UBS House Vei w - United States of America...prices have never provoked a US recession, cheaper crude has not yet provided the expected boost to the US consumer. Fears of a China hard

Investment Strategy Guide

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CIO Wealth Management Research

US edition

UBS House ViewFebruary 2016

Mind the gapsIn Context: What it will take In Focus: Simmering risks unlikely to boil overVideos: Brian Nick on tactical adjustments and Jeremy Zirin on market risks

A messAge from the regionAl Cio

The year hasn’t gotten off to the kind of start that any of us had hoped for or ex-pected. Economic data has largely disap-pointed, oil prices have plunged by 25%, and policymakers have sent mixed sig-nals with regard to their intentions. In re-sponse, risk assets have sold off sharply, with global equity markets off to their worst start ever and credit spreads reach-ing their widest levels since 2011. Not sur-prisingly, the level of anxiety among in-vestors (both institutional and individual) has risen to the point where some now see parallels to prior crisis periods.

But is this really the end of the nearly seven-year-old bull market for financial assets?

In this month’s Feature article, we iden-tify the “gaps” that have arisen across the global landscape and assess their im-pact. These include the gaps between strong consumption and weak manufac-turing, between current oil production and future demand, and those related to pegged currencies. We recommend that investors “mind the gaps” that these transitions are creating and watch for more potentially destabilizing changes, such as a potential “Brexit” from the EU, or unexpected changes in Federal Re-serve interest rates.

In our In Focus article, investment strate-gists Jeremy Zirin and Brian Nick explain why they do not think simmering risks are

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

1 Tactical preferences

2 Feature Mind the gaps by Mark Haefele

8 In context What it will take by Mike Ryan

10 Preferred investment views

11 At a glance

11 Month in review

12 Global economic outlook

14 Asset classes overview Equities Fixed income Commodities Foreign exchange

20 In focus Simmering risks unlikely to boil over by Jeremy Zirin and Brian Nick

Video feature

22 Top themes Beyond benchmark fixed income

investing

The rising Millennials

Valuing your human capital

24 Key forecasts

25 Detailed asset allocation

32 Performance measurement

35 Appendix

39 Publication details

Contents

Dear reader,

Video featureClick play button to watch

likely to boil over. In their words, “while voices calling this the beginning of a worldwide recession have become louder and more numerous, we see few truly threatening signs that things are headed in that direction.”

In the In Context article, we focus upon the current correction and what it will take to stabilize markets. With the burden of proof now on those with a more con-structive view, markets are apt to remain volatile in the near term. It is therefore our view that we will likely need clearer evidence that decelerating US economic momentum during the fourth quarter was temporary, indications that commodity prices and the dollar have begun to sta-bilize, confirmation that corporate profit growth has not peaked, and a commit-ment on the part of global policymakers to remain pragmatic in order to arrest the decline in risk assets.

While we believe that these dynamics will begin to play out as the year progresses, investors will need to remain patient in the near term.

Regards,

Mike Ryan, CFAChief Investment Strategist, WMA

http://www.ubspodcast.ch/us/wmr/podcast/en/topofthemorning/160121-UBSHV_Portfolio_Adjustments_BrianNick_3.mp4

februAry 2016 UBS hoUSe view 1

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tACtiCAl preferenCes

We are now neutral across major asset classes but see opportunities in Eurozone and US small-cap equities.

Foreign exchange

We are now overweight the US dollar against the Japanese yen.

Equities We have reduced our equity weight to neutral through down-grades to non-US markets.

Fixed income We are neutral on fixed income and prefer investment grade corporates.

each bar represents a +/- 2% tactical tilt or part thereof (i.e., one bar = 0.5% to 2%, 2 bars = 2.5% to 4%, 3 bars = over 4%). Note: tactical time horizoN is approximately six moNths

neutral: tactical recommen-dation to hold the asset class in line with its weight in the moderate risk strategic asset allocation (see page 25)

underweight: tactical recom-mendation to hold less of the asset class than specified in the moderate risk strategic asset allocation (see page 25)

overweight: tactical recom-mendation to hold more of the asset class than specified in the moderate risk strategic asset allocation (see page 25)

Asset classesTactical asset allocation

LEGEND

Note: Chart includes changes made on 7 January 2016. For more information, see House View Update: Markets do not yet understand Chinese – reduce equities to neutral, 7 January 2016.

2 UBS hoUSe view februAry 2016

Currently, we consider the risk and reward for equities balanced. While low oil prices have never provoked a US recession, cheaper crude has not yet provided the expected boost to the US consumer. Fears of a China hard landing have made global markets acutely sensitive to even minor policy changes or slight disappointments in markets and data. The correlation between the Shanghai and US equity markets has soared, and the recent correction can be traced to a modest 1.5% devaluation of the Chinese yuan versus the US dollar.

These new sources of volatility need to be digested by the markets to enable them to find direction. Opportunities to overweight and underweight equity markets remain, but overall we consider it best to be neutral on equities in our global tactical asset allocation (TAA). Yet this is no time for investors to abandon long-term investment discipline. We should remember that market falls can represent good opportunities to rebalance portfolios toward long-term strategic allocations.

In the remainder of the letter, I address some of the “gaps” we are watching to inform our investment positioning. These include the gap between strong consumption and weak manufacturing, which is now a global phenomenon; the gap between oil production and demand, which has caused a jarring 75% slide in prices since summer 2014; and the gaps that are popping up in markets related to pegged currencies, which are indicative of the current global instability. In the months ahead, investors will need to “mind the gaps” that these transitions are creating, and watch for more potentially destabilizing changes, such as a possible “Brexit” from the EU, or unexpected changes in Federal Reserve interest rates. Some of the gaps caused by market volatility are also creating opportunities. A variety of divergences contributes to our global TAA positioning, such as an overweight to Eurozone equities, and underweights to emerging market (EM) stocks, UK equities, and government bonds. We are making two changes to our global TAA this month, closing our overweight position in Japanese equities

Mark HaefeleGlobal Chief Investment Officer

Wealth Management

feAture

Mind the gapsMarket risks Investors have been unsettled by fears over China’s transition into the global financial system, worries over the resilience of US growth, and the falling oil price.

Watch the gaps We are monitoring a range of dislocations in markets and the real economy. These include the gap between the two Chinese currency rates, and differ-ing views on the path of US interest rates.

Balanced position Additional volatility justifies greater caution and for now we are neutral on equities in our global tactical asset allocation. But the recent market falls offer a good entry point for investors who have been on the sidelines.

Asset allocation We initiate an underweight Japanese yen position against the US dollar. We are also reducing Japanese equities to neutral, and reducing our UK equity underweight.


relative to UK equities, and initiating an underweight Japanese yen position relative to the US dollar.

Gap #1: Services vs. manufacturing My first gap to watch exists between services and manufacturing (see Fig. 1). This is something evident across the world, but perhaps most strikingly in the US and in China, where manufacturing is in recession, but retail sales growth remains good.

It is clearly a positive that the services sector is holding up well. Not only does the services sector make the greatest contribution to most developed economies (and a growing contribution to China’s), its growth also tends to translate, labor-intensive as it is, into greater levels of employment, confidence, and consumption, when it is humming along.

Investors will need to pay attention to how this gap closes, however. I think we all want to see a recovery in manufacturing sentiment, and this would be a clear and simple positive. But investors will need to watch for any indications that the weakness in manufacturing is infecting the services side of the economy. One potential source of contagion is through credit spreads, where borrowing costs have been on the rise in recent months, even for companies outside of the energy sector. We will need to remain alert for signs that higher borrowing costs are affecting economic investment and hiring across sectors.

Gap #2: Oil supply and demandThe world had grown used to oil costing more than USD 100 per barrel.

With prices now down by more than 75%, the world is trying to adjust. These adjustments are creating uncertainty and volatility: oil majors, US drillers, and state-run energy firms in EM have made dramatic job and investment expenditure cuts. The extent to which many economies rely on oil investment and hiring has, like the scale of recent oil price falls, taken many by surprise. And investment write-downs,

Service industries have been outperforming manufacturing by a widening margin.

Manufacturing weakness could undermine the services sector.

The price of Brent crude has fallen by three quarters since summer 2014...

...which has dented capital spending by oil firms and fuelled stock market volatility.

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Fig. 1: US services strength vs. soer manufacturing sector

Source: Bloomberg, UBS, as of 31 December 2015

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The gap between US manufacturing and services activity is near its highest in a decade.


deleveraging, and tighter credit conditions will continue to stoke price instability and global growth concerns until oil finds a floor.

Investors will need to watch oil inventories for indications that the dramatic supply-demand imbalance is easing (see Fig. 2). In OECD nations, crude stocks are approaching three billion barrels of oil – around 300 million barrels more than the five-year average. Until signs that this excess is clearing appear, uncertainty about the sector and its knock-on effects is likely to hold sway. This should affect EM most severely, and we hold an EM equity underweight in our global TAA.

Gap #3: Pegs vs. pressureA third type of gap investors will need to watch is that popping up in the forward and interest rate markets of pegged currencies, indicative of potential trouble to come. These are most evident, at present, in Saudi Arabia, China, and Hong Kong. Saudi Arabia’s peg to the US dollar has held firm since 1986, but has recently come under speculative pressure, thanks to the sharp decline in oil prices. Forward markets are pricing in a 2% fall in the riyal (or a 20% probability of a 10% drop) against the US dollar. The government has since reportedly banned the sale of forward options to prevent a self-fulfilling crisis.

Similarly, China’s delinking of its currency from the US dollar, and toward a broader basket of currencies, has driven uncertainty and speculation about further depreciation. At one point earlier this month, the offshore yuan was trading at a record discount to the onshore rate, before aggressive government intervention, including wild swings in offshore yuan borrowing rates, quashed any speculation (see Fig. 3).

China’s moves have had a notable impact on Hong Kong, too, where USDHKD hit an eight-year high, albeit remaining within the Hong Kong Monetary Authority’s trading band.

The imbalance between oil supply and demand will be a key metric for investors to watch.

Currency pegs have come under pressure, due to worries over China and the falling oil price.

The Saudi currency has been one target of speculative selling...

...along with the Hong Kong dollar.

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Fig. 2: Oil supply has continued to outpace demand

Source: International Energy Agency, UBS, as of 19 January 2016

Global oil statistics - in millions of barrels per day

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These gaps are important not because they present easy trading opportunities – heavy government intervention in all markets makes bets on peg breaks highly risky propositions – but insofar as they give us an indication of market stress and the direction of capital flows. Until the global tension between market forces and government policy is resolved, markets are likely to remain volatile.

Gap #4: European togethernessA fourth gap to monitor will be that between European states with respect to views on integration. The migrant crisis has placed strains on relations in recent months, and, following events in Cologne over the New Year, is now a major political topic in Germany. Question marks around freedom of movement of people could lead to questions about the wider European project, creating a potential repeat of the kind of instability we saw previously around Greece.

An important barometer of this will be the UK’s vote on EU membership, which looks increasingly likely to take place this year. Our base case remains that the pro-EU camp will prevail, but the latest polls give the campaign only a 5 percentage point lead, down from about 16 points in September. This data has led us to raise our “Brexit” probability to 20-30%, and this will remain a crucial gap to watch in the months ahead.

In a ‘Brexit’ scenario, UK assets would clearly be in the firing line. The pound has already been under pressure in recent weeks due to concerns about the economy, and more weakness is probable if anxiety about a “Brexit” mounts. And even if an exit were arranged on favorable terms, it would create prolonged uncertainty, darkening the investment outlook for one of Europe’s largest economies.

Gap #5: The Fed “dot plot” vs. market expectationsOnly one month on from the Fed’s first rate hike in nine years, some investors are already questioning whether the US economy could catch a cold, as China sneezes and oil markets sputter. Futures markets seem to suggest it might, pricing in fewer than two quarter-point Fed increases this year. Our models broadly agree.

