You are on page 1of 8

UBS House View

Weekly
United States
CIO Americas, WM

We welcome your feedback.


23 October 2017

Week ahead Key messages For more key messages on the week
ahead from Justin Waring, click here.

u How will the ECB handle tapering? The Euro-


pean Central Bank is expected to outline its plan u 1. Trying to time the market can backfire.
to reduce the pace of its bond purchases this
week. We believe President Mario Draghi will sig- This October marks the 30-year anniversary of Black Monday, when the S&P 500 dropped
nal a reduction in monthly purchases to EUR 20% in a single day. While many investors view this event as a warning of how risky and
30bn from next January to September, from EUR unpredictable markets can be, we believe the main lesson is that attempts to time the
60bn at present. This move is now widely priced market usually fail. Even if an investor had predicted the crash, selling any more than 20
into markets so we dont expect a further boost months early would have been worse than staying invested. And it took just 12 months
to the euro, which is already up around 12.5% after the crash for the index to recover the lost ground. A longer historical perspective
year-to-date versus the US dollar. Our six-month underlines this point. Since 1936 an investor with good market timing able to sell 10
forecast for EURUSD is 1.18. months before a market peak and buy back 10 months after a trough would still have
ended up worse off (by 19%) relative to a buy-and-hold investor.
u Can the US economy keep up the momen-
tum? The week ends with a raft of data releases Takeaway: We believe global equities can continue to grind higher, and investors should
from the US, including third quarter GDP growth,
avoid trying to time markets.
personal consumption, consumer confidence, and
the personal consumption expenditure gauge
the Feds favorite measure of inflation. We expect u 2. Brighter times for active management?
this data to confirm that US growth remains Results from Blackrock, the worlds largest asset manager, showed continued strong inflows
robust. We stay overweight global equities.
into passively managed funds. In the industry as a whole, the share of equity mutual
funds and ETFs that are passively managed has climbed from 22% to 46% over the past
u Will the US earnings season live up to expec-
tations? More than 200 of the MSCI US firms decade, no doubt helped by 93% of S&P 500-benchmarked fund managers failing to beat
release third quarter results this week. Overall, the market between 2013 and 2016. However, the outlook for active managers could be
we forecast earnings per share to climb around improving. The potential for alpha is increasing, helped by falling correlations and high
56%. But this is depressed by around 23 per- valuation dispersion. Active managers are starting to outperform: US equity mutual funds
centage points by storm costs. That said, underly- have outperformed by 1 percentage point year-to-date. And investors are just starting to
ing profit growth looks set to remain strong. If respond: last week saw active managers earn their first inflow in 11 weeks.
the weeks results come in line with expectations,
this would support our global equity overweight Takeaway: We could be entering an environment more favorable to active management.
position.
u 3. Value in Chinas new economy stocks after the Party Congress.
A week of contrasts in China. Xi Jinpings Party Congress speech emphasized that stability
Market moves remains a key priority. Yet central bank governor Zhou warned that the country needs to
Level 1-w chg YTD chg defend against the risk of a Minsky Moment, against a backdrop of debt-to-GDP rising
S&P 500 2,575 0.86% 16.28% from around 150% in 2008 to over 260% today. His comments helped send the Hang
DJIA 23,329 2.00% 19.45% Seng down 1.9%. We believe China will need to deleverage and rebalance its economy,
Nasdaq 6,629 0.35% 23.81% and in this context we continue to like asset-light new economy stocks, which account for a
Nikkei 225 21,458 1.43% 12.26% growing share of Chinas expanding service sector, now already near 55% of GDP.
Eurostoxx 50 3,605 0.01% 9.56% Takeaway: We favor new economy stocks within the Chinese market, with a focus on
MSCI EM* 1,117 0.42% 29.53% ecommerce, healthcare, financials/insurance.
MSCI World* 2,033 0.48% 16.11%
MSCI EAFE* 2,006 0.52% 19.12%
DXY 94 0.66% 8.32%
Gold
Brent crude oil
$ 1,281/oz
$ 57.8/bbl
1.74%
1.15%
11.65%
1.78%
Investor spotlight
US 10-year yield 2.381% 11bps 6bps u Flows out, Abe in. The past week saw Japanese equity funds suffering record outflows
VIX 9.97 0.36pts 4.1pts reflecting investor uncertainty ahead of Shinzo Abes victory on 22 October.
Source: Bloomberg, as of 20 October 2017, EST 4:30 pm.
Note: All returns are in local currency u Robots managing portfolios? The first ETF in which robots will select stocks launched
* As of 19 October 2017 last week, amid tech funds seeing their largest inflows in 38 weeks.

