Global risk radar Too much optimism? 11 February 2021 Chief Investment Office, WM Dirk Effenberger, Head Investment Risk, Chief Investment Office GWM, dirk.effenberger@ubs.com; Daniil Bargman, Strategist, daniil.bargman@ubs.com; Daniel Trum, CFA, Strategist, daniel.trum@ubs.com; Clemence Rusek, CFA, Analyst, clemence.rusek@ubs.com; Paul Donovan, Chief Economist, UBS GWM, paul.donovan@ubs.com; Brian Rose, Senior Economist Americas; Frederick Mellors, Strategist, frederick.mellors@ubs.com; Claudia Panseri, Strategist, claudia.panseri@ubs.com

This publication series helps investors identify and assess global financial market risks and their investment implications.

At a glance

• CIO holds a risk-on bias in its tactical asset class preferences. In our base case, we expect the vaccine rollout to accelerate in developed countries, allowing restrictions to be lifted more sus-tainably in the second quarter. Monetary and fiscal policy should remain accommodative. In the US, we expect the Biden admin-istration to pass a fiscal package of over USD 1tr through rec-onciliation over the coming weeks.

• Risks to this outlook are centered around the path of monetary and fiscal policy; the speed of the recovery from the pandemic; geopolitical developments, especially around US trade policy; and the potential for too much market optimism.

Source: iStock

• We have slightly upgraded the equity targets across our scenarios, resulting in single-digit return expectations for most developed market equities, while we anticipate further weakness for the US dollar.

Table 1: Scenario asset class targets for December 2021

Upside Central Downside

Asset class Spot*

impact S&P 500 3909 4,300 4,100 3,200 (targets for December Euro Stoxx 50 3657 4,200 3,800 3,000

2021 MSCI EM 1400 1,650 1,500 1,100

SMI 10793 12,500 11,500 9,500

USD IG spread** 65 45bps / +0.5% 70bps / +0.5% 150bps / -1.5%

USD HY spread** 354 270bps / +5.0% 300 bps / +5.0% 550bps / -6.0%

EMBIGspread** 342 280bps / +4.0% 340bps / +3.0% 550bps / -9.0%

EURUSD 1.21 1.32 1.27 1.15

Gold 1843 USD 1,500-1,600/oz USD 1,800/oz USD 2,000-2,100/oz

Source: UBS, as of 11 February 2021 * Spot prices as of 9 February 2021 ** During periods of market stress, credit bid-offer spreads tend to widen and result in larger ranges. Percentage changes refer to expected total return (t.r.) for the indicated spread levels Note: asset class targets above refer to the respective macro scenarios. Individual asset prices can be influenced by factors not reflected in the macro scenarios

This report has been prepared by UBS Switzerland AG, UBS AG London Branch, UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosures at the end of

the document.

Global risk radar

In our 2021 Year Ahead outlook report, we identified three potential sources of market setbacks this year: economic policy, the pandemic, and geopolitics. While all of these risks remain valid and deserve close monitoring, the needle has moved in the right direction, in our view. For example, the new US administration has signaled its willingness to pass a large fiscal stimulus package; the vaccine rollout has accelerated in many countries (with some notable exceptions in continental Europe) and is showing early signs of success in lowering hospitalization rates; and US President Joe Biden has reaffirmed the importance of global alliances, easing worries about the continuation of a unilateral approach toward global trade and diplomacy.

CIO holds a risk-on bias in its tactical asset class preferences. In our base case, we expect the vaccine rollout to accelerate in developed countries (Fig. 1), allowing restrictions to be lifted more sustainably in the second quarter. Both monetary and fiscal policy should remain accommodative. In the US, for example, we expect the Biden administration to pass a fiscal package of over USD 1tr through reconciliation over the coming weeks.

With key market drivers falling into place, equities have the potential to generate high single-digit returns this year. Returns on fixed income should be in the low single digits, driven mainly by carry rather than a further narrowing of spreads. We also expect the US dollar to weaken further against the euro.

But there are many risks to this view. Key among them is uncertainty around virus mutation and the vaccines' ability to protect against illness from new strains. Surprises on this front will have a bearing on policymakers’ reaction function toward economic reopening.

Another risk is increasing optimism in the market itself. While volatility markets are showing signs of cautiousness (see box), asset prices are increasingly accounting for a brighter investment environment, as clearly seen in near-record-high equity prices in developed countries. But too much optimism can lead to unintended consequences for

Related reports • The Year Ahead, revisited, 14 January 2021

• CIO Monthly Letter: "Sparkles and bubbles," 14 January 2021

• POTUS 46: "Investing under a Biden administration," 25 January 2021

• Global Risk Radar: "A calm after the storm?" 12 November 2020

Note: How can investors make use of elevated volat ilty levels?

Since November 2020, stocks have consistently hit new highs. Despite the positive sentiment on equity markets, the CBOE Volatility Index VIX has remained stubbornly above 20 and, as of today, it still trades some points above its long-term average. The divergence between equity and volatility markets creates investment opportunities for investors who wish to take advantage of high levels of implied volatility and skew. Key demand/supply aspects in volatility markets have contributed to keeping implied volatilities elevated throughout 2020 and the beginning of 2021. Retail flows in single-stock call options, high demand for protective puts at the index level and the lower participation of short-volatility players can also help to understand important risks linked to investors' positioning.

