global risk radargeopolitics and markets and commercial ties to qatar over its alleged support to...

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

Global risk radarGeopolitics and markets11 July 2017Chief Investment Office WMDirk Effenberger, strategist; Vittorio Bosio, strategist; Jérôme Audran, CFA, FRM, analyst; Sundeep Gantori, CFA, CAIA, analyst; DaniilBargman, strategist

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

At a glance

• Overall, we regard none of the top global risks as likely enoughto cause market disruption over our tactical investment horizon.

• We stay slightly "risk on" given a supportive macro envi-ronment, robust corporate earnings and continued central banksupport.

• However, developments in the Middle East and North Koreadeserve close attention, as the situation remains fluid despitemore benign statements at the recent G20 meeting. Other risksto watch are a hard landing of the Chinese economy, a failureof Trumponomics, and a global rise in protectionism.

Source: iStock

Risks remain manageable for nowThe G20 meeting in Hamburg provided little additional information onhow some of the more market-relevant geopolitical risks will evolve.While we are not much closer to a solution for some of them, a furtherescalation hasn't become more likely, either. Two examples:

• Protectionism: Global leaders concluded that "internationaltrade and investment are important engines of growth,productivity, innovation, job creation and development" and"we will keep markets open, (...) continue to fight protectionismincluding all unfair trade practices and recognize the role oflegitimate trade defense instruments in this regard." However,the communique was vague on which criteria could legitimizethe use of such instruments. For now, we regard the risk offurther trade tensions, with sustained impact on markets, as low(see page 11).

• North Korea conflict: China issued a statement that PresidentXi Jinping and US counterpart Donald Trump had "enhancedmutual understanding" about North Korea and "confirmed thebroad direction of using peaceful means to resolve this issue."The media also reported that Trump showed signs of patience

Related reports:• UBS House View Weekly: "Is it time to

worry about tail risks?," 29 June

• UBS House View Monthly: "The paradoxof historical knowledge," 22 June

• Global Risk Radar: "Protection fromprotectionism," 22 May

Global risk radar

UBS CIO WMR 11 July 2017 2

by saying that "as far as North Korea is concerned, we will have,eventually, success. It may take longer than I'd like. It may takelonger than you'd like. But there will be success in the end oneway or the other." As a result, and despite North Korea's latesttesting of an intercontinental missile, we continue to see the riskof military escalation in the region as very low (see page 8).

We have not changed our view on other risk topics such as a Chinahard landing or a failure of Trumponomics, but regard a monetarytightening surprise by the European Central Bank (ECB) as less likelyand therefore removed it from our list of risk topics. Furthermore, weare now monitoring the risk of a spike in crude oil prices on the backof escalating tensions in the Middle East.

Overall, investors need to keep an eye on these risks. Diversificationis the best defense against tail risks, in our view. However, we do notthink these risks are yet big enough to affect markets, and we remainoverweight global equities. Investors who withdraw from marketscould miss out on positive performance at a time of synchronized globalgrowth, rising earnings and continued central bank support.

Fig. 1: Global risk map

Rising protectionism

Risks under review

1 2 3 4

CIO Risk Score Risk probability (Next 6 -12 months)

>50%Base case High Moderate Low Very low

<10%

Europeandisintegration

Probability

Probability

China hard landing

Geopolitics:North Korea

Failure of Trumponomics Middle East escalation:Oil supply shock

Probability

Probability

Probability

More restrictivecentral bank policy

Global

Source: UBS. Note: The CIO risk score is a composite of four risk "dimensions": probability (the likelihood of occurrence within the nextsix to 12 months), urgency (how soon the event would likely take place), geographic scope (the extent of regional/global financial andeconomic contagion), and expected market impact (by how much the returns on the affected asset classes would deviate from the baseline).Each dimension score can take a value between 1 and 4, with 4 being the highest risk level; the overall CIO risk score is the average ofthe scores for the four risk dimensions.

Global risk radar


Middle East escalation: Oil supply shockSaudi Arabia and Iran have been competing for influence in the Gulfregion and fighting through proxy wars for years. Tensions betweenthese two states are not new, but they have intensified as of late.Although the risk of direct Saudi-Iran confrontation is very low, in ourview, further escalation cannot be ruled out.