ab This report has been prepared by UBS Financial Services Inc. and UBS Switzerland AG.
Please see important disclosures and disclaimer on the last page.
UBS House View Weekly 23 October 2017

Deeper dive

Is active investing
ready for a comeback? Mark Haefele

For more than a decade, money has flowed out of actively of 9.2%, compared with a 20-year average of 44%. From
managed funds into passive ones. Active US equity funds 20002016, equity long-short strategies generated aver-
last calendar year of net inflows was 2005. In contrast, ETFs age annual alpha of 6.5% or more when correlation was
are growing rapidly; in the first nine months of 2017, assets lower than the median.
invested in global ETFs rose by almost 25% to reach a new
high of USD 4.3 trillion. Equity ETFs have led the rise; they 2. While S&P 500 stock price dispersion has yet to rise
account for three quarters of the total, and passive funds are much, the dispersion in valuation between the cheap-
the vast majority. est and most expensive stocks is very wide (at the 80th
percentile of the range since 1991). This suggests price
The proportion of equity ETF and mutual fund assets that dispersion could rise a lot if investor focus shifts to valua-
are passively managed has also grown significantly, as well tions creating an attractive environment for long-short
as in absolute terms; rising to 46% from 22% in the US, and managers.
to 35% from 11% in Europe, since 2007. The ETF market is
now more than USD 1trn larger than the entire hedge fund 3. As normalizing interest rates replace loose monetary
industry, and over 10% of the global equity market cap is policy, active managers could see trading opportunities.
now managed passively. Hedge funds typically outperform other asset classes
when rates are rising. In the US, during the past three
Investor preference for passive funds has been supported rate hiking cycles over the last 20 years, equity long-short
by lower costs and risk-on, risk-off equity markets, which hedge funds produced annualized total returns close to
made it difficult for active managers to outperform. Be- 14%, compared with slightly less than 8% for the S&P
tween 2013 and 2016, more than 93% of fund managers 500.
benchmarked against the S&P 500 failed to beat the market.
Over a longer time period, active managers have still strug- These dynamics are already having an effect. Returns to
gled. Less than 15% of US stock fund managers managed to active management appear to be picking up. In 1H 2017,
beat their benchmarks over the past 15 years. 54% of US active managers surpassed their benchmarks.
As of end-September, global equity long-short hedge funds
But while growth in passive investing in recent years is have gained 9.6% year-to-date, their best performance since
understandable, there are reasons why some active manage- 2013. If correlations stay low and price dispersion increases,
ment strategies could outperform indexes in the future: this trend could prove durable.

1. Falling correlations should help managers generate


alpha. Earlier this month, one-month implied correlation Mark Haefele
between the S&P 500s top 50 stocks fell to a record low Global Chief Investment Officer WM

Bottom line
For more than 10 years, passive investing has gained equity market share at the expense of actively managed funds. In equity
markets driven by swings from risk-on to risk-off, active managers have struggled to outperform and only a small proportion
have beaten their benchmarks. But now, low correlations, wide valuation dispersion, and monetary tightening suggest active
managers may start to outperform.

2
Top of the Morning daily podcast Week in Review/Preview with UBS House View Weekly 23 October 2017
Jason Draho, Head of Tactical Asset Allocation Americas
www.ubs.com/topofthemorning

Regional view

The year of the cryptocurrency


Bubbles normally occur when the
price of an asset deviates from its
fundamentally-based value.

