revenue at the time. Exxon’s settlement for the 1989 Valdez oil spill ultimately came in at just over USD 1 bil-lion, or 1% of 1989 revenues.

That stands in contrast to the larger punishments meted out to other companies in recent years for a range of infractions. BP’s deep water oil spill in 2010 has resulted in a draft settlement of USD 20.8 billion, equivalent to 7% of 2010 rev-enues. Volkswagen, meanwhile, has shed almost 32% of its value, or just over 24 billion euros in market capitalization, since it was shown to be evading emis-sions tests – an indication of the market’s estimate of the fines, costs, and repu-tational damage the company faces.

The aggregate level of fines and settlements in the US hit USD 180 billion in 2014 (see Fig. 1). This represented a more-than-threefold increase in just half a decade and was a record, with the exception of 1998, the year of a master settlement with the tobacco industry. It is not just the scale: the volume of fines is on the up too. A record 24 fines in excess of USD 1 billion were issued in 2013 and 2014, twice the number of five years before. And it doesn’t appear that investors can avoid this risk by hiding in particular sectors: the fines were broadly spread. Financial services companies may be in the news, but penalties of more than USD 1 billion have been imposed on a diverse group of firms in chip making, the auto industry, pharmaceuticals, and energy. The range of possible infractions that have resulted in large damage is also broad, from environmental damage and sanctions breaches to anti-trust behavior and tax violations.

Regulatory intolerance of poor behavior by companies is increasing the risk involved in holding single company stocks.

Back in the 1970s and 1980s, corporate punishments were relatively light...

...now markets are anticipating long-term damage from Volkswagen's emissions test controversy.

Over the past five years, the number of corporate fines and settlements in excess of USD 1bn has doubled in the US.

China has been drawing down its foreign currency war chest.

Fig. 2: China FX reserves have dropped, reflecting capital outflows

Source: Bloomberg, UBS, as of 21 October 2015

People’s Bank of China reserves (USD trn)

2009 2010 2011 2012 2013 2014

2.0

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The idea that companies should be more accountable is not a threat to capital-ism overall. However, as I discuss below, I believe that investors have enough “involuntary” risks to deal with that they would do well to avoid such “volun-tary” risks associated with over-concentration in individual stocks. Nonetheless, around 16% of our clients currently have more than 20% of their portfolio in the securities of a single company.

Uncertainty aheadEven assuming investors avoided some of the individual company issues, it has still been a challenging few months for financial market returns. The simplest reason for the market swoon – that stocks don’t go up in a straight line – may also be best. But there are three big issues related to the drop that we continue to monitor closely.

China’s capital account: While the depreciation of China’s currency in August was relatively small (around 3%), the potential implications remain a cause for concern. First, suspicions linger that China may be tempted to use currency devaluation as a form of economic stimulus. A more rapid devalua-tion would export deflation to the rest of the world, and impair the economies of export rivals in Asia. Second, even if China does not pursue such an approach and is merely looking to liberalize its capital account, uncertainty remains about the potential direction of capital flows. This has important implications: persistent capital outflows could increase China’s domestic inter-est rates and spark credit concerns. A drawdown of foreign exchange reserves (see Fig. 2) could leave the country less well prepared for any future crisis. We will be monitoring announcements on capital account policy at the upcoming Fifth Plenum, between October 26–29.

US policy: Policy direction is increasingly uncertain in the US. While we hope Congress will help the long-term global outlook by ratifying the historic Trans-Pacific Partnership, there is a chance US lawmakers will throw a curve-ball at markets by forcing another government shutdown. In addition, with the Fed due to meet on October 27–28, the long anticipated Fed interest rate move remains elusive. Author Milan Kundera described “flirt-ing” as the promise of sex without the guarantee. By this definition, the Fed-eral Reserve is flirting with rate hikes. Although top Fed officials have said they expect to hike rates before the end of the year, futures suggest that traders have paid most attention to the Fed’s “data dependent” message and are betting there will be no hike until 2016. Such communication fumbles tend to increase market volatility.

Investors face enough unavoidable risks without assuming the voluntary risks involved in over-concentration in single stocks.

The outlook for Chinese capital flows remains a concern for markets...

... along with uncertainty about US monetary policy or the chance of a government shutdown.

US auto sales are at the strongest level in a decade.

Fig. 3: Car sales suggest US consumers are in buoyant spirits


US total auto sales (m, annualized)

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Earnings: Developed markets can only “decouple” so far from an emerging market slowdown. Manufacturing purchasing managers' indices, while still in positive territory, have weakened in recent months. Although manufacturing is a small part of most developed economies, it has often proved to be a lead-ing indicator for other sectors. We will closely follow third quarter earnings releases for signs of a broader based deceleration.

Reasons for cautious optimism Despite lingering questions, we believe that events in August and September likely represented a correction, rather than the early stages of a global recession.

This is based on three main observations:

There are signs of stability in China: GDP growth held steady at 6.9% year-over-year in the third quarter, topping expectations. The data provided some reassurance that the slowdown in industry, which grew by just 6.0% in the year to September, is being partly offset by an acceleration for services, which expanded by 8.4%. While purchasing managers’ indices remain below 50, indi-cating contraction, they are showing signs of stabilizing too. In addition, export data has begun to improve, and the renminbi is now relatively steady, as capital outflows have abated. Meanwhile, property sales in the 30 largest cities increased by 21.6% in September, helping calm fears of a renewed housing slump, and auto sales climbed by 6% in September, the first positive number since June. In summary, recent evidence points to a slowdown rather than a crash.

Consumers are still spending: As mentioned above, manufacturing data has weakened. But it is a small part of most developed economies, and while services data remains strong, we can be relatively confident in the overall out-look. In the US, for example, auto sales hit an annualized 18.1 million in Sep-tember (see Fig. 3), the fastest pace in a decade. Consumer confidence in the Eurozone remains high. And whatever the doubts about China’s industrial sector, retail sales growth has remained over 10%, helping to offset the gloom in other parts of the economy.

