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Monthly Investment Guide

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CIO Wealth Management Research

US edition

UBS House ViewOctober 2016

Taking away the punchbowl?In Context: Will the real active managers please stand up?In Focus: As the race tightensVideos: Tom McLoughlin and Kristin Stephens

A MESSAGE FROM THE REGIONAL CIO

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 Taking away the punchbowl? by Mark Haefele

8 In context Will the real active managers please stand up? by Michael Crook

10 Preferred investment views

11 At a glance

11 Month in review

12 Top themes spotlight Counties at risk by Kristin Stephens and Laura Kane

14 Global economic outlook

16 Asset classes overview Equities Fixed income Commodities Foreign exchange

22 In focus As the race tightens by Mike Ryan

24 Top themes overview

26 UBS proprietary networks

27 Key forecasts

28 Detailed asset allocation

35 Performance measurement

38 Appendix

42 Publication details

CONTENTS

Dear reader,In recent weeks and months, there

has been a growing sentiment that we stand on the precipice of a signifi-

cant change. This is partially due to an increased focus on binary events such as the impending US election.

Binary events focus our uncertainty and split our view of the future into two dis-crete outcomes. When those visions are clearly dissimilar – and there are few starker contrasts than the US presiden-tial candidates’ worldviews and policy prescriptions – uncertainty can grow into anxiety.

But as we learned from the UK refer-endum a few months ago, it can be easy to overestimate the risks of a bi-nary event – even if the outcome is unexpected.

In this month’s Feature article, we focus on the debate over the balance between monetary and fiscal policy. We also ex-plore the challenging environment for cash, bonds, and portfolio diversifica-tion, and discuss some strategies for navigating this unforgiving landscape.

In the In Context article, we outline portfolio management strategies, such as portfolio rebalancing and tax-loss harvesting, which can consistently and significantly improve returns. We also evaluate the potential benefit of private market investments and putting excess cash to work.

This month’s Top Themes Spotlight focuses on municipal bonds and the conclusions from our recent America’s Counties report. We identify county gov-ernments whose credit may be deterio-rating, and provide recommendations for positioning portfolios to limit risk. Finally, we devote this month’s In Focus to recent developments in the US elec-tion, where the race has tightened sig-nificantly. But while the headlines have focused on the top of the ticket ahead of the upcoming Presidential debate, there has been a far larger shift in the legisla-tive branch. We evaluate the prospect for legislative change and review the poten-tial investment implications.

While the US election appears to be a catalyst for significant change, our analy-sis concludes that it doesn’t represent a significant factor for market fundamen-tals, which continue to support our over-weight to risk assets and our preferences for US and emerging market equities.

Mike Ryan, CFAChief Investment Strategist, WMA

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OCTOBER 2016 UBS HOUSE VIEW 1

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TACTICAL PREFERENCES

We prefer US equities and investment grade corporates, and favor emerging markets over Swiss equities.

Currencies

We introduce a preference for a basket of emerging market versus developed market currencies.

Equities We remain overweight US and emerging markets, and underweight Swiss stocks.

Fixed income We remain overweight US in-vestment grade corporates and underweight non-US bonds.

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

2 UBS HOUSE VIEW OCTOBER 2016

Even as the temperatures outside cool, the debate among policy makers has become more heated. Bank of England Governor Mark Carney has gone so far as to suggest that the path to negative rates was the “wrong” route to take. The Bank of Japan (BoJ) decided at its September meeting to refrain from pushing rates deeper into negative territory. At the same time it unveiled no-vel stimulus policies, which suggests that sub-zero rates may be going out of fashion.

A consensus has begun to emerge that a world of more active fiscal policy, in which finance ministers take greater charge of economic management, may lie on the “other side” of the monetary attempts to stimulate growth. Even in Europe, the idea of deficit spending is becoming less taboo. European Commis-sion President Jean-Claude Juncker is reportedly considering plans to relax and simplify the Stability and Growth Pact, the set of fiscal rules designed to limit spending among EU member countries.

The prospect that debates about the efficacy of monetary stimulus might lead to the punchbowl being taken away has provoked rising market volatility after a period of summer calm. Importantly for portfolios, it has also resulted in rising correlation between stocks and bonds. Correlations are now close to their highest levels in five years (Fig. 1), making portfolios more vulnerable to increased short-term volatility.

One investor response has been to seek safety in cash, with average investor proportions of it rising to 5.5% from 5.4% in the most recent BAML Global Fund Manager Survey.

Mark HaefeleGlobal Chief Investment Officer

Wealth Management

FEATURE

Taking away the punchbowl?Diversification Bonds and stocks have become more positively correlated, which complicates asset allocation.

Central bank policy The monetary policy debate has grown, with support for negative rates appearing to wane. We expect stimulus to continue. But central banks may use different tools.

Cash is not king Investors can use alternative asset classes to limit volatility and generate returns that should beat cash and government bonds.

Asset allocation We introduce a preference for a basket of emerging market currencies versus a selection of G10 currencies. We remain overweight US equities versus government bonds, and prefer EM stocks over Swiss shares.

Follow me on LinkedInlinkedin.com/in/markhaefele


FEATURE

Central banks staying but shifting If you think that central banks will give up on stimulus measures tomorrow, then a well-timed move out of a diver-sified asset allocation and into cash makes sense. In my view, central bank questions about monetary policy will lead to a new phase of stimulus, but not less stimulus.

When I started investing, “prudence” from a central bank meant a willingness to raise interest rates sooner rather than later. Now, according to the US Federal Reserve’s Lael Brainard, it means keeping them lower for longer – a strategy that the Fed followed by staying on hold at its September policy meeting. While policy makers are right to question the efficacy of some of the more un-orthodox policies – such as negative rates and quantitative easing (QE) – central banks will continue to pursue these and other measures. For example, the BoJ has continued to innovate, introducing commitments to “overshoot” its 2% inflation target and to cap 10-year bond yields at zero. It might take away the punchbowl, but not until the cups of sake have been poured.

There are at least two important considerations for investors to entertain as we enter what may become a new phase of stimulus efforts:

First, the global policy war on cash is far from over. Investors should prepare for even more negative real yields on cash if inflation rises. With oil unlikely to fall 35% again as it did last year, and with the US close to full employment, infla-tion can trend higher. Most US inflation gauges are already at or above their 20-year averages. Top money managers participating in our Investor Forum this month expressed their belief in a firmer inflation outlook. It is also worth noting that some serious economists want to increase the war on cash in other ways – calling for its abolition – so that monetary policy making and law enforcement efforts are more effective.

The Bank of Japan’s recent decision highlights that mon-etary policy makers can con-tinue to innovate.

Cash is under threat from con-tinued monetary stimulus and rising inflation.

Positive correlation poses a threat to diversification.

Fig. 1: US bonds and stocks have started to move in lock-step.

Source: Bloomberg Finance L.P., UBS. Data as of 19 September 2016.

Two-month rolling correlation of daily returns for S&P 500 Index and US high grade 5-7yr bonds, total price return.

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FEATURE

Second, bonds look increasingly at risk. The rally in government bonds this year has been supported by negative interest rate and QE policies that may now be reaching their limits. We’ve seen sharp sell-offs in recent weeks, particularly in the UK and Japan (two countries currently pursuing bond buying but where central bank chiefs are clearly uneasy about going further). Such market moves demonstrate the potential risks for bonds if loose monetary policy is shifting focus from bonds to other assets or measures.

What are the alternatives?Cash and bonds have historically been important components of a diversified portfolio, but they may be getting even more costly to hold as “insurance.” In a world where cash and bonds have low to negative yields, we have to work harder to find lower volatility, diversification, and/or higher returns.

For investors seeking diversification and returns in a world where bonds may be at risk of sharp drawdowns, we believe that alternatives – hedge funds and private markets – are worth allocations.

Hedge funds are unlikely to deliver the kind of returns they did before the fi-nancial crisis; the industry has expanded and competition for alpha is high. But they still provide effective portfolio diversification, and returns still compare favorably with other assets in a strategic allocation.

The best managers are still able to seize opportunities in more opaque markets, and even in sideways or down-trending markets.

Managers of private markets funds have the flexibility to buy assets and add value in illiquid markets. They can more easily take advantage of mispriced assets as in-

Government bonds offer both low returns and elevated risks at present.

Hedge funds can offer effective portfolio diversification.

Private markets funds have the potential to reward investors for accepting less liquidity.

Private markets have historically held up better when listed stocks are falling.

Fig. 2: US private equity returns resilient in tough times for listed stocks.

Source: Bloomberg Finance L.P., Cambridge Associates LLP, UBS. Data as of end March 2016. 10 worst quarters for global stocks: 1Q 1990, 3Q 1990, 3Q 1998, 1Q 2001, 3Q 2001, 3Q 2002, 3Q 2008, 4Q 2008, 2Q 2010, and 3Q 2011.

Quarterly percentage returns for US private equity and average performance in the worst 10 quarters for global stocks (MSCI AC World).

US Private Equity quarterly performance (%)Average global equity return in worst 10 quarters for global listed equities (MSCI AC World)Average private equity return in worst 10 quarters for global listed equities (MSCI AC World)

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FEATURE

formation may not be readily available or disclosed to average investors. Private markets have also proven their ability to diversify returns in periods of equity mar-ket turbulence: compared to the average of the 10 worst drawdowns for public equities over the last decade, private market indices have been more resilient (Fig. 2, although we should note that public and private market returns are not directly comparable given different industry standards for presenting perfor-mance).

Tactical asset allocationOver our six-month investment time frame, we remain positive on risk assets. Volatility has risen in the short term as the policy debate has gotten louder, and there are a number of political and economic risks ahead. However, as we saw with the Brexit vote shock, policy action and economic growth are likely to prove a stronger driver of markets in the medium term.

On the economic side, we continue to monitor Chinese data and Fed policy closely. Headline growth in China has been good, but balance sheet strains re-main – debt is rising, house price growth is extreme in some cities, and financial sector pressure points came to the fore again as Hong Kong interbank rates spiked. And while we believe the Fed is likely to remain cautious over the long-term horizon, varying market interpretations of the path of Fed rates could lead to higher short-term volatility, similar to that seen in recent weeks.

A number of political risks also loom between now and next year’s 19th Party Congress in China, the biggest being the US election. A Donald Trump victory is not priced in to markets and would likely cause marked short-term volatility. A Trump win is not our base case, and we will continue to track the US election campaign in our ElectionWatch series.

Growth and policy trends should outweigh political risks.

Relative valuations favor US stocks over govenment bonds.

Fig. 3: US equities still look attractively valued against bonds.

Source: Bloomberg Finance L.P., UBS. Data as of 8 September 2016.

S&P 500 equity risk premium (earnings yield less real 10-year Treasury yields).