Recent developmentsA withdrawal by the US from the 2015 nuclear deal with Iran couldfurther escalate tensions in the Middle East and North Africa (MENA)region. Although Tehran has so far complied with the terms of theagreement, US Secretary of State Rex Tillerson recently said that thedeal "fails to achieve the objective of a non-nuclear Iran" by "onlydelaying their goal of becoming a nuclear state."

In the meantime, President Trump's anti-Iran rhetoric and pro-Saudistance have strengthened the kingdom's position in the region. Shortlyafter his speech in Riyadh, Saudi Arabia and other Gulf states severeddiplomatic and commercial ties to Qatar over its alleged support toterrorist groups and ties to Iran.

On 23 June, the Saudi kingdom and its allies submitted a list of 13demands to resolve the rift with Qatar. In our view, failure to find acompromise may actually bring Qatar closer to Turkey and Iran, raisingregional tensions further. Qatar allegedly only signaled its willingnessto hold talks, and its foreign minister said the country will not complywith demands that it considers in violation of international law. A quicksolution to the crisis thus seems unlikely, and ongoing mediation effortsby Kuwait and the US seem paramount.

Our scenariosBase case: No meaningful disruption to energy exportsWe do not expect meaningful sanctions to be raised against Iranianenergy exports, or the long-running tensions between Sunni SaudiArabia and Shiite Iran to escalate to a direct armed conflict. Othergeopolitical risks in the region, such as ISIS attacks aimed at disruptingoil production, shouldn't lead to a large or sustained spike in the oilprice. That being said, the oil market could still price in a geopoliticalrisk premium if tensions in the region rose.

Risk case: Escalating tensions disrupt energy exportsDeeply rooted tensions between Iran and Saudi Arabia could intensifythrough proxy wars in the MENA region, possibly disrupting energyexports out of the Middle East. If this coincided with renewed sanctionson Iranian energy exports, the oil price could reach USD 80/bbl and staythere for three to six months. CIO attaches a very low probability (lessthan 10%) to this risk scenario.

Fig. 2: Crude oil production and consumption byregionIn million tons per year, for 2016

0

500

1000

1500

Middle East CIS USA EU Asia

Consumption Production

Source: Enerdata, “Global Energy Statistical Yearbook2017", as of 10 July 2017

Global risk radar


Macroeconomic implicationsIf the oil price spikes to USD 80/bbl, our economists expect globalgrowth to decelerate by around 0.25–0.5% over a 12-month horizon,relative to our base case forecast. Global inflation could exceed ourbase case estimate by around one percentage point.

Net oil importers, such as the Eurozone, are expected to fare worseunder this risk scenario. On the other hand, net oil exporters, such asRussia, Brazil and Venezuela, would benefit from rising oil prices, andtheir appreciating currencies would limit the inflationary impact, too. Inthe US, a higher oil price would stimulate investments in the shale oilsector, thereby reducing the negative impact on growth. Fig. 2 showshow different regions rely on imported energy.

We would expect the Federal Reserve to look through the spike inheadline inflation and refrain from hiking rates faster. The impact on theFed's preferred measure of inflation – core PCE (personal consumptionexpenditures) inflation – would be small and temporary. We believethe ECB would remain in a wait-and-see mode and possibly extend itsquantitative easing (QE) program by six months.

Investment implications: A historical perspectiveTo better understand the potential market implications of higher oilprices, we can look at previous episodes of energy supply shocks. Figs.3 to 6 show the average return of the main asset classes during thefollowing historical events:

• Iran-Iraq war of 1979

• Gulf War of 1990–1991

• Venezuelan general strike of 2002–2003

• Libyan civil war of 2011

Although equity markets suffer initially, they tend to recover within sixmonths, with Japan being the notable exception (see Fig. 3). Countrieswith a larger dependence on imported oil tend to suffer more, as isthe case for Europe which imports around 90% of the crude oil itconsumes.