A key measure of this will be polls in the UK ahead of a vote on continued EU membership.

Futures markets are at odds with Fed officials over the outlook for rates...

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Fig. 3: The fluctuating gap between the onshore and offshore Chinese currency

Source: Bloomberg, UBS, as of 21 January 2016

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Eliminating a record currency spread required government intervention.


Charting the Fed’s course will be tricky, and investors will need to mind the gap between market expectations, and the median forecast of Federal Open Market Committee (FOMC) members that is calling for three to four quarter-point hikes.

Should the Fed reduce the pace of hikes toward market expectations, it would still need pitch-perfect communication to avoid exacerbating fears of a US slowdown. Equally, staying the course with four rate hikes would accord with US labor market strength, but it could fuel the fire for further declines in EM, given how much many of them depend on the dollar.

No matter how the gap closes, it won’t be an unqualified success for monetary policy.

Bottom lineI’ve looked at a (non-exhaustive) list of gaps to watch as markers of what could go wrong globally. When you factor in their recent volatility, global stock markets appear especially sensitive to negative news, or the opening of any new gaps. In light of this, we are maintaining a neutral stance on equities in our global TAA.

But we also have to consider the possibility that things will go right, not wrong, and that investors could stay pessimistic too long, missing a rebound. Growth scares in recent years have passed rapidly, especially after central banks took further policy action. While we suggest waiting for some of the highlighted gaps to close before taking on too much short-term risk, investors with a longer-term time horizon may find the sell-off creating opportunities in selected financial assets. Now could be a good time for far sighted investors to put cash to work, especially if they are underinvested relative to their long-run equity benchmark or reference.

Tactical positioning We are changing our positioning around the Japanese “reflation” trade in our global TAA. We close our relative overweight to Japanese equities versus UK equities. Inflation in Japan has tailed off recently, and we expect a more modest earnings growth outlook for the market this year, after a double-digit rate of increase last year. Conversely, UK stocks may enjoy an earnings tailwind from a

...with FOMC members expecting a faster pace of monetary tightening.

We are neutral on equities in our tactical asset allocation.

But the sell-off also creates opportunities in selected financial assets.

We close our relative overweight to Japanese equities versus UK equities. We initiate an underweight posi-tion in the yen relative to the US dollar.

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weaker pound, and from an eventual bottoming out in oil prices. That said, we still expect to see the Bank of Japan do more to combat deflation, particularly in light of the decline in oil prices, and so see this as a good time to initiate underweight positions in the Japanese yen relative to the US dollar.

Overall, we hold a neutral allocation to equities, with a relative overweight in the Eurozone against underweights in the UK and EM.

The sell-off in US high yield credit is opening up opportunities for longer-term investors, but the latest oil slide is likely to increase default rates among the most highly geared producers. We forecast the US high yield default rate to rise to 5.5% this year.

Finally, within European currencies we continue to believe the Norwegian krone will rise against the euro. The markets still appear to be expecting the Norwegian central bank to ease further, despite core inflation at 2.9%. While Norway is suffering from the depressed oil price, its monetary policy does not need to be eased further, in our view. By contrast there is a greater chance that the European Central Bank will have to cut rates, especially if inflation disappoints.

Mark HaefeleGlobal Chief Investment OfficerWealth Management

For comments please contact: [email protected]

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It remains our view that the bull market that began in March 2009 remains intact. However, the steep sell-off in risk assets that started the new year has clearly shaken investor confidence and prompted many to question that view. Against this unsettled backdrop, the burden of proof has now shifted away from those who hold a nega-tive market view to those who have a more constructive outlook for risk assets.

So what will it take for markets to begin to stabilize and validate this more construc-tive view? It is our view that we will likely need to see some combination of the fol-lowing to arrest the decline in risk assets:

• clearer evidence that the deceleration in US economic momentum in the fourth quarter was indeed temporary;

• indications that commodity prices and the US dollar have begun to stabilize;

• confirmation that corporate profit growth has not peaked and that the collapse in energy sector earnings is not spilling over to remaining sectors;

• commitment on the part of global poli-cymakers to remain pragmatic and re-sponsive in their decision making.

Keep in mind, of course, that these devel-opments are highly interdependent. So it’s important to consider the dynamics as not only fluid, but linked as well. For example, the level of growth will influence mone-tary policy which will, in turn, impact the strength of the dollar. Likewise, energy prices and the level of the dollar will affect corporate profitability, which heavily influ-ences investor sentiment.

With that in mind, consider the following:

Improvement in the economic data – This most recent sell-off in risk assets shares at least one characteristic in com-mon with each of the prior pullbacks we have seen since the crisis: it has been prompted in large part by a global growth scare. It is therefore necessary that upcom-ing economic data releases provide

What it will takevalidation that the global economic expan-sion remains intact and that the weakness in the fourth quarter represents just an-other episodic “soft patch.” Of particular interest will be evidence that consumers in the US remain fully engaged, signs that the normalization of credit conditions in the Eurozone has created a more durable ex-pansion, and validation that growth in China is not collapsing under the weight of both heavy debt burdens and a series of poorly planned policy moves.

It is our view that upcoming data releases will confirm that the economic expansion endures – uneven and substandard though it may be. There is a whole host of data that can be scrutinized to help gauge the current pace of economic activity – PMIs, payrolls, industrial production, and retail sales among them. Keep in mind, however, that markets typically react not only to the economic data releases themselves, but also by how far they deviate from consen-sus expectations. So a helpful way for mar-ket participants to gain confirmation is through a rise in the economic surprise in-dicator (see Fig. 1). Given the most recent downgrade of growth expectations, the bar is now set pretty low. We will therefore look for an upswing in the economic sur-prise indicator as a signal that recessionary fears are overdone.

Stabilization in commodity prices and the dollar – The ongoing slide in oil prices and strengthening of the dollar are espe-cially burdensome for commodity-produc-ing emerging market economies with heavy external debt burdens (i.e., dollar-denomi-nated debt). But the decline in crude is also adding to the deflationary headwinds for developed market countries as well. Although falling oil prices are positive for energy importers such as Japan and the Eurozone in the long term, for now at least the focus is clearly centered upon financial market stress.

Given the heavy supply overhang, crude prices are unlikely to recover in the very

Mike Ryan, CFAChief Investment Strategist, Wealth Management Americas

IN CONTExT


near term. However, with most of these “supply shocks” – sustained North American production, breakdown of disci-pline within OPEC, reintroduction of Iranian supply – being already well known, further oil price declines from here should be more limited. Meanwhile, the combina-tion of softer growth and increased market volatility reduces the prospects for aggres-sive Fed rate hikes. This, in turn, will help take some of the edge off the dollar’s ap-preciation. The combination of more sta-ble energy prices and a steadier dollar should help ease the stress on emerging markets and soften deflationary forces in the developed world.

Continued corporate profit growth – The stronger dollar and lower oil prices have also taken a heavy toll on US corpo-rate profitability. Overall earnings growth stalled in 2015, with the energy sector posting year-over-year declines of 60% and companies with significant currency exposure representing another 3% drag on profits. Keep in mind that with US stocks trading at valuations close to histori-cal norms and the Fed in the early stages of policy normalization, further equity market gains from here will depend mostly upon the level of corporate profits.

With the fourth-quarter earnings season now upon us, we should begin to get a bit more clarity on the all-important profit pic-ture. As has been the case for each of the three previous quarters last year, analysts

have been active in cutting their earnings forecasts in the weeks leading up to the reporting season. As such, earnings in ag-gregate should handily beat currently de-pressed forecasts. More important, earn-ings outside of the energy sector are likely to have risen between 4% and 6% during the quarter and 7% for the full year (see Fig. 2). This should help ease concerns over an earnings recession and help stabilize the market.

Pragmatic policy response – The combi-nation of China’s move to devalue its cur-rency in August and the decision by the Fed to raise rates in December served to unsettle markets accustomed to a more benign policy backdrop. Although China’s move toward greater currency flexibility was prompted more by efforts to have the yuan added to the basket of central bank reserve currencies than to engage in a competitive devaluation, the impact on emerging markets was immediate and harsh. Meanwhile, the Fed’s decision to raise rates despite a near complete ab-sence of price pressures only added to the overall tightening of financial conditions.

Following a second surprise devaluation in January that contributed to the New Year sell-off, China has gone to great lengths to defend the yuan. This suggests that Chinese officials will be more cautious and deliberate in allowing for further currency depreciation. Likewise, recent comments by senior Fed officials indicate that

IN CONTExT

weakness in the economy and volatility in financial markets could materially influence the Fed’s decision-making. So in the ab-sence of a reacceleration of growth and stabilization of risk assets, the odds of a Fed rate hike in March have diminished. Chances for the European Central Bank to boost the size of its quantitative easing in March also seem to be rising given com-ments made during Mario Draghi’s press conference. These more pragmatic ap-proaches should ease concerns over a sig-nificant policy misstep.

Burden of proofIt remains our view that markets are cur-rently oversold and that the risks of an economic recession, policy mistake, and earnings collapse are greatly overstated. However, sentiment remains poor and the burden of proof now lies with the bulls rather than the bears. This suggests that markets are apt to remain volatile, and any recovery in risk assets will be limited in the near term until we get further clarity on the macro, policy, commodity, currency, and profit front. We believe this will begin to materialize as the year progresses, but investors may need to be patient.

In the meantime, we recommend that cli-ents refrain from actively selling out of eq-uity positions, maintain “normal” levels of risk in their portfolios, and, assuming a sufficiently long time horizon, consider putting large cash positions to work.


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Preferred investment views

Most preferred Least preferred

Equities• US small-caps • UK

• Eurozone* • Emerging markets* • The rising Millennials

• North American energy independence

• US technology

• Cancer therapeutics

• Valuing your human capital

Bonds• US investment grade • Government bonds*

• Beyond benchmarks

Currencies• NOK • EUR

• USD • JPY

Alternative investments

Recent upgrades

Recent downgrades


As of 21 January 2016*Change made on 7 January 2016

Note: For more information, see House View Update: Markets do not yet understand Chinese – reduce equities to neutral, 7 January 2016.


EconomyChina has once again taken center stage in early 2016 as its government’s currency management raised uncertainty about the future path and degree of renminbi de-preciation among global investors. While the risk of global contagion has risen, our base case remains for China avoiding an economic “hard landing.” More impor-tantly, we expect continued growth in the US and Eurozone, balancing the general growth weakness of emerging markets (EM). The Federal Reserve kicked off the rate-hiking cycle on 16 December. This occurred against the backdrop of a robust labor market, as highlighted by strong new job creation in December. Still, this hik-ing cycle will progress only very gradually due to low inflation and the prevalent weakness in parts of the economy, namely manufacturing. Meanwhile, Eurozone growth continues apace. Latest leading indicators showed a further mild improve-ment in the outlook. Still, at persistently low inflation levels, more ECB easing is be-coming more likely.

EquitiesAgainst a backdrop of volatile markets susceptible to otherwise manageable neg-ative shocks as well as the uncertainty over the Chinese government’s currency management intentions, we recommend a neutral position in global equities in our tactical asset allocation. However, we believe Eurozone companies are cur-rently best positioned to benefit from continued global demand. Low refinancing costs and a supportive currency effect should additionally support rising profit-ability. Therefore, we prefer Eurozone over UK and EM equities in a regional con-text. UK equities have a large exposure to the energy and the materials sectors, where the latest rout in commodity prices weighs, while EM equities’ earnings and profit margins continue to deteriorate against a backdrop of weak domestic fundamentals.

Fixed incomeWe maintain an overweight in US investment grade (IG) bonds. Spreads have widened amid the market turmoil but we do not believe there is a high probabil-ity of a US recession or a wider crisis in higher-quality corporate credit beyond the energy sector. At an average yield to maturity of 3.6% they offer an appeal-ing yield pickup over government bonds. From current low yield levels, US gov-ernment bonds are unlikely to deliver attractive total returns over the next six months. We are underweight the asset class while acknowledging that it contin-ues to play a crucial role as portfolio diversifier, stabilizing portfolio returns when risk assets sell off.