Central banks remain willing and able to support growth and stabilize markets: The Federal Reserve, Bank of Japan, and European Central Bank have all indicated that they would respond to deteriorating fundamentals or undesirable market trends. Importantly, it now appears as though investors are listening. Bond yields did not rise in the recent equity rally – a potential sign that investors expect further intervention to keep rates low.

We will be alert for signs of weakness in 3Q earnings.

On the upside, recent data suggests that the Chinese economy is stabilizing...

...and consumer demand in most of the world is holding up.

Finally, central bankers remain willing and able to support growth in the US, Eurozone and Japan.

Capital has been flowing out of emerging markets into mature markets.

Fig. 4: Investors have lost faith in EM in recent years


Value-adjusted portfolio allocations, % of total bond and equity allocations

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Mature markets (LHS) Emerging markets (RHS)


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The rally since the beginning of the fourth quarter suggests that markets may be starting to adhere to our view, but we will continue to watch the data and mar-ket sentiment closely.

Tactical changesWith recent signs of stability in China and renewed market faith in central bank policy, we are overweight risk assets. We have, however, made one change to our tactical asset allocation this month. We move our underweight position in emerging markets to neutral, and fund this by reducing the size of our over-weight position in Eurozone equities. Despite the move, Eurozone equities remain our preferred global equity market.

Following a decade of excessively high expectations for EM, recent years have seen a “wash out” of positive views, with once unthinkable recessions hitting Brazil and Russia. Investors have shift ed funds away from the region, with port-folio allocations to emerging market bonds and equities falling from about 17.3% in 2013 to about 15.6% at present, below the average since 2008 (see Fig. 4).

We believe that emerging market equities have fallen far enough that it may only require incremental good news to lead to stronger performance. As an example, the MSCI emerging markets index is trading at 1.4 times price-to-book, against a historical average of 1.9x, with valuations well below the lows seen aft er the 2008 crisis.

We have shift ed our underweight emerging market equity position to neutral.

At current depressed valuation levels even incrementally good news could boost performance.



Potential sources of improved news could include stabilizing net profit margins, which have been on a downward trend since 2007 but are showing some signs of settling. Headwinds from falling commodity prices appear to be abating too, and industrial production growth in emerging markets is outpacing that of devel-oped markets by the greatest margin in more than two years. All that said, the fundamental situation remains challenging, and we are cautious about the way the higher US interest rates might impact those emerging markets most reliant on foreign funding. We are expecting earnings growth in emerging markets of 4–6% for the coming 12 months, still far below the 8–12% we fore-cast for Eurozone companies. As such we move to neutral, rather than over-weight.

Finally, we recently closed our overweight in the British pound relative to an underweight Australian dollar, a position which has returned close to 8% since May. We believe that the downward pressure on the Australian economy is likely to moderate in coming months as conditions in China stabilize. The fall in the price of iron ore, Australia’s biggest source of foreign income, has started to abate. In addition, the Australian dollar now looks fairly valued against the Brit-ish pound on a purchasing power parity basis.

Mark HaefeleGlobal Chief Investment OfficerWealth Management

For comments please contact: [email protected]

Net profit margins in emerging markets show signs of stabilizing and the headwind from lower commodity prices is abating.

We have also closed our underweight Australian dollar position.

UBS Investor Forum Insights

At this monthly gathering, CIO invites thought leaders to debate the key topics affecting financial markets, and to challenge the UBS House View.

• Deflation was a key topic this month, and one cited by numerous guests as a threat to global markets. In the short term, most agreed that defla-tion would remain a concern.

• However, most felt that this is not a global phenomenon and that certain countries and sectors have continued to experience healthy levels of inflation.

• Over the medium and long term, with the base effects of lower oil prices coming through, deflation should dissipate, and ultimately the main worry will become a pickup in price pressures.

Preferred investment views

Recent upgrades

Recent downgradesMost preferred Least preferred

Equities• Eurozone • UK

• Japan

• Profit from US share buybacks and dividends – page 24

• Eurozone value: Investing in style

• Japanese companies ready for share buybacks

• Water: Thirst for investments

Bonds• Global investment grade • Developed market high grade bonds

• European high yield

• Yield pick-up with corporate hybrids

• Rising stars – page 25

• Opportunities in European leveraged loans

Alternative investments• Favoring equity hedge strategies – page 26

At a glance

Economy

Equities Bonds

Alternative investmentsand commodities

Currencies

Prices of global risk assets have rallied so far in October, as economic data have shown suffi-cient improvement to dismiss fears of an immi-nent global recession, but not so strong as to point to immediate monetary policy tightening in the US. Given the lack of inflationary pres-sures, global monetary policy is set to remain very accommodative for the foreseeable future. The economic recovery is furthest advanced in the US, where the labor market

recovery continues albeit at a slower pace than in the first half of the year. Europe continues its path of slow but steady improvement. In particular, solid credit growth is a positive sig-nal for economic growth to come. While still weak, economic data in emerging markets recently stopped its downtrend. We think China will manage to prevent its manufactur-ing slump from bringing down the more important service sector.

Against this mix of moderate economic growth and accommodative monetary policy, we hold a constructive view on global equities, expressed via an overweight position in the Eurozone stock market. Corporate earnings growth is still superior among Eurozone and Japanese compa-nies, and quantitative easing remains a tailwind in both regions. We hold an overweight in Japa-nese stocks relative to an underweight in UK equities, where earnings growth is muted in part due to the strong currency and exposure to commodity-related sectors. We are closing our underweight in emerging market equities. While we think it is too early to call for a turn-around as earnings are still falling, the attractive valuations combined with the recent tentative stabilization in the region‘s economic data could lead to a further improvement in sentiment towards EM equities.