High grade bonds were less effective as a portfolio hedge during oilsupply shocks than in other periods of market stress. A likely reason isthe increase in inflation expectations, which prevented yields of long-term bonds from decreasing. Nonetheless, high grade bonds deliveredpositive returns just three months after the events took place, asshown in Fig. 4. In credit, high yield and emerging market (EM) bondsexperienced the largest drawdowns, but the asset class was in positiveterritory within three months (see Fig. 5).

Safe-haven currencies such as the Swiss franc and the Japanese yenappreciated due to increased geopolitical risk premium, as can be seenin Fig. 6. The US dollar initially appreciated against the euro, the Britishpound and EM currencies as investors sought a safe haven right afterthe conflicts started; however, this move was reversed in the followingsix months because of higher oil prices.

Fig. 3: Equities during recent oil supply shocksAverage performance, in %

-30% -20% -10% 0% 10%

MSCI EM

MSCI Japan

MSCI EMU

MSCI US

MSCI World

Worst loss 3 months 6 months

Source: Bloomberg, UBS, as of 5 July 2017

Fig. 4: High grade bonds during recent oilsupply shocksAverage performance, in %

-4% -2% 0% 2% 4%

High grade 5-7 EUR

High grade 1-2 EUR

High grade 5-7 USD

High grade 1-2 USD



Fig. 5: Credit during recent oil supply shocksAverage performance, in %

-15% -10% -5% 0% 5% 10%

EM corporate bonds

EM sovereign bonds

High yield EUR

High yield USD

Investment grade EUR

Investment grade USD



Fig. 6: Major currencies during recent oil supplyshocksAverage performance against the US dollar, in %

-15% -10% -5% 0% 5% 10%

EM FX

Japanese Yen

Swiss Franc

British Pound

Euro



Global risk radar


How investors can protect their portfolioIf escalating tensions in the Middle East and North Africa were to disruptenergy exports, the oil price would spike and likely cause a correctionin risky assets. Under such a scenario, we would expect lower globalgrowth and higher inflation relative to our base case.

Investors who wish to protect their portfolio against this risk scenariocan consider investing in:

• Crude oil and oil products: Direct long exposure to thecommodity would help investors hedge against an escalationin the Middle East. This position should deliver a positiveperformance even under our base case, as we expect larger oilinventory drawdowns in the months to come and seasonallyimproving oil demand.

• Energy companies: The energy sector would benefit from higheroil prices under this risk scenario. Even under our base case, weexpect the sector to be supported by improving earnings on theback of cost-cutting measures and gradually rising oil prices.

• Gold: The yellow metal is a safe-haven asset that is expectedto appreciate under heightened geopolitical risk. During an oilsupply shock, it also benefits from rising inflation expectations.

• Safe-haven currencies: The Swiss franc and the Japanese yenshould appreciate as investors seek protection in traditional safe-haven assets when geopolitical risks rise.

Authors: Vittorio Bosio ([email protected]),Jérôme Audran ([email protected]),Giovanni Staunovo ([email protected])

Global risk radar


Regular risk updatePolitical and policy uncertainty continues to dominate the risks on ourradar. Between North Korea's military ambitions, China's efforts tocontain a slowing economy, and US policy on taxes and trade, thereliance of global economic stability on the "human factor" remainshigh for any investor's comfort.

Fortunately, policymakers have demonstrated on multiple fronts that itis not in their interest to disrupt the global economic cycle. For example,Donald Trump has softened his tone with regards to protectionisttrade policy, while the ECB Governing Council decided not to surprisemarkets with an earlier-than-expected withdrawal of QE (we areremoving the ECB policy risk from our regular Risk Radar coverage forthe time being).

Of course, we are not nearly out of the woods yet. The Fed is expectedto start shrinking its balance sheet in the coming months, while theECB will likely start reducing its QE program from January next year. Atthe same time, the North Korea issue remains unresolved and Chinesegrowth continues to slow down.

While we acknowledge a number of global political and policyrisks, we do not expect any of them to materialize. Moreover, asheightened political uncertainty becomes more of a status quo, marketsincreasingly focus on strong fundamentals and continue to performwell. This makes us comfortable with our mild pro-risk investmentstance, with preferences for global equities and US high yield.