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FEATURE

Despite these and other risks, we are overweight US equities against govern-ment bonds because they are less expensive, less vulnerable, and have greater upside, in our view. The earnings yield of stocks relative to Treasuries has only been higher 16% of the time since 1956 (Fig. 3). As current bond-buying meas-ures are increasingly being questioned, government bonds are vulnerable to sharper drawdowns. And we see clear catalysts for US equity gains: the earn-ings drag in the US from lower oil prices and a stronger dollar is abating, and we expect earnings growth of 3% this year overall, which should accelerate to 6.5% next year.

We are overweight emerging market equites versus Swiss equities. Profits are starting to stabilize in emerging countries after a multi-year malaise. The turna-round should be fueled by reviving economic momentum. Gauges of business activity show manufacturing activity expanding. And with the Fed still in go-slow mode, emerging market currencies have rallied, further reducing inflation pressures and the need for tighter monetary policy. Meanwhile, Swiss stock indices are skewed toward defensive sectors, and are less well positioned to exploit a global earnings improvement in more cyclical sectors.

We favor the Norwegian krone versus the euro. Norway is arguably more ad-vanced than most other regions in as much as it has generated high inflation – currently running at 4%. We believe this means its central bank’s easing cycle is clearly over, a view supported by the more hawkish tone of the Norges Bank’s September meeting.

We are introducing a new position on a basket of emerging market currencies – the Russian ruble, Brazilian real, South African rand, and Indian rupee – versus a group of G10 currencies – the Australian dollar, Canadian dollar, and Swedish krona. The goal of this position is to take advantage of the interest rate differ-entials between these nations which currently amounts to roughly 8% p.a. We prefer a basket of currencies in order to limit the overall risk of the trade. Taking this position during a time of improving economic conditions limits the danger of weakening emerging market currencies. And the low-yielding developed currencies we have chosen to underweight share a high exposure to commodi-

We are overweight US equities versus government bonds.

We are introducing a new cur-rency position to take advan-tage of higher emerging mar-ket yields.


FEATURE

ties and/or the global economic cycle. As a result they should diversify the risk of the EM basket.

ConclusionThe debate over the right balance between monetary and fiscal policy has grown louder in recent months, contributing to higher volatility. I believe policy support is likely to remain firmly in place for the foreseeable future, even if the means of implementation shift. Cash and bonds are at risk in this environment, and investors will be required to find more creative ways to seek safety and diversification over the longer term. Over the short term, I maintain a positive view on risky assets. Loose policy and earnings growth should offset potential risks, and we are staying overweight equities relative to bonds in our global tactical asset allocations.

Mark HaefeleGlobal Chief Investment OfficerWealth Management

UBS Global Research is produced independently. All views expressed herein are the views of the named analyst(s) and were prepared in an independent manner including with respect to UBS. The views expressed by the analyst do not necessarily represent the views of UBS as an institution.

Follow Mark Haefele on Linkedin and Twitter

linkedin.com/in/markhaefele

https://twitter.com/UBS_CIO

UBS Investor Forum Insights

At this monthly gathering, we invite thought leaders to debate the key topics af-fecting financial markets, and to challenge the UBS House View.

• This month, participants discussed whether fiscal policy will take over from monetary policy as the popularity of exceptional monetary easing fades. Seve-ral participants argued that monetary policy will continue to propel markets.

• Participants debated a number of looming political risks. While the US election was considered to be the biggest near-term risk, uncertainty in Europe next year dominated discussions.


IN CONTEXT

Michael Crook, CAIA, CRPCHead of CIO Investment PlanningWealth Management US

According to Morningstar, index-tracking investment funds now comprise a third of all mutual fund

and exchange traded fund (ETF) assets in the US, up from 25% just three years ago. That’s impressive growth, but not surprising in the context that over the 12 months ending June 2016, 85% of active US equity managers underperformed their benchmarks by an average of almost 7% (see Fig. 1).

Of course, short term underperformance should be understood in proper context. As we’ve written before, even the top ac-tive stock pickers will have trouble out-performing consistently on a quarter-to-quarter or year-to-year basis. But the data now points to a clear long-term trend of broad-based sustained underperformance by a large majority of managers. Recent manager underperformance comes on the heels of a similarly terrible track record over the last ten years (see Fig. 2), and re-search by Barclays indicates that the me-dian active fund manager has likely under-performed since the early 1980s.

In a world of low yields and low returns, persistent underperformance can impact the ability of families and institutions to meet their goals. For instance, private foundations appear to have been caught in the active management crosshairs in 2015. As a group, private foundations un-derperformed by about 1.8% in domestic equities, 0.8% in fixed income, 3.5% in international equities, and 2% or so in al-ternative investments last year. Trailing 10-year returns are now in the 5-6% range, and spending rates remained at 5.1%, in-dicating that the average foundation has shrunk in value on an inflation-adjusted basis over the last ten years.

Will the real active managers please stand up?

Not to pile on the bad news, but the ac-tive fund management underperformance problem is even worse for taxpayers. Be-tween 1990 and 2012, turnover in the av-erage US equity mutual fund created an additional 1.14% annual tax burden for its investors, which compares unfavorably to the much smaller 0.34% annual tax bur-den created by ETFs over similar measure-ment periods. No small wonder that many investors are throwing in the towel on ac-tive fund management.

The upside of activeIt’s important for investors to put active fund management in proper context. As-set allocation, not manager selection, will always be the main driver of long-term in-vestment returns for nearly all investors. Even investors who select the very best (or worst) 5% of managers will find that their asset allocation is responsible for about 80% of their overall performance – with active managers adding or subtracting a bit from that starting point. Stock picking and the active/passive debate get a lot of attention in the media, but selecting active fund managers is simply not the most im-portant decision an investor will make. Of course, many investors will continue to be-lieve in and use active fund management. We’re not arguing against doing so, but simply putting the potential impact – and the importance of being highly selective - in perspective.

Second, investors should maintain focus on the active management that really mat-ters: proper day-to-day portfolio manage-ment. For instance, investors already had at least one opportunity to rebalance this year following the significant equity mar-ket decline in January and February. Our analysis indicates that systematically taking advantage of rebalancing opportunities,


IN CONTEXT

whenever they happen, has historically added 0.7% outperformance to portfo-lios annually.

Similarly, maintaining a high degree of tax awareness in portfolio implementa-tion will also lead to outperformance. ETFs result in lower tax burdens than most active managers, but taxable in-vestors can do even better. Proactively harvesting losses out of an equity port-folio (and across an asset allocation) en-ables a taxable investor to defer realized gains and keep more money invested for longer periods, enabling compound-ing of growth. Multiple studies indicate that doing so can increase after-tax re-turns by about 0.5% per year. Perhaps even more importantly, the impact of tax awareness increases substantially for legacy assets, since embedded gains ef-fectively disappear when the basis gets a “step-up” as the assets pass to the next generation.

Third, investors seeking manager skill and outperformance would do well to look to diversifying strategies in private markets, including private equity and private real estate. As Mark Haefele dis-cusses in his feature article, we expect

the combination of management flex-ibility, lower market efficiency, and illi-quidity to result in superior risk-adjusted returns. In addition to providing more fertile ground for outperformance, many investors will find that diversifying out-side of publicly traded stocks and bonds increasingly necessary in a world where high-quality fixed income returns 0-1% after inflation.

Finally, the media obsession with man-ager outperformance misses the biggest drag on most investors’ returns today: excess cash. Investors holding cash have lost more purchasing power since 2009 than during any other seven-year period in the last century. Cash is a very risky asset for long-term investors, since it’s nearly impossible to accurately forecast what it will be worth in five, 10, or 20 years. We encourage investors to hold enough cash to meet their near-term spending needs, but to find productive investment opportunities for any assets in excess of that amount.

1 2015 Council on Foundations – Commonfund Study of Investment of Endowments for Private and Community Foundations.

Source: S&P Dow Jones Indices LLC, CRSP, UBS, as of 30 June 2016

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Fig. 1: The performance gap has increased recently

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Preferred investment views Recent upgrades

Recent downgrades

As of 22 September 2016

Most preferred

Equities• US• Emerging markets • North American energy independence• Transformation technologies• e-Commerce• Golden years for Baby Boomers

Bonds• US investment grade • Beyond benchmarks• Counties at risk

Currencies• NOK

Cash

Least preferred

Equities• Switzerland

• US rth American energy independerIndia• REITs• e-Commerce

• Government bonds •

• US mid-c

• EUR



EconomyWhile we still expect the next rate hike by the Fed in December, we do not see an end to very loose global monetary conditions anytime soon. The ECB is likely to extend its bond purchases beyond March 2017. Despite some weakening in lead-ing indicators over the past month, the global economy remains supported by solid private consumption. The US unemployment rate of 4.9%, as well as house price gains of more than 5% over the past 12 months are supporting our con-structive outlook, and in this environment, we are holding onto a moderate risk-on positioning, expressed in an overweight in US equities over government bonds. US earnings are likely to return to positive growth before year-end.

EquitiesBesides our overweight in US equities, we hold an overweight in emerging mar-kets (EM) against Swiss stocks. As the economic backdrop has stabilized in many EM countries, earnings are improving. Price momentum of EM equities is close to its highest level since 2014 – usually a supportive signal for future returns. Mean-while, we expect Swiss equities to benefit less from improving global growth con-ditions due to the defensive sector mix. Negative interest rates will likely remain a headwind to financial sector earnings.

Fixed incomeThe US 10-year Treasury yield has risen by 35bps from its July low, causing nega-tive returns on government bonds. While we expect a further gradual rise in global yields, concerns about aggressive monetary policy tightening are prema-ture. We believe global central bankers, particularly Fed Chair Janet Yellen and ECB President Mario Draghi, will continue to lean toward a cautious policy stance. In this environment, credit continues to offer better return prospects than govern-ment bonds, and we maintain an overweight in US investment grade bonds, of-fering a yield of 2.3%. Fixed income investors, who can tolerate some illiquidity, should find the best value in a well-diversified portfolio of credit assets, including senior loans.

Foreign exchangeWe newly favor a basket of EM currencies (Brazilian real, Indian rupee, Russian ru-ble, South African rand) over a basket of developed market currencies (Australian dollar, Canadian dollar, Swedish krona), as we think the recent stabilization in EM data provides a supportive backdrop to harvest the attractive interest rate carry. We also maintain a preference for the Norwegian krone over the euro. Strong eco-nomic momentum in Norway, as well as rising consumer and house prices, should keep the central bank from easing policy, while the ECB continues its quantitative easing. This should support further appreciation in the NOKEUR exchange rate.

US economic data remained mixed this month. The ISM Manufactur-ing PMI fell below 50 for the first time since March, and the ISM Non-Manufacturing PMI read-ing was the lowest since February 2010 at 51.4. Employment data remained strong though, with job openings rising to a record-high of around 5.9mn. As expected by the market, the Fed announced its decision on 21 September to keep interest rates unchanged, although Fed Chair Janet Yellen implied that a rate hike before the end of the year is likely.

The European Central Bank an-nounced no further changes to interest rates or its asset purchase program beyond the March cut-off date. Its total government bond purchases moved past the EUR 1tr mark earlier this month. July spending data for the Eurozone was strong, with 2.9% year-over-year growth. The UK Manufactur-ing PMI hit a 10-month high at 53.3, defying market expectations of further post-Brexit weakness.