Foreign exchangeWe maintain our favorable view on the Norwegian krone compared to the euro. A stabilizing Norwegian economy should lead to monetary policy divergence and support a rising yield differential in favor of the krone. We are adding an under-weight position in the Japanese yen against the US dollar. The yen strengthened amid the recent global risk-off sentiment, thereby making it even more difficult for the Bank of Japan to reach its inflation target. The BoJ is hence expected to at least maintain, if not expand, its very easy monetary policy stance. The Fed, on the other hand, has embarked on a path of gradual policy tightening. For EU-RUSD, we maintain our 6- and 12-month forecasts of 1.08 and 1.10, respectively.

The S&P 500, as of this writing, has fallen 9% this month, in line with other major developed equity mar-kets, due to acute concerns over global growth prospects amid tum-bling commodity prices. US eco-nomic data has been mixed-to-dis-appointing to begin the year. The ISM manufacturing index fell to 48.2 and vehicle sales disappointed. On the positive side, nonfarm pay-rolls continued to increase at a ro-bust pace with 292,000 jobs added in December.

European Central Bank President Mario Draghi hinted at further stim-ulus on 21 January as Eurozone in-flation still remains substantially be-low target. Eurozone economic data has been better than expected, and the latest Eurozone composite PMI report showed an increase from 54 to 54.3.

Onshore Chinese equity markets have fallen nearly 20% so far in January on increased concerns over further currency depreciation and continued slowing manufacturing growth. To begin the year, China’s A-share market was shut down for trading several times, after triggering the 7% circuit breaker for intra-day losses. The circuit breaker was aban-doned several days into the year.

Oil prices continued their steep de-scent. Brent crude oil fell below the USD 28/bbl threshold on 20 January, representing a 26% decline since the end of last year. Sentiment in the oil markets has remained over-whelmingly negative, and the selling momentum that began the year has continued unabated with no positive catalysts in the near term. Fears over the health of the Chinese economy have also created demand concerns.

Month in Review

At a Glance


Global economic outlookBrian Rose, PhD, US Economist

Recent US economic data has been mostly dis-appointing. While the labor market continues to improve, consumer spending has been soft, and the manufacturing sector is struggling. The Euro-zone has been a relative bright spot, but Japan is treading water. Emerging market economies have been relatively weak. China continues to struggle, although government support measures are help-ing to stabilize the economy. Inflation is subdued and monetary policy is extremely accommodative in most countries.

Robust growth in USBrian Rose, PhD

US Economist

House viewProbability: 70%

We expect robust US real GDP growth over the next 12 months. Improved US house-hold and business fundamentals should support private domestic demand growth, though with a moderate drag due to a strong USD. Against a backdrop of falling unemployment and faster wage growth, the Fed started to raise rates in Decem-ber. We expect the pace of rate hikes to be much more gradual than in previous tight-ening cycles. Housing starts should con-tinue to increase and prices should remain on a modest upward trend. The negative impact of lower oil prices on energy sector fixed investment has been a significant drag on growth, particularly in the manufactur-ing sector, which remains stagnant.

Positive scenarioProbability: 15%

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 pol-icy rates significantly more than marketsanticipate.

Negative scenarioProbability: 15%

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 in-vestment spending. The Fed stays on hold in 2016.

Key finAnCiAl mArKet drivers

Real GDP growth in % Inflation in %2015 2016f 2017f 2015 2016f 2017f

us 2.5 2.8 2.5 0.1 1.5 2.7Canada 1.1 2.2 2.5 1.5 1.9 2.0brazil -3.6 -2.8 0.7 10.6 6.4 4.8Japan 0.6 1.3 0.7 0.9 1.0 1.2Australia 2.2 2.6 2.7 1.5 2.2 2.4China 6.9 6.2 5.8 1.5 1.5 1.2india 7.1 7.6 7.8 5.0 4.6 4.0eurozone 1.5 1.8 1.8 0.0 0.7 1.7uK 2.4 2.4 2.3 0.1 1.1 1.9switzerland 1.0 1.4 1.8 -1.1 -0.4 0.3russia -3.7 -1.2 1.5 15.5 8.6 5.7World 3.1 3.3 3.4 3.5 3.8 3.4

source: reuters ecoWin, imf, ubs, as of 19 January 2016note: in developing the Cio economic forecasts, Cio economists worked in collaboration with economists employed by ubs investment research. forecasts and estimates are current only as of the date of this publication, and may change without notice.

Global growth in 2016 expected to be 3.3%

27 January 2016FOMC policy decision The Fed raised rates in December, and, in our view, is unlikely to take any further action at this meeting. With no news conference sched-uled, the wording of the statement could have a big impact on markets.

29 January 2016US 4Q15 GDPRecent US economic data has sur-prised mainly on the downside, and it appears that GDP growth slowed significantly in 4Q15. Consumer spending in particular was weaker than we expected going into the quarter.

29 January 20164Q15 Employment Cost Index (ECI)This report will be watched closely for any signs that a shortage of la-bor is putting upward pressure on wages. We consider the ECI to be a better measure of wages than hourly earnings from the monthly labor report.

1 February 2016PCE price index for DecemberThe Personal Consumption Ex-penditures price index is the Fed’s preferred measure of inflation and has been running well below their 2% target. Any further slowdown would make it difficult for the Fed to hike rates.

1 February 2016ISM Manufacturing for JanuaryThe ISM Manufacturing PMI slumped to 48.2 in January, its low-est reading since 2009 and the sixth straight monthly decline. Any sign of stabilization in the January report would be welcomed.

Key dates Improving Eurozone growthRicardo Garcia-Schildknecht

Economist


The Eurozone economy is likely to im-prove further in the coming quarters as the monetary impulse reaches its peak, with easy financing conditions support-ing a capital expenditure boost. The re-newed fall in oil prices means downside risks to inflation, in particular further weakness in the first half of 2016. The probability of further ECB easing around the second quarter has increased sub-stantially, despite an accelerating Euro-zone economy and the expected rate hikes in the US.


Better-than-expected growthOil prices and the euro decline more than expected, with loan demand and the economy recovering faster than en-visaged. France follows a credible re-form path and speeds up fiscal consoli-dation. Political risks fade further.


Deflation spiralThe Eurozone slips into a deflation spiral due to a shock, such as Greece leaving the Eurozone, a sharp escalation in the Ukraine conflict, or China suffering a se-vere economic downturn.

Resolving over-capacityChih-Chieh Chen; Yifan Hu

Analysts


We forecast China’s GDP to grow by 6.2% in 2016. As China transforms, the manufacturing PMI is likely to remain in contraction territory, while the ser-vices PMI is expected to stay above 50. Investment will continue to decelerate, dragged down by traditional manufac-turing and real estate; consumption is expected to grow mildly, contributing 56% to GDP growth in 2016 from 54% in 2015. CPI inflation will rise mildly to 2% in 2016, mainly due to rising pork prices and a low base for comparison. PPI inflation will rebound slightly, but remain negative.


Growth accelerationAnnual growth is 6.8% year-over-year as a result of more substantial policy stimulus measures from the government or a strong pickup in external demand.


Sharp economic downturnA hard landing materializes, which we define as sub-5% real GDP growth for more than two quarters. The economy weakens abruptly due to a sharper downturn in property investment and widespread credit events.



Asset ClAsses overvieW

Against a backdrop of volatile markets susceptible to otherwise manageable negative shocks, we recommend a neutral position in global equities. However, we believe Eurozone companies are currently best positioned to benefit from continued global demand. Low refinancing costs and a supportive currency effect should support rising profitability. We prefer Eurozone over emerging market equities, whose earnings and profit margins con-tinue to deteriorate against a backdrop of weak domestic fundamentals.

Equities

Eurozone overweight

We are overweight Eurozone equities. Corporate earnings growth is improving, supported by rising margins and steady top-line growth. Ongoing monetary easing is supportive of prospects for continued economic recovery. Leading eco-nomic indicators are showing more upside in economic activity ahead, benefiting companies’ revenue generation prospects. Our most preferred sectors are financials, energy, healthcare, and technology.

UK underweight

We are underweight UK equities. Earnings dynamics remain weaker than in other countries, especially with the renewed sharp fall in commodity prices. In the UK, the energy sector has a 12% weighting, and the materials sector, 5%. The recent weakening of the pound is helpful to FTSE 100 earnings, but has not yet created a strong currency tailwind versus last year. Due to its defensive sector stance, the UK will likely benefit less should the economic outlook improve.

Emerging markets underweight

We are underweight EM equities in our global portfolio. The consensus expectation is for EM earnings to grow 8-9% over the next 12 months. We are more cautious, however, and ex-pect about 2-6% growth. The devaluation of the Chinese yuan relative to the US dollar has created new uncertainties. We forecast trailing P/E valuations will stay around current lev-els. We prefer China and Turkey to Mexico, Thailand, Taiwan, and South Africa.

EURO STOxx (index points, current: 305) Six-month target

House view 325

Positive scenario 385

Negative scenario 270

FTSE 100 (index points, current: 5,674) Six-month target

House view 5,925

Positive scenario 6,650

Negative scenario 5,000

MSCI EM (index points, current: 693) Six-month target

House view 715



Japan neutral

We are neutral on Japanese equities. While Japanese companies are seeing solid earnings growth, the tailwind of a weak yen is fading. The recent rise in investors’ risk aversion is harming the cyclical-oriented Japanese equity index. Uncertainty about the growth outlook of the Chinese economy and more mixed data out of Japan weigh on the market. Company share buybacks, in adherence to Japan’s corporate governance code, add support. We expect Topix trailing P/E to expand to 13.8x in the next six months from the current level of around 13.5x.

TOPIx (index point, current: 1,339) Six-month target

House view 1400



Jeremy Zirin, CFA; Brian Nick, CAIA; David Lefkowitz, CFA; Manish Bangard, CFA; Markus Irngartinger, PhD, CFA

Note: Current values as of 20 January 2016


US equities – styleLarge-cap growth was one of the few market segments to deliver solid returns in 2015. The Russell 1000 Growth Index rose 5.7% last year, compared to the 3.8% decline in the Rus-sell 1000 Value index. Many of the factors that led to growth outperformance are still in place – reasonable valuations for growth and strong prospects for the tech sector. But a rebound in oil prices and/or interest rates should benefit value. We rec-ommend a balanced allocation between growth and value.

US equities overview neutral

The S&P 500 barely eked out a positive total return in 2015, rising by just 1.4%, and 2016 is off to an even more challeng-ing start. Last year, flat market returns for US equities largely mirrored the flat earnings growth delivered by S&P 500 com-panies. We have reduced our 2016 S&P 500 EPS estimate to USD 126 from USD 130, but this still represents mid-single-digit growth over 2015 levels. Most sectors outside of energy should still see earnings growth in 2016, and the earnings drag from the collapse in oil prices and a strong dollar should be less acute than in 2015. Our six-month price target is 2,025.

US sectorsCyclical sectors appear inexpensive relative to defensive sec-tors, and we have a moderate pro-cyclical tilt in our US sec-tor strategy. Technology remains our largest overweight, and even after outperforming the S&P 500 by about 5% last year, the sector trades at discount to the market at under 15 times forward one-year earnings. We have a moderate overweight in healthcare and energy. Energy continues to slump, but we see value at current depressed valuations, particularly for pa-tient investors. This month, we downgraded industrials to neutral and trimmed our telecom underweight.

US equities – sizeSmall-caps have lagged this year. Mixed economic data, fears of a global slowdown, and rising corporate credit spreads have all contributed to weak performance. However, with valuations relative to large-caps at five-year lows, the prospects for small-caps to outperform appear bright if markets recover as we ex-pect. Small-caps have weaker credit ratings; therefore, lower high yield credit spreads will be vital in order for small-caps to stage a comeback.