We expect high grade (HG) bonds to deliver slightly negative total returns over the next six months, as current yield levels are too low to compensate for the expected gradual rise in yields, weighing on average prices. Still, the asset class remains an important portfolio diversifier whose value was apparent during the sell-off in risk assets through September: from June, USD HG bonds had gained 3%, while global equities lost more than 5%. Tacti-cally, we prefer high yield (HY) bonds denomi-nated in euro as well as short-dated USD investment grade bonds. Euro HY bonds offer an appealing carry of more than 5% over euro government bonds. Default risks remain low, in our view, as European companies have solid balance sheets and the index has a low expo-sure to commodity-sensitive sectors.

We closed our overweight position in the British pound against the Australian dollar on 8 October, taking profits. Latest statements by central banks reduced our conviction in mone-tary policy divergence between the BoE and RBA. We therefore no longer see a near-term catalyst for the position. The expected diver-gence of monetary policy between the US on the one hand and the Eurozone and Japan on the other will likely weigh on the latter‘s cur-rencies, pushing EURUSD to 1.08 and USDJPY to 127 in six months.

Global commodity prices remain highly vola-tile. The oil price (Brent) rallied above USD 54 per barrel earlier in October, but fell back below USD 50 recently. We continue to advise against strategic holdings in commodities as the risk-return outlook compares unfavorably to other asset classes. Within the alternative universe, we favor hedge funds, in particular those with equity-hedge strategies. Private markets offer appealing opportunities for investors who have a very long time horizon and are prepared to accept low liquidity.


Global growth in 2015 expected to be: 3.2%

EurozoneRicardo Garcia-Schildknecht

Economist

Negative scenarioProbability: 10%

Positive scenario Probability: 20%

House view Probability: 70%

Global economic outlookRicardo Garcia-Schildknecht

Economist

Key financial market drivers

Real GDP growth in % Inflation in %2014 2015F1 2016F1 2014 2015F1 2016F1

US 2.4 2.6 2.8 1.6 0.2 1.6

China 7.3 6.9 6.2 2.0 1.5 1.5

Eurozone 0.9 1.4 1.9 0.4 0.1 1.1

UK 3.0 2.7 2.5 1.5 0.1 1.1

Switzerland 1.9 1.0 1.4 0.0 –1.2 –0.4

Russia 0.6 –3.6 0.0 7.8 15.6 7.0

World 3.4 3.2 3.6 3.3 3.4 3.3

Sources: Reuters EcoWin, IMF, UBS; as of 26 October 2015 1 UBS Forecasts

We expect global growth to show strong divergence between countries, while emerging markets remain the weakest link. We see the policies of major central banks diverging, the Fed is expected to start hiking interest rates in December. We believe that inflation will remain subdued, even if divergences among countries are set to increase.

Improving growthThe Eurozone economy is likely to accelerate in the coming quarters as the monetary impulse reaches its peak, with easy financing conditions supporting a capital expenditure revival. The ECB is supposed to expand its QE program by 3–6 months and to cut the deposit rate by 0.1% to –0.3%. Further out in 2016, the recovery is expected to remain on track as the Eurozone economy is set to accelerate further and inflation to swing to around +1% in the first quarter.

Better-than-expected growthOil prices and the euro decline more than expected, with loan demand and the economy recovering faster than envisaged. France and Italy follow a credible reform path and speed up fis-cal consolidation. Political risks fade further.

Deflation spiralThe Eurozone slips into a deflation spiral due to a shock, such as Greece leaving the Eurozone, a sharp escala-tion in the Ukraine conflict or China suffering a severe economic down-turn.


Key financial market drivers



USBrian Rose

Economist

ChinaTing Gao and Chih-Chieh Chen

Analysts





In developing the CIO WM economic forecasts, CIO WM economists worked in collaboration with economists employed by UBS Investment Research. Forecasts and estimates may change without notice.

Key dates

29 October 2015US3Q15 GDP estimate

30 October 2015EurozoneConsumer price inflation for October (estimate) 10 November 2015ChinaConsumer price inflation for October (estimate) 13 November 2015Eurozone3Q15 GDP estimate 16 November 2015Japan3Q15 GDP estimate

Robust expansionWe expect robust US real GDP growth over the next 12 months. Improved US household and business fundamentals should support private domestic demand growth, though with a mod-erate drag due to a strong USD. The negative impact of the lower oil price on energy sector fixed investment has been significant, but is fading. Against a backdrop of above-trend growth and falling unemployment, the Fed will likely start raising rates in Decem-ber. But we expect the pace of rate hikes to be much more gradual than in previous tightening cycles.

Strong expansionUS real GDP growth rises significantly above 3%, propelled by an expansive monetary policy, improved business and consumer confidence, strong housing investment and subsiding risks overseas. The Fed raises policy rates significantly more than markets anticipate.

Growth recessionUS growth stumbles. Consumers save rather than spend the windfall from lower energy prices, while businesses lack the confidence to hire workers and boost investment spending. The Fed remains on hold.

Slowing Chinese growthWe expect headline economic growth to decline, led by investment. Key drags remain property and industrial excesses; these may take another year to work through the system. As a result, manufacturing investment and real estate development investment remain on a downtrend. Construction starts are contracting on a year-to- date basis. The silver lining is that property sales have rebounded so far in 2015 and despite a recent dip in September should remain robust, sup-ported by policy. Therefore, the excesses will only be incrementally worked out of the system.

Growth accelerationAnnual growth is 7% year-on-year as a result of more substantial policy stimulus measures from the govern-ment or a strong pickup in external demand.

Sharp economic downturnDespite policy easing measures, the economy fails to stabilize and weak-ens in the next 6–12 months due to a sharp downturn in property invest-ment, more widespread credit events and/or tighter liquidity as the govern-ment reins in shadow banking activity. Within this scenario we see a 15% risk of a more extreme “hard land-ing”outcome.