In Asia, the Bank of Japan an-nounced a new policy frame-work after its September meeting, “QQE with Yield Curve Control,” in pursuit of its 2% inflation goal. The announcement came after the core inflation rate fell to its lowest level since March 2013.

Oil fell below USD 44/bbl in early September on news that OECD countries’ oil inventories had reached a record 3.1bn barrels due to increased supply from OPEC producers. However, prices ral-lied to over USD 48/bbl later in the month after government data re-vealed that US crude inventories had declined to their lowest level since February.

Month in Review

At a Glance


Our newest top theme leverages the analysis from the America’s Counties report released last

week. This is the first top theme within the municipal bond space.

There are over 3,000 counties in the United States – and no two are exactly alike. They vary in size from a mere 26 square miles to more than 88,000 square miles, and their populations range from under 100 persons to over 8 million. Counties differ in functionality as well. In some states, counties play a major role in providing public services and infra-structure, and have a significant number of employees. In others, they have more limited authority, or simply constitute lines on a map. Due to these differences, the financial health of the nation’s coun-ties tends to vary as well. We believe that heightened attention to US local govern-ment credits is warranted in an era when the growth in fixed costs associated with pensions and employee healthcare ben-efits often outpaces revenue growth. With our latest Top theme, Counties at risk, we identify those county govern-ments whose credit may be deteriorat-ing, and recommend repositioning port-folios to limit exposure to weaker county governments.

While we expect credit ratings to be sta-ble for most county governments as long

Kristin Stephens, Municipal Research Strategist

Laura Kane, CFA, Thematic and Sustainable Investing Strategist

Counties at risk

as the economy continues to gradually grow, we find the credit risks to be un-evenly distributed. For a smaller number of county governments, there has been little progress in restoring structural bal-ance in their financial operations since the last recession. In instances where this trend is accompanied by narrow re-serves and liquidity, the county is much more likely to exhibit deeper financial dis-tress when the next economic downturn occurs.

County governments with greater credit difficulties tend to share certain char-acteristics. A history of underlying eco-nomic weakness, for example, is an obvi-ous one. Second, contingent exposure to a poorly performing enterprise (such as a nursing home) could trigger subsidies that are no longer affordable. Another challenge is weak disclosure practices. A delay in the release of a comprehensive annual financial report does not guar-antee credit stress, but there are many instances where the correlation is pretty high. Lastly, for many county govern-ments, our foremost concern is that their pension liability and/or current pension funding practices present a longer-term credit risk. All of these factors (see Fig. 1), when accompanied by a more narrow financial position, can increase the likeli-hood of rating pressure or credit spread widening.

TOP THEMES SPOTLIGHT


To identify county governments whose credit may be deteriorating, we looked first at available liquidity held in the pri-mary operating funds of counties with populations over 100,000 as of the date of their most recently filed audited finan-cial report. We believe that low liquidity can indicate credit stress and signal chal-lenges ahead. Focusing specifically upon those with below average liquidity, we identified over 60 individual counties this year that required closer scrutiny. We fo-cused on trends related to the local econ-omy, debt burden, reserve levels, assessed value, and pension liabilities. Based on our findings, we then classified the group into three primary credit outlook group-ings: stable, cautious, and negative. For a handful, we expressed more serious con-cern. In our view, these are not appropri-ate investments for private clients in lad-dered portfolios at this time.

Portfolio recommendationsGiven the disparity among US counties’ financial health, we believe there are sev-eral steps that can be taken to improve positioning within municipal bond alloca-tions. With credit quality spreads tight on a historical basis, we believe this to be a good time to take action (see Fig. 2).

First, sidestep pension risk. We ex-pect the pressure presented by rising pension costs to weigh on local govern-ments for some time. With that in mind, we recommend weighting a municipal bond portfolio’s allocation toward reve-nue bonds issued by essential public ser-vice enterprises.

Second, cross state lines. For inves-tors who focus exclusively on single-state portfolios, we find that it is difficult to sufficiently diversify risk, with the excep-tion of California, given its sheer size. In our view, the advantage of diversifica-tion outweighs the value of the in-state tax exemption, in most instances.

And lastly, position portfolios for the longer term. We encourage inves-tors to review local government hold-ings to determine if they remain in line with investment objectives. Local gov-ernments are creatures of their respec-tive states, and it is reasonable to expect a more difficult operating environment for those situated in states facing more serious budgetary and pension-related challenges.

Source: Center for Retirement Research at Boston College, UBS, as of 8 September 2016

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Fig. 1: For some counties, pension contributions are a more significant expense

Pension contributions as a % of 2013 revenue

Pension contributions as a % of 2013 revenue (lhs)

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TOP THEMES SPOTLIGHT

Fig. 2: Credit quality spreads

Source: MMD, UBS, as of 12 September 2016

In bps

150

100

50

0

200

250

BAA GO 10 yr – AAA GO 10 yr AA GO 10 yr – AAA GO 10 yr

A GO 10 yr – AAA GO 10 yr

Sep-15Sep-14Sep-13Sep-12Sep-11 Sep-16

Video feature Kristin Stephens discusses counties at risk. Click to play.

http://www.ubspodcast.ch/us/wmr/podcast/en/topofthemorning/160920-Muni_Update-Americas_Counties-Kristin_Stephens.mp4


Global economic outlookThe UK economy has slowed after the Brexit vote but a recession may be avoided, and the global impact has been limited. With the US labor market tightening, we expect the Fed to hike rates in December despite some weak-ness in the recent data. The Eurozone recovery is continuing at a modest pace, and Japanese data has been weak. Emerging market econo-mies are looking somewhat better than they did early in the year. Inflation is subdued, and monetary policy is extremely accommodative in most countries.

Central bank policyBrian Rose, PhD US Economist

Ricardo Garcia-SchildknechtEconomist

House viewProbability: 60%

Ideological divisions within the US Federal Reserve have been evident in the disparate range of comments from members of the FOMC. This has created some uncertainty among investors about not only the pace of policy tightening, but also the factors thatwill drive tightening in 2017. The quantita-tive policy position (measured by the Fed’s balance sheet to GDP ratio) continues to tighten in a moderate way. We believe that a 25bps increase in Fed Funds is justified, and will take place at the December FOMC meeting against a backdrop of higher head-line inflation, a relatively tight labor market, and greater clarity over the political outlook.

Positive scenarioProbability: 20%

Worse macro backdropThe Fed is forced to stay on hold, but a rate cut remains unlikely. The ECB launches addi-tional monetary easing, with a focus on sta-bilizing or increasing bank credit growth.

Negative scenarioProbability: 20%

Macro risks fadeDiminished risks allow the Fed to signal more aggressive rate hikes in 2017. The ECB reacts to the increase in headline inflation, with some countries potentially experienc-ing inflation over the 2% level, by exiting from quantitative policy in March.

KEY FINANCIAL MARKET DRIVERS

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

US 2.6 1.4 2.4 0.1 1.3 2.2Canada 1.1 1.2 2.3 1.1 1.5 1.8Brazil -3.8 -2.8 1.6 10.7 6.9 4.7Japan 0.6 0.5 1.2 0.8 -0.2 0.3Australia 2.5 2.8 3.0 1.5 1.2 1.8China 6.9 6.6 6.3 1.4 1.9 2.0India 7.6 7.4 7.6 4.9 5.4 4.5Eurozone 1.6 1.5 1.3 0.0 0.3 1.8UK 2.2 1.9 0.7 0.0 0.8 2.5Switzerland 0.8 1.4 1.3 -1.1 -0.3 0.4Russia -3.7 -0.6 1.5 15.5 7.1 4.9World 3.2 2.9 3.3 2.7 2.7 2.8

Source: Reuters EcoWin, IMF, UBS, as of 22 September 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 2.9%


30 September 2016Personal income and spending for AugustIn addition to the important data on income and spending, this re-port includes the personal con-sumption expenditures (PCE) price index, the inflation measure that the Fed focuses on.

1 October 2016ISM Manufacturing for SeptemberThe ISM Manufacturing PMI fell back below 50 in August, sug-gesting that the sector continues to face headwinds despite robust growth in US consumer spending.

5 October 2016ISM Non-Manufacturing for SeptemberThe ISM Non-Manufacturing PMI is an important indicator of cur-rent economic conditions. The Non-Manufacturing PMI dropped sharply in August, a troubling sign if confirmed by another weak reading in September.

7 October 2016Labor report for SeptemberNonfarm payrolls increased by 151,000 in August, slowing after two straight months of stronger gains. We will look at details of the report for evidence that the labor market is getting tighter, a key fac-tor for the Fed when deciding on monetary policy.

14 October 2016Retail sales for SeptemberWith consumer spending driving overall economic growth, retail sales data is even more important than usual. Sales were strong in 2Q, but there was some payback in July and August.

Key dates Crude oil market rebalancingGiovanni Staunovo Analyst

Dominic Schnider Analyst

Wayne Gordon Analyst


In the near term, we expect the oil sup-ply to remain ample: OPEC production will remain strong, disrupted supply has returned to the market, and a mi-nor counter-seasonal inventory buildup is expected in 2H16. Oil prices are thus vulnerable to price setbacks toward USD 40/bbl in the coming months.

Positive scenarioProbability: 10–20%

Sharper-than-expected contractionPrices could rise quicker than expected due to destabilizing geopolitical events in oil-exporting regions like Venezuela, Africa, or the Middle East, thus trigger-ing additional outages, a faster contrac-tion in US crude production, and/or an emergency OPEC meeting that results in the implementation of a production cut. On the demand side, a cold winter could stimulate demand growth.


Resilient productionMore resilient non-OPEC production, or fewer OPEC production outages, could keep the market oversupplied. A last-ing ceasefire in Nigeria and Libya could result in a return of 1mbpd or more of disrupted supply. Cost reductions and ongoing efficiency gains could lead to more resilient US tight oil production, while the latest oil price increase could moderate US production declines and/ or stimulate supply growth early next year. On the demand side, a broader economic crisis in Asia (particularly in China) could slow incremental demand for oil and keep the market in surplus.

US earnings growth to resumeJeremy Zirin, CFAHead, Investment Strategy, WMA

David Lefkowitz, CFASenior Equity Strategist


While headline 2Q16 S&P 500 earnings-per-share (EPS) fell slightly (by 1.5% year-over-year), results compared favorably to the 6% decline in the first quarter. This improving trend should continue with headline S&P 500 earnings growth resuming in the third quar-ter. The huge drag on profits from the strong US dollar and poor energy sector results have largely run their course. Excluding the energy sector, 1Q16 was the only quarter over the past two years with negative year-over-year earnings (down just 1%). S&P 500 EPS ex-en-ergy grew by 3% in 2Q16.