Source: FactSet, UBS, as of 20 January 2016

90

105

102

99

96

93

108

111

9

5

6

7

8

4

3

2012 2015 20162011 20142010

Small-caps should rebound as high-yield stress diminishesSmall-cap vs. large-cap performance and high-yield spreads

2013

High yield spread (rhs, inverted)

Small vs. large (lhs)

UBS 6-mthforecast

Eliminating a record currency spread required government intervention.

Source: FactSet, UBS, as of 20 January 2016Note: 2015 and 2016 S&P 500 EPS are UBS CIO estimates.

100

125

120

115

110

105

130

Energy Energy S&P 5002016 EPS

Nonenergy

Nonenergy

S&P 5002014 EPS

Non-energy growth to be more visible in 2016Components of change in S&P 500 earnings per share (EPS), in USD

S&P 5002015 EPS

Positive contribution

Negative contribution

Base

US equitiesUS and global equity markets have suffered sharp declines at the start of 2016. Similar to the late August 2015 market sell-off, fears of a disorderly slowdown in China and other emerg-ing markets appear to be the trigger. Additionally, the further slump in oil prices, continued weak global manufacturing, and uncertainty over the Fed have further stoked domestic recessionary fears. These concerns may linger in the near term, but we expect both the US economy and S&P 500 profits to prove resilient.

S&P 500 (index points, current: 1,859) Six-month target

House view 2,025

Positive scenario 2,250

Negative scenario 1,700

Note: Current value as of 20 January 2016



We expect the 10-year US Treasury yield to move modestly higher as the economy contin-ues to grow, the labor market continues to improve, and the Federal Reserve responds by continuing to gradually raise the policy rate. Some weakness persists in the manufacturing sector, although there are no signs of significant negative spillover to the rest of the econ-omy. Both the service sector and consumer spending are improving, while inflation remains pressured by the strong dollar and declining commodity prices.

Bonds

Government bonds underweight

Treasury yields have declined more than 30bps in the first two weeks of January as volatility has increased investor appetite for the safe haven of US government securities. With global uncertainties increasing, yields have continued to decline, even when faced with stronger job numbers. We maintain our 12-month yield forecast at 2.50% on 10-year Treasuries, as yields will gradually rise once short-term volatility subsides.

Emerging market bonds neutral

We maintain a neutral allocation to emerging market sover-eign and corporate bonds denominated in USD in the context of a globally diversified portfolio. Credit spreads have further widened on fears about China, commodities, and weak US economic data. Concerns about an unstable China and a slow-down in the US seem overstated, in our view, and we expect favorable technicals to support valuations. However, slower growth in China will keep hurting EM currencies, ratings out-looks remain skewed toward downgrades, and default rates are likely to increase.

US investment grade corporate bonds overweight

Although investment grade (IG) corporate bond spreads moved wider, their returns have benefited from the decline in US Treasury yields with IG bonds up 0.6% year-to-date. IG bonds offer an attractive risk/reward profile, with spreads at their widest since 2012. Spreads will likely narrow if risk assets stabilize, while IG bonds’ long duration would help during fur-ther market weakness. We recommend 5- to 10-year maturi-ties. Within financials, we prefer higher-rated issuers’ subordi-nated bonds, and within non-financials, we favor select issuers that are deleveraging.

US 10-YEAR YIElD (Current: 1.98%) Six-month target

House view 2.5%

Positive scenario 2.9–3.3%

Negative scenario 1.7–2.1%

EMBIG div / CEMBI div SPREAD (Current: 485bps / 478bps)

Six-month target

House view 380bps / 400bps

Positive scenario 300bps / 320bps

Negative scenario 520bps / 540bps

US IG SPREAD (Current: 190bps*) Six-month target

House view 125bps

Positive scenario 100bps

Negative scenario 250bps

US high yield corporate bonds neutral

At 827bps, high yield spreads are currently pricing in default rates of over 8%, above our forecast of 5% in the next 12 months. We expect HY spreads to tighten from their current levels and hold a neutral allocation to HY. At a yield over 9%, the coupon income will be a significant source of HY’s total re-turn, even with defaults expected to reduce income by 2-3%. Persistently low oil prices add to uncertainty, although risks to the US energy sector are reflected in distressed pricing, in our view. We generally favor the consumer goods and services sec-tor over the energy and metals sectors.

USD HY SPREAD (Current: 827bps*) Six-month target

House view 590bps

Positive scenario 450bps

Negative scenario 1,100bps

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

*data based on capital boAml high yield indexes

*data based on barclay’s Corporate Aggregate index



Preferred securitiesPreferreds returned 8.5% in 2015, outperforming other major sectors that struggled with supply issues and credit concerns. Spread compression acted as a “shock absorber” to periodic rate spikes – cushioning the impact and driving returns higher. Returns this year could be more challenged, given the likeli-hood of higher sustained rates and greater volatility, while cur-rent spread levels leave limited prospects for further compres-sion. We maintain our neutral view. Current option-adjusted spread is: 120bps (160bps last month) based on the BAML Core Plus Fixed Rate Preferred Index.

Municipal bonds neutral

The tailwinds that were supportive of municipal bond prices in the last few months of 2015 have now extended into the new year. Munis have posted a positive total return of 1.0% thus far in 2016. Muni yields have fallen, but at a slower pace than witnessed in the US Treasury bond market. As the year pro-gresses, refunding transactions are likely to increase based on low interest rates and a flatter yield curve. As a result, a pickup in supply is apt to weaken the strong technicals now in place. Current AAA 10-year muni-to-Treasury yield ratio: 86.0% (last month: 84.4%).

Treasury inflation-protected securities (TIPS)TIPS break-even inflation (BEI) has been falling with the decline in oil prices. This factor, combined with low wage inflation, has temporarily dragged down TIPS performance. However, even with this strong adversity, TIPS BEI has not reached the levels seen last fall – with much lower oil prices. We remain holders of 5-year TIPS and believe the outperformance will once again resume when volatility declines. Current 10-year breakeven in-flation rate of 1.37% (1.58% last month).

Non-US developed fixed income underweight

Non-US bond yields moved mostly lower over the past month, although by slightly less than in the US. The dollar gained modestly against most other currencies as the Fed’s Decem-ber rate hike provided support. As a result, returns on non-US bonds were positive, but lower than on US bonds. We expect yields to gradually rise and the dollar to strengthen further in the near term, producing poor returns on non-US developed bonds for dollar-based investors. We therefore recommend an underweight position on the asset class.

Additional US taxable fixed income (TFI) segments

Credit sector spreads have widened substantially from theJune 2014 tights due to the continued decline in oil prices

Source: BAML, UBS as of 20 January 2016

HY and IG corporate spreads (in bps) vs. WTI oil price (USD)

600

500

400

300

200

700

800

10585654525

125

185165145

205

HY spread (rhs) IG spread (lhs)

Oil price (lhs)

Sep-15Jun-15Mar-15Dec-14Sep-14Jun-14 Dec-15

CIO WMR interest rate forecastsin %

Americas 21 Jan-16 3 months 6 months 12 months

usd 3m libor 0.6 1.2 1.5 2.0

usd 2y treas. 0.8 1.4 1.5 1.8

usd 5y treas. 1.4 1.9 2.0 2.1

usd 10y treas. 2.0 2.4 2.5 2.5

usd 30y treas. 2.8 3.1 3.2 3.2

source: bloomberg, ubs, as of 21 January 2016

Mortgage-backed securities (MBS)MBS current coupon performance has been very stable, given the increase in volatility we have witnessed year-to-date. Cur-rently, the spread is 104bps over the 5-year and 10-year Trea-sury curve. We removed our overweight in MBS last Novem-ber, and went back to a neutral allocation. Given the lack of credit exposure within MBS, we feel the asset class will per-form well in 2016, but underlying uncertainty remains for the Fed’s balance sheet. Current spread is 104 bps to the 5-year and 10-year Treasury blend (versus 104 bps last month).

Agency bondsAgency debt valuations continue to look rich to us versus the traditional alternatives. However, we cannot dispute that agency debt has performed well as risk assets falter. The BAML Agency Index has returned over 1.19%. This return is one of the top-performing within the fixed income asset class year-to-date. However, we maintain our view that MBS is the better alternative. Current spread is 20bps to the 5-year Trea-sury (versus 15bps last month).




Most commodity markets are oversupplied and in dire need of stronger demand. The global economy should accelerate only to 3.3% in 2016, from 3.1% in 2015, leaving the demand prospects for commodities uncertain. More importantly, most of the global growth acceleration is likely to come from the developed world, while Asia (China), which holds the lion’s share of demand for industrial metal and bulk commodities, is set to slow further.

Commodities and other asset classes

Commodities neutral

Precious metals Following the December liftoff, we expect four 25bps hikes by the US Federal Reserve in 2016, and the fed funds rate is projected to reach 1.25-1.50% at the end of2016. Gold prices should therefore weaken further in the short run, followed by a recovery in six to 12 months. In the short term, this could shift gold prices to new multi-year lows, potentially dipping below USD 1,000/oz as we approach the March Fed meeting; so gold is still an unattractive story.

GOlD (Current USD 1,101/oz) Six-month target

House view USD 1,050/oz

Positive scenario USD 1,300/oz

Negative scenario USD 900/oz

Crude oil Oil prices have continued sliding on renewed eco-nomic concerns related to emerging Asia. With a current oil market surplus of 1-1.5 mbpd (world oil consumption close to 96 mbpd), rising inventories remain a key price burden for crude oil in the short term. The oil market’s high vulnerabil-ity to even lower prices, whereby production is forced to shut down, makes the near-term price bottom difficult to call. Only extremes seem to discourage production and motivate the capital market to pull out.

BRENT (Current: USD 27.9/bbl) Six-month target

House view USD 45/bbl

Positive scenario USD 70/bbl

Negative scenario USD 20/bbl

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

Base metals The outlook for base metal prices overall re-mains poor. Almost all the metal markets are in surplus, and demand concerns remain elevated in 1H16. Moreover, we haven’t seen a material supply response yet to turn price-pos-itive in a sustainable manner. We see the most downside risks

Agriculture Grain prices should remain range-bound as fa-vorable weather in Brazil should boost the prospects of adding more production to the already high global inventories. The soy-beans/corn price ratio of above 2.4 suggests that US farmers will again favor soybean planting over corn in the upcoming spring planting season. This supports our relative preference of corn versus soybeans. Wheat supplies remain ample, capping the price upside potential. That said, prospects of a La Niña event are a longer-term bullish risk to our view. In softs, we see down-side risk for sugar prices as larger inventories and a weaker Bra-zilian currency remain a price burden in the short term.

in copper and lead. We expect copper prices to move to USD 4,000/mt, despite the bearish positioning in the futures mar-ket. Nickel and aluminum prices are likely to see better price support from a production cost perspective.

Other asset classeslisted real estate Listed real estate has rebounded since its September 2015 low, and has outperformed global equities. Yet, it failed to surpass its peak in March 2015. Nevertheless, stocks are currently trading at expensive levels (versus histori-cal levels). Elevated interest rate volatility and slightly widening credit spreads may be the reason. While property market funda-mentals remain supportive, we anticipate growing uncertainties among investors about the sustainability of the current up-cycle that began in 2009.

FTSE EPRA/ NAREIT Developed TR USD (Current: 3,899) Six-month target

House view USD 4,300

Positive scenario USD 4,500

Negative scenario USD 3,700



USD overweight Despite weaker US business sentiment, the la-

bor market has continued to recover quite strongly, paving the way for more Fed rate hikes this year. We therefore expect the USD to retain its strength. However, we think there is a limit to further dollar appreciation. An even stronger USD would negatively impact US inflation and the international competi-tiveness of US companies.