Asset class overview

Equities

Eurozone overweight

US neutral

Switzerland neutral

EURO STOxx (as of 21 October 2015: 342) Six-month target

House view overweight 360

Positive scenario 425

Negative scenario 300

S&P 500 (as of 21 October 2015: 2,019) Six-month target

House view neutral 2,125

Positive scenario 2,400

Negative scenario 1,800

SMI (as of 21 October 2015: 8,602) Six-month target

House view neutral 9,000



We are neutral on US stocks because we see further upside potential in the Eurozone and Japan. That said, we firmly believe that the late-summer equity market correction does not mark the end of the bull market and we expect stocks to recoup their losses. The US expansion remains firmly intact, and because trade is only a small percentage of US economic activity, weakness overseas is unlikely to derail the growth outlook. While headline earnings growth has slowed due to plummeting energy sector profits and nega-tive currency effects, non-energy earnings continue to advance at a healthy rate. Monetary conditions will likely remain accommodative – especially with inflationary pres-sures contained by lower oil prices – and broad valuation gauges are reasonable given the durable growth and low inflation environment.

We are overweight on Eurozone equities. Corporate earnings growth is improving, supported by rising margins and steady top-line growth. Resilient domestic demand should help accelerate earnings growth going forward. Low oil prices should favor the relatively cyclical and con-sumer exposed equity market. Our most preferred sectors are financials, energy and healthcare.

We are neutral on Swiss equities. The still strong Swiss franc is a headwind outweighing the sales growth (in local currencies) of companies in year-on-year terms. The third quarter corporate results season has begun with positive and negative surprises. We expect that early trend to con-tinue. In particular, we expect the currency drag to slightly exceed expectations. On the other hand, we expect sales growth in local currencies to be mixed on a company- specific basis but to confirm the recent modest accelera-tion overall, supported by moderate improvements in Eurozone economies. We favor high quality dividend pay-ers and midcaps. Quality dividend payers are attractive amid current low interest rates. Midcaps offer the stron-gest balance sheets and the highest organic growth at a minimal valuation premium.

Overweight equities

Markus Irngartinger, Bert Jansen, Katarina Cohrs, strategists

We recommend an overweight allocation to equities via exposure to Eurozone and Japanese stocks. Corporate earnings in these regions keep growing due to improving profitability, solid global demand, and accommodative monetary policies. UK equities are underweight as low commodity prices and a relatively strong British pound weigh on earnings.


Emerging markets

UK underweight

Listed real estate

Japan overweight

MSCI EM (as of 21 October 2015: 859) Six-month target

House view neutral 900


Negative scenario 725

FTSE 100 (as of 21 October 2015: 6,348) Six-month target

House view underweight 6,500



FTSE EPRA/NAREIT DEVElOPED TR USD (as of 21 October 2015: 4,321)

Six-month target

House view 4,400



TOPIx (as of 21 October 2015: 1,527) Six-month target

House view overweight 1,600



Overweight: Tactical recommendation to hold more of the asset class than specified in the strategic asset allocation

Neutral: Tactical recommendation to hold the asset class in line with its weight in the strategic asset allocation

Underweight: Tactical recommendation to hold less of the asset class than specified in the strategic asset allocation

We are underweight on UK equities. Earnings dynamics remain weaker in the UK than in other countries. Due to its defensive sector stance, the market will likely benefit less from an improving economic outlook in developed markets. Lower commodity prices compared to a year ago weigh on trailing company earnings, while the develop-ment of the trade-weighted currency is not a tailwind as it is elsewhere. In the UK market, the energy sector has a 13% weighting and the materials sector 6%. Within the UK, our preferred investment strategy is UK value, which tends to outperform when the long-end bond yields rise ahead of interest rate increases.

We are overweight on Japanese equities relative to UK equities. Japanese companies are benefiting from improv-ing demand in developed markets, a weak yen, low oil prices and resilient corporate investment. We expect cor-porate earnings to grow about 18% in FY15 (ending March 2016). The state pension funds‘ equity purchases and the BoJ‘s potential for further monetary easing should prove supportive of Japanese equities. More company share buybacks recently in adherence to Japan‘s corporate governance code add support. We expect the Topix trailing P/E to stay around the current level of 15.6x in the next six months.

Listed real estate has rebounded since its September low and is currently attractively valued in absolute terms. Uncertainties regarding values and rental growth should gradually abate and the price volatility diminish for the next two to three months. Potential higher interest rates are currently better reflected in valuations. Direct market fundamentals remain robust. Property yields are clearly above financing costs and recent credit spread widening shouldn‘t hurt listed real estate in the short term. We favor the US for its strong property fundamentals, Japanese developers on valuation and Hong Kong as well as Singa-pore developers that have priced in an overly pessimistic scenario in terms of fundamentals and interest increases. We least prefer Australia and Singapore REITs because of weakening fundamentals. We estimate the UK listed real estate to be the most expensive market.

neutral We are neutral on EM equities in our global portfolio. The consensus expectation is for EM earnings to grow around 9% over the next 12 months. We are more cautious, how-ever, and expect about 4-6% growth. We forecast trailing P/E valuations will stay around current levels. We prefer India and Turkey to Malaysia and Thailand.



Bonds

Corporate bonds overweight

High yield bonds overweight

High grade bonds underweight

CURRENT GlOBAl SPREADS Six-month target (as of 21 October 2015: 162bps / 139bps) USD / EUR

House view overweight 125bps / 100bps

Positive scenario 100bps / 80bps

Negative scenario 250bps / 250bps

CURRENT SPREADS Six-month target (as of 21 October 2015: 607bps / 509bps) USD / EUR

House view overweight 525bps / 425bps

Positive scenario 400bps / 350bps

Negative scenario 1,100bps / 1,200bps

10-YEAR GOVERNMENT YIElDS Six-month target (As of 21 October 2015: 2.0% / 0.57%) USD / EUR

House view underweight 2.5% / 1.1%

Positive scenario 2.9–3.3% / 1.3–1.5%

Negative scenario 1.7–2.1% / 0.2–0.4%

neutral

overweight

underweight

Corporate default rates still low

Michael Bolliger, Douglas S. Rothstein and Philipp Schöttler

Strategists

Corporate bonds, particularly from lower rated issuers, provide some compensation for rising rates through carry and potential spread compression. Meanwhile, credit fundamentals still look decent, in particu-lar in Europe. We therefore hold a small overweight in USD investment grade (IG) and Euro high yield (HY) bonds, backed further by our outlook for below-average default rates over the next six months.