Matthew Kevin
DeMichiel Dennean, CFA
Thematic Strategist Technology and
Telecom Equity Sector
Strategist Americas
It may be in a bubble ties. This is because, with blockchain, all
We caution that some cryptocurrencies transactions are automatically reconciled.
may be displaying characteristics similar We estimate that blockchain could add
to past bubbles, such as investor exu- as much as USD 300400bn of global
This year we have seen an explosion of berance and aggressive value apprecia- economic value by 2027. Further, we
investor interest in cryptocurrencies and tion over a short time. In a September believe blockchain as a technology can
their underlying technology blockchain. interview, Nobel laureate Robert Shiller, gain widespread adoption even without
This can be seen, at least in part, from author of Irrational Exuberance, pointed cryptocurrency.
Bitcoins 580% surge in value against the to Bitcoin as the best example of a cur-
US dollar since the start of the year. rent market bubble. Mr. Shiller famously Outlook and implications
warned about market excesses ahead of Going forward, we believe regulatory
These emergent technologies may, in the the dotcom and housing bubbles. action will be important. So far, the SEC
future, be applicable to a wide variety of and the Commodities Futures Trading
industries. We believe blockchain could Bubbles normally occur when the price Commission (CFTC) have maintained a
dramatically reduce the costs and im- of an asset deviates from its fundamen- light touch in an attempt to not stifle
prove the efficiency of transactions, trad- tally-based value. However, prices move innovation. However, if cryptocurrencies
ing and settlement, and general record much more quickly than fundamentals, become further entwined with financial
management, to name a few examples. which can often result in a significant markets, regulators will likely revise their
Although these kinds of applications are disconnect. The fair value of crypto- approach.
in their infancy, expectation has fueled currencies is highly uncertain, given the
the rapid appreciation in some cryptocur- emergent nature of blockchain technolo- We believe investors should remain
rencies value. gy, and with thousands of competing ver- cautious in the short term and fully un-
sions it is unclear which will end up being derstand the risks before investing in any
Anything but boring successful. Further, fundamentally-based cryptocurrency or blockchain technology.
Bitcoin, for example, has enjoyed an models are not always accurate and may For more commentary on cryptocur-
outsized return on investment this year. not explain market pricing. With crypto- rencies and blockchain, see our latest
However, this has not happened without currencies, the fundamental value can publication Beneath the bubble.
significant volatility. In mid-March, Bitcoin be difficult to assess, therefore making
lost over 30% of its value when the Se- it even more challenging to determine if Kind regards,
curities and Exchange Commission (SEC) the market price is reasonable. Matthew DeMichiel and
denied approval of a proposed Bitcoin Kevin Dennean
exchange-traded fund. Bitcoin dropped Blockchain applications
again in September this time by over We do believe that blockchain has ex-
25% after regulators in China banned citing potential. Its decentralized nature
all cryptocurrency exchanges and trading could facilitate greater transparency and
by Chinese citizens. eliminate the need for trusted third par-

3
UBS House View Weekly 23 October 2017

Strategy and performance


TAA and market returns: Cross asset and equities

Asset classes MTD YTD 2016 US equity sectors Weekly MTD YTD 2016

Equity 1.88 19.45 7.86 Cons. Discr. 0.04 1.17 13.25 5.00
Fixed Income 0.29 6.55 2.09 0.94 0.29 6.88 4.21
Cons. Staples
Cash NA NA NA 0.70 1.11 7.67 27.79
Energy
n + ++ +++
Total return indices in USD, Financials 0.81 1.93 14.65 21.68
underweight neutral overweight
in %
Healthcare 1.70 2.51 23.32 3.56
Note: Indexes used to calculate returns are MSCI All Country World (for Equity), Barclays Capi-
tal Global Aggregate Index (for Fixed Income), Dow Jones-UBS Commodity Index Total Return Industrials 0.22 1.52 15.86 18.07
Source: UBS, as of 20 October 2017 0.31 3.21 31.45 12.22
Technology
Materials 0.23 2.49 18.70 15.78