EUR underweight The ECB eased policy further in December,

but still managed to disappoint the market. Recent Eurozone economic activity has surprised positively, while inflation remains extremely subdued. The ECB signaled at its January meeting that it would reevaluate its policy in March, which in our estimation raises the probability of further easing mea-sures and introduces more downside risk for the euro against USD and other currencies in the near term.

GBP neutral The Bank of England (BoE), once thought to be

right on the heels of the Fed in the race to tighten monetary policy first, has become far more dovish in its recent meetings. Partly as a result, GBPUSD has fallen to levels not seen since the financial crisis. GBP is likely to struggle unless and until the BoE adopts a more restrictive policy stance, but we expect this to happen and to contribute to GBP strength as the year wears on.

CHF neutral EURCHF has established a 1.05-1.10 range, where

we expect it to stay. The Swiss franc has little room to weaken versus the euro as long as the ECB continues with quantita-tive easing, while the Swiss National Bank will prevent it from strengthening.

Foreign exchangeBrian Nick; Thomas Flury

The dollar has benefited from global risk aversion in January, appreciating against every major currency save the Japanese yen. With oil prices expected to rebound, we believe this trend may be nearing its end, although the more advanced stage of monetary policy in the US should support USD even at these lofty levels. We now prefer USD to JPY, with the Fed and the Bank of Japan (BoJ) headed in opposite directions and risk aversion likely to wane.

UBS CIO Fx forecasts21 Jan 2016 3m 6m 12m ppp*

eurusd 1.091 1.05 1.08 1.10 1.26

usdJpy 116.6 127 127 124 77

usdCAd 1.452 1.44 1.38 1.34 1.20

Audusd 0.688 0.68 0.68 0.65 0.70

gbpusd 1.417 1.48 1.55 1.58 1.63

nZdusd 0.643 0.60 0.60 0.60 0.58

usdChf 1.002 1.01 1.00 1.00 0.99

eurChf 1.094 1.06 1.08 1.10 1.25

gbpChf 1.421 1.49 1.55 1.58 1.62

eurJpy 127.2 133 137 136 97

eurgbp 0.770 0.71 0.70 0.70 0.77

eurseK 9.364 9.40 9.40 9.00 8.94

eurnoK 9.702 9.00 8.60 8.50 9.70

source: thomson reuters, ubs, as of 21 January 2016note: past performance is not an indication of future returns.*ppp = purchasing power parity

JPY underweight The risks are skewed to a weaker yen against

the US dollar. The BoJ remains accommodative in order to reach its inflation target. JPY strength may begin to affect company earnings, according to a recent survey. Chinese demand is weaker, which should stir the BoJ to act. Short yen positions were unwound in recent months, and market expec-tations for US rate hikes are very conservative.

Other developed market currencies overweight Commodity currencies continue to be hurt by

plummeting oil prices. Should our bullish oil forecast prove correct, the Canadian dollar in particular has lots of room to appreciate against USD. Within Europe, we prefer the Nor-wegian krone to the euro for similar reasons. The Australian and New Zealand dollars continue to come under stress with a slowing China demanding fewer commodity imports. Their in-terest rates have also fallen relative to those in the US.



in foCus

Jeremy Zirin, CFAChief US Equity Strategist

We are in the midst of the worst pe-riod for global equity markets since 2011. Concerns are centered on a slow-ing China and a sharp decline in energy prices to levels not seen in over a decade. While voices calling this the beginning of a worldwide recession have become louder and more numerous, we see few truly threatening signs that things are headed in that direction.

China and energy creating ripples…While most US investors were still sleep-ing on the first business day of the year, China was already making worrisome headlines. A plummeting onshore Chi-nese equity market and unusually high foreign exchange-rate volatility echo last summer’s market correction. But with oil prices and global manufacturing activity both at fresh lows, equity markets have now fallen through their 2015 lows.

To what do we attribute these market fears? First, there’s an impression that a decelerating China may trigger reces-sions in Asia and beyond. Second, there are worries that the fall in WTI crude oil to under USD 27 per barrel from USD 107 in 2014 is due as much to slump-ing global growth as it is to oversupply. Furthermore, the oil price collapse has already led to a wave of energy sector debt defaults and higher loan-loss pro-visions from banks, stoking fears of a credit crunch. Pessimism about energy has bled significantly into the broader market. Fig. 1 shows that excluding the global financial crisis and its aftermath, the S&P 500 Index and the Bloomberg Commodity Index have never been more highly correlated than they have been over the past year.

…but no tsunamiBecause the last two US recessions were associated with large buildups and rapid contractions in single sectors (technol-ogy in 2000; financials in 2007), it’s logi-cal to ask whether the collapsing energy sector may lead to a wider contraction in growth. But while a halt in energy-re-lated investment has clearly impacted the broader US economy, we believe the US and most other large developed econo-mies will ultimately benefit from lower energy prices. Our colleagues on the US Economics team in UBS Investment Re-search have highlighted that the savings to consumers from lower gasoline prices in 2015 outweighed the losses from lower energy investment by USD 44 bil-lion, or 0.2% of GDP (see Fig. 2). Even if some of that windfall is saved rather than immediately spent, stronger household balance sheets will make consumers more resilient down the road. We certainly could not say the same for the damaging residual impact of the bursting technol-ogy bubble in 2000 or the global financial crisis in 2007-08.

Simmering risks unlikely to boil over

“ We’re going to take markdowns...great for consumers. Consumers are going to have a field day because we’re going to have lots of values out there.”

Terry Lundgren, Macy’s CEO, on company’s 3Q15 earnings call

Brian Nick, CAIAHead of Tactical Asset Allocation US

Video featureClick play button to watch

http://www.ubspodcast.ch/us/wmr/podcast/en/topofthemorning/160122-Simmering_risks_unlikely_to_boil_over_Jeremy_Zirin.mp4


in foCus

Keep in mind that the combined weights of the technology, media and telecom sectors reached 46% of the S&P 500 by market cap in early 2000, a much higher peak from which to fall. The energy sec-tor peaked at 16% of the S&P 500 in 2008, and now accounts for only 6%. Scaling the potential credit impact pro-vides additional valuable insight. While the 70% decline in oil prices will create loan losses for several regional banks, only 2-7% of loans are energy-related. Compare this to 2008, when well over half of total bank loans were tied to real estate. Furthermore, increased capital requirements and annual bank “stress tests” mitigate the risks of another bank-ing crisis.

What about corporate profits? S&P 500 company earnings last year failed to grow at all, but excluding the 60% drop in energy profits, they were up 7%. This year, the headwinds from low oil prices and a strong US dollar should be smaller, and we expect companies to produce positive mid-single-digit growth. Sup-porting this view is the fact that energy now comprises less than 5% of S&P 500 earnings, down from 11% in 2014.

Similarly, China accounts for only 5% of S&P 500 profits, far less than Europe or the rest of the emerging markets. To be sure, a rapid slowdown in China would present serious risks to global growth and corporate profitability. But we be-lieve this scenario has been given too much weight in market pricing. China’s manufacturing sector continues to strug-gle, but retail sales growth remains ro-bust and the services sector sits firmly in expansion territory. We see only a 10% chance of sub-5% GDP growth in China this year. Our base case is a continua-tion of China’s growth transition and moderation. While this may create dif-ficulties for companies supplying indus-trial equipment to China’s “old growth model,” it should not materially threaten global growth.

When the tide comes back inIn his “In Context” piece earlier in this publication, UBS WMA Chief Investment Strategist Mike Ryan lists some of the factors he will be watching as we look for an end to the current market tumult. Investment opportunities lie at the end of that list. Past growth scares, most notably in 2011, have often provided

excellent windows to deploy new money or replenish diminished equity al-locations. While return expectations for risk assets in 2016 are not lofty, they are a good deal better than those available on cash and short-term fixed income.

Source: UBS Investment Research, as 31 December 2015

–100

100

50

0

–50

150

Consumer savings ongasoline spending

Investment inenergy extraction

Fig. 2: Positive net effect of oil prices on US economy Consumer savings vs. investment decline due to 2015 energy pricecollapse, in USD

$115B

–$71B


–0.25

–0.50

0.75

0.50

0.25

0.00

1.00

2013201020072004200119981995 20161992

Fig 1: Equity-commodity correlation unusually high

12-month rolling correlation of daily returns, S&P 500 and Bloomberg Commodity Index


Given the large size and earnings po-tential of Millennials, we believe that companies with positive exposure to this rising generation will experience a growth tailwind in the years to come. The types of companies that stand to benefit from this generation include certain innovative technology companies, wellness-focused brands, and service-oriented industries.

This is a generation of “digital na-tives.” Its passion for and fluency with technology is fueling growth in e-Commerce, social media services, and mobile applications. Additionally, easy access to information is lead-ing to more informed consumption decisions that favor cost-competitive online retailers and wellness-focused brands. Finally, this commitment-free generation is renting in large num-bers and supporting the growth in “sharing economy” services.

Top themes

u Growth opportunities

u Multi-year: Decade theme

u Portfolio integration

As a satellite holding within a us equity port-folio, through our recom-mended basket of single securities within the con-sumer and technology sectors.

u Full report

the rising millennials

Highlights from our monthly selection of highest conviction investment themes across the asset class spectrum

The rising MillennialsSally Dessloch

us equityus and non-us fixed income

Portfolio contextThe path to a normalized growth and interest rate environment will produce headwinds for fixed income investors over a medium- to longer-term period. Higher rates will exert pressure on prin-cipal values, and low starting yields will lead to greater bond price sensitivity. Accordingly, future fixed income returns are likely to be more modest, with start-ing yield levels being a strong indicator of future performance.

We recommend diversifying bond port-folios away from traditional taxable fixed income benchmarks that are heav-ily government-weighted (i.e., Barclays Aggregate Index), and incorporating other types of “beyond-benchmark” assets. In our view, the flexibility pro-vided by extending beyond a traditional benchmark should add value more of-ten than not over longer market cycles. We favor credit spread sectors and in-vestment approaches that are flexible and that utilize active management.

Portfolio context

u Equity growth and income

u Multi-year: Decade theme


diversify away from high- quality bond portfolios to-ward greater exposure to credit spread sectors and actively managed fixed income strategies.

u Full report

Beyond benchmark fixed income investing

Beyond benchmark fixed income investing Barry McAlinden, CFA; Leslie Falconio; Stephen Freedman, CFA; David Wang

Source: BAML, UBS, as of 31 December 2015

678

45

21

3

0

9

Age

ncie

s

MBS

TIPS

Trea

surie

s

IG c

orps

HY

cor

ps

Pref

erre

ds

Seni

or lo

ans

Secu

ritiz

ed

Yields at higher starting point helps future returns

In %

Year end yield 2015Year end yield 2014

Source: UBS Evidence Lab, UBS Investment Bank, Examining Consumer Usage ofSocial Media, as of 8 December 2014

LinkedIn

Pinterest

WhatsApp

Instagram

Twitter

SnapChat

Facebook

Age 13–17

Age 18–34

10 20 30 40 50 60 700

Millennials are using social media at higher rates than oldergenerations

Daily users of each service by age group, in %

Age 35–54

Age 55+


The investment themes highlighted in

this section are among our highest conviction

thematic recommendations. The full list of

most preferred themes (see below) is

discussed in our monthly publication

entitled “Top themes.” Preferred themes

• US technology: Secular growth, on sale

• Eurozone comeback

• Major advances in cancer therapeutics

• North American energy independence: Reenergized

• The rising Millennials

• Beyondbenchmarkfixedincomeinvesting

• Valuing your human capital

Ask your Financial Advisor for a copy

of this publication.

ab

Thematic investment ideas from CIO Wealth Management Research

Top themesFinancials returning capital

February 2016

Highlights from our monthly selection of highest conviction investment themes across the asset class spectrum