We are underweight on high grade (HG) bonds relative to HY bonds as well as equities. For HG bonds in EUR, USD and CHF, our total return expectation is negative due pri-marily to our forecast for an increase in rates large enough to outweigh positive roll-down and negligible carry. Over-all, within the bond portion of portfolios, we recommend a neutral duration stance, irrespective of the currency. Bonds with low credit risk remain an important portfolio diversifier.

We hold an overweight position in Euro HY bonds against higher rated bonds. We expect EUR and US HY spreads to tighten over the next six months as risk sentiment should improve and valuations are attractive. The current yield lev-els (yield-to-maturity of 7.7% for US HY and 5.5% for Euro HY) are attractive, particularly in Europe where we expect below-average default rates. In the next six months, we expect total returns of 3–4% for both US and EUR HY. While oil price uncertainty adds to the volatility of US HY, we believe risks to the energy sector are largely priced in. In Europe, the ECB‘s QE program provides a powerful tail-wind and should lead to tighter spreads.

We hold a small overweight position in USD IG bonds with shorter maturities (1–5 years). Bonds from the lower IG rating segments (BBB) offer better return potential than higher rated issuers. We remain cautious on IG bonds with very long maturities (15 years and longer) as they remain the most vulnerable to rate volatility and high supply at the long end of the curve. Selected subordinated (hybrid) bonds of high quality non-financial issuers offer yield gain at moderate additional risk.



Emerging market bonds

EM bonds in local currencies

EM corporate bonds in USD neutral

EM sovereign bonds in USD neutral

GBI-EM YIElD Six-month target (as of 21 October 2015: 6.8%)

House view 7.2%

Positive scenario 6.2%

Negative scenario 7.5%

CEMBI BROAD SPREAD Six-month target (as of 21 October 2015: 402bps)

House view neutral 400bps

Positive scenario 320bps

Negative scenario 540bps

EMBIG SPREADS Six-month target (as of 21 October 2015: 402bps)

House view neutral 380bps

Positive scenario 300bps

Negative scenario 520bps

Credit spreads of EM sovereign bonds (denominated in USD) have trended sideways over the past month, and US interest rates declined marginally, leading to positive returns on an asset class level. Although the aggregate EM manufacturing PMI did not deteriorate further, it has been in contractionary territory for seven months now, and the weakness is fairly widespread across regions. We think val-uations of EM sovereign bonds are mostly fair and com-pensate investors for weakened credit fundamentals. Accordingly, we expect sovereign spreads to trend side-ways to slightly lower over the next six months. We still recommend a neutral allocation to EM sovereign bonds in a globally diversified portfolio.

With slightly lower US interest rates and moderately rising credit spreads on EM USD corporate bonds, total returns were moderately positive over the past month. Economic growth remains subdued in many EM countries, although manufacturing PMI indicators did not deteriorate further in September on average. Economic activity in China contin-ues to soften, while Brazil and Russia, two large EM econ-omies, remain in a recession. Meanwhile, rising commodity prices brought support to several troubled markets. This said, we think EM corporate bond valuations are fair on average, and we expect spreads to trend sideways to slightly lower over the next six months. We recommend a neutral allocation to the asset class in both globally diversi-fied and dedicated EM portfolios.

The recent sentiment-driven rally might last in the near term, but weak fundamentals still argue for a cautious view on the asset class. Weak economic activity still limits the attractiveness of emerging markets. The ongoing export contraction is particularly worrisome and low com-modity prices continue to weigh on exporters. Therefore, most EM central banks are expected to keep their mone-tary policy accommodative for as long as possible, but we see limited room for further monetary easing outside of Asia. Meanwhile, shifting expectations regarding the beginning of rate hikes in the US and the outlook for China will likely lead to further bouts of volatility. In sum, global conditions and growth-inflation dynamics in emerg-ing markets limit the attractiveness of the asset class over a six-month time horizon.


Commodities and alternative investments

Hedge fundsCRUDE OIL

CommoditiesGOLD

House view Prefer equity-hedge strategies

Positive scenario Prefer equity-hedge and event driven strategies

Negative scenario Prefer macro/trading (Global Macro + CTA)

CRUDE OIl (BRENT) Six-month target (as of 21 October 2015: USD 47.9/bbl)

House view USD 60/bbl

Positive scenario USD 80/bbl

Negative scenario USD 40/bbl

GOlD (as of 21 October 2015: USD 1,167/oz) Six-month target

House view USD 1,100/oz

Positive scenario USD 1,400/oz

Negative scenario USD 900/oz

No demand growth to the rescue

Dominic Schnider, Giovanni Staunovo and Wayne Gordon

Analysts

Although broadly diversified commodity indices showed signs of strength in early October, it is still too early to call for a sustained rally. Supply adjustments have not kept pace with deteriorating industrial activity across the globe, particularly in China. Our negative demand outlook makes us skeptical of the recent price advances.

With short-term US interest rates projected to turn more negative in 2016, we expect the gold price to be well sup-ported at around USD 1,100/oz over the next six months. Fewer ETF outflows on the back of negative real rates allows stronger gold demand from emerging markets to be price supportive.

The oil market remains in surplus to the tune of 1mbpd in 2H15, but falling non-OPEC supply and oil demand rising by 1.3mbpd next year should help to clear this surplus in 2H16, allowing crude oil prices to trade higher over the next 6 to 12 months. Elevated volatility and roll yield costs makes direct oil investment not yet attractive, whereas the valuations and dividends offered by energy equities are appealing.

Equity-hedge strategies are attractive in an environment of low intra-stock correlation in which company-specific fun-damentals, rather than market movements, fuel share price returns. Event-driven and relative-value strategies should generate risk-adjusted returns in line with the hedge fund composite index. Macro/trading strategies are still challenged by their large long-duration bond positions.