Equities MTD YTD 2016 Real Estate 0.69 1.63 9.14 2.56

Global NA NA NA Telecom 0.86 3.77 8.29 22.27

US 1.68 15.82 12.74 Utilities 1.27 3.35 15.62 15.06

1.77 9.83 17.34 n + ++ +++


Large-Cap Value Total return indices in USD, in %
underweight neutral overweight
Large-Cap Growth 2.81 24.12 7.08
Note: S&P 500 Sector Indexes used to calculate returns.
Mid-Cap 1.51 13.42 13.80
Source: UBS, as of 20 October 2017
Small-Cap 0.78 11.81 21.31

Intl Developed 1.67 21.96 1.00


International developed equities MTD YTD 2016
Emerging Markets 3.29 31.98 11.19
EMU 0.74 28.56 1.16
n + ++ +++
underweight neutral overweight Total return indices in USD,
UK 0.36 16.16 1.18
in %
Japan 2.93 17.99 2.96
Note: Indexes used to calculate returns are MSCI All Country World (for Equity), Barclays Capi-
tal Global Aggregate Index (for Fixed Income), Dow Jones-UBS Commodity Index Total Return Australia 3.42 16.30 10.89
Source: UBS, as of 20 October 2017
Canada 1.75 13.88 24.18

Switzerland 0.64 20.68 5.07


S&P 500 forecast CIO-A WM
Other NA NA NA
6-month rolling price target USD 2550 n + ++ +++
Total return indices in USD,
2016 earnings per share actual USD 119.1 underweight neutral overweight
in %
2017 earnings per share estimate USD 131.0
Note: MSCI Region or Country Indexes used to calculate returns.
2018 earnings per share estimate USD 146.0 Preference in hedged terms (excluding currency movements).
Source: UBS, as of 20 October 2017
Source: UBS, as of 20 October 2017

Tactical deviations from benchmark symbols Past performance is no indication of future performance.
The overweight and underweight recommendations represent tactical deviations that can
+ Moderate overweight vs. benchmark be applied to any appropriate benchmark portfolio allocation. They reflect CIO-A WMs
++ Overweight vs. benchmark assessment of market opportunities and risks in the respective asset classes and market
segments. The benchmark allocation is not specified here. Please see the most recent UBS
+++ Strong overweight vs. benchmark
House View: Investment Strategy Guide for definitions/explanations of benchmark allocati-
n Neutral, i.e. on benchmark on. They should be chosen in line with the risk profile of the investor. Note that the Regional
Moderate underweight vs. benchmark Bond Strategy is provided on an unhedged basis (i.e., it is assumed that investors carry the
underlying currency risk of such investments). Thus, the deviations from the benchmark
Underweight vs. benchmark reflect our views of the underlying equity and bond markets in combination with our as-
Strong underweight vs. benchmark sessment of the associated currencies.

Notes + Indicates +/ change


These tables represent the tactical asset allocation for a moderate, taxable investor
without alternative investments. Terms and abbreviations
See the latest UBS House View: Investment Strategy Guide for an interpretation of the EMU = European Monetary Union and is comprised of European countries that have
tactical deviations and an explanation of the corresponding benchmark allocation. adopted the Euro as their currency. Intl = international. YTD = year-to-date.
MTD = month-to-date. USD = US dollar. TAA = tactical asset allocation.
Tactical time horizon is approximately six months.
Total return market performance is from Bloomberg as of close of business on
source date, using representative indices, and is provided for information only.

4
UBS House View Weekly 23 October 2017

Strategy and performance


TAA and market returns: Fixed income and currencies
Fixed income MTD YTD 2016 USD Taxable Fixed Income MTD YTD 2016