Fig. 1: Vaccination progress accelerating Percentage of population that has received at least one vaccine dose

50 investors in at least two ways:

• Bubble risk: As discussed in our House View letter in January, some of the preconditions for a financial market bubble are in Pe

rcen

tage 40

30 20 10

place, and we are seeing signs of irrational exuberance in some market segments. At present, the broader equity market is not in a bubble, in our view. But while we think that positioning for a bubble to burst poses more risk than reward, high valuations make the market more vulnerable to setbacks.

• Tapering risk: Economic recovery is widely expected to pick up in the second quarter. A key question is whether this provides central banks the opportunity to reduce some of the stimulus they injected over the last 12 months and start tapering their asset purchases. In our base case, we don’t think conditions will be right for central banks to dial down on purchases until at least this September. However, we see a risk that investors could become increasingly worried about a premature tapering starting even if no actual tapering takes place.

We think investors should keep these risks in mind as they will likely gain in importance in the second half of the year. However, given our

0

United States Germany United Kingdom Israel

Source: Macrobond, ourworldindata.org, UBS, as of February 2021

Chief Investment Office GWM 11 February 2021 2

Global risk radar

generally constructive outlook, we remain positive on risk assets (see House View letter).

Fig. 1: Risk map

Table 2: Key market driver scenarios

Pandemic recoveryEconomic policy & momentum Polit ics

Upside

Central

Dow nside

Vaccinat ion COVIDFiscal policy Monetary policy Real rates Geopolit ical risksGrow th1

2 developmentsprogram

Discretionary fiscal impulse Central banks stay continues to support the accommodative but

economy. US Congress passes reduce asset purchases in USD 1.9tr fiscal bill through 2H 2021 as recovery

resolution. beats expectations.

On track for recovery by

3Q21

Tendency lower

Sufficient by 1Q21

Fewer restrictions; low public fear

Potential rollback of measures taken by

Trump on China and return to the nuclear

deal with Iran

Fiscal impulse fades gradually as governments adapt to

recovery. US Congress passes USD 1.5tr fiscal bill through

resolution.

Central banks stay accommodative. No

tapering of asset purchases until at least

September 2021.

On track for recovery by end-2021

Low and stable

Outbreaks with limited public fear; More nuanced and

Sufficient by Restrictions fade multilateral approach 2Q21 sustainably with help ease tensions;

sufficient no tariff hike vaccinations

Diminishing fiscal impulse unable to compensate for

economic weakness. President Biden's proposed fiscal bill

fails to pass through resolution.

Central banks stay accommodative, but higher inflation raises

market concerns about earlier tightening.

On track for recovery in

2022

Tendency higher

Sufficient by Outbreaks trigger Markets hurt by an

2H21, or strict restrictions escalation of tensions

much less and heightened between US-China or

efficient public fear US-Iran

vaccines

1GDP back to pre-pandemic level in developed countries 2Programs are deemed sufficient once they have fully vaccinated 70% of key risk groups (age 65+ and health care employees)

Source: UBS, as of February 2021

Chief Investment Office GWM 11 February 2021 3

Global risk radar

Key dates to watch

Feb 27 February, Expiration of China's tariff waiver of certain US imports Ongoing Monitoring

Mar 4 March, OPEC meeting

11 March, ECB meeting

16 - 17 March, FOMC meeting

Central bank policy

Board meetings / interest rate decisions Statements by key officials

17 March, Dutch general elections

18 - 19 March, BoJ meeting

23 March, Israeli legislative election

25 March, SNB meeting

Politics Supranational organizations (e.g. G7, G20, IMF) US-China relations (One China policy, South China Sea) Middle East

25 - 26 March, European Council Elections

Sanctions (e.g. Russia, Iran, North Korea)

Apr 26 - 27 April, BoJ meeting

22 April, ECB meeting

27 - 28 April, FOMC meeting

5 - 11 April, IMF / World Bank spring meeting

International trade

Negotiation on new and existing free trade agreements (e.g. USMCA)

Discussion and action on tariffs (e.g. US tariffs on Chinese goods)

May 6 May, BoE meeting

6 May, United Kingdom local elections

18 May, Expiration of China's tariff waiver of certain US commodities

Jun 6 June, Iraq parliamentary election

10 June, ECB meeting

11-13 June, G7 summit

15 - 16 June, FOMC meeting

17 - 18 June, BoJ meeting

17 June, SNB meeting

18 June, Iranian presidential election

24 - 25 June, European Council

Jul 15 - 16 July, BoJ meeting

22 July, ECB meeting

27 - 28 July, FOMC meeting

Aug 5 August, BoE meeting

17 - 20 August, World Economic Forum annual meeting

Sep 9 September, ECB meeting

19 September, Russian legislative election (date to be confirmed)

21 - 22 September, BoJ meeting

21 - 22 September, FOMC meeting

Chief Investment Office GWM 11 February 2021 4

Global risk radar

Pandemic recovery

Will vaccinations allow a return to normality?