Currencies

CHF neutral

EUR neutral

USD neutral

GBP neutral

JPY neutral

UBS CIO foreign exchange forecasts

26.10.15 3M 6M 12M PPP

EURUSD 1.104 1.05 1.08 1.10 1.28

USDJPY 120.8 127 127 124 76

GBPUSD 1.534 1.55 1.58 1.58 1.65

USDCHF 0.977 1.03 1.02 1.00 0.97

EURCHF 1.079 1.08 1.10 1.10 1.24

GBPCHF 1.499 1.59 1.61 1.58 1.60

EURJPY 133.4 133 137 136 97

EURGBP 0.720 0.68 0.68 0.70 0.77

Sources: Reuters EcoWin, IMF, UBS; as of 26 October 2015PPP = Purchasing power parity

The ECB made clear that it stands ready to increase its asset purchase program if needed, which is likely to weigh on the EUR over the coming months.

In the UK growth forecasts are being revised down, which is also weighing on the pound on a broader basis. The Bank of England did not make any commitment at its October meeting, which has been weighing on the GBP. GBPUSD is likely to stay in a 1.51–1.58 range. We closed our overweight in GBP, financed by an underweight posi-tion in AUD. The risks on the position have increased as economic progress has slowed in the UK, as did the eco-nomic deterioration in Australia.

EURCHF has established a new 1.05–1.10 range. The Swiss franc will hardly weaken versus the euro, as long as an expansion of the ECB quantitative easing program is being discussed.

USDJPY fell quickly during the recent China induced mar-ket volatility. The risk for additional QQE by the Bank of Japan has risen after USDJPY fell below 120. Therefore, we regard USDJPY 120 or lower as an attractive entry for long positions.

The US economy is strengthening, albeit more slowly than expected in 3Q15. Expectations for a Fed rate hike this year are fading. The USD depreciated steadily ever since the Fed kept rates unchanged in September, citing interna-tional developments as the main hurdle. We continue to see the USD as one of the strongest currencies.

Don’t hurry, be happy

Thomas Flury, Teck leng Tan and Constantin Bolz

Strategists

We closed our overweight position in GBP versus an underweight in AUD, taking profit after a good performance in recent months. Risks to the position have increased from several angles. The Bank of England has turned more cautious on the economic outlook, lowering the likelihood for a rate hike in the next months and, thus, weighing on the outlook for the pound. The Australian central bank, on the other hand, is less inclined to cut rates and to weaken the AUD anytime soon, as the unemployment rate is not rising right now and hopes for a near-term rebound of China‘s economy are rising. The US economy is still growing strongly, but not as strong as projected by the US Federal Reserve. Therefore, the expectations for a rate hike this year have fallen. In our view, this should not hurt the USD for long, as the Fed contin-ues to prepare for a first rate hike. We therefore, advise buying dips in USD. The contrary can be said about the ECB and the BoJ. Both European and Japanese monetary policymakers talk openly about the opportunity to ramp up their asset purchase programs even further. This should keep EUR and JPY under pressure. EURCHF should stay in a 1.05-1.10 range, as levels above 1.10 seem unsustainable as long as further ECB easing is likely. Nevertheless, it is increasingly being used as a funding currency to finance carry positions in higher-yielding currencies like the USD and GBP.

6 month forecast

Asset class TAA1 Benchmark Value2 m/m perf.

in %3

ytd perf. in %4

HouseView

Positive scenario

Negative scenario

EquitiesUS S&P 500 2,075 7.4 0.8 2,125 2,400 1,800

Eurozone Euro Stoxx 355 8.8 10.9 360 425 300

UK FTSE 100 6,411 4.9 –2.4 6,500 7,250 5,500

Japan Topix 1,559 7.2 10.8 1,600 1,900 1,330

Switzerland SMI 8,893 4.6 –1.0 9,000 10,000 7,800

Emerging markets MSCI EM 869 10.1 –9.2 900 1,000 725

Listed real estate FTSE EPRA/NAREIT Dev.

4,343 6.4 2.0 4,400 4,600 3,800

BondsHigh grade bonds US 10yr yield 2.1 1.3 0.3 2.5% 2.9–3.3% 1.7–2.1%

German 10yr yield

0.5 1.1% 1.3–1.5% 0.2–0.4%

USD corporate bonds Spread USD IG 159 1.1 0.8 USD 125bps USD 100bps USD 250bps

EUR corporate bonds Spread EUR IG 136 1.1 –0.5 EUR 100bps EUR 80bps EUR 250bps

USD high yield bonds Spread USD HY 597 0.8 0.2 USD 525bps USD 400bps USD 1,100bps

EUR high yield bonds Spread EUR HY 502 1.2 2.1 EUR 425bps EUR 350bps EUR 1,200bps

Emerging Market Sovereign Bonds

Spread EMBIG 417 2.1 3.1 380bps 300bps 520bps

Emerging Market Corporate Bonds

Spread CEMBI broad

429 1.9 3.1 400bps 320bps 540bps

Emerging market bonds in local currencies

Yield GBI EM 6.8 5.2 –10.7 7.2% 6.2% 7.5%

Alternative investmentsGold USD/oz 1,165 1.6 –1.7 USD

1,100/ozUSD

1,400/ozUSD

900/ozCrude oil (Brent) USD/barrel 48 –2.4 –26.5 USD

60/bblUSD

80/bblUSD

40/bblHedge funds HFRX Global 1,188 –0.6 –2.5 Prefer

equity-hedge strategies

Prefer equity-hed-ge and

event-driven strategies

Prefer macro/trading (Global Macro + CTA)

Currencies Currency pair

USD USDCHF 0.98 –0.4 1.7 1.02

USDJPY 120.87 –0.8 –0.9 127

EUR EURUSD 1.10 –1.8 –8.8 1.08

EURCHF 1.08 1.4 11.5 1.10EURGBP 0.72 2.9 7.8 0.68

GBP GBPUSD 1.53 1.0 –1.6 1.58

GBPCHF 1.50 –1.4 3.3 1.61

Past performance is no indication of future performance. Forecasts are not a reliable indicator of future performance.