Top themes

Human capital is the value of an indi-vidual’s future labor income, and rep-resents an important intangible asset class that should be considered along-side stocks and bonds. It tends to be the largest early in one’s professional career, and runs down as retirement nears. Human capital has character-istics that are more bond-like than equity-like. Therefore, considering an individual’s entire net worth (including human capital) suggests holding alloca-tions to stocks, with the allocations de-clining over time along a certain glide path. The specific path depends on the individual’s type of work. Another implication is that a permanent loss of human capital can have devastating consequences for a household. There-fore, it is critical to protect the value of human capital through life insurance and disability insurance strategies.

u Equity growth and income

u Medium-term: 6 to 12 months


implications for strategic asset allocation and for insurance strategies.

u Full report

valuing your human capital

Valuing your human capitalMichael Crook, CAIA

Portfolio context

Source: UBS, as of 31 December 2015

Human capital

Financial assets

80

0

20

40

60

100

25 27 29 31 33Age

35 37 55 5751 5347 4941 43 4539 59

Human capital as a percentage of assets declines over time

Illustrative total wealth balance sheet, % of total wealth


overweight

neutral

underweight

Key forecastsAs of 20 January 2016


6-month forecast

Asset class tAA1 Change benchmark value m/m perf.

in %2 house view positive

scenarionegative scenario

eqUitieS *

usA – s&p 500 1859 -7.3% 2025 2250 1700

eurozone * euro stoxx 305 -11.2% 325 385 270

uK ftse 100 5674 -6.3% 5925 6650 5000

Japan topix 1339 -12.9% 1400 1700 1200

switzerland – smi 7966 -7.5% 8375 9400 7150

emerging markets * msCi em 693 -12.3% 715 825 590

BonDS *

us government bonds – 10yr yield 2.0% 1.4% 2.5% 2.9–3.3% 1.7–2.1%

us Corporate bonds – spread 190 bps 0.0% 125 bps 100 bps 250 bps

us high yield bonds – spread 827 bps -3.2% 590 bps 450 bps 1100 bps

em sovereign – spread 485 bps -1.4% 380 bps 300 bps 520 bps

em Corporate – spread 478 bps -3.1% 400 bps 320 bps 540 bps

otheR aSSet claSSeS

gold – spot price 1101 /oz. 3.3% 1050 1300 900

brent crude oil – spot price 27.88 /bbl. -24.4% 45 70 20

listed real estate – eprA/nAreit dtr 3899 -7.3% 4300 4500 3700

cURRencieS Currency pair

usd nA nA nA nA nA

eur – eurusd 1.09 0.2% 1.08 <1.00 >1.15

gbp – gbpusd 1.42 -4.7% 1.55 nA nA

Jpy usdJpy 117 -3.5% 127 >128 <115

Chf – usdChf 1.00 1.2% 1.00 nA nA

source: bloomberg, ubs1 tAA = tactical asset allocation, 2 month over month*Change made on 7 January 2016.

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


detAiled Asset AlloCAtion

Detailed asset allocation taxable with non-traditional assets

investor risk profile

conservative Moderately conservative

moderate Moderately aggressive

aggressive

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Cash 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Fixed Income 69.0 +0.0 69.0 57.0 +0.0 57.0 46.5 +0.0 46.5 41.0 +0.0 41.0 33.0 +0.0 33.0

US Fixed Income 62.0 +2.0 64.0 51.0 +2.0 53.0 40.5 +2.0 42.5 34.0 +2.0 36.0 26.0 +2.0 28.0

us gov’t 7.0 -0.5 6.5 5.5 -0.5 5.0 4.0 -1.0 3.0 3.5 -1.0 2.5 2.0 -1.0 1.0

us municipal 50.0 +0.0 50.0 39.0 +0.0 39.0 30.0 +0.0 30.0 24.0 +0.0 24.0 17.0 +0.0 17.0

us ig total market 4.0 +1.5 5.5 3.5 +1.5 5.0 3.0 +2.0 5.0 2.5 +2.0 4.5 2.0 +2.0 4.0

us ig 1–5 years 0.0 +1.0 1.0 0.0 +1.0 1.0 0.0 +1.0 1.0 0.0 +1.0 1.0 0.0 +1.0 1.0

us hy Corp 1.0 +0.0 1.0 3.0 +0.0 3.0 3.5 +0.0 3.5 4.0 +0.0 4.0 5.0 +0.0 5.0

Int’l Fixed Income 7.0 -2.0 5.0 6.0 -2.0 4.0 6.0 -2.0 4.0 7.0 -2.0 5.0 7.0 -2.0 5.0

int’l developed markets 6.0 -2.0 4.0 4.0 -2.0 2.0 3.0 -2.0 1.0 3.0 -2.0 1.0 2.0 -2.0 0.0

emerging markets 1.0 +0.0 1.0 2.0 +0.0 2.0 3.0 +0.0 3.0 4.0 +0.0 4.0 5.0 +0.0 5.0

Equity 16.0 +0.0 16.0 27.0 +0.0 27.0 34.5 +0.0 34.5 45.0 +0.0 45.0 55.0 +0.0 55.0

US Equity 9.0 +0.5 9.5 15.0 +0.0 15.0 20.0 +0.5 20.5 26.0 +0.5 26.5 31.0 +0.5 31.5

us large cap growth 2.5 -0.5 2.0 4.5 -1.0 3.5 6.0 -1.0 5.0 8.0 -1.0 7.0 9.5 -1.0 8.5

us large cap value 2.5 -0.5 2.0 4.5 -1.0 3.5 6.0 -1.0 5.0 8.0 -1.0 7.0 9.5 -1.0 8.5

us mid cap 3.0 +0.0 3.0 4.0 +0.0 4.0 5.0 +0.0 5.0 7.0 +0.0 7.0 8.0 +0.0 8.0

us small cap 1.0 +1.5 2.5 2.0 +2.0 4.0 3.0 +2.5 5.5 3.0 +2.5 5.5 4.0 +2.5 6.5

International Equity 7.0 -0.5 6.5 12.0 +0.0 12.0 14.5 -0.5 14.0 19.0 -0.5 18.5 24.0 -0.5 23.5

int’l developed markets 4.0 +0.5 4.5 7.0 +1.0 8.0 8.5 +1.0 9.5 11.0 +1.0 12.0 14.0 +1.0 15.0

emerging markets 3.0 -1.0 2.0 5.0 -1.0 4.0 6.0 -1.5 4.5 8.0 -1.5 6.5 10.0 -1.5 8.5

Commodities 4.0 +0.0 4.0 4.0 +0.0 4.0 4.0 +0.0 4.0 5.0 +0.0 5.0 5.0 +0.0 5.0

Non-traditional 11.0 +0.0 11.0 12.0 +0.0 12.0 15.0 +0.0 15.0 9.0 +0.0 9.0 7.0 +0.0 7.0

hedge funds 11.0 +0.0 11.0 12.0 +0.0 12.0 10.0 +0.0 10.0 3.0 +0.0 3.0 0.0 +0.0 0.0

private equity 0.0 +0.0 0.0 0.0 +0.0 0.0 5.0 +0.0 5.0 6.0 +0.0 6.0 7.0 +0.0 7.0

private real estate 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

“Wmr tactical deviation” legend: overweight underweight neutral “Change” legend: p upgrade q Downgrade *Refers to moderate-risk profile. 1the current allocation column is the sum of the strategic asset allocation and the tactical deviation column.

Source: UBS and WMA AAC, 21 January 2016. See appendix for information regarding sources of strategic asset allocations and their suitability, investor risk profiles, and the interpretation of the sug-gested tactical deviations from the strategic asset allocations.



Detailed asset allocationtaxable without non-traditional assets

Investor risk profile

Conservative Moderately conservative

Moderate Moderately aggressive

Aggressive

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Cash 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Fixed Income 80.0 +0.0 80.0 66.0 +0.0 66.0 54.5 +0.0 54.5 44.0 +0.0 44.0 33.0 +0.0 33.0

US Fixed Income 72.0 +2.0 74.0 58.0 +2.5 60.5 47.0 +2.0 49.0 36.0 +2.0 38.0 26.0 +2.0 28.0

us gov’t 8.0 -0.5 7.5 7.0 -0.5 6.5 5.0 -1.0 4.0 3.0 -1.0 2.0 2.0 -1.0 1.0

us municipal 58.0 +0.0 58.0 45.0 +0.0 45.0 35.0 +0.0 35.0 26.0 +0.0 26.0 16.0 +0.0 16.0


us ig 1–5 years 0.0 +1.0 1.0 0.0 +1.0 1.0 0.0 +1.0 1.0 0.0 +1.0 1.0 0.0 +1.0 1.0

us hy Corp 2.0 +0.0 2.0 3.0 +0.0 3.0 4.0 +0.0 4.0 5.0 +0.0 5.0 7.0 +0.0 7.0




Equity 16.0 +0.0 16.0 30.0 +0.0 30.0 40.5 +0.0 40.5 51.0 +0.0 51.0 62.0 +0.0 62.0

US Equity 9.0 +0.5 9.5 18.0 +0.0 18.0 23.0 +0.5 23.5 29.0 +0.5 29.5 36.0 +0.5 36.5



us mid cap 2.0 +0.0 2.0 5.0 +0.0 5.0 6.0 +0.0 6.0 7.0 +0.0 7.0 9.0 +0.0 9.0

us small cap 1.0 +1.5 2.5 3.0 +2.0 5.0 3.0 +2.5 5.5 4.0 +2.5 6.5 5.0 +2.5 7.5




Commodities 4.0 +0.0 4.0 4.0 +0.0 4.0 5.0 +0.0 5.0 5.0 +0.0 5.0 5.0 +0.0 5.0





Detailed asset allocation non-taxable with non-traditional assets





Aggressive

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Cash 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Fixed Income 68.0 +0.0 68.0 56.0 +0.0 56.0 46.5 +0.0 46.5 39.0 +0.0 39.0 33.0 +0.0 33.0

US Fixed Income 60.0 +2.0 62.0 49.0 +2.0 51.0 40.0 +2.0 42.0 32.5 +2.0 34.5 26.0 +2.0 28.0

us gov’t 47.0 -1.0 46.0 36.0 -1.5 34.5 28.0 -2.0 26.0 19.5 -2.0 17.5 13.0 -2.0 11.0

us municipal 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0


us ig 1–5 years 0.0 +1.0 1.0 0.0 +1.0 1.0 0.0 +1.0 1.0 0.0 +1.0 1.0 0.0 +1.0 1.0

us hy Corp 4.0 +0.0 4.0 6.0 +0.0 6.0 7.0 +0.0 7.0 9.0 +0.0 9.0 11.0 +0.0 11.0




Equity 17.0 +0.0 17.0 28.0 +0.0 28.0 34.5 +0.0 34.5 42.0 +0.0 42.0 53.0 +0.0 53.0

US Equity 10.0 +0.5 10.5 16.0 +0.0 16.0 20.5 +0.5 21.0 24.0 +0.5 24.5 31.0 +0.5 31.5



us mid cap 2.5 +0.0 2.5 4.0 +0.0 4.0 5.5 +0.0 5.5 6.0 +0.0 6.0 8.0 +0.0 8.0

us small cap 1.5 +1.5 3.0 2.0 +2.0 4.0 3.0 +2.5 5.5 3.0 +2.5 5.5 4.0 +2.5 6.5




Commodities 4.0 +0.0 4.0 4.0 +0.0 4.0 4.0 +0.0 4.0 5.0 +0.0 5.0 5.0 +0.0 5.0

Non-traditional 11.0 +0.0 11.0 12.0 +0.0 12.0 15.0 +0.0 15.0 14.0 +0.0 14.0 9.0 +0.0 9.0

hedge funds 11.0 +0.0 11.0 12.0 +0.0 12.0 10.0 +0.0 10.0 8.0 +0.0 8.0 3.0 +0.0 3.0

private equity 0.0 +0.0 0.0 0.0 +0.0 0.0 5.0 +0.0 5.0 6.0 +0.0 6.0 6.0 +0.0 6.0

private real estate 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0




Detailed asset allocation non-taxable without non-traditional assets

Source: UBS and WMA AAC, 21 January 2016. See appendix for information regarding sources of strategic asset allocations and their suitability, investor risk profiles, and the interpretation of the suggested tactical deviations from the strategic asset allocations.