Positive scenarioProbability: 20%

Business confidence acceleratesHigher interest rates and rising commodity prices, driven by improving global growth pros-pects, could produce stronger-than-anticipated S&P 500 EPS growth as energy and financials experience meaningful gains. Increased confi-dence in the global economic expansion could spur greater capital investment, improving the outlook for industrials. Technology end-mar-kets improved in 2Q16, and continued strength could result in earnings upside. Regardless of the November presidential election outcome, tax-reform momentum is expected to build. Lower taxation on repatriated foreign earn-ings could boost S&P 500 EPS via higher share buybacks.


Growth slump or stagnationA downturn in US and global growth could lead to weaker-than-projected revenues for S&P 500 companies. Wage pressures, unac-companied by improving consumer and busi-ness demand, could pressure profit margins and earnings growth rates. Persistently low short-term interest rates and continued de-clines in long-term interest rates could pressure financial sector earnings.



ASSET CLASSES OVERVIEW

Performance has been mixed year-to-date. US equities are near record-highs, and emerging markets (EM) have gained, but the stronger yen has restrained the Japanese market, and negative interest rates have weighed on Eurozone financials. We are overweight US and EM equities, and underweight Swiss equities. Easier comparisons from oil prices and the dollar, coupled with continued strength in consumer spending, should help S&P 500 earnings-per-share (EPS) advance in the quarters ahead.

Equities

Eurozone neutral

We are neutral Eurozone equities. Solid domestic consumer demand and ongoing monetary easing support a continued economic recovery. Leading economic indicators – especially for manufacturing activity – have stabilized in expansionary territory. While currency depreciation supported earnings last year, the euro has appreciated modestly this year. Earnings dynamics remain rather weak compared to other regions. Our most preferred sectors are energy, materials, technology, and utilities.

UK neutral

We are neutral on the UK. A weakening economic backdrop after the UK vote to leave the EU may lead to downgrades in earnings of cyclical and domestic areas, including financials. However, the bigger drive has been international companies that are seeing upgrades to earnings based on the benefits from the weaker pound. We believe the FTSE 100 has an 8% currency boost to earnings from the pound’s decline. Earnings are likely to be slightly negative this year, but we expect them to return to a double-digit growth rate next year.

Emerging markets overweight

We are overweight emerging market (EM) equities in our global portfolio. EM economic activity numbers are stabiliz-ing, and manufacturing sentiment is turning more positive from low levels. Corporate earnings growth is improving, es-pecially compared with several developed markets. The re-cent rise in commodity prices is encouraging, and the global liquidity backdrop remains supportive. Also, EM equities are trading at a discount to their developed market counterparts. We prefer China, Brazil, South Korea, and India to Mexico, the Philippines, and Taiwan.

EURO STOXX (index points, current: 323) Six-month target

House view 335

Positive scenario 375

Negative scenario 270

FTSE 100 (index points, current: 6,835) Six-month target

House view 7,025

Positive scenario 7,500

Negative scenario 5,600

MSCI EM (index points, current: 906) Six-month target

House view 940



Japan neutral

We are neutral Japanese equities. Earnings growth should be moderate at 3% in FY16 (which ends in March 2017) and 4% in FY17. The yen has strengthened by more than 15% this year, and USDJPY trades around 100 currently. We don’t expect the yen to strengthen further in the next 12 months. Thus, the currency headwind for corporate earnings is likely to fade toward next year. The Bank of Japan continues its easy monetary policy with a new focus on yield curve control. Our preferred ideas within Japan equities include share-buy-back and high-dividend yield stocks.

TOPIX (index point, current: 1,353) Six-month target

House view 1,375


Negative scenario 1,100

Jeremy Zirin, CFA; David Lefkowitz, CFA; Markus Irngartinger, PhD, CFA

Note: Current values as of 21 September 2016


US equities – styleWe maintain our neutral view between growth and value stocks. While value has outperformed growth by 3.7% year-to-date (af-ter growth outperformed by 9.5% in 2015), we do not believe that the stage is set for an extended outperformance cycle by value. Our sector strategy – particularly our overweight alloca-tion to technology – supports a growth tilt; however, rebounding energy stocks and the prospects for a Fed rate hike in December should benefit the broader value index.

US equities overview overweight

Aggregate S&P 500 earnings-per-share have stagnated over the past few quarters, primarily driven by the outright collapse in energy sector profit. Profits for US multinationals also suf-fered from the effects of the strong dollar. However, outside of energy, earnings have been generally healthy. Given the rebound in oil prices and the fall in the dollar over the past eight months, year-over-year earnings comparisons are set to become easier for the broad market index. Market valuations should remain well-supported in a moderate-growth and low-inflation environment. We maintain our six-month S&P 500 price target of 2,225.

US sectorsAfter leading the market during the first half of 2016, the “bond proxies” of the equity market – utilities, telecom, and consumer staples – have lagged this quarter. We expect fur-ther underperformance in these expensive sectors as inter-est rates gradually rise and domestic growth prospects firm. We close our underweight to the materials sector as com-modity prices have stabilized and emerging market growth appears on more solid footing. Renewed price competition drives us to deepen our underweight in the telecom sector, while we trim the consumer discretionary sector to a moder-ate overweight.

US equities – sizeOur US equity overweight is spread evenly across small-, mid-, and large-caps. Small-caps have outperformed in 2016, driven by a benign credit environment and stronger relative earnings. Rising interest rates, driven by improving domestic growth, should also boost smaller-size segments. However, small-cap leverage is high, relative valuations appear fair, and, typically, large-caps perform best in the latter stages of the business cycle.

Source: Bloomberg, UBS, as of 21 September 2016

100

75

50

25

150

175

Oct-16Oct-13Oct-10Oct-07Oct-04Oct-01

125

Banks

Real estate

Insurance Diversified financials

Financials

Real estate does not behave like other financials

Performance relative to S&P 500, indexed

200

Source: DataStream, Bloomberg, UBS, as of 22 September 2016

50

40

30

0

70

Interest rates

20

10

60

US stocks: earnings matter more than interest rates

Correlation of stocks vs. interest rates and EPS, last five years, in %

90

80

100

EPS

US equitiesWe are overweight US equities. The recent rise in domestic and global long-term interest rates, coupled with increased US election uncertainty, has caused – and may continue to drive – bouts of market volatility. However, we expect that the primary narrative around the US equity market over the next six months will be the return of positive year-over-year cor-porate profit growth. Select cyclical and growth-oriented sectors appear best positioned, given both attractive relative valuations and improving earnings.

S&P 500 (index points, current: 2,163) Six-month target

House view 2225

Positive scenario 2450





We expect yields to move modestly higher as the US economy grows and approaches full employment, and as the Fed gradually raises rates. A healthy labor market and steady con-sumer suggest that the economy is in good shape, and inflation should reach the Fed’s target. Risks include market disruptions due to Brexit implementation or a slowing Chinese economy. Somewhat higher rates will result in minimal returns for Treasury bonds. We are underweight US Treasuries versus US equities and US corporate bonds.

Bonds

Government bonds underweight

Last month, the trading range in 10-year yields was the lowest the market had witnessed since 2006. When such low volatil-ity occurs and trading ranges last for long periods of time, the market has a tendency to breakout fairly quickly. A disappoint-ing European Central Bank meeting and a steepening Japanese Government Bonds curve pushed the 10-year yield to 1.73% and steepened the curve meaningfully. Our 12-month forecast for the 10-year yield remains 1.90%, but we are watching the recent higher trend in interest rates

Emerging market bonds neutral

Emerging market sovereign and corporate credit spreads have remained below our six-month target (360bps) in the last few weeks. Stable-to-improving economic fundamentals and ac-commodative global monetary policies should continue to support the asset class. That said, lower spreads and linger-ing EM-specific and global macro risks will limit further spread tightening, in our view. We recommend that investors remain neutral on the asset class in globally diversified portfolios. The HY segment should outperform its IG counterpart due to the yield advantage and positive sector developments.

US investment grade corporate bonds overweight

We continue to like the risk/reward profile of investment grade credit and its relative appeal compared to government bonds. IG offers a yield of 2.9%, compared to 1.3% for US Treasuries. The global search for yield will keep foreign demand elevated as overseas investors take advantage of the scale and liquidity that US IG offers. Among IG sectors, we favor US IG financials, which have improved somewhat versus non-financials, but still offer relative value. Along the IG curve, we favor intermediate credit maturities in the 5- to 10-year range.

US 10-YEAR YIELD (Current: 1.6%) Six-month target

House view 1.7%

Positive scenario 1.2–1.5%

Negative scenario 1.9–2.1%

EMBIG div / CEMBI div SPREAD (Current: 335bps / 337bps)

Six-month target

House view 360bps / 360bps

Positive scenario 300bps / 300bps

Negative scenario 550bps / 580bps

US IG SPREAD (Current: 142bps*) Six-month target

House view 150bps

Positive scenario 125bps

Negative scenario 275bps*Data based on BAML IG corporate index

US high yield corporate bonds neutral

High yield has returned 14% year-to-date, and 10% when excluding commodity sectors. While price gains are unlikely to be repeated, we look for HY to deliver coupon-driven returns over the next six months. We lower our six-month spread tar-get to 550bps, based on our forecast for lower defaults over the next 12 months of 3–4% compared to 5.3% over the past 12 months. This is due to our assessment that defaults outside of the troubled commodities sectors should remain relatively low, while we expect commodity sector defaults to gradually decline.

USD HY SPREAD (Current: 522bps*) Six-month target

House view 550bps

Positive scenario 450bps

Negative scenario 1,100bps

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

*Data based on BAML High Yield indexes



Preferred securitiesWhile valuation in the preferred market has improved some-what, relative value remains historically low. Rate volatility has pressured the sector (along with other rate-sensitive groups), but ETF flows remain positive and could prolong valuation im-balances. We maintain a neutral outlook given the potential for rate and spread volatility, and tight valuations. We con-tinue to favor preferreds with call protection and either fixed-to-floating rate coupons that have high back-end spreads or high-coupon fixed-rate preferreds. Current spread: 94bps vs. 74bps last month.

Municipal bonds neutral

Following a lengthy period in which powerful technical factors pushed muni prices higher, the market is now exhibiting some price weakness. Over the past month, munis have lost 0.7%, reducing the sector’s year-to-date return to 3.9%. Municipal mutual funds continue to attract assets, but at a slower pace. In the near term, volatility may increase due to uncertainty sur-rounding the final outcome of the US elections. At current levels, tax-exempt paper holds value versus US Treasuries. Cur-rent AAA 10-year municipal-to-Treasury yield ratio: 93.0% (last month: 90.3%).

Treasury inflation-protected securities (TIPS)The 5-year TIPS breakeven inflation rates rose to 1.34% on the back of a stronger-than-expected CPI. We had moved to neutral at a 1.51% breakeven inflation rate in 5-year TIPS, well above the current level. Although oil prices have stabilized, the duration component within the TIPS market has us waiting on the sidelines for a better entry point. With volatility likely to in-crease in the fourth quarter, we await a time to start incremen-tally adding back. Current 10-year breakeven inflation rate of 1.48% (1.47% last month)

Non-US developed fixed income underweight

Over the past month, bond yields moved mostly higher in countries outside of the US, and overall, the dollar gained against other major currencies, hurting the value of non-US as-sets when measured in dollars. As a result, non-US developed fixed income generated negative returns. Non-US bond yields are at very unattractive levels, with many bonds offering nega-tive yields, and we expect the dollar to strengthen in the near term as the Fed prepares to raise rates. We therefore recom-mend an underweight position on the asset class.