Recent developments

Israel and the United Arab Emirates have already successfully vaccinated large portions of their populations. As of this writing, more than one-third of Israelis have had at least one of the two jabs, and early signs suggest a significant reduction in hospitalizations among the elderly following these vaccinations. The rollout has been slower across Europe and the US, but it is accelerating. Supply issues have reportedly been a key hindrance.

Meanwhile, COVID-19 hospitalizations remain high in the US and Europe, and the last two months have seen fresh outbreaks sweeping the UK, Brazil, and South Africa, raising concerns about the spread of new virus mutations (Fig. 2). In response, France and Germany tightened restrictions further. Nonetheless, despite having already implemented strict measures in the fourth quarter, Germany still surprised positively by narrowly avoiding another GDP contraction.

Our view

Base case (60% probability): Vaccines and limited public fear allow a continued recovery despite recurring outbreaks

Once a sufficient part of key at-risk groups has been vaccinated, restrictions can be lifted more meaningfully and sustainably. Major developed economies should reach that point in the second quarter. Their most vulnerable people—mainly defined as people aged 65 and over and health workers—typically make up 20–30% of the population. Thanks to a faster rollout and more robust supply, they should be fully immunized in the US by April; inoculating 1 in 200 people every day throughout the first quarter (Fig. 3) should be a sufficient speed to reach that target. We expect the European Union to follow through by June. Some emerging economies may take well into the second half due to a later start and smaller supply contracts.

Hence, we expect developed economies to recover to pre-pandemic GDP levels by end-2021. The US may even achieve that feat in the second quarter. Lifting restrictions after having vaccinated at-risk groups should be much more sustainable than the back-and-forth that has often happened in this pandemic (Fig. 4). While COVID-19 is unlikely to disappear, a lower mortality rate among at-risk groups should calm public fears. Hospitals would be less likely to be overwhelmed even if the virus continues to circulate in high numbers in the younger population. Businesses that depend on large indoor gatherings, such as the hospitality and entertainment sectors, should finally be able to begin their return to normalcy after having suffered from forced closures during winter in the Northern Hemisphere.

Upside (20% probability): Very high vaccination rates and low public fear speed up economic recovery

Recent lockdowns in Europe and North America appear to have caused much less economic damage than the preceding episode in early 2020 (Fig. 5). We see this as a sign that societies are finding new ways to adapt to this difficult situation while reducing the negative impact on most businesses. Pandemic fatigue may be one part of this story, which could lead to lower levels of fear over subsequent outbreaks.

Fig. 1: Scenario probabilities CIO expert assessment

Fig. 2: Renewed outbreak waves SARS-CoV-2, 7-day case incidence per 100,000 people

800

600

400

200

0

Brazil Israel South Africa United Kingdom United States

Source: Macrobond, WHO, UBS, as of February 2021

Fig. 3: US close to sufficient speed for opening in April Daily vaccinations per 1mn people, 7-day rolling average

25,000

20,000

15,000

10,000

5,000

0 21-Dec 4-Jan 18-Jan 1-Feb

United States United Kingdom Germany China Israel US Q1 target

Source: Macrobond, ourworldindata.org, UBS, as of February 2021

Chief Investment Office GWM 11 February 2021 5

Global risk radar

Technological advancements like faster and cheaper mass-scale testing may further facilitate a more efficient handling of the crisis.

If such progress is combined with rapid, large-scale vaccinations, we could see a speedier economic recovery than in our base case. Developed countries could then see their GDP return to pre-pandemic levels by mid-2021, especially if fiscal and monetary policy stay accommodative in such a scenario, which seems likely.

Downside (20% probability): Heightened public fear and strict business restrictions postpone full recovery into 2023 A worse scenario could materialize if vaccination programs stumble, for instance due to difficulties in ramping up the production of vaccines. It is also possible that virus mutations significantly reduce the effectiveness of vaccines. Rolling out modified vaccines against such mutations would probably take between a few months and a couple of quarters, and could thus also significantly postpone our economic recovery timeline.

Government restrictions on business activity would keep recurring throughout 2021. We would then expect developed economies to reach pre-pandemic levels of activity only by end-2022 or later. Fiscal and monetary policy support would likely be increased if needed. But such a more protracted crisis would still increase the risk of longer-lasting economic damage on the back of rising debt and bankruptcies among the more heavily affected businesses.

Investment conclusions

Increasingly widespread vaccinations should support the economic recovery from COVID-19, and thus a risk-on stance in financial markets via equities (global small-caps) and Asian high yield credit (Table 1). Even though vaccinations are likely to be rolled out more slowly in most emerging markets, we see attractive value in their equities. They are historically more cyclical in nature, and should hence benefit from a solid global growth recovery. Likewise, oil prices should rise and the US dollar should weaken. Further opportunities may be found outside listed equities in private markets, such as in dislocated credit markets.

In our upside scenario, a faster and broader global economic recovery would push emerging market equities and EURUSD significantly higher still. We would expect broad US dollar weakness amid continued easy monetary and fiscal policy. The EUR and GBP should benefit. High grade bonds and the safe-havens gold and Japanese yen would likely suffer.

The downside scenario would be negative for risk assets due to repeated economic growth setbacks. Commodities and the euro would also weaken. Assets or strategies that should perform better under such circumstances should include gold, dynamic asset allocation strategies, long duration Treasuries, and option structures.