Overweight Neutral Underweight

Source: UBS, Bloomberg 1 TAA = Tactical asset allocation 2 As of 26 October 20153 Month-on-month performance in %4 Year-to-date performance in %

Key forecasts26 October 2015

In memoriam

Missing postcards

Andreas Hoefert, our Chief Global Economist and dear friend, passed away on the morning of Tues-day, October 6 2015, after suffering an apparent heart attack, at the tragically tender age of 48.

Andreas was not only a trusted colleague but a valued mentor – a role he served both for investment profession-als and for the many investors around the world who followed his sage advice. Those of us who had the great fortune to work side by side with Andreas over these many years were amazed by the strength and scope of his intellect. By simply stepping into Andreas’s office, you were able to glimpse both the depth and breadth of his intellectual pursuits. Texts on macroeconomic theory, behavioral finance, and geopolitics would share shelf space with books on quantum physics, molecular biology, and statistical analysis. The classical works of Plato and Aristotle sat side by side on his desk with Joyce’s Ulysses and Whitman’s Leaves of Grass.

But Andreas did not just read books; he devoured them with a seemingly insatiable appetite. His grasp of the material – almost regardless of the subject matter – was always commanding and deep, and his reasoning flawless. But Andreas was not a selfish intellectual. He joyously shared his insights and passed along his passions to any-one fortunate enough to cross paths with him. He would often stroll into my office with a book he had recently purchased for me that he thought I might find interesting. I learned very quickly that if Andreas was recommending it, then I was interested in reading it. Because while my

own intellect is undisciplined and prone to distraction, his was focused and committed. He was among the most brilliant and insightful men I have ever met.

He became my intellectual North Star, and I will miss that guiding presence in my life.

Of course, someone as gifted and passionate as Andreas could never be defined merely by what he read, but rather by what he did. Andreas’s many varied interests included jazz, photography, cooking, sports, wine, and – my own personal favorite – beer. He had multiple iPods loaded with his extensive jazz collection, and would also some-how include in his exhaustive travel schedule a visit to a local jazz club in whatever city he happened to be. Andreas would often show up at events with a camera in tow to document seemingly ordinary milestones the import of which would only become apparent to the rest of us with time. He could cook a mean ratatouille, select the perfect cabernet sauvignon, and identify the best craft IPA in any American city – you could say he was the “most interesting man in the world” long before there ever was a “most interesting man in the world.” But perhaps Andreas’s greatest passion was his love of sport. His interest ran so deep that he once built an econ-ometric model and framework for selecting the World Cup champions. I recall watching the pundits scoff when Andreas predicted in 2006 that Italy would win the Cup, and later enjoyed seeing them all try to sheepishly explain how they really knew the Italians would win all along. Others might have beaten their chests in vindication, but Andreas simply smiled. I once tested just how far his love of sport would extend by inviting him to my home for Super Bowl Sunday. Despite his protestations that there was simply no comparison to “the beautiful game,” Andreas was soon sucked in by the moment, cheering with full throat for the Pittsburgh Steelers. In the years that followed, he developed an appreciation for the New England Patriots that he shared with my wife. I can’t tell you how much I enjoyed listening to Andreas and Tracy lament how all the experts still were underrating Tom Brady as a quarterback.

Mike Ryan

Regional CIO WM US

Andreas Hoefert, 1967–2015

In memoriam

Andreas taught me the importance of living a full and robust life beyond the offi ce – a lesson I am still working to perfect.

But it is neither his intellect nor his interests that ulti-mately defi nes Andreas’s legacy; rather, it was his humil-ity, his humanity and his sense of humor. Despite his soar-ing intellect and broad interests, the thing that always struck me most about Andreas was his genuinely humble nature. He was, to anyone who came in contact with him, a “regular guy.” He had neither a pretentious nor a con-descending bone in his body. Doormen and mailroom clerks were aff orded the same level of respect as corpo-rate CEOs and central bank heads. What’s more, he was – in all ways and at all times – comfortable in his own skin. Andreas never sought to be anybody but himself. He was simply the “big man” – caring, gentle and kind.

Andreas also loved deeply and fearlessly: he admired his parents, adored his wife, and embraced his many friends. He looked up to his father with pride, and cared for his mother with devotion. Jacqueline was the love of his life, and the enduring nature of their relationship somehow defi ed both time and distance. He was also as dedicated and loyal a friend as you could ever hope to fi nd. He was wise in his counsel, generous with his time, and unwavering in his support for his friends. Among the Irish, we call that type of man a “solid man.”

Andreas was indeed a “solid man.”

There is so much more that I and others could share, but I thought it more appropriate to close with one story that captures so much of who Andreas was. During his exten-sive travels, both personal and professional, Andreas would always take time out to send postcards to friends and family. They would be short notes that helped you track where he had been and what he had been doing. My family and I were fortunate enough to be included as part of this little ritual. My girls, who were still young when they fi rst met Andreas, loved to get the colorful postcards from exotic locales and dream destinations. Whenever we received a card, the girls would break out the map (mind you, this was before Google Earth) to track where Andreas had been. He taught my girls more about geography than any teacher ever could – he made it per-sonal for them.

Once when we were both at an off site event in Singa-pore, I was headed to join the rest of the group for cock-tails at the bar aft er a long and eventful day. As I passed the front desk, I ran into Andreas who was still poring over postcards. When I asked him whom they were for, he simply told me that he was sending them to “Tracy and the girls” – my wife and daughters. I asked him to send along my regards as well – and he did.

Although he was eight years my junior, there was so much that I learned from Andreas in the years that we worked together. He taught me how to be more disciplined intel-lectually, while also being more actively engaged in the world around me. He helped me learn what true humility is all about and just how important it is to embrace our humanity. There is still so much I needed to learn from him, but will now never get the chance.

I will miss the postcards. I will miss my friend.