Additional US taxable fixed income (TFI) segments

Source: BAML, UBS, as of 19 September 2016

Jun-16Mar-16Dec-15Sep-15 Sep-16

IG credit spread (lhs)

HY credit spread (rhs)

Credit spreads only modestly wider amid the recent volatilty

Spreads, in bps

650

550

450

850

750

950

165

145

125

205

185

225

Mortgage-backed securities (MBS)MBS spreads narrowed to the lower end of their yearly band of 95bps–115bps. Volatility rose ahead of the Fed and the Bank of Japan decisions, however, and MBS spreads moved out to 101bps to the Treasury curve. The stability of this spread range is beyond impressive given the land mines faced this year with oil, Brexit, and central bank divergence. MBS remains a great carry and liquidity. FNMA 4% and 4.5% coupons offer good carry and lower duration. Current spread is +100bps to the 5-year and 10-year Treasury blend (versus +102bps last publication).

Agency bondsThe agency market had held in over the past few weeks as volatility has increased. Year-to-date agency debt has re-turned 3.3%, a respectable return for a low-risk asset class. Investors await an increase in volatility to re-enter the callable market and a pickup in incremental yield. CIO remains over-weight spread product versus the safe haven of agency debt, although we anticipate a rise in volatility into the end of the year. Current spread is +18 bps to the 5-year (versus +18bps last month).


CIO WMR interest rate forecast

Americas 20-Sep-16 3 mths 6 mths 12 mths

USD 3M Libor 0.9 1.2 1.3 1.6

USD 2Y Treas. 0.8 0.9 1.0 1.1

USD 5Y Treas. 1.2 1.2 1.3 1.5

USD 10Y Treas. 1.7 1.5 1.7 1.9

USD 30Y Treas. 2.4 2.3 2.5 2.7

Source: UBS, as of 21 September 2016



Investors should not expect much from commodities in the near term. Our three-month return forecast is negative in the mid-single digits, driven by a modest spot decline and nega-tive roll yield returns. Most of the weakness relates to energy due to further setbacks in oil prices. Potential softness also comes from precious metals as a pending US Federal Reserve rate hike should temporarily weigh on the sector. Price advances in base metals, agriculture, and livestock should be insufficient to turn the tide for the asset class.

Commodities and other asset classes

Commodities neutral

Precious metals Gold prices have benefitted from three fac-tors this year: higher financial market volatility, political un-certainties, and lower US real rates, which stem partly from the Fed’s slower hiking path. We continue to like its insurance qualities and see longer-term prices as better supported with US real rates dipping further into negative territory. As a result, we expect gold to trade at USD 1,350/oz in six and 12 months.

GOLD (Current USD 1,335/oz) Six-month target

House view USD 1,350/oz

Positive scenario USD 1,450/oz

Negative scenario USD 1,200/oz

Crude oil Supply availability of crude oil has improved with the return of disrupted Canadian oil supply and the highest OPEC crude production since 2008. This makes oil vulnerable to lower prices, in our view, as inventories build counter-sea-sonally in 2H16. We remain confident that a combination of contracting non-OPEC supply and rising oil demand in emerg-ing markets will result in a balanced oil market next year, which should bring with it Brent oil prices of USD 55/bbl or higher in 12 months. Price setbacks offer an opportunity to in-crease exposure to the oil market, in our view.

BRENT (Current: USD 46.8/bbl) Six-month target

House view USD 45/bbl

Positive scenario USD 70/bbl

Negative scenario USD 30/bbl

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

Agriculture Recent USDA estimates show that global grains markets remain in surplus; stockpiles of wheat, for example, remain near recent record-highs. Weather damage to the Eu-ropean wheat crop has yet to be fully accounted for in global market prices, particularly in the price differential between the different wheat qualities. We therefore remain positive on Kansas wheat versus European wheat. The influence of La Niña on growing conditions in Asia and South America re-mains benign. Global weather agency models show a trend toward La Niña; however, critical thresholds signaling a stron-ger event ahead have not yet been breached.

Base metals Signs of USD strength have been weighing on base metals as of late. Although the USD could become even stronger in the near term, global industrial activity and base metal-specific factors should remain the key price drivers. For the former, we expect some improvements globally since in-dustrial production has expanded modestly this year. So our

Other asset classesListed real estate Earnings growth remains solid at 4.5% for 2016-17. A 3.8% dividend yield makes an 8% full-year return possible, provided overall bond yields stay low. Yet, listed real estate has already delivered more than 12% annualized return this year, and is unattractively valued. It trades at a 1.0% dis-count to net asset value compared to –6.4% historically. But financial conditions for real estate stabilized after deteriorat-ing at the start of the year and remain favorable despite some gradual worsening occurring again. Yield spread expansion presents the biggest risk at these extremely low bond yields.

FTSE EPRA/ NAREIT Developed TR USD (Current: 4,704) Six-month target

House view USD 4,500

Positive scenario USD 4,800

Negative scenario USD 4,000


view on the sector is positive over the next 6–12 months. On an individual commodity level, we favor aluminum and nickel. Both metals are cheap and offer good value for money, in our view, with nickel supply contracting, and cost consideration limiting the price downside for aluminum.


USD neutral The events in the upcoming months will be crucial

for the USD. The US elections and the monetary policy of the Federal Reserve could expose the USD to larger swings. We continue to expect the Fed to hike interest rates in December, while money markets are only pricing for one at the end of 2017. The USD should be supported once markets start to re-price the probability of an earlier rate hike.

EUR underweight EURUSD should fall ahead of the expected

US rate hike in December. After this the market will not expect another rate hike to come too soon thereafter. In the second half of next year the ECB will likely discuss tapering its current easing measures, which should initiate a longer-term rebound of EURUSD. Our working assumption is that Hillary Clinton will win the presidential election. A Trump victory would lead to a more immediate weakness of the USD vs. EUR.

GBP neutral The UK decided to leave the EU in June. Not much

has happened since then and the complacency about this event led to a rebound of sentiment indicators. In our view, this is a misinterpretation and we expect the triggering of Article 50 to lead to the next sentiment shock in the UK, which is likely to keep sterling under pressure.

CHF neutral The CHF is near equilibrium against the USD, but it

is strongly overvalued against other G10 currencies. We expect the USD to appreciate first, as the Fed is expected to tighten first. In the long term, though, USDCHF should follow its multi-decade downtrend, as Swiss inflation stays well below US inflation.

Foreign exchangeThomas Flury

The events in the upcoming months will be crucial for the USD. The US elections and the monetary policy of the Federal Reserve could expose the USD to larger swings. We continue to expect the Fed to hike interest rates in December. The USD should be supported once markets start to re-price the probability of an earlier rate hike. We continue to favor the NOK over the EUR. We continue to expect the AUD and NZD to weaken as central banks in these countries ease to weaken their currencies against the USD.

UBS CIO FX forecasts

3M 6M 12M PPP*

EURUSD 1.08 1.10 1.10 1.25

USDJPY 104 104 107 78

USDCAD 1.30 1.28 1.25 1.22

AUDUSD 0.72 0.71 0.71 0.70

GBPUSD 1.25 1.28 1.32 1.59

NZDUSD 0.70 0.68 0.68 0.61

USDCHF 1.00 1.00 1.02 1.00

EURCHF 1.08 1.10 1.12 1.25

GBPCHF 1.25 1.28 1.34 1.59

EURJPY 112 114 118 97

EURGBP 0.86 0.86 0.83 0.78

EURSEK 9.50 9.30 9.00 8.90

EURNOK 9.00 8.70 8.70 9.92Source: Thomson Reuters, UBS, as of 21 September 2016Note: Past performance is not an indication of future returns.*PPP = Purchasing Power Parity

JPY neutral The Bank of Japan fixed the yield curve by setting

the target for the 10-year rate close to zero and keeping the policy rate at -10 basis points. The USDJPY exchange rate is consequently much more directly exposed to changes of the Fed policy and shifts in the US yield curve. Rising global growth should therefore lift USDJPY and global risk aversion will pres-sure USDJPY even more than before.

Other developed market currencies overweight The NOK should continue its uptrend in the

coming months as the combination of Norway’s growth re-bound and high inflation rates speaks for a tighter policy path of the Norges Bank relative to the ECB. We favor the NOK over the EUR. The Australian dollar has been strongly supported by carry trades in the past. For the last two years, the rate cuts in Australia and one rate hike in the US have led to a shrink-ing yield differential, which hurt the AUD’s attractiveness. We expect this process of yield convergence to continue and push AUDUSD towards 0.70.



IN FOCUS

The tightening in the race for the White House over the past several weeks was, to a certain extent, to

be expected. After all, most political con-tests tend to narrow in the weeks leading up to the election as likely voters begin to settle on one of the leading candidates. Still, the speed and magnitude of Donald Trump’s resurgence has, once again, con-founded expectations and the wisdom of seasoned political veterans.

In just over a month, Mr. Trump has virtu-ally eliminated Secretary Clinton’s eight point lead. National polls, which help to indicate the likely popular vote, now sit within the margin of error – and some even show an outright Trump lead.

While the popular vote is important, the presidential election is ultimately deter-mined by the Electoral College – and specifically the outcome of a handful of “battleground” states. While the electoral map has long favored Clinton, offering her more “paths to victory,” we have also seen a narrower race in several key swing states. Trump has now drawn virtually even with Clinton in vital states such as Florida, Ohio, and New Hampshire.

Trust and securityIt would appear that this recent shift in voter preferences stems at least in part from perceptions about Clinton’s general level of trustworthiness. Disclosures re-garding her role in the Clinton Global Ini-tiative, handling of sensitive material while Secretary of State, and even her cam-paign’s forthrightness with regard to her health status have each likely contributed to these concerns among potential voters.

But the tightening in the contest may also be related to unease over potential

national security threats. In a recent Pew Research Center poll, voters identified terrorism and homeland security as the subjects that they believe should be al-located the most time in the upcoming Presidential debates. This helps to explain the recent tightening in the race, since Trump is generally viewed more favorably by likely voters than Clinton on national security issues. And bear in mind that this poll took place prior to the recent attacks in Minneapolis, New York, and New Jer-sey, which may further increase voters’ focus on these issues.

Still Clinton’s to loseYet, despite the progress made by Trump in closing the deficit, it remains our view that Clinton is more likely to emerge as the winner in November. Keep in mind that the electoral math is still stacked heavily against Trump. With states rep-resenting 247 votes “likely-or-leaning” Democratic, versus states with just 191 “likely-or-leaning” Republican, Trump still has a much more difficult road to the White House. He would essentially have to sweep each of the contested swing states. But Clinton has an advantage there as well.