Fig. 4: No sustainable lifting of restrictions yet UBS restrictiveness index

10

8

6

4

2

0

US UK France Germany Source: UBS, as of February 2021

Fig. 5: Recent lockdowns caused less damage to economies GDP, indexed (4Q19 = 100)

120

110

100

90

80

70

Forecast

US Eurozone UK China Switzerland

Source: Bloomberg, UBS, as of February 2021

Table 1 : Expected market impact

EM equities High grade bonds Base case Asian HY credit IG bonds

Oil USD

DM sovereign bonds EM equities Gold Global equities

Dow nside JPY HY credit CHF EUR Volatility Commodities

Scenario

High grade bonds

Positive for Negative for

EMU equities Credit GoldUpside EUR USD GBP JPY

Source: UBS, as of February 2021

For further information please contact Daniel Trum , daniel.trum@ubs.com .

Chief Investment Office GWM 11 February 2021 6

Global risk radar

Economic policy

Will there be a taper tantrum in 2021?

Recent developments

At the onset of the COVID-19 pandemic, all major central banks lowered policy interest rates to the effective lower bound and initiated unprecedented amounts of asset purchases (see Fed example, Fig. 2). This has suppressed yields on safe bonds to record-low levels. Currently nearly USD 18tr worth of debt is negative yielding, accounting for around a quarter of all debt outstanding (Fig. 3).

With safe bonds all but guaranteeing losses in real terms over the long run, investors have been forced to reallocate capital into riskier alternatives such as equities and credit. As a result, risk assets have rallied throughout the second half of 2020 and into 2021, despite a weak economy (see equity example, Fig. 4).

Until the global recovery accelerates and catches up with the market, capital gains in risk assets will continue to hinge on economic stimulus. On the fiscal side, this requires the success of major spending projects like the European Union's EUR 750bn recovery fund and US President Biden's proposed USD 1.9tr relief bill. On the monetary policy side, it means ultra-loose policy remaining in place for the foreseeable future.

Our view

Base case (60% probability): Recovery catches up with markets

CIO continues to expect an economic acceleration in 2021. GDP growth should reach 6.1% globally (5% in the US and Europe) for the full year, from negative rates in 2020. This growth relies on continued policy support from governments and central banks, and assumes the lifting of pandemic-related restrictions from late spring or early summer.

We expect no tapering of asset purchases by any major central bank until at least September, with no interest rate hikes on the cards for at least another couple of years thereafter. Fiscal policy is also likely to remain expansionary, with the US continuing to take the lead (Fig. 5). Given President Biden's latest announcements, spending on pandemic relief, infrastructure, and green energy look likely to occur before less market-friendly policies like tax increases for the time being. We expect a package of around USD 1.5tr to be passed through reconciliation before the end of March. Fundamentally, these conditions should continue to support risk assets over the next six to 12 months.

Downside (20% probability): Taper tantrum 2021

All major central banks are currently officially committed to maintaining ultra-loose monetary policy for an extended period, even in the face of near-term rises in inflation. However, the market's confidence in central banks' ability to keep their promises may be tested if inflation starts to move rapidly above policy targets. While this is not our base case, CIO sees a non-negligible risk of increased market worries about monetary policy in the coming months for a number of reasons, including: 1. Elevated inflation due to low a low base of comparison from April

and May 2020; 2. The delayed arrival of price pressures from the first waves of fiscal

stimulus; and 3. A rapid increase in economic activity following the relaxation of

restrictions related to the COVID-19 pandemic.

Fig. 1: Scenario probabilities CIO expert assessment

Upside 20%

Base case 60%

Downside 20%

Source: UBS, as of February 2021

Fig. 2: The Fed is buying record amounts of assets Year-on-year change in balance sheet, in USD tr; recessionary periods shaded

Source: Bloomberg, UBS, as of December 2020

Fig. 3: The amount of negative-yielding debt is at record highs Outstanding amount of bonds with negative yields, in USD tr

Source: Bloomberg, UBS, as of 31 December 2020

Chief Investment Office GWM 11 February 2021 7

Global risk radar

These forces may conspire to push inflation numbers well past central bank targets in late spring to early summer, with US core PCE inflation potentially reaching as high as 3% compared to the Fed's long-term target of 2%. Even though central banks are likely to look beyond such a surge in prices, for a time investors will have to grapple with a higher risk of sustained inflationary pressures, and accordingly a higher probability of earlier-than-expected policy tightening. At the current level of Treasury yields and equity valuations, this could result in a market event similar to the "taper tantrum" seen in summer 2013.

Investor concerns could be further exacerbated if an inflationary surge were to last longer than two or three months, or if it were to coincide with a disappointment in fiscal spending, such as the US fiscal package failing to pass through reconciliation in Congress.

Upside (20% probability): Tapering for good reasons Conversely, the economy may also surprise positively in 2021:

• Inflation may not spike materially in late spring as structural disinflationary forces outweigh the base effects from 2020;

• Government spending announcements may surprise on the upside, for example with US Congress passing President Biden's proposed USD 1.9tr fiscal package in full through reconciliation in the first quarter;

• The growth benefits of recent economic policy measures may turn out to have been underestimated.