Please find below a table summarizing some of the key events tomonitor over the coming months (see Table 1), as well as a moredetailed analysis of some of the risk scenarios on our Global Risk Map.

Global risk radar


Table 1: Risk calendar

2017 Key EventsRisk categories 2017

Ongoing monitoring

Trumponomics· Trump policy with respect to:

1) Tax reform2) Regulatory relief3) Fiscal spending4) Global engagement

Rising protectionism· Negotiation on new and existing

free trade agreements (e.g. NAFTA)· New tari

(e.g. 45% tari· EU-UK negotiation

Geopolitics· US-China relations (e.g. One China

policy, South China Sea)· Geopolitics - other than US-China

relations (e.g. Middle East)· Cyber attacks· Sanctions (e.g. Russia, Iran)

European disintegration· Early Italian general election· EU refugee crisis

Central bank policy· Statements by key central bank

members· In related data (e.g. CPI,

wage growth, unemployment)

China hard landing· PMIs and industrial production· Fixed asset and intrastructure

investments· FX reserves

Central bank policy

China Hard Landing

European disintegration


Trumponomics

Geopolitics

September 20, FOMC meeting

September 07, ECB meeting

September 01, BRICS summit

September 24, German federal election

October 1, Catalan independence referendum

July 26, FOMC meetingJuly 20, ECB meeting

October, US debt ceilingOctober 26, ECB meeting

November 01, FOMC meetingNovember, China's 19th National People's Congress

December 14, ECB meetingDecember 13, FOMC meeting

Jul

Sep

Aug

Oct

Nov

Dec

Jan

Source: UBS CIO, as of 10 July 2017

Global risk radar


North Korea

A US military strike after a provocation by North Korea is a tail risk.

North Korea has been a source of political risk for several decades.The first US-North Korea nuclear crisis dates back to the early 1990s,and the first North Korean nuclear test was conducted in 2006. Inrecent months, a confluence of factors has again reignited geopoliticaltensions in the region. A powerful US anti-missile defense system(THAAD) was deployed in South Korea, while the new White House hasbeen demonstrating a more aggressive approach to foreign policy.

Recent developments

On 4 July, as the US was celebrating Independence Day, North Koreareportedly carried out the first successful test of an intercontinentalballistic missile (ICBM). A successful ICBM test does not necessarilyimply that North Korea is capable of delivering a nuclear warhead ontoUS soil; however, advancements in North Korea's missile program haveput further pressure on the US and its allies to come up with an effectiveresponse strategy.

At the G20 summit in Hamburg there was no indication of intent to usemilitary action against the regime: the US and China - the two majorforces at play in the conflict - both agreed on a "broad direction of usingpeaceful means to resolve [the North Korea] issue". Both countriesalready have economic sanctions in place against North Korea.

Trend StableProbability Very low

Risk dimensionsCIO expert assessment

Note: Distance from center (1-4) represents thedimension score. The CIO risk score is an average of thefour risk dimensions.Source: UBS, as of July 2017

Our view

Base case: Diplomatic process

Given recent statements by G20 leaders, we believe a diplomaticprocess is the likely course of action for the US and its allies in themonths ahead. Historically, economic sanctions have been the UN'scustomary response to North Korea's nuclear and missile tests, andfurther proposals to tighten sanctions are likely to come forward inthe coming weeks. Additional measures could include limiting the flowof oil to North Korea's military and weapons programs, increasing airand maritime restrictions, and imposing targeted sanctions on seniorofficials.

Economic sanctions on North Korea are unlikely to be disruptive for theglobal economy. Consequently, they should have a very limited impacton global financial markets.

Tail risk: Military escalation

Although Donald Trump has recently acknowledged that "[resolvingthe North Korea issue] may take longer than I'd like", as US presidenthe has the power to take military action against North Korea at any timeand for up to 60 days, without requiring Congressional approval. Webelieve this development is highly unlikely, unless it comes in responseto North Korea's aggressive action against the US or its allies.

Asset class impact

The table illustrates the expected impact of the riskscenario on various asset classes should it materialize:positive (green), negative (red) or neutral (blue).