The Clinton campaign learned a valu-able lesson after failing to secure the nomination in 2008, and in response, has built an impressive “ground game” this time around with well-staffed teams in each of the key battleground states. This should pay dividends in terms of mobiliz-ing likely Clinton backers on Election Day. The Trump campaign, in contrast, has a loosely structured organization with less-experienced political operatives and fewer campaign foot soldiers. So as the prob-abilities in Fig. 1 illustrate, it would appear that this election is still Clinton’s to lose.

As the race tightens

Mike Ryan, CFAChief Investment Strategist, WMA

Tom McLoughlinCo-head of Fundamental Research, WMA


IN FOCUS

A toss-up in the SenateBut while our assessment of the outcome of the presidential election has not been materially altered by the tightening of the polls, given the “winner-take-all” vote apportionment process of the Electoral College, the prospects for the Senate are a different matter entirely. In closely con-tested Senate elections, a narrower popu-lar vote could mean all the difference be-tween an incumbent Republican Senator losing or retaining his/her seat.

The shifting fortunes in the Senate elec-tions are clearly captured in the most re-cent betting in the PredictIt.org political prediction markets. The implied probability of Democrats winning the Senate has de-clined precipitously from 73% in mid-Au-gust to 53% in late September (see Fig. 2).

Shifting fortunesWhile the race continues to favor a Re-publican majority in the House of Repre-sentatives (PredictIt.org shows an implied probability of 90%), the tighter Senate race has altered the likely congressional makeup. John Savercool and his team in the UBS office of Public Policy have up-dated their subjective probabilities of the different 2016 election scenarios. These new probabilities are also shown in Fig. 1.

What becomes immediately clear from this table is that the baseline scenario of a Clinton presidency accompanied by a Democratic Senate and Republican House has become less likely. Alterna-tively, the prospects for a Clinton presi-dency combined with Republican control of both houses of Congress have risen sharply. Together, these two scenarios – which we categorize as “status quo” out-comes – are now assigned a nearly 65% probability.

Investment implicationsThe investment implications of a con-tinued divided government are pretty straightforward. In contrast to either a Democratic or Republican sweep, a di-vided government will likely result in a more limited legislative agenda. Overall, these “status quo” outcomes are viewed as favorable for domestic equity mar-kets. Given the narrower range of poten-tial outcomes, the level of policy uncer-tainty should remain relatively low, thus easing concerns among likely investors. The same holds for the bond market. In the absence of a massive fiscal spend-ing or tax cut plan, government deficits are apt to remain more manageable. This will serve to limit any backup in Treasury yields. Meanwhile, municipals will benefit

Source: PredictIt.org, Will Republicans maintain a Senate majority aer the next election?, as of 20 September 2016

20

0

80

40

Jul-16 Sep-16Aug-16Jun-16

Republican Senate majority

Democratic Senate majority

Fig. 2: Markets are now predicting a closer race for the Senate majority

Market-implied likelihood of a Democratic vs. Republican Senate majority in the 2016 election, in %

100

60

as the status quo also likely preserves cur-rent marginal tax rates and reduces the risk of a municipal exemption cap.

While these more impactful policies are unlikely under a divided government, there is still room for bipartisan compro-mise on several fronts, including targeted tax relief for the middle class, limited re-form of the corporate tax code, small-scale public infrastructure spending, re-tention of current trade agreements, and modest increases in defense spending.

These more modest policy shifts will likely make the election a bigger news story than a market driver over the course of the next several months.

Video feature Tom McLoughlin discusses the US election. Click to play.

Fig. 1: Updated probabilities of the six plausible election out-comes

Scenario Probability

old new President Senate House

1 60% 45% Clinton D R

2 25% 30% Trump R R

3 8% 5% Clinton D D

4 3% 19% Clinton R R

5 3% 1% Trump D R

6 1% 0% Trump D D


http://www.ubspodcast.ch/us/wmr/podcast/en/topofthemorning/160922-House_View-US_Election-Tom_McLoughlin.mp4


e-Commerce: Beyond Amazon As consumers of traditional retail shift their shopping and spending online, opportuni-ties abound for true omnichannel retailers and related companies. We believe that long-term positive drivers of digital growth, including the rapid adoption of mobile devices, will continue to hasten market share shifts online. We recommend taking a look at select opportunities in consumer-focused industries that take an omnichannel approach and that utilize digital marketing strategies to complement their online efforts.

Short Medium Long Decade

Click for full report

e-Commerce: Beyond Amazon

Golden years for Baby BoomersThe Baby Boomers – who represent almost a quarter of the US population – are aging and entering their retirement years. This generation, by its sheer size, has always had an outsized influence on society. As the Boomers enter into their hard-earned retirement and set out to enjoy their golden years, we expect various segments of the economy to benefit disproportionately, particularly segments of the healthcare, consumer, and financial sectors.



Golden years for baby boomers

India – A land of many (re)turnsWe believe Indian equities have the potential to outperform the broader market over the next year. Recent economic data points to a gradual pickup in growth that should create an environment conducive for a corporate profit revival. Further, valuations look attractive, as markets have priced out any major benefits from reform efforts. We see the potential for a moderate re-rating in recognition of the many credible efforts that the Narendra Modi-led government has already made.

Short Medium


India – A land of many (re)turns

North American energy independence: ReenergizedWe continue to focus on the North American oil and gas business, where we project that growth will resume with the recovery in energy commodity prices; and in energy infrastructure, where we believe opportunities still exist due to evolving trends in the US. The strongest operators could emerge from the downturn with an enhanced competitive position. Meanwhile, lower oil prices and an advantaged regional natural gas price are beneficial to North American industrial energy consumers. We also see advances in renewable and alternative energy providing new approaches to satisfy-ing energy demand.



North American energy indepen-dence: Reenergized

Transformational technologiesWe believe there are two areas of technological innovation that will be driving forces behind productivity gains during the next decade. The first is the set of business opportu-nities around the explosion of digital data. The second is automation and robotics. Both have the potential to transform the structure of our economy, disrupt existing business models, and create opportunities for those well-positioned to participate. Security under-pins both digital data and industrial automation, and in our view, is the key enabling technology for the next wave of innovation across both information technology and the industrial sector.



Transformational technologies

Top themes overviewOur Top themes list represents our currently recommended thematic ideas

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/us-equities-2016-07-19-ecommerce-beyond-Amazon.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/us-equities-2016-07-19-ecommerce-beyond-Amazon.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/us-equities-2016-08-23-golden-years-for-baby-boomers.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/us-equities-2016-08-23-golden-years-for-baby-boomers.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/em-equities-2016-08-05-india-land-of-many-returns.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/em-equities-2016-08-05-india-land-of-many-returns.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/us-equities-2016-07-19-north-american-energy-independence.pdf



https://www.ubs.com/content/dam/WealthManagementAmericas/documents/us-equities-2016-07-20-transformational-technologies.pdf

https://www.ubs.com/content/dam/WealthManagementAmericas/documents/us-equities-2016-07-20-transformational-technologies.pdf


NEW Counties at riskWe believe that heightened attention to US local government credits is warranted in an era when the growth in fixed costs associated with pensions and employee healthcare benefits often outpaces revenue growth. While we expect credit ratings to be stable for most county governments as long as the economy continues to grad-ually grow, we find the credit risks to be unevenly distributed. We recommend repo-sitioning portfolios to limit exposure to county governments with narrow financial positions whose credit may be deteriorating.

Short Medium Long

A copy of this report can be found on the Online Services Research website under Thematic Research.

Beyond benchmark fixed income investingOver the next decade, we believe that US taxable fixed income investors will find them-selves in a challenging market environment characterized by low starting yield levels, bouts of volatility, and a longer, drawn-out normalization cycle. For these investors, the most widely used benchmark is the Barclays Aggregate Index, which suffers from sev-eral flaws, in our view. We argue that investors can circumvent benchmark shortcom-ings by diversifying bond portfolios beyond a traditional benchmark and adopting a more flexible approach to active fixed income management.



Beyond benchmark fixed income investing

Top themes overview

Drivers behind Top themes

Resources/Environment

Innovation/Technology

Demographics/Society

Int’l trade and investment

Government/Regulation

Cyclical factors Financial industry trends

Theme name

e-Commerce: Beyond Amazon P P P

India – A land of many (re)turns P P P P

North American energy independence: reenergized P P P P P

Transformational technologies P P P

Beyond benchmark fixed income investing P P

Golden years for Baby Boomers P P P

Counties at risk

P P P

Source: UBS


https://www.ubs.com/content/dam/WealthManagementAmericas/documents/us-fixed-income-2016-09-19-beyond-benchmark.pdf




CIO proprietary networksUBS UHNW CIO runs multiple proprietary networks that augment the service offering for UHNW clients. These include the UBS Investor Forum, where external experts challenge the House View, and the UBS Industry Leader Network, which engages UBS client entrepre-neurs and obtains a pulse on the global economy.

Alec Zimmermann

Proprietary Network Specialist

Investor ForumIs government spending the solution?Growing disenchantment with the extraordinary central bank policy that is ongoing in many regions has many market partici-pants speculating about the possibility of fiscal policy being adopted by governments.

Infrastructure in the US is a likely area to be targeted for greater government spending, although the upcoming election will play a large role in whether it is pursued.

Not all participants agreed with this assessment, however. Some sided with the CIO view that monetary policy will con-tinue to be the more important market driver.

Will politics derail expansion?Participants this month largely agreed that political risks will continue to hamper economic expansion. But some noted that the pressures on most companies come from localized con-cerns.

Europe, with its myriad of political events on the horizon, pres-ents the largest cumulative risk, although the US election is the riskiest single event.

Emerging markets on the other hand have been holding back expansion due to economic concerns, though the situation is improving.

Samantha Naleski

Proprietary Network Specialist

Industry Leader NetworkIs business expansion being held back?One year ago, we asked network members about the obstacles inhibiting business expansion. Almost 40% cited shortages in skilled labor while 21% said economic uncertainties were hold-ing back expansion plans.

A year later, we asked the same question again to see if these barriers still persist. The majority of respondents (63%) reported that they are no longer experiencing constraints to business growth.

Businesses are primarily expanding their market sharePrimarily, they are focused on expanding their market share through low cost marginal growth by entering new regions rather than investing in the development of new products and services in existing markets. This, in part, is why just 6% of members now report that labor constraints are an issue. Last year, a shortage of skilled workers led to higher wage costs, which made many hold off on expanding.

Among those experiencing constraints, the most commonly mentioned barrier, cited by 27% of respondents, is political uncertainty. Specifically, members referenced how political instability has led to the mistrust of governing bodies as well as FX volatility, and has impeded local and foreign investment decisions.