As a result, the economic recovery this year may surprise even the market's currently high expectations, leading to further outperformance of risk assets. Central banks would then be able to start unwinding asset purchases come the second half without disturbing financial markets.

Investment conclusions

CIO maintains a constructive view on risk assets such as equities and credit, while remaining cautious toward high grade bonds.

• In the base case, stronger growth and moderately higher inflation in 2021 should benefit global equities. In the context of ultra-loose monetary policy, credit is likely to generate positive returns as well. In equities, we like cyclical sectors such as energy and materials; technology-enabled themes like fintech, greentech, and healthtech; and the more attractively valued market segments like small-cap stocks. In credit, we see the most value in Asia high yield.

• In our downside scenario, a taper-tantrum event could trigger a correction in many traditional asset classes including equities, bonds, commodities, and gold. The US dollar would likely appreciate, with volatility-linked instruments benefiting as well. According to CIO's simulations, emerging market assets and the safest fixed income segments (government bonds and investment grade credit) would take the longest to recover. Developed market risk assets are likely to retrace most of the capital losses over a six-month horizon.

• In our upside scenario, CIO's base case recommendations would likely outperform our central projections and offer even stronger returns to investors this year. High-quality bonds would underperform on a six- to 12-month horizon.

For more information, please refer to the latest CIO House View.

Fig. 4: Risk assets have rallied despite the ongoing pandemic Select equity indices in 2020, rebased to 100 as of January.

Source: Bloomberg, UBS, as of 30 December 2020

Fig. 5: Fiscal spending expected to continue into 2022 Budget balance as a % of GDP, including Bloomberg survey forecasts (2020–22).

Source: Bloomberg, UBS, as of 18 January 2021

Table 1: Expected market impact Scenario

EM equities High-quality bonds Base case Asian HY credit

Oil USD

USD EM assets

Dow nside Volatility

Global fixed income Global equities Commodities

EM equities DM equities

DM sovereign bonds

Positive for Negative for

Upside Credit Commodities USD EUR

Source: UBS, as of February 2021

For further information please contact Daniil Bargman , daniil.bargman@ubs.com , Paul Donovan , paul.donovan@ubs.com .

Chief Investment Office GWM 11 February 2021 8

.

.

Global risk radar

Geopolitics

How will US foreign policy be defined under a Biden-led administration?

Recent developments

In his first days in office, President Joe Biden immediately signaled a shift in US foreign policy. One clear priority of his administration is to rebuild US ties with traditional allies that it believes have been strained under the Trump presidency. By rejoining the Paris climate agreement and the WHO, the administration demonstrated its commitment to international cooperation and tackling climate change.

The appointment of Obama veterans to Biden’s foreign policy team is further evidence of a return to a more traditional approach to international relations. The appointment of diplomat Kurt Campbell as coordinator for Indo-Pacific affairs shows a further intention to deepen US engagement in Asia.

Our view

Base case (70% probability): A nuanced and multilateral approach

A Biden presidency lessens the uncertainty around US external policy. The approach and tone of the new administration will likely be more collaborative and targeted, and, most important for markets, less volatile than under Trump. We expect a multilateral approach toward rivals (e.g., China, Iran), which in our base case does not lead to an escalation of tensions. We think, however, that Biden’s focus will primarily be on domestic issues, at least initially in his presidency.

US-China We continue to believe that the new administration will refrain from using tariffs as its primary trade policy tool, and instead seek to reduce tensions and emphasize negotiations. CIO, however, doesn't expect a significant shift in China policy. While we could see occasional flare-ups in tensions, we see little reason to expect a significantly negative economic impact in the near term as long as tariffs don’t rise further. Yet investors should still be positioned for a structural decoupling between the two economies.

With bipartisan support to maintain a tough policy on China, we do not expect the new cabinet to rush to reverse Trump's policies and tariffs. Despite the more moderate views of the new administration compared to some of Trump's hardliners, we believe the strategy of China containment is set to continue. During his confirmation hearing, Secretary of State Anthony Blinken set the tone by backing the previous administration's tough posture toward China, although disagreeing with Trump's tactics. We expect the new administration to focus on human rights and strategic issues such as intellectual property protection, while strengthening US alliances and potentially working toward a framework of competitive coexistence.

For its part, China's approach to the US is unlikely to change. Beijing now recognizes that the US has developed a distrust of China that will not reverse despite the new occupant in the White House. It is therefore likely that China will make concessions only in return for US concessions.

Fig. 1: Scenario probabilities CIO expert assessment

Upside

Base case

Downside

15%

70%

15%

Source: UBS, as of February 2021

Fig. 2: Trump administration implemented a wide range of measures against China List of actions the Trump administration has taken against China

Measure Implicat ions

Restrict ions on U.S. stock t rading

Holding Foreign Requires foreign companies to provide audit working Companies papers for U.S. accounting oversight or face a delisting Accountable Act from U.S. stock exchanges

Banning U.S. investors from owning or trading stocks DoD list of companies with alleged connections to the Chinese Executive Order 13959

military

Restrict ions on doing-business Banning the use of eight Chinese payment apps in theSof tw are bans

Executive Order 13971 U.S. Sanctions on officials and entities in Hong Kong andHong Kong mainland China that are deemed to help violate Hong

Autonomy Act Kong's autonomy Restricting the sale of U.S. goods and technology (incl.