Emerging market equitiesUS dollar (USD)

Provocative actions by North KoreaImpact on the South Korea (KOSPI) equity index

Source: UBS, Bloomberg, press reports, as of April 2017.

Global risk radar


In case of a US military response, a retaliation by Pyongyang, a regimecollapse, chaos in the peninsula, and a refugee crisis cannot be ruledout. Asian equity markets could fall some 15% and test recent crisis-level valuations. The Korean won could slump by 8–10%, and theJapanese yen could rally by a similar amount. Other Asian currencieswould likely fall by some magnitude in the mid-single digits.

North Korea reportedly still lacks the military capability to hit thecontinental US with a nuclear ballistic missile. Accordingly, thelikelihood of a provocation by Pyongyang resulting in US military actionremains very low, in our view. We currently assign less than a 10%chance to such a scenario.

Investment conclusions

During the past five nuclear tests by North Korea, (South) Koreanequities fell by an average of 2.5%, while equities in Asia ex. Japan lost0.6% within seven days of the nuclear tests - a limited impact overall.The impact of a full-scale military escalation would likely be far moresevere, but Asian assets would still be affected disproportionately morethan the rest of global markets. We continue to monitor the situationclosely, but remain comfortable with our preference for risky assets inthe context of a well-diversified portfolio.

Key dates to watch

•30 Sep 2017: Ongoing: UN sanctions againstNorth Korea

•31 Dec 2017: China's 19th National Congress(NPC) scheduled for 2H 2017.

For further information please contact Sundeep Gantori , Jason Draho , Daniil Bargman .

Global risk radar


Failure of Trumponomics

None of Trump's major domestic stimulus packages (tax reform,infrastructure spending) are implemented.

Recent developments

Republicans have been focused on health care reform, delaying actionon the rest of President Trump's economic agenda. The probability oftax reform is conditional on the outcome of the health care vote. Afailed vote would likely lead the Republicans to immediately pivot to taxreform in order achieve some legislative success before the mid-termelections. But a failure on healthcare would reduce the chances of majortax reform too. We keep the odds of some form of tax cuts at 55%. Ifhealth care reform does pass, it would create positive momentum andmake major tax reform incrementally more likely.

Headwinds to Trump's agenda are the ongoing special probe into hisalleged influence on the FBI investigation of former National SecurityAdvisor Michael Flynn and the investigation into Russian interferencesin the US elections. Although highly unlikely, there is a very small chancethat the investigation could lead to the impeachment of PresidentTrump, though not before 2018.

Our view

Base Case: US corporate tax lowered to 25-30%

We expect at least some progress on the Trump agenda, including UScorporate tax reform. The rate is likely to be lowered to 25-30%, notthe 15% (Trump) or 20% (Paul Ryan) had proposed, while there is likelyto be a reduced rate on the repatriation of foreign earnings. The actualtax cut could be less than the original proposals because the reformis unlikely to include a border adjustment tax (BAT), which would helppay for a larger reduction. The cut shouldn't have a significant impacton the federal budget deficit, though it may increase modestly. In lieuof a BAT, the administration may seek to impose targeted import tariffsin an attempt to improve trade deals and reduce the trade deficit.

Risk Case: Failure of Trumponomics

Although tax reform should be less politically contentious thanhealthcare reform because it mostly provides benefits to the publicrather than taking them away, the risk is that any big comprehensivelegislation gets bogged down by competing interests. If negotiationson tax reform drag into 2018, the loss of political momentum couldmean that nothing of significance on Trump's major domestic stimuluspackages (tax reform, infrastructure spending, etc.) gets implemented.We currently assign a 30-40% probability to this scenario.


In the event that Trumponomics fails, risk assets, especially those in theUS, are likely to suffer losses. We see US equities down about 5% asa worst-case scenario with the failure of Trumponomics. In a portfoliocontext, this would be partly offset by a modest decline in Treasuryyields. However, in our base case we continue to see upside for equitiesbased on accelerating global growth and corporate earnings, whichwould get a boost from tax cuts and ongoing regulatory relief.