Overweight

Neutral

Underweight

Key forecastsAs of 21 September 2016

6-month forecast

Asset class TAA1 Change Benchmark Value m/m perf.

in %2 House View Positive

scenarioNegative scenario

EQUITIES

US – S&P 500 2163 -1.0% 2225 2450 1875

Eurozone – Euro Stoxx 323 0.5% 335 375 270

UK – FTSE 100 6835 -0.4% 7025 7500 5600

Japan – Topix 1353 4.4% 1375 1500 1100

Switzerland – SMI 8226 1.2% 8365 9000 7000

Emerging Markets – MSCI EM 906 -0.5% 940 1075 725

BONDS –

US Government bonds – 10yr Treasury yield 1.6% -0.4% 1.7% 1.2–1.5% 1.9–2.1%

US Corporate bonds – BAML IG spread 142 bps -0.6% 150 bps 125 bps 275 bps

US High yield bonds – BAML US HY spread 522 bps 0.0% 550 bps 450 bps 1100 bps

EM Sovereign – EMBI Diversified spread 335 bps -0.6% 360 bps 300 bps 550 bps

EM Corporate – CEMBI Diversified spread 337 bps -1.6% 360 bps 300 bps 580 bps

OTHER ASSET CLASSES

Gold – Spot price 1335 /oz. -0.6% 1350 1450 1200

Brent crude oil – Spot price 46.83 /bbl. -8.0% 45 70 30

Listed real estate – RUGL Index 4704 -1.7% 4500 4800 4000

CURRENCIES Currency pair

USD – NA NA NA NA NA

EUR – EURUSD 1.12 -1.2% 1.1 NA NA

GBP – GBPUSD 1.30 -0.3% 1.28 NA NA

JPY – USDJPY 102 0.1% 104 NA NA

CHF – USDCHF 0.98 1.4% 1 NA NA

Source: Bloomberg, UBS1 TAA = Tactical asset allocation, 2 Month over monthNote: Current values as of 21 September 2016Past performance is no indication of future performance. Forecasts are not a reliable indicator of future performance.


DETAILED ASSET ALLOCATION

Source: UBS and WMA AAC, 22 September 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.

Investor risk profile

Conservative Moderately conservative

Moderate Moderately ag-gressive

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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 60.0 -2.0 58.0 49.0 -2.0 47.0 40.0 -2.0 38.0 31.0 -2.0 29.0 26.0 -2.0 24.0

US Fixed Income 54.0 +0.0 54.0 43.0 +0.0 43.0 34.0 +0.0 34.0 25.5 +0.0 25.5 21.0 -1.0 20.0

US Gov’t 6.0 -1.0 5.0 5.0 -1.5 3.5 3.0 -2.0 1.0 2.5 -2.0 0.5 2.0 -2.0 0.0

US Municipal 44.0 +0.0 44.0 34.0 +0.0 34.0 26.0 +0.0 26.0 18.0 +0.0 18.0 13.0 +0.0 13.0

US IG Corp 3.0 +1.0 4.0 2.0 +1.5 3.5 2.0 +2.0 4.0 1.0 +2.0 3.0 1.0 +1.0 2.0

US HY Corp 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

Int’l Fixed Income 6.0 -2.0 4.0 6.0 -2.0 4.0 6.0 -2.0 4.0 5.5 -2.0 3.5 5.0 -1.0 4.0

Int’l Developed Markets 5.0 -2.0 3.0 4.0 -2.0 2.0 3.0 -2.0 1.0 2.0 -2.0 0.0 1.0 -1.0 0.0

Emerging Markets 1.0 +0.0 1.0 2.0 +0.0 2.0 3.0 +0.0 3.0 3.5 +0.0 3.5 4.0 +0.0 4.0

Equity 9.0 +2.0 11.0 19.0 +2.0 21.0 30.0 +2.0 32.0 40.0 +2.0 42.0 50.0 +2.0 52.0

US Equity 5.0 +2.0 7.0 12.0 +2.0 14.0 17.5 +2.0 19.5 23.0 +2.0 25.0 28.0 +2.0 30.0

US Large cap Growth 1.5 +0.5 2.0 3.5 +0.5 4.0 5.5 +0.5 6.0 7.0 +0.5 7.5 8.5 +0.5 9.0

US Large cap Value 1.5 +0.5 2.0 3.5 +0.5 4.0 5.5 +0.5 6.0 7.0 +0.5 7.5 8.5 +0.5 9.0

US Mid cap 1.0 +0.5 1.5 3.0 +0.5 3.5 4.0 +0.5 4.5 6.0 +0.5 6.5 7.0 +0.5 7.5

US Small cap 1.0 +0.5 1.5 2.0 +0.5 2.5 2.5 +0.5 3.0 3.0 +0.5 3.5 4.0 +0.5 4.5

International Equity 4.0 +0.0 4.0 7.0 +0.0 7.0 12.5 +0.0 12.5 17.0 +0.0 17.0 22.0 +0.0 22.0



Commodities 3.0 +0.0 3.0 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 28.0 +0.0 28.0 28.0 +0.0 28.0 26.0 +0.0 26.0 24.0 +0.0 24.0 19.0 +0.0 19.0

Hedge Funds 16.0 +0.0 16.0 16.0 +0.0 16.0 14.0 +0.0 14.0 12.0 +0.0 12.0 6.0 +0.0 6.0

Private Equity 6.0 +0.0 6.0 7.0 +0.0 7.0 7.0 +0.0 7.0 8.0 +0.0 8.0 10.0 +0.0 10.0

Private Real Estate 6.0 +0.0 6.0 5.0 +0.0 5.0 5.0 +0.0 5.0 4.0 +0.0 4.0 3.0 +0.0 3.0

“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.

Taxable ultra high net worth investor with non-traditional assets






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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 60.0 -2.0 58.0 49.0 -2.0 47.0 40.0 -2.0 38.0 31.0 -2.0 29.0 26.0 -2.0 24.0

US Fixed Income 54.0 +0.0 54.0 43.0 +0.0 43.0 34.0 +0.0 34.0 25.5 +0.0 25.5 21.0 -1.0 20.0

US Gov’t 6.0 -1.0 5.0 5.0 -1.5 3.5 3.0 -2.0 1.0 2.5 -2.0 0.5 2.0 -2.0 0.0

US Municipal 44.0 +0.0 44.0 34.0 +0.0 34.0 26.0 +0.0 26.0 18.0 +0.0 18.0 13.0 +0.0 13.0

US IG Corp 3.0 +1.0 4.0 2.0 +1.5 3.5 2.0 +2.0 4.0 1.0 +2.0 3.0 1.0 +1.0 2.0

US HY Corp 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 9.0 +2.0 11.0 19.0 +2.0 21.0 30.0 +2.0 32.0 40.0 +2.0 42.0 50.0 +2.0 52.0

US Equity 5.0 +2.0 7.0 12.0 +2.0 14.0 17.5 +2.0 19.5 23.0 +2.0 25.0 28.0 +2.0 30.0



US Mid cap 1.0 +0.5 1.5 3.0 +0.5 3.5 4.0 +0.5 4.5 6.0 +0.5 6.5 7.0 +0.5 7.5

US Small cap 1.0 +0.5 1.5 2.0 +0.5 2.5 2.5 +0.5 3.0 3.0 +0.5 3.5 4.0 +0.5 4.5




Commodities 3.0 +0.0 3.0 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 28.0 +0.0 28.0 28.0 +0.0 28.0 26.0 +0.0 26.0 24.0 +0.0 24.0 19.0 +0.0 19.0

Hedge Funds 16.0 +0.0 16.0 16.0 +0.0 16.0 14.0 +0.0 14.0 12.0 +0.0 12.0 6.0 +0.0 6.0

Private Equity 6.0 +0.0 6.0 7.0 +0.0 7.0 7.0 +0.0 7.0 8.0 +0.0 8.0 10.0 +0.0 10.0






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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 -2.0 78.0 66.0 -2.0 64.0 54.5 -2.0 52.5 44.0 -2.0 42.0 33.0 -2.0 31.0

US Fixed Income 72.0 +0.0 72.0 58.0 +0.5 58.5 47.0 +0.0 47.0 36.0 +0.0 36.0 26.0 +0.0 26.0

US Gov’t 8.0 -1.0 7.0 7.0 -1.5 5.5 5.0 -2.0 3.0 3.0 -2.0 1.0 2.0 -2.0 0.0

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 Corp 4.0 +1.0 5.0 3.0 +2.0 5.0 3.0 +2.0 5.0 2.0 +2.0 4.0 1.0 +2.0 3.0

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 +2.0 18.0 30.0 +2.0 32.0 40.5 +2.0 42.5 51.0 +2.0 53.0 62.0 +2.0 64.0

US Equity 9.0 +2.0 11.0 18.0 +2.0 20.0 23.0 +2.0 25.0 29.0 +2.0 31.0 36.0 +2.0 38.0



US Mid cap 2.0 +0.5 2.5 5.0 +0.5 5.5 6.0 +0.5 6.5 7.0 +0.5 7.5 9.0 +0.5 9.5

US Small cap 1.0 +0.5 1.5 3.0 +0.5 3.5 3.0 +0.5 3.5 4.0 +0.5 4.5 5.0 +0.5 5.5




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


Source: UBS and WMA AAC, 22 September 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.

Taxable ultra high net worth investorwithout non-traditional assets



Source: UBS and WMA AAC, 22 September 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.




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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 57.0 -2.0 55.0 46.5 -2.0 44.5 39.0 -2.0 37.0 32.0 -2.0 30.0 27.5 -2.0 25.5

US Fixed Income 51.0 +0.0 51.0 40.5 +0.0 40.5 33.0 +0.0 33.0 26.0 +0.0 26.0 21.5 -1.0 20.5

US Gov’t 41.0 -1.0 40.0 31.0 -1.5 29.5 23.0 -2.0 21.0 15.0 -2.0 13.0 9.0 -3.0 6.0

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 Corp 8.0 +1.0 9.0 6.0 +1.5 7.5 4.0 +2.0 6.0 3.0 +2.0 5.0 2.0 +2.0 4.0

US HY Corp 2.0 +0.0 2.0 3.5 +0.0 3.5 6.0 +0.0 6.0 8.0 +0.0 8.0 10.5 +0.0 10.5




Equity 10.0 +2.0 12.0 19.5 +2.0 21.5 29.0 +2.0 31.0 38.0 +2.0 40.0 47.5 +2.0 49.5

US Equity 5.5 +2.0 7.5 10.5 +2.0 12.5 16.0 +2.0 18.0 22.0 +2.0 24.0 26.5 +2.0 28.5



US Mid cap 1.5 +0.5 2.0 3.0 +0.5 3.5 4.0 +0.5 4.5 6.0 +0.5 6.5 7.0 +0.5 7.5

US Small cap 1.0 +0.5 1.5 1.0 +0.5 1.5 2.0 +0.5 2.5 3.0 +0.5 3.5 3.5 +0.5 4.0




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 29.0 +0.0 29.0 30.0 +0.0 30.0 28.0 +0.0 28.0 25.0 +0.0 25.0 20.0 +0.0 20.0

Hedge Funds 18.0 +0.0 18.0 18.0 +0.0 18.0 15.0 +0.0 15.0 13.0 +0.0 13.0 7.0 +0.0 7.0