Ent ity list (BIS) Huawei)

Tarif fs on Chinese goods Tariff lines (List 1,2,3 (25%) and 4A (7.5%) on Chinese

Sect ion 301 goods Tariffs on all imported washing machines and solar

Sect ion 201 panels

Sect ion 232 25% tariffs on steel imports and 10% on aluminum

Source: UBS, US Federal register

Chief Investment Office GWM 11 February 2021 9

Global risk radar

US-Middle East Iran could be the first test of Biden's foreign policy. Since the start of the year, Iranian leaders have made a series of comments intended to challenge the new US administration to remove the sanctions imposed when Trump pulled out of the Joint Comprehensive Plan of Action (JCPOA). Iran is demanding that the US lift sanctions before it returns to compliance with the previous nuclear deal. The US has responded that Iran should take the first steps. The priority of the US administration seems to be to improve relations while working with the other parties to the original deal. Given these challenges, CIO does not expect any material developments over the short term, but rather drawn-out negotiations.

With Iranian presidential elections next June, Hassan Rouhani may wish to apply pressure. But the US holds significant leverage over Iran's economy, as oil exports—Teheran's most important source of revenue and hard currency—remain heavily impacted by the sanctions, despite a recent ramp-up in production. So we believe Biden should have sufficient tools to engage with Iran to halt the nuclear proliferation in return for an easing of sanctions pressure.

On balance, we retain our positive outlook for oil prices, with Brent reaching USD 60/bbl by midyear and the oil market remaining undersupplied this year.

Downside (15% probability): Renewed tensions hurt growth

In our risk case, we see an escalation of tensions that leads to confrontation with other major or regional powers, which could lead to a risk-off move in markets. Events that could trigger our risk case include:

• US-China: A worsening of tensions is still possible. For example, Chinese actions perceived by the US to be hostile (e.g., related to the South China Sea, Taiwan, etc.), or an unwillingness to work on specific issues such as human rights and intellectual property (IP) protection, could make their relations more contentious. Biden has also said he wants to protect US manufacturing jobs and technological competitiveness. This is likely to keep the IP and industrial disputes alive, with lingering tariffs or other export control measures on Chinese companies.

• US-Middle East: Iran's recent actions suggest a confrontational attitude, and in testing the will of the new presidency, a miscalculation is not to be excluded. Iran can also mobilize its proxies to disrupt oil supply from the region, should it decide to. We think it is unlikely that they will block shipping in the Strait of Hormuz, but they may temporarily impact the movement of tankers through the Strait. Iran and its proxies can also target oil facilities across the Middle East. Such destabilization in oil-producing countries could trigger a sharp drop in supply for a sustained period. In our pessimistic scenario, prices could spike above USD 85/bbl for several months. This could weigh on global capital spending and the consumer.

Upside (15% probability): Further easing of tensions accelerating growth upswing

• US-China: The new administration may consider constructive talks in the next few months after the secretary of commerce and the US trade representative receive Senate confirmation.

Fig. 3: US sanctions have halted Iranian oil production Iranian oil output, in millions of barrels per day

Mill

ions

10/2015: The JCPOA takes effect

05/2018: Trump withdraws from the JCPOA

2014 2015 2016 2017 2018 2019 2020

5

4

3

2

1

0

Source: UBS, Macrobond, OPEC. JCPOA = Joint Comprehensive Plan of Action

Chief Investment Office GWM 11 February 2021 10

Global risk radar

This could later lead to relaxing the US blacklist of Chinese tech companies, or cutting tariffs on China. This may prove a tough call, as these measures have bipartisan support in Congress. However, a removal of tariffs is possible over time, in exchange for Chinese commitments to IP protection, human rights, and US market access in China. A further easing of tensions could support the recovery in business sentiment and lead to higher investments and stronger economic growth.

• US-Middle East: Similarly, the US and Iran could return to the JCPOA more quickly than expected, with preliminary negotiations resuming and progressing rapidly. Either a renewal of the deal or an interim agreement could allow Iran to return to

Table 1: Expected market impact compliance and to reengage with international financial markets

Scenario Positive for# Negative for# and resume some oil exports. However, the net impact on oil

EM equities High quality bonds Investment Gradewould depend on how much global demand recovers over the Base case Asian high yield credit bonds

Oil USDyear. Gold Global equities High-quality bonds US-Iran specific: CHF EM credit

DownsideInvestment conclusions

Base case: Improved policy predictability could boost investor sentiment. This should be positive for risk assets in general, including

JPY TRY, INR US- Iran specific: Oil NOK, CAD, RUB

Global equities High-quality bonds Credit USD EM currenciesboth global equities and credit. We think this environment should be US-China specific: CNY AUD

particularly positive for emerging market and Chinese equities. Upside

US-Iran specific: High yielding crude importersDownside case: Our downside scenario would significantly increase

the risk of a bear market in 2021. High-quality bonds have offered some Source: UBS, as of February 2020

protection in the past, but they may be a less effective hedge today as interest rates are close to all-time lows. Safe-haven currencies such as the Swiss franc and the Japanese yen would likely appreciate alongside gold. US-China: Equity sectors exposed to the trade conflict (e.g., industrials and materials) would suffer more than defensive sectors such as consumer staples and healthcare. US-Iran: Global equities have fallen on average about 15% during previous oil price shocks, but recovered within six months. In credit, high yield and emerging market bonds have suffered the most, but recovered within three months. The worst-hit markets would likely be high-yielding crude importers. In the past, the US dollar initially appreciated as investors sought a safe haven, but then weakened on higher oil prices.