Trend StableProbability High



Asset class impact


US equitiesHigh-grade bondsUS dollar (USD)

Market-implied probability of corporate taxreform by end of 2017In %

20

30

40

50

60

70

80

Apr 17 May 17 Jun 17

Source: PredictIt.org, as of 6 July 2017

Key dates to watch

•31 Oct 2017: Debt ceiling increase by then

For further information please contact Jason Draho , Vittorio Bosio .

Global risk radar



The US imposes tariffs on imports from countries that contribute themost to its trade deficit, causing them to retaliate swiftly.

Recent developments

Global trade was a controversial topic discussed at the last G20 meetingin Hamburg. The communique reiterated the role of global trade asan engine of growth, but also the importance of legitimate defenseinstruments against unfair trade practices. Although the G20 produceda unanimous declaration, German Chancellor Angela Merkel admittedthat discussions on trade were very difficult.

The US Department of Commerce has completed two importantinvestigations, the results of which could be communicated by end-July. The first focuses on the causes of the US trade deficit and couldultimately imply further protectionist measures. The second deals withsteel imports and whether they pose a danger to national security. TheUS president can decide to limit imports if they are determined to bea threat to the country's security. The US is the world's largest steelimporter, and tariffs could hit its trade partners such as Canada, Mexico,South Korea, Japan and Europe. The EU has already vowed to retaliatein such a scenario, and other countries could follow suit.

Our view

Base case: No broad-based protectionist measures

The moderation of President Trump's rhetoric on protectionism since hisearly days in office should prevent disruptions in global supply chainsand limit the negative impact to a few industries against which theUS has raised multiple WTO complaints over the years. We believe theUS administration will not impose broad-based protectionist measuressuch as tariffs or a border adjustment tax. In our view, the US will likelyrenegotiate existing trade agreements and focus on bilateral ratherthan multilateral deals. It may raise new complaints to the WTO andbe more aggressive with its trading partners, but not to the extent thatresults in a full-blown trade war with tit-for-tat retaliation.

Risk case: Rising protectionism

In an effort to reduce the US trade deficit, Donald Trump'sadministration could impose tariffs on imports from countries with ahigh trade surplus vis-à-vis the US. China, the Eurozone, Japan andMexico are likely candidates. In turn, these countries could retaliaterather swiftly, triggering a trade conflict between the US and the restof the world and higher import prices globally. CIO attaches a 10–20%probability to this scenario.


Equities tend to suffer when growth slows as a result of less globaltrade. Equity markets of export-oriented emerging economies and ofdeveloped economies that derive a larger portion of their revenuesfrom abroad (i.e. Eurozone, Japan) are particularly exposed. Initially,high-grade bonds could provide some protection given their safe-havenstatus. However, as yields rise to compensate for higher inflation, bondswould come under pressure. Finally, we would expect emerging marketcurrencies to depreciate against the US dollar, in particular those ofcountries most tightly integrated into global value chains, such as SouthKorea, Taiwan, Malaysia and Mexico.

Trend StableProbability Low



Asset class impact


Eurozone equitiesEmerging market equitiesHigh-grade bondsUS dollar (USD)

Top contributors to US current account deficitIn %

0%

10%

20%

30%

40%

50%

China Eurozone Japan Mexico

% of US trade deficit

Listed companies' revenue exposure to US (%)

Source: World Bank, Factset, UBS, as of 15 May 2017

Key dates to watch

•31 Jul 2017: Results of investigations by USDepartment of Commerce known by then

For further information please contact Jason Draho , Vittorio Bosio .

Global risk radar


China hard landing

Will China's real estate and credit markets collapse and provoke asharp economic slowdown?

Recent developments

China's growth has moderated since April after witnessing a strongmomentum in the first quarter. While the economy continued to besupported by healthy global demand for Chinese products, Moody'sdowngraded China's sovereign credit rating in May (from Aa3 to A1)due to concerns about rising leverage. The downgrade came as nosurprise to markets or Chinese regulators, and China's deleveragingefforts seem under way. In the meantime, China's foreign exchangereserves rose for the fourth straight month in May and are back aboveUSD 3trn, alleviating market concerns about the risk of capital outflows.