US 0.13 3.28 2.65 Treasuries 0.58 3.25 1.1

Government 0.07 2.32 1.05 TIPS 0.81 3.88 4.8

Municipal 0.68 5.37 0.25 Agencies 0.32 2.81 1.5

IG Corporates 0.38 5.48 5.63 Agency MBS 0.06 3.50 1.7

HY Corporates 0.43 7.46 17.13 MBS/Securitized products 0.51 4.06 13.2

Intl Developed 0.40 9.17 1.49


IG Corporate* 0.26 6.75 6.0
Emerging Markets 0.47 8.47 9.44
HY Corporates 0.65 7.88 17.5
TIPS 0.81 3.88 4.8 0.53 7.08 5.2
Taxable Municipal
n + ++ +++ Total return indices in USD, 0.10 11.22 2.3
Preferred Securities
underweight neutral overweight in %
Bank Loans 0.35 8.83 10.2
Note: Indexes used to calculate returns are Barclays Capital (BarCap) US Aggregate, n + ++ +++ Total return indices in USD,
BarCap US Aggregate Government, BarCap Municipal Bond, BarCap US Aggregate Credit underweight neutral overweight in %
(for IG), BarCap US Aggregate Corp HY, BarCap Global Aggregate ex-USD (for Intl Deve-
loped), BarCap Emerging Markets Government and BarCap Global Emerging Markets USD Note: Indexes used to calculate returns are Bank of America Merrill Lynch (BoA ML) US
(50% of each for Emerging Markets). Treasury, BoA ML US Inflation-Linked Treasury, BoA ML US Composite Agency, BoA
Source: UBS, as of 20 October 2017 ML US Mortgage Backed Securities, BoA ML US Corporate, BoA ML US High Yield
Constrained, BoA ML Fixed Rate Preferred Securities. BoA ML CMBS Fixed Rate, S&P/
LSTA Leveraged Loan Index, Barclays Taxable Municipal Index. See the latest Fixed Income
Strategist for more information.
Foreign exchange (FX) MTD YTD 2016 Source: UBS, as of 20 October 2017

USD NA NA NA

EUR 0.31 11.98 3.80


International Developed Fixed Income MTD YTD 2016
GBP 1.56 6.88 16.71
EMU 0.05 12.17 0.14
JPY 0.84 2.99 2.95

CHF 1.70 3.36 3.05 UK 1.38 7.60 7.46

Other NA NA NA Japan 0.86 2.54 6.50


n + ++ +++ Other
Change against USD, in % NA NA NA
underweight neutral overweight
n + ++ +++ Total return indices in USD,
Source: UBS, as of 20 October 2017 underweight neutral overweight in %

Note: BarCap Region or Country Indexes used to calculate returns.


Source: UBS, as of 20 October 2017

Tactical deviations from benchmark symbols Past performance is no indication of future performance.
The overweight and underweight recommendations represent tactical deviations that can
+ Moderate overweight vs. benchmark be applied to any appropriate benchmark portfolio allocation. They reflect CIO-A WMs
++ Overweight vs. benchmark assessment of market opportunities and risks in the respective asset classes and market
segments. The benchmark allocation is not specified here. Please see the most recent UBS
+++ Strong overweight vs. benchmark House View: Investment Strategy Guide for definitions/explanations of benchmark allocati-
n Neutral, i.e. on benchmark on. They should be chosen in line with the risk profile of the investor. Note that the Regional
Bond Strategy is provided on an unhedged basis (i.e., it is assumed that investors carry the
Moderate underweight vs. benchmark
underlying currency risk of such investments). Thus, the deviations from the benchmark
Underweight vs. benchmark reflect our views of the underlying equity and bond markets in combination with our as-
Strong underweight vs. benchmark sessment of the associated currencies.

Notes + Indicates +/ change


These tables represent the tactical asset allocation overweight and underweight
recommendations for a moderate, taxable investor without alternative investments. Terms and abbreviations
EMU = European Monetary Union and is comprised of European countries that have
See the latest UBS House View: Investment Strategy Guide for an interpretation of the
adopted the Euro as their currency. Intl = international. YTD = year-to-date.
tactical deviations and an explanation of the corresponding benchmark allocation.
MTD = month-to-date. USD = US dollar. TAA = tactical asset allocation.
Tactical time horizon is approximately six months.
Total return market performance is from Bloomberg as of close of business on
source date, using representative indices, and is provided for information only.

5
UBS House View Weekly 23 October 2017

Earnings calendar
The Earnings Calendar provides publicly announced reporting dates and times of companies covered by CIO Americas, WM. Reporting
dates and times are subject to change by the reporting companies.