Aggressive

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Cash 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Fixed Income 78.0 +0.0 78.0 65.0 +0.0 65.0 55.0 +0.0 55.0 46.0 +0.0 46.0 36.0 +0.0 36.0

US Fixed Income 69.0 +2.0 71.0 57.0 +2.0 59.0 47.0 +2.0 49.0 38.0 +2.0 40.0 29.0 +2.0 31.0

us gov’t 55.0 -1.0 54.0 42.0 -2.0 40.0 32.0 -2.0 30.0 23.0 -2.0 21.0 13.0 -2.0 11.0

us municipal 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0


us ig 1–5 years 0.0 +1.0 1.0 0.0 +1.0 1.0 0.0 +1.0 1.0 0.0 +1.0 1.0 0.0 +1.0 1.0

us hy Corp 4.0 +0.0 4.0 7.0 +0.0 7.0 9.0 +0.0 9.0 11.0 +0.0 11.0 13.0 +0.0 13.0




Equity 18.0 +0.0 18.0 31.0 +0.0 31.0 41.0 +0.0 41.0 50.0 +0.0 50.0 59.0 +0.0 59.0

US Equity 10.0 +0.5 10.5 18.0 +0.0 18.0 23.0 +0.5 23.5 28.0 +0.5 28.5 33.0 +0.5 33.5



us mid cap 3.0 +0.0 3.0 5.0 +0.0 5.0 6.0 +0.0 6.0 7.0 +0.0 7.0 9.0 +0.0 9.0

us small cap 1.0 +1.5 2.5 2.0 +2.0 4.0 3.0 +2.5 5.5 4.0 +2.5 6.5 4.0 +2.5 6.5




Commodities 4.0 +0.0 4.0 4.0 +0.0 4.0 4.0 +0.0 4.0 4.0 +0.0 4.0 5.0 +0.0 5.0




Publication note The All Equity and All Fixed Income portfolios complement our balanced portfolios and offer more granular implementation of our House View. While we generally do not recommend that investors hold portfolios consist-ing of only stocks or only bonds, the All Equity and All Fixed Income portfolios can be used by investors who want to complement their existing holdings. It is also possible to combine the All Equity portfolio with one of the All Fixed In-come portfolios to generate a balanced portfolio. The tactical tilts in the port-folios are based on the corresponding tilts in our balanced portfolios (mod-erate risk profile, without alternative investments).

A special feature of the All Equity port-folio is that it includes “carve-outs”: 3% allocations to our preferred sec-tors within US large-caps as well as our preferred countries within both inter-national developed markets and the emerging markets. A maximum of two sectors/countries of each type may be selected for carve-outs. The amount of cash in the All Equity portfolio will vary one-for-one with the overall over-weight/underweight on equities in the balanced portfolio, subject to a 3% maximum. This allows us to express a tactical preference between stocks and bonds.

The All Fixed Income portfolios include both taxable and non-taxable versions. These are based on the fixed income portion of the balanced portfolios, with the non-taxable version incorporating an additional allocation to Mortgage-Backed Securities. In addition, the All Fixed Income portfolios include alloca-tions to government bonds (Munis in the taxable version, Treasuries in the non-taxable version) of different ma-turities, allowing views on duration to be expressed. Cash is set at 5% of the portfolios, with small deviations pos-sible due to rounding.

Detailed asset allocation all equity and all fixed income models

source: ubs and WmA AAC, 21 January 2016. see appendix for information regarding sources of strategic asset allocations and their suit-ability, investor risk profiles and the interpretation of the suggested tactical deviations from the strategic asset allocations.

All equity All fixed income, taxable

All fixed income, non-taxable

All figures in %st

rate

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Cash 5.0 +0.0 5.0 5.0 -1.0 4.0 5.0 -0.5 4.5

Fixed Income 0.0 +0.0 0.0 95.0 +1.0 96.0 95.0 +0.5 95.5

US Fixed Income 0.0 +0.0 0.0 82.0 +4.5 86.5 81.0 +4.0 85.0

us gov’t – total market 0.0 +0.0 0.0 9.0 -2.0 7.0 16.0 +2.5 18.5

us gov’t – 1~3 years 0.0 +0.0 0.0 0.0 +0.0 0.0 6.0 -1.5 4.5

us gov’t – 3~7 years 0.0 +0.0 0.0 0.0 +0.0 0.0 14.0 -2.5 11.5

us gov’t – 7~10 years 0.0 +0.0 0.0 0.0 +0.0 0.0 10.0 -1.5 8.5

us mbs 0.0 +0.0 0.0 0.0 +0.0 0.0 9.0 +0.0 9.0

us munis – total market 0.0 +0.0 0.0 28.0 +0.0 28.0 0.0 +0.0 0.0

us munis – short duration 0.0 +0.0 0.0 11.0 +0.0 11.0 0.0 +0.0 0.0

us munis – long duration 0.0 +0.0 0.0 22.0 +1.0 23.0 0.0 +0.0 0.0

us ig – total market 0.0 +0.0 0.0 5.0 +3.5 8.5 10.5 +5.0 15.5

us ig 1~5 years 0.0 +0.0 0.0 0.0 +2.0 2.0 0.0 +2.0 2.0

us high yield 0.0 +0.0 0.0 7.0 +0.0 7.0 15.5 +0.0 15.5

Int’l Fixed Income 0.0 +0.0 0.0 13.0 -3.5 9.5 14.0 -3.5 10.5

int’l developed markets 0.0 +0.0 0.0 7.0 -3.5 3.5 7.0 -3.5 3.5

emerging markets 0.0 +0.0 0.0 6.0 +0.0 6.0 7.0 +0.0 7.0

Equity 95.0 -0.0 95.0 0.0 +0.0 0.0 0.0 +0.0 0.0

US Equity 54.0 +0.5 54.5 0.0 +0.0 0.0 0.0 +0.0 0.0

us large-cap growth 7.0 -1.0 6.0 0.0 +0.0 0.0 0.0 +0.0 0.0

us large-cap value 7.0 -1.0 6.0 0.0 +0.0 0.0 0.0 +0.0 0.0

us large-cap total market 19.0 -3.0 16.0 0.0 +0.0 0.0 0.0 +0.0 0.0

it sector 0.0 +3.0 3.0 0.0 +0.0 0.0 0.0 +0.0 0.0

us mid-cap equity 14.0 +0.0 14.0 0.0 +0.0 0.0 0.0 +0.0 0.0

us small-cap equity 7.0 +2.5 9.5 0.0 +0.0 0.0 0.0 +0.0 0.0

International Equity 41.0 -0.5 40.5 0.0 +0.0 0.0 0.0 +0.0 0.0

int’l developed markets 23.5 -2.0 p 21.5 0.0 +0.0 0.0 0.0 +0.0 0.0

eurozone currency hedged 0.0 +3.0 3.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Japan 0.0 +0.0 q 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

global em equity 17.5 -4.5 13.0 0.0 +0.0 0.0 0.0 +0.0 0.0

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

“Wmr tactical deviation” legend: overweight underweight neutral 1the current allocation column is the sum of the strategic asset allocation and the tactical deviation column.


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

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

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

Risk Profile ==>> conservative

Moderately conservative

Moderate

Moderately aggressive

aggressive

Taxable with non-traditional assets

estimated return 4.4% 5.1% 5.9% 6.4% 7.0%

estimated risk 5.6% 7.4% 9.6% 11.5% 13.5%

Taxable without non-traditional assets


estimated risk 5.4% 7.5% 9.5% 11.5% 13.5%

Non-taxable with non-traditional assetsestimated return 4.3% 5.0% 5.8% 6.4% 7.0%

estimated risk 5.5% 7.4% 9.5% 11.4% 13.4%

Non-taxable without non-traditional assets


estimated risk 5.4% 7.5% 9.5% 11.4% 13.5%

asset class capital Market assumptions

annual total return annual risk

us Cash 2.5% 0.5%

us government fixed income 2.2% 4.3%

us municipal fixed income 2.9% 4.7%

us Corporate investment grade fixed income 3.5% 5.9%

us Corporate high yield fixed income 5.6% 11.7%

international developed markets fixed income 4.0% 9.0%

emerging markets fixed income 4.9% 9.1%

us large-cap equity 7.5% 16.8%

us mid-cap equity 8.4% 19.6%

us small-cap equity 8.6% 21.8%

international developed markets equity 8.5% 19.7%

emerging markets equity 10.0% 25.5%

Commodities 6.4% 18.9%

hedge funds 6.2% 6.7%

private equity 11.8% 24.4%

private real estate 8.5% 11.8%



asset class capital Market assumptions

annual total return annual risk

us Cash 2.5% 0.5%

us government fixed income 2.2% 4.3%

us municipal fixed income 2.9% 4.7%

us Corporate investment grade fixed income 3.5% 5.9%

us Corporate high yield fixed income 5.6% 11.7%

international developed markets fixed income 4.0% 9.0%

emerging markets fixed income 4.9% 9.1%

us large-cap equity 7.5% 16.8%

us mid-cap equity 8.4% 19.6%

us small-cap equity 8.6% 21.8%

international developed markets equity 8.5% 19.7%

emerging markets equity 10.0% 25.5%

Commodities 6.4% 18.9%

hedge funds 6.2% 6.7%

private equity 11.8% 24.4%

private real estate 8.5% 11.8%

Additional asset allocation models

International developed markets (non-US) equity module, in %Benchmark CIO WMR tactical deviation2 Current allocation3

allocation1 previous current

emu / eurozone 28.0 +30.0 +20.0 48.0

uK 20.0 -20.0 -10.0 10.0

Japan 19.0 +10.0 -2.0 17.0

Australia 7.0 -2.5 -2.0 5.0

Canada 9.0 -2.5 -2.0 7.0

switzerland 8.0 -2.5 -2.0 6.0

other 9.0 -2.5 -2.0 7.0

source: ubs, as of 21 January 2016

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

The US Taxable Fixed Income Allocation table appears in Fixed Income Strategist, which is published on a monthly basis and can be found in the Fixed Income section of the Online Services Research website.

Benchmark WMR tactical deviation2 Current allocation3

allocation1 previous current

emu / eurozone 42.0 -5.0 +0.0 42.0

uK 9.0 +0.0 +5.0 14.0

Japan 32.0 +0.0 -10.0 22.0

other 17.0 +5.0 +5.0 22.0


footnotes1 For the first table on this page, the benchmark allocation is based on S&P 500 weights. For the second and third tables on this page, the benchmark allocation refers to a moderate risk profile and represents the relative market capitalization weights of each country or region.2 see “deviations from strategic asset allocation or benchmark allocation” in the appendix for an explanation regarding the interpretation of the suggested tactical deviations from benchmark. the “current” column refers to the tactical deviation that applies as of the date of this publication. the “previous” column refers to the tactical deviation that was in place at the date of the previous edition of UBS House View or the last UBS House View Update.3 The current allocation column is the sum of the CIO WMR tactical deviation columns and (the S&P 500 benchmark allocation for the first table on this page) (the benchmark allocation for the second and third tables on this page).