Kind regards,

Mike Ryan, CFAChief Investment Strategist, WMA

Investment ideas


Investment idea

Time horizonLong term (>12 months)

Asset classEquities

Initiation date23 May 2013

Equities

Profit from US share buybacks and dividends

Rolf Ganter, analyst

David Lefkowitz, strategist

Investors in companies that return cash through dividends and share buybacks have been rewarded by the stock market. They offer an attractive yield and, as our data shows, outperform the underlying index.

US companies have large amounts of cash on their balance sheets that are yielding very little in the current low interest rate environment. They distribute cash to shareholders through dividends and/or share repurchases. On average, S&P 500 companies returning cash to shareholders offer investors a total yield of 5–6% (when combining share buyback and dividend yields). Around two-thirds of this yield comes from share buybacks.

In the long term, companies with high total yield histori-cally outperform those with low total yield. This suggests that the general theme of buying companies that return large amounts of cash to shareholders via dividends and/or share repurchases should offer outperformance in the long run. We believe one reason this strategy works over the long term is related to the signal management sends to the market by repurchasing a large number of shares. It shows the confidence of the management team in the business outlook or indicates that they believe the stock is underval-ued. Returning capital to shareholders may also prevent companies from investing in unproductive projects, which may eliminate some investor concerns about future busi-ness returns.

Recent developmentsThe amount of share buybacks announced this year is well on track to achieve levels close to the record highs of 2007. In particular the technology and financial sectors have been very active. Companies‘ cash balances are high, currently standing at around 12% of assets. In combination with ongoing low interest rates, i.e. cheap funding to finance further share buybacks, this bodes well for further cash dis-tributions. In the current environment, we also like to focus on dividend growth to accommodate for any potential interest rate increases.


Time horizonLong term (>12 months)

Asset classBonds

Initiation date13 February 2014

Investment idea

Bonds

Rising stars

Rochus Baumgartner, analyst

Jayadev Mishra, analyst

Thomas Rauh, analyst

The transition of companies from high yield (HY) to investment grade (IG) is often associated with material spread tightening. We recommend adding potential rising stars to the portfolios of investors who can hold cross-over credit.

We generally expect the ongoing economic recovery to be good news for credit quality in the corporate sector. Over the mid-term, corporates should, in our view, increasingly benefit from top-line growth, stronger margins and conse-quently also higher cash generation. This should gradually also translate into growing rating headroom and the poten-tial upgrade of some HY-rated issuers to an IG rating.

Since this transition is often associated with material spread tightening as a result of strong technical pressures, we rec-ommend that investors who can hold bonds of a lower quality add instruments from potential rising stars to their portfolios. Our historical analysis shows that rising stars generated outperformance around the time of the rating action in 85% of cases. However, as one would intuitively expect, it pays to assume a position in a name early in order to benefit from the material spread tightening that often takes place before the rating action.

Should one of our rising star candidates be upgraded, we would expect a more or less marked outperformance ver-sus both BB and BBB corporates. However, second-guess-ing the actions of rating agencies (or the timing thereof) is not easy and – even though we may be convinced by the improving credit profile of an issuer – an upgrade is never

guaranteed. However, in the absence of a broadly based market sell-off, we would still expect our rising star candi-dates to outperform IG corporates. Recent developmentsAlthough EM growth concerns and falling energy prices continue to weigh on market sentiment, overall portfolio returns have held up comparatively well. Although volatility will likely remain elevated, we continue to see potential for relatively attractive risk-adjusted returns from our rising star issuers and recommend adding selected bonds to diversi-fied portfolios.


Investment idea

Hedge Funds Time horizonLong term (>12 months)

Asset classHedge funds

Initiation date13 March 2014

Favoring equity-hedge strategies

Nils Beitlich, analyst

Karim Cherif, analyst

Higher intra-stock dispersion should support equity-hedge strategies.

Alpha: We think the current environment is conducive to stock-picking and is likely to persist. In fact, higher interest rates, for example, should support increased intra-stock dispersion, which is positive for this style, enabling manag-ers to generate excess returns. Some industries have ele-vated debt levels, such as REITs and telecoms, and higher costs of carry would hurt their earnings per share. Conversely, other industries like banks should be able to charge more of their services and will benefit.

Beta: CIO still favors risky assets, and there are still good reasons to own equities even after the recent market cor-rection. Most economies are recovering, earnings are improving, and merger and acquisition activity is high. Bouts of equity volatility remain a risk and investors should consider gaining some degree of market exposure through equity-hedge strategies that can capitalize on rising equi-ties but also offer a good degree of downside protection.

Shorting: After struggling to generate attractive returns on the short side for many years, the recent equity market volatility created a fertile environment for managers to short stocks. A normalization in volatility combined with higher dispersion should keep the opportunity set for shorting attractive.

Recent developmentsEquity-hedge strategies posted a loss of 1.71% in Septem-ber, led by technology/healthcare-focused funds (2.95%). We continue to see numerous opportunities for equity-hedge strategies. However, the different states of econo-mies globally require different regional equity-hedge approaches. While the European and Japanese equity mar-kets are still better suited to top-down driven trades, the US offers more opportunities for fundamental stock pick-ers. That said, we continue to prefer managers running lower gross and net exposures with a strong focus on alpha generation (i.e. market neutral, quantitative equity, and low beta).


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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 (Italia) S.p.A., via del vecchio politecnico 3, Milano, an Italian bank duly authorized by Bank of Italy to the provision of financial services and supervised by “Consob” and Bank of Italy. UBS Italia has not participated in the pro-duction of the publication and of the research on investments and financial analysis herein contained. Jersey: UBS AG, Jersey Branch, is regulated and authorized by the Jersey Financial Services Commission for the conduct of banking, funds and investment business. luxembourg: This publication is not intended to constitute a public offer under Luxembourg law, but might be made available for information purposes to clients of UBS (Luxembourg) S.A., 33A avenue J.F. Kennedy, L-1855 Luxembourg, R.C.S. 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