Upside case: Risk assets could gain from an easing in tensions, while yields on safe bonds could rise. Emerging market currencies would also benefit. Improved US-China relations would benefit regions and sectors impacted by tariffs in emerging markets as well as the Chinese yuan. Chinese stocks should further benefit if the threat of delisting Chinese companies from US exchanges were to recede. If improved US-Iran relations lead to lower oil prices, it would help sectors such as consumer discretionary and staples, due to lower input costs and higher disposable income. The high-yielding crude importers could also benefit.

For further information please contact Clemence Rusek , clemence.rusek@ubs.com , Brian Rose , brian.rose@ubs.com , Giovanni Staunovo , giovanni.staunovo@ubs.com , Michael

Bolliger , michael.bolliger@ubs.com , Kathy Li , kathy.li@ubs.com . Chief Investment Office GWM 11 February 2021 11

Global risk radar

Disclaimer UBS Chief Investment Office's ("CIO") investment views are prepared and published by the Global Wealth Management business of UBS Switzerland AG (regulated by FINMA in Switzerland) or its affiliates ("UBS").The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research. Generic investment research – Risk information: This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Different assumptions could result in materially different results. 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UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is not suitable for every investor as there is a substantial risk of loss, and losses in excess of an initial investment may occur. Past performance of an investment is no guarantee for its future performance. Additional information will be made available upon request. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in foreign exchange rates may have an adverse effect on the price, value or income of an investment. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information. 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Investing in structured investments involves significant risks. For a detailed discussion of the risks involved in investing in any particular structured investment, you must read the relevant offering materials for that investment. Structured investments are unsecured obligations of a particular issuer with returns linked to the performance of an underlying asset. Depending on the terms of the investment, investors could lose all or a substantial portion of their investment based on the performance of the underlying asset. Investors could also lose their entire investment if the issuer becomes insolvent. UBS Financial Services Inc. does not guarantee in any way the obligations or the financial condition of any issuer or the accuracy of any financial information provided by any issuer. Structured investments are not traditional investments and investing in a structured investment is not equivalent to investing directly in the underlying asset. Structured investments may have limited or no liquidity, and investors should be prepared to hold their investment to maturity. The return of structured investments may be limited by a maximum gain, participation rate or other feature. Structured investments may include call features and, if a structured investment is called early, investors would not earn any further return and may not be able to reinvest in similar investments with similar terms. Structured investments include costs and fees which are generally embedded in the price of the investment. The tax treatment of a structured investment may be complex and may differ from a direct investment in the underlying asset. UBS Financial Services Inc. and its employees do not provide tax advice. Investors should consult their own tax advisor about their own tax situation before investing in any securities. Important Information About Sustainable Investing Strategies: Sustainable investing strategies aim to consider and incorporate environmental, social and governance (ESG) factors into investment process and portfolio construction. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable Investing considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies. The returns on a portfolio consisting primarily of sustainable investments may be lower or higher than portfolios where ESG factors, exclusions, or other sustainability issues are not considered by the portfolio manager, and the investment opportunities available to such portfolios may differ. Companies may not necessarily meet high performance standards on all aspects of ESG or sustainable investing issues; there is also no guarantee that any company will meet expectations in connection with corporate responsibility, sustainability, and/ or impact performance. External Asset Managers / External Financial Consultants: In case this research or publication is provided to an External Asset Manager or an External Financial Consultant, UBS expressly prohibits that it is redistributed by the External Asset Manager or the External Financial Consultant and is made available to their clients and/or third parties. USA: This document is not intended for distribution into the US and / or to US persons. For country information, please visit ubs.com/cio-country-disclaimer-gr or ask your client advisor for the full disclaimer. Version C/2020. CIO82652744 © UBS 2021.The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