Our view

Base case: Orderly deceleration

China's growth is likely to face more challenges in 2H17 due to aslowing property market and moderating infrastructure investment. For2017 as a whole, we expect GDP growth levels more consistent withthe government's target of "around 6.5%" rather than the 6.9% thatwe saw in the first quarter.

Consumer price (CPI) inflation for 2017 is likely to hover around 2%,while producer price (PPI) inflation should continue to moderate towardlower single-digit levels. Fiscal policy should remain supportive, whilemonetary policy is likely to become more accommodative wheneverstability is challenged.

Risk case: China hard landing

We now see a 10–20% chance of a "hard landing" within the nextsix months. We define this scenario as sub-6% real GDP growth alongwith a credit crunch for more than two quarters, whereby the economyweakens abruptly due to a sharp fall in investment, accompanied bywidespread credit defaults.


• In 2017, CIO expects a single-digit depreciation of the Chineseyuan against the official CFETS currency basket, and believesyuan exchange-rate risks are worth hedging for the time being.For investors concerned with a potential hard landing, hedgingyuan downside risk could provide an additional protectionbenefit.

• Within Asian equities, China remains our preferred region,aided by our expectation of further economic stabilization inthe country. At the same time, we view offshore ChineseUSD-denominated bonds as expensive, which could weigh onperformance of the asset class in 2017.

Trend StableProbability Low



Asset class impact


US equitiesEmerging market equitiesHigh-grade bondsInvestment grade creditUS dollar (USD)

Slowing credit on deleveraging effortsin CNY billions

0

500

1,000

1,500

2,000

2,500

3,000

3,500

03/15 06/15 09/15 12/15 03/16 06/16 09/16 12/16 03/17

New household loans (CNY bn) New non-financial corporation (CNY bn)

New social financing (CNY bn)

Source: CEIC, UBS, as of June 2017

Key dates to watch

•13 Jul 2017: China June international trade•17 Jul 2017: China June fixed asset investment,

retail sales, and GDP for 2Q 2017

For further information please contact Yifan Hu , Kathy Li , Daniil Bargman .

Global risk radar


Disclaimer

Research publications from Chief Investment Office Americas, Wealth Management, formerly known as CIO Wealth Management Research, are published by UBS Wealth Management and UBSWealth Management Americas, Business Divisions of UBS AG or an affiliate thereof (collectively, UBS). In certain countries UBS AG is referred to as UBS SA. This publication is for your informationonly 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 recommendationor take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Different assumptionscould result in materially different results. We recommend that you obtain financial and/or tax advice as to the implications (including tax) of investing in the manner described or in any of theproducts mentioned herein. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors.All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to itsaccuracy or completeness (other than disclosures relating to UBS). All information and opinions as well as any prices indicated are current only as of the dateof this report, and are subject to changewithout notice. Opinions expressed herein may differ or be contrary to thoseexpressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria. At anytime, 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 toquantify. 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 optionstrading is considered risky. Past performance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and large falls in value and on realizationyou may receive back less than you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or income of an investment. This report is fordistribution only under such circumstances as may be permitted by applicable law.Distributed to US persons by UBS Financial Services Inc. or UBS Securities LLC, subsidiaries of UBS AG. UBS Switzerland AG, UBS Deutschland AG, UBS Bank, S.A., UBS Brasil Administradora deValores Mobiliarios Ltda, UBS Asesores Mexico, S.A. de C.V., UBS Securities Japan Co., Ltd, UBS Wealth Management Israel Ltd and UBS Menkul Degerler AS are affiliates of UBS AG. UBS FinancialServices Incorporated of Puerto Rico is a subsidiary of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-US affiliate whenit distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and notthrough a non-US affiliate. The contents of this report have not been and will not be approved by any securities or investment authority in the United States or elsewhere. UBS Financial Services Inc.is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section 15B of the Securities Exchange Act (the "Municipal Advisor Rule") and the opinionsor views contained herein are not intended to be, and do not constitute, advice within the meaning of the Municipal Advisor Rule. UBS specifically prohibits the redistribution or reproduction ofthis material in whole or in part without the prior written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect.Version as per May 2017.© UBS 2017. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

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