US equity sector allocation, in %

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

s&p 500 CIO WMR Tactical deviation2 currentBenchmark Numeric Symbol allocation3

allocation1 previous current previous current

Consumer discretionary 12.9 +0.0 +0.0 n n 12.9

Consumer staples 10.5 -1.0 -1.0 – – 9.5

energy 6.2 +1.0 +1.0 + + 7.2

financials 16.0 +0.0 +0.0 n n 16.0

healthcare 15.5 +1.0 +1.0 + + 16.5

industrials 10.0 +1.0 +0.0 + n 10.0

information technology 20.5 +2.0 +2.0 ++ ++ 22.5

materials 2.6 +0.0 +0.0 n n 2.6

telecom 2.6 -2.0 -1.0 – – – 1.6

utilities 3.3 -2.0 -2.0 – – – – 1.3

source: s&p, ubs, as of 21 January 2016Note: The benchmark allocation, as well as the tactical deviations, are intended to be applicable to the US equity portion of a portfolio across investor risk profiles.

Note: Table includes changes made on 7 January 2016. For more information, see House View Update: Markets do not yet understand Chinese – reduce equities to neutral, 7 January 2016.


The performance calculations shown in Table A commence on 25 January 2013, the first date upon which the Investment Strategy Guide was published following the release of the new UBS WMA strategic asset allocation (SAA) models. The performance is based on the SAA without non-traditional as-sets for a moderate risk profile investor, and the SAA with the tactical shift (see detailed asset allocation tables where the SAA with the tactical shift is referred to as “current alloca-tion”). Performance is calculated utilizing the returns of the indices identified in Table B as applied to the respective allo-cations in the SAA and the SAA with the tactical shift. For ex-ample, if US Mid Cap Equity is allocated 10% in the SAA and 12% in the SAA with the tactical shift, the US Mid Cap Equity index respectively contributed to 10% and 12% of the results shown. Prior to 25 January 2013, CIO WMR published tactical asset allocation recommendations in the Investment Strategy Guide using a different set of asset classes and sectors. The performance of these tactical recommendations is reflected in Table C.

The performance attributable to the CIO WMR tactical devia-tions is reflected in the column in Tables A and C labeled “Ex-cess return,” which shows the difference between the per-formance of the SAA and the performance of the SAA with the tactical shift. The “Information ratio” is a risk-adjusted

Tactical asset allocation performance measurement

performance measure, which adjusts the excess returns for the tracking error risk of the tactical deviations. Specifically the information ratio is calculated as the ratio of the annual-ized excess return over a given time period and the annual-ized standard deviation of daily excess returns over the same period. Additional background information regarding the computation of the information ratio figures provided below are available upon request.

The calculations assume that the portfolios are rebalanced whenever changes are made to tactical deviations, typi-cally upon publication of the Investment Strategy Guide on a monthly basis. Occasionally, changes in the tactical devia-tions are made intra-month when warranted by market con-ditions and communicated through an Investment Strategy Guide Update. The computations assume portfolio rebalanc-ing upon such intra-month changes as well. Performance shown is based on total returns, but does not include trans-action costs, such as commissions, fees, margin interest, and interest charges. Actual total returns adjusted for such trans-action costs will be reduced. A complete record of all the rec-ommendations upon which this performance report is based is available from UBS Financial Services Inc. upon written re-quest. Past performance is not an indication of future results.

Table A: Moderate risk profile performance measurement (25 January 2013 to present)

saa saa withtactical shift

excessreturn

Information ratio

(annualized)

Russell 3000stock index

(total return)

Barclays CapitalUS Aggregate bondindex (total return)

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

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

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

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

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

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

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

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

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

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

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

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

1Q 2016 to date -4.57% -4.81% -0.24% -8.4 -9.51% 1.07%

since inception (25 January 2013) 3.32% 3.63% 0.31% +0.2 29.93% 5.75%


performAnCe meAsurement



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

25 Jan 2013 to present

us large Cap growth (russell 1000 growth) 7.0

us large Cap value (russell 1000 value) 7.0

us mid Cap (russell mid Cap) 6.0

us small Cap (russell 2000) 3.0

international dev. eq. (msCi eAfe) 10.0

emerging markets eq. (msCi emf) 7.5

us government fixed income (barCap us Agg government) 5.0

us municipal fixed income (barCap municipal bond) 35.0

us investment grade fixed income (barCap us Agg Credit) 3.0

us Corporate high yield fixed income (barCap us Agg Corp hy) 4.0

international dev. fixed income (barCap global Agg xus) 4.0

emerging markets fixed income (50% barCap em gov and 50% barCap global em (usd)) 3.5

Commodities (dow Jones-ubs Commodity index) 5.0

source: ubs

The performance calculations shown in Table C, which start on 25 August 2008 and end on 24 January 2013, have been provided for historical information purposes only. They are based on prior SAAs (referred to as benchmark allocations) with non-traditional assets for a moderate risk profile inves-tor, and on prior SAAs with tactical shifts as published in the Investment Strategy Guide during the same time period. Per-formance is calculated utilizing the returns of the indices iden-tified in Table D as applied to the respective allocations in the SAA and the SAA with the tactical shift. See the discussion in connection with Table A, previous page, regarding the mean-ings of the “Excess return” and “Information ratio” columns and how the “Information ratio” column is calculated.

Tactical asset allocation performance measurement

From 25 August 2008 through 27 May 2009, the Investment Strategy Guide had at times published a more detailed set of tactical deviations, whereby the categories “Non-US De-veloped Equities” and “Non-US Fixed Income” were further subdivided into regional blocks. Only the cumulative recom-mendations at the level of “Non-US Developed Equities” and “Non-US Fixed Income” were taken into account in calculat-ing the performance shown in Table C opposite. Prior to 25 August 2008, WMR published tactical asset allocation rec-ommendations in the “US Asset Allocation Strategist” using a less comprehensive set of asset classes and sectors, which makes a comparison with the subsequent models difficult.



Tactical asset allocation performance measurementTable C: Moderate risk profile performance measurement (25 August 2008 to 24 January 2013)

Benchmark Allocations (SAA)

Benchmark Allocation (SAA)

with tactical shift

excessreturn

Information ratio(annualized)

Russell 3000stock index

(total return)

Barclays CapitalUS Aggregate bondindex (total return)

25 Aug 08 to 31 dec 08 -16.59% -15.64% 0.96% +2.0 -29.00% 3.33%

2009 Q1 -5.52% -5.45% 0.07% +0.3 -10.80% 0.12%

2009 Q2 11.18% 11.37% 0.18% +1.0 16.82% 1.78%

2009 Q3 10.44% 11.07% 0.63% +2.1 16.31% 3.74%

2009 Q4 2.99% 3.30% 0.31% +1.1 5.90% 0.20%

2010 Q1 2.74% 2.56% -0.18% -0.9 5.94% 1.78%

2010 Q2 -4.56% -4.87% -0.31% -1.4 -11.32% 3.49%

2010 Q3 8.34% 7.99% -0.35% -2.1 11.53% 2.48%

2010 Q4 5.18% 5.17% -0.01% -0.1 11.59% -1.30%

2011 Q1 3.23% 3.15% -0.08% -0.4 6.38% 0.42%

2011 Q2 0.62% 0.47% -0.16% -0.9 -0.03% 2.29%

2011 Q3 -7.65% -8.56% -0.90% -2.5 -15.28% 3.82%

2011 Q4 4.66% 4.39% -0.27% -0.8 12.12% 1.12%

2012 Q1 5.89% 5.41% -0.48% -2.3 12.87% 0.30%

2012 Q2 -1.59% -1.57% 0.02% +0.2 -3.15% 2.06%

2012 Q3 4.18% 4.08% -0.10% -1.1 6.23% 1.59%

2012 Q4 0.69% 0.65% -0.04% -0.7 0.25% 0.21%

01 Jan 13 to 24 Jan 13 2.17% 2.20% 0.03% +2.5 5.19% -0.23%

since inception 24.86% 24.10% -0.76% -0.1 31.81% 30.76%

source: ubs

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

25 Aug 2008 to 23 Feb 2009 24 Feb 2009 to 24 Jan 2013

us large Cap value (russell 1000 value) 12.5 us large Cap value (russell 1000 value) 11.0

us large Cap growth (russell 1000 growth) 12.5 us large Cap growth (russell 1000 growth) 11.0

us small Cap value (russell 2000 value) 2.0 us mid Cap (russell midcap) 5.0

us small Cap growth (russell 2000 growth) 2.0 us small Cap (russell 2000) 3.0

us reits (ftse nAreit All reits) 1.5 us reits (ftse nAreit All reits) 2.0

non-us dev. eq. (msCi gross World ex-us) 10.5 developed markets (msCi gross World ex-us) 10.0

emerging markets eq. (msCi gross em usd) 2.0 emerging markets (msCi gross em usd) 2.0

us fixed income (barCap us Aggregate) 30.0 us fixed income (barCap us Aggregate) 29.0

non-us fixed income (barCap global Aggregate ex-usd) 8.0 non-us fixed income (barCap global Aggregate ex-usd) 8.0

Cash (Jp morgan Cash index usd 1 month) 2.0 Cash (Jp morgan Cash index usd 1 month) 2.0

Commodities (dJ ubs total return index) 5.0 Commodities (dJ ubs total return index) 5.0

Alternative investments (hfrX equal Weighted strategies) 12.0 Alternative investments (hfrX equal Weighted strategies) 12.0

source: ubs


AppendiX

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

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

Global Investment Committee compositionThe GIC is comprised of 12 members, representing top market and investment expertise from across all divisions of UBS:

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

(*) Business areas distinct from Chief Investment Office/Wealth Management Research

Investment committee

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

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

• Mike Ryan • Michael Crook • Richard Hollmann (*)• Brian Nick • Jeremy Zirin• Stephen Freedman

(*) Business areas distinct from Chief Investment Office/Wealth Management Research


AppendiX

Explanations about asset classes

Scale for tactical deviation charts

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

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

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

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

source: ubs

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

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

The process by which the strategic asset allocations were derived is de-scribed in detail in the publication entitled “UBS WMA’s Capital Markets Model: Explained, Part II: Methodology,” published on 22 January 2013. Your Financial Advisor can provide you with a copy.

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

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


AppendiX

Nontraditional AssetsNontraditional asset classes are alternative investments that include hedge funds, private equity, real estate, and man-aged futures (collectively, alternative investments). Interests of alternative investment funds are sold only to qualified investors, and only by means of offering documents that include information about the risks, performance and expenses of alternative invest-ment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund is speculative and involves significant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same regulatory requirements as mutual funds; (2) may have per-formance that is volatile, and investors may lose all or a substantial amount of their investment; (3) may engage in leverage and other speculative investment practices that may increase the risk of in-vestment loss; (4) are long-term, illiquid investments; there is gen-erally no secondary market for the interests of a fund, and none is expected to develop; (5) interests of alternative investment funds typically will be illiquid and subject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation infor-mation to investors; (7) generally involve complex tax strategies and there may be delays in distributing tax information to investors; (8)

Appendix

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

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

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

are subject to high fees, including management fees and other fees and expenses, all of which will reduce profits.

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

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

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

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

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

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

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


AppendiX

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

This report was published on 22 January 2016.

lead authors Mark HaefeleMike Ryan

Authors (in alphabetical order)Manish BangardChih-Chieh ChenMichael CrookSally DesslochLeslie FalconioThomas FluryStephen FreedmanRicardo Garcia-SchildknechtWayne GordonYifan HuMarkus IrngartingerDavid LefkowitzBarry McAlindenKathleen McNamaraBrian NickBrian RoseDominic SchniderPhilipp SchoettlerFrank SileoGiovanni StaunovoThomas VeraguthDavid WangJeremy Zirin

EditorsAbraham De RamosBarbara Rounds-SmithRoslyn Myers

Project Management Paul LeemingJohn Collura Matt Siegel

Desktop PublishingGeorge StilabowerCognizant Group – Basavaraj Gudihal, Srinivas Addugula, Pavan Mekala and Virender Negi

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©2016 UBS Financial Services Inc. All rights reserved. Member SIPC. All other trademarks, registered trademarks, service marks and registered service marks are of their respective companies.

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

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