UBS Chief Investment Office's ("CIO") investment views are prepared and published by the Global Wealth Management business of UBS Switzerland AG (regulated by FINMA in Switzerland) or its affiliates ("UBS"). The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research. Instrument/issuer-specific investment research – Risk information: This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Different assumptions could result in materially different results. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS). All information and opinions as well as any forecasts, estimates and market prices indicated are current as of the date of this report, and are subject to change without notice. This publication is not intended to be a complete statement or summary of the securities, markets or developments referred to in the report. Opinions expressed herein may differ or be contrary to those expressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria. In no circumstances may this document or any of the information (including any forecast, value, index or other calculated amount ("Values")) be used for any of the following purposes (i) valuation or accounting purposes; (ii) to determine the amounts due or payable, the price or the value of any financial instrument or financial contract; or (iii) to measure the performance of any financial instrument including, without limitation, for the purpose of tracking the return or performance of any Value or of defining the asset allocation of portfolio or of computing performance fees. By receiving this document and the information you will be deemed to represent and warrant to UBS that you will not use this document or otherwise rely on any of the information for any of the above purposes. UBS and any of its directors or employees may be entitled at any time to hold long or short positions in investment instruments referred to herein, carry out transactions involving relevant investment instruments in the capacity of principal or agent, or provide any other services or have officers, who serve as directors, either to/for the issuer, the investment instrument itself or to/for any company commercially or financially affiliated to such issuers. At any time, investment decisions (including whether to buy, sell or hold securities) made by UBS and its employees may differ from or be contrary to the opinions expressed in UBS research publications. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is not suitable for every investor as there is a substantial risk of loss, and losses in excess of an initial investment may occur. Past performance of an investment is no guarantee for its future performance. Additional information will be made available upon request. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in foreign exchange rates may have an adverse effect on the price, value or income of an investment. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information. Research publications from CIO are written by UBS Global Wealth Management. UBS Global Research is written by UBS Investment Bank. Except for economic forecasts, the research process of CIO is independent of UBS Global Research. As a consequence research methodologies applied and assumptions made by CIO and UBS Global Research may differ, for example, in terms

Chief Investment Office GWM 11 February 2021 12

Global risk radar

of investment horizon, model assumptions, and valuation methods. Therefore investment recommendations independently provided by the two UBS research organizations can be different. The compensation of the analyst(s) who prepared this report is determined exclusively by research management and senior management (not including investment banking). Analyst compensation is not based on investment banking, sales and trading or principal trading revenues, however, compensation may relate to the revenues of UBS as a whole, of which investment banking, sales and trading and principal trading are a part. Tax treatment depends on the individual circumstances and may be subject to change in the future. UBS does not provide legal or tax advice and makes no representations as to the tax treatment of assets or the investment returns thereon both in general or with reference to specific client's circumstances and needs. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of our individual clients and we would recommend that you take financial and/or tax advice as to the implications (including tax) of investing in any of the products mentioned herein. This material may not be reproduced or copies circulated without prior authority of UBS. Unless otherwise agreed in writing UBS expressly prohibits the distribution and transfer of this material to third parties for any reason. UBS accepts no liability whatsoever for any claims or lawsuits from any third parties arising from the use or distribution of this material. This report is for distribution only under such circumstances as may be permitted by applicable law. For information on the ways in which CIO manages conflicts and maintains independence of its investment views and publication offering, and research and rating methodologies, please visit www.ubs.com/research. Additional information on the relevant authors of this publication and other CIO publication(s) referenced in this report; and copies of any past reports on this topic; are available upon request from your client advisor. Options and futures are not suitable for all investors, and trading in these instruments is considered risky and may be appropriate only for sophisticated investors. Prior to buying or selling an option, and for the complete risks relating to options, you must receive a copy of "Characteristics and Risks of Standardized Options". You may read the document at https://www.theocc.com/ about/publications/character-risks.jsp or ask your financial advisor for a copy. Investing in structured investments involves significant risks. For a detailed discussion of the risks involved in investing in any particular structured investment, you must read the relevant offering materials for that investment. Structured investments are unsecured obligations of a particular issuer with returns linked to the performance of an underlying asset. Depending on the terms of the investment, investors could lose all or a substantial portion of their investment based on the performance of the underlying asset. Investors could also lose their entire investment if the issuer becomes insolvent. UBS Financial Services Inc. does not guarantee in any way the obligations or the financial condition of any issuer or the accuracy of any financial information provided by any issuer. Structured investments are not traditional investments and investing in a structured investment is not equivalent to investing directly in the underlying asset. Structured investments may have limited or no liquidity, and investors should be prepared to hold their investment to maturity. The return of structured investments may be limited by a maximum gain, participation rate or other feature. Structured investments may include call features and, if a structured investment is called early, investors would not earn any further return and may not be able to reinvest in similar investments with similar terms. Structured investments include costs and fees which are generally embedded in the price of the investment. The tax treatment of a structured investment may be complex and may differ from a direct investment in the underlying asset. UBS Financial Services Inc. and its employees do not provide tax advice. Investors should consult their own tax advisor about their own tax situation before investing in any securities. Important Information About Sustainable Investing Strategies: Sustainable investing strategies aim to consider and incorporate environmental, social and governance (ESG) factors into investment process and portfolio construction. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable Investing considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies. The returns on a portfolio consisting primarily of sustainable investments may be lower or higher than portfolios where ESG factors, exclusions, or other sustainability issues are not considered by the portfolio manager, and the investment opportunities available to such portfolios may differ. Companies may not necessarily meet high performance standards on all aspects of ESG or sustainable investing issues; there is also no guarantee that any company will meet expectations in connection with corporate responsibility, sustainability, and/ or impact performance. External Asset Managers / External Financial Consultants: In case this research or publication is provided to an External Asset Manager or an External Financial Consultant, UBS expressly prohibits that it is redistributed by the External Asset Manager or the External Financial Consultant and is made available to their clients and/or third parties. USA: This document is not intended for distribution into the US and / or to US persons. For country information, please visit ubs.com/cio-country-disclaimer-sr or ask your client advisor for the full disclaimer. Version C/2020. CIO82652744 © UBS 2021. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

Chief Investment Office GWM 11 February 2021 13