Private Equity 6.0 +0.0 6.0 7.0 +0.0 7.0 8.0 +0.0 8.0 8.0 +0.0 8.0 9.0 +0.0 9.0



Tax-exempt institutional investor with non-traditional assets



Source: UBS and WMA AAC, 22 September 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 -2.0 76.0 65.0 -2.0 63.0 55.0 -2.0 53.0 46.0 -2.0 44.0 36.0 -2.0 34.0

US Fixed Income 69.0 +0.0 69.0 57.0 +0.0 57.0 47.0 +0.0 47.0 38.0 +0.0 38.0 29.0 +0.0 29.0

US Gov’t 55.0 -1.0 54.0 42.0 -1.5 40.5 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 Corp 10.0 +1.0 11.0 8.0 +1.5 9.5 6.0 +2.0 8.0 4.0 +2.0 6.0 3.0 +2.0 5.0

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 +2.0 20.0 31.0 +2.0 33.0 41.0 +2.0 43.0 50.0 +2.0 52.0 59.0 +2.0 61.0

US Equity 10.0 +2.0 12.0 18.0 +2.0 20.0 23.0 +2.0 25.0 28.0 +2.0 30.0 33.0 +2.0 35.0



US Mid cap 3.0 +0.5 3.5 5.0 +0.5 5.5 6.0 +0.5 6.5 7.0 +0.5 7.5 9.0 +0.5 9.5

US Small cap 1.0 +0.5 1.5 2.0 +0.5 2.5 3.0 +0.5 3.5 4.0 +0.5 4.5 4.0 +0.5 4.5




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


Tax-exempt institutional investor without non-traditional assets



Detailed asset allocation all equity and all fixed income models

Publication note The All Equity and All Fixed Income portfolios complement our balanced portfolios and offer more granular im-plementation of our House View. While we generally do not recommend that investors hold portfolios consisting of only stocks or only bonds, the All Equity and All Fixed Income portfolios can be used by investors who want to comple-ment their existing holdings. It is also possible to combine the All Equity port-folio with one of the All Fixed Income portfolios to generate a balanced port-folio. The tactical tilts in the portfolios are based on the corresponding tilts in our balanced portfolios (moderate 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 sectors within US large-caps as well as our pre-ferred countries within both interna-tional 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.

Source: UBS and WMA AAC, 22 September 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.

All equity All fixed income, tax-able

All fixed income, non-taxable

All figures in %

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Cash 5.0 -2.0 3.0 5.0 +0.0 5.0 5.0 +0.5 5.5

Fixed Income 0.0 +0.0 0.0 95.0 +0.0 95.0 95.0 -0.5 94.5

US Fixed Income 0.0 +0.0 0.0 82.0 +3.5 85.5 81.0 +3.0 84.0

US Gov’t – total market 0.0 +0.0 0.0 9.0 -3.5 5.5 16.0 +4.5 20.5

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 +2.0 30.0 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 Investment Grade 0.0 +0.0 0.0 5.0 +4.0 9.0 10.5 +4.0 14.5

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 +2.0 97.0 0.0 +0.0 0.0 0.0 +0.0 0.0

US Equity 54.0 +2.0 56.0 0.0 +0.0 0.0 0.0 +0.0 0.0

US Large-cap Growth 7.0 +0.5 7.5 0.0 +0.0 0.0 0.0 +0.0 0.0

US Large-cap Value 7.0 +0.5 7.5 0.0 +0.0 0.0 0.0 +0.0 0.0

US Large-cap Total Market 19.0 -3.0 p 16.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Consumer discretionary 0.0 +0.0 q 0.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Healthcare 0.0 +3.0 3.0 0.0 +0.0 0.0 0.0 +0.0 0.0

US Mid-cap Equity 14.0 +0.5 14.5 0.0 +0.0 0.0 0.0 +0.0 0.0

US Small-cap Equity 7.0 +0.5 7.5 0.0 +0.0 0.0 0.0 +0.0 0.0

International Equity 41.0 +0.0 41.0 0.0 +0.0 0.0 0.0 +0.0 0.0

Int’l Developed Markets 23.5 -1.0 22.5 0.0 +0.0 0.0 0.0 +0.0 0.0

Global EM Equity 17.5 -5.0 12.5 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

India 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 assets


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%


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 +2.0 +2.0 30.0

UK 20.0 +2.0 +2.0 22.0

Japan 19.0 +2.0 +2.0 21.0

Australia 7.0 +2.0 +2.0 9.0

Canada 9.0 +0.0 +0.0 9.0

Switzerland 8.0 -8.0 -8.0 0.0

Other 9.0 +0.0 +0.0 9.0


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 CIO WMR tactical deviation2 Current allocation3

allocation1 Previous Current

EMU / Eurozone 42.0 -5.0 -5.0 37.0

UK 9.0 +0.0 +0.0 9.0

Japan 32.0 +0.0 +0.0 32.0

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 subsector 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 12.5 +2.0 +1.0 ++ + 13.5

Consumer Staples 9.9 -1.0 -1.0 – – 8.9

Energy 7.0 +1.0 +1.0 + + 8.0

Financials 12.9 +0.0 +0.0 n n 12.9

Health Care 14.8 +2.0 +2.0 ++ ++ 16.8

Industrials 9.6 +0.0 +0.0 n n 9.6

Information Technology 21.2 +1.0 +1.0 + + 22.2

Materials 2.9 -2.0 +0.0 – – n 2.9

Real Estate 3.1 NA +0.0 NA n 3.1

Telecom 2.6 -1.0 -2.0 – – – 0.6

Utilities 3.4 -2.0 -2.0 – – – – 1.4

Source: S&P, UBS, as of 22 Septeber 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.



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 2.11% 1.72% -0.39% -3.7 0.97% 3.03%

2Q 2016 2.81% 2.88% 0.08% +1.1 2.63% 2.21%

3Q 2016 to date 1.25% 1.34% 0.09% +1.5 2.82% -0.12%

2016 year to date 6.29% 6.05% -0.24% -1.0 6.55% 5.18%

Since inception (25 January 2013) 15.08% 15.45% 0.37% +0.2 52.99% 10.06%



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



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 (*) • 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. 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

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.

there may be delays in distributing tax information to investors; (8) 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

Chief Investment Office (CIO) Wealth Management (WM) Research is published by UBS Wealth Management and UBS Wealth Manage-ment Americas, Business Divisions of UBS AG (UBS) or an affiliate thereof. CIO WM Research reports published outside the US are branded as Chief Investment Office WM. In certain countries UBS AG is referred to as UBS SA. 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, invest-ment strategies, financial situation and needs of any specific recipi-ent. It is based on numerous assumptions. Different assumptions could 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 the products mentioned herein. Certain services and products are subject to le-gal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All informa-tion and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no represen-tation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and its affili-ates). All information and opinions as well as any prices indicated are current only as of the date of this report, and are subject to change without notice. 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. At any time, investment decisions (including whether to buy, sell or hold securi-ties) made by UBS AG, its affiliates, subsidiaries and 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 in-vestment 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 op-tions trading 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 realization you 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 for distribution 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 de Va-lores Mobiliarios Ltda, UBS Asesores Mexico, S.A. de C.V., UBS Se-curities Japan Co., Ltd, UBS Wealth Management Israel Ltd and UBS Menkul Degerler AS are affiliates of UBS AG. UBS Financial Services Incorporated of PuertoRico 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 when it dis-tributes 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 not through 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 opinions or 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 of this 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 September 2015.

© UBS 2016. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

Disclaimer


APPENDIX

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

This report was published on 23 September 2016.

Lead authors Mark HaefeleMike Ryan

Authors (in alphabetical order)Leslie FalconioThomas FluryRicardo Garcia-SchildknechtWayne GordonMarkus IrngartingerLaura KaneDavid LefkowitzBarry McAlindenTom McLoughlinKathleen McNamaraBrian RoseRob SamuelsDominic SchniderPhilipp SchoettlerFrank SileoGiovanni StaunovoKristin StephensThomas VeraguthJustin WaringJeremy Zirin

EditorsRoslyn 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.

UBS Financial Services Inc.www.ubs.com/financialservicesinc

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

UBS House View Monthly CallA unique opportunity to hear the House View explained and to interact directly with CIO WMR’s thought leaders. The next call will be on:Thursday, October 6 at 1:00 PM ET / 10:00 AM PT

Dial in: 1-877-200-4456Passcode: 46502#

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Debate prep

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ElectionWatchPerspectives on the 2016 US elections from UBS CIO Wealth Management Research

This report has been prepared by UBS Financial Services Inc. Please see important disclaimer on page 14.

20 September 2016

As the two leading candidates prepare to face each other in their first debate, the presidential race has tightened dra-

matically. Hillary Clinton’s lead in national polls has diminished to within the ‘margin of error’ as concerns regarding her physical health have dominated the headlines. State-specific polls, which tend to be a better barometer of a can-didate’s probability of winning, also suggest a closer election. Donald Trump gained ground in two critical swing states, Ohio and Florida, dur-ing Clinton’s absence from the campaign trail.

The candidates’ personalities, and the strong feelings they elicit among the voting public, make this election unique in many respects. Both Clinton and Trump have exceptionally low ‘net favorability’ ratings. While both have ardent supporters, a greater number of voters view one or the other with distaste. And two other candidates who will not appear on the debate stage, Gary Johnson and Jill Stein, will garner enough votes to ensure that the next president is elected with far less than 50% of the popular vote.

Presidential debates have the ability to nudge undecided voters in one direction or another, but we do not expect them to alter the views of most Americans. However, they do offer a glimpse of the candidates’ governing philoso-phy and the degree to which they are ade-quately prepared for the duties of the office. We expect two public policy priorities to domi-nate the debates once again this year, namely national security and economic growth, which will be front and center in voters’ minds, as they have been so often in the past.

The two explosions in New York and New Jer-sey this past weekend, and the attack by a knife-wielding assailant in Minnesota, have reinforced the issue of national security as an

important campaign theme. In a recent poll, the Pew Research Center asked voters to iden-tify which subjects would be allocated the most amount of time if they served as a mod-erator of this year’s presidential debates. The respondents said they would devote the most amount of time to the subject of terrorism and homeland security. We expect they will get their wish.

In this month’s edition of ElectionWatch, we place this year’s presidential debates in an historical context, offering a viewer’s guide to assess the likely success of the candidates’ policies, and to discuss the impact of the elec-tion on monetary policy. We also include the first of two interviews with the Head of our US Office of Public Policy, John Savercool. This month’s interview focuses on domestic pol-icy options for the next president. A second interview on foreign policy will appear in next month’s edition.

Contents

02 Inside the Beltway

04 Managing expectations

05 Reality bites

07 Lessons learned

09 Viewer’s guide

10 Putting promises into practice

12 Monetary policy

14 Disclaimer

Video Tom McLoughlin talks about highlights in this report. Click to watch.

ubs house view - our financial services around the globe | ubs …€¦ · · 2016-09-28october...

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