Date Company Ticker Company Ticker Company Ticker

23-Oct-2017 Halliburton Co. HAL State Street Corp. STT Crane Co. CR

23-Oct-2017 VF Corp. VFC Kimberly-Clark Corp. KMB

24-Oct-2017 TD Ameritrade Holding Corp. AMTD Caterpillar, Inc. CAT Akamai Technologies, Inc. AKAM

24-Oct-2017 Corning, Inc. GLW General Motors Co. GM Express Scripts Holding Co. ESRX

24-Oct-2017 PulteGroup, Inc. PHM 3M Co. MMM Capital One Financial Corp. COF

24-Oct-2017 Centene Corp. CNC McDonald's Corp. MCD Ameriprise Financial, Inc. AMP

24-Oct-2017 Eli Lilly & Co. LLY Healthcare Trust of America, Inc. HTA Equity Residential EQR

24-Oct-2017 Biogen, Inc. BIIB Juniper Networks, Inc. JNPR Edwards Lifesciences Corp. EW

24-Oct-2017 United Technologies Corp. UTX Nabors Industries Ltd. NBR Baker Hughes, a GE Co. BHGE

24-Oct-2017 Lockheed Martin Corp. LMT Texas Instruments Incorporated TXN Discover Financial Services DFS

25-Oct-2017 Amgen, Inc. AMGN Thermo Fisher Scientific, Inc. TMO Ally Financial, Inc. ALLY

25-Oct-2017 General Dynamics Corp. GD The Coca-Cola Co. KO The Boeing Co. BA

25-Oct-2017 Suncor Energy, Inc. SU International Paper Co. IP Norfolk Southern Corp. NSC

25-Oct-2017 DTE Energy Co. DTE New York Community Bancorp, NYCB Public Storage PSA
Inc.
25-Oct-2017 Visa, Inc. V Walgreens Boots Alliance, Inc. WBA Whiting Petroleum Corp. WLL

25-Oct-2017 Anthem, Inc. ANTM Baxter International, Inc. BAX Mid-America Apartment MAA
Communities, Inc.
26-Oct-2017 EQT Midstream Partners LP EQM American Electric Power Co., Inc. AEP Camden Property Trust CPT

26-Oct-2017 MPLX LP MPLX Bristol-Myers Squibb Co. BMY Fortinet, Inc. FTNT

26-Oct-2017 Marathon Petroleum Corp. MPC ConocoPhillips COP Gilead Sciences, Inc. GILD

26-Oct-2017 Valero Energy Corp. VLO Ford Motor Co. F Alphabet, Inc. GOOGL

26-Oct-2017 Air Products & Chemicals, Inc. APD Altria Group, Inc. MO National Oilwell Varco, Inc. NOV

26-Oct-2017 Comcast Corp. CMCSA Celgene Corp. CELG Intel Corp. INTC

26-Oct-2017 Hilton Worldwide Holdings, Inc. HLT McKesson Corp. MCK Stryker Corp. SYK

26-Oct-2017 Praxair, Inc. PX NextEra Energy, Inc. NEE Amazon.com, Inc. AMZN

26-Oct-2017 Southwest Airlines Co. LUV T. Rowe Price Group, Inc. TROW Microsoft Corp. MSFT

26-Oct-2017 Invesco Ltd. IVZ WEC Energy Group, Inc. WEC Eastman Chemical Co. EMN

26-Oct-2017 Raytheon Co. RTN United Parcel Service, Inc. UPS Apartment Investment & AIV
Management Co.
27-Oct-2017 Phillips 66 Partners LP PSXP Merck & Co., Inc. MRK Chevron Corp. CVX

27-Oct-2017 AbbVie, Inc. ABBV Colgate-Palmolive Co. CL Simon Property Group, Inc. SPG

27-Oct-2017 Ventas, Inc. VTR Phillips 66 PSX

27-Oct-2017 Rockwell Collins, Inc. COL Exxon Mobil Corp. XOM

Source: FactSet, UBS, as of 19 October 2017

6
UBS House View Weekly 23 October 2017

Key economic indicators


Date Indicator Period Time (ET) Unit Consensus Previous

24-Oct-17 Richmond Fed Manufacturing Index October 10:00 AM level 16 19

24-Oct-17 Markit US Manufacturing PMI October 9:45 AM level 53.0 53.1

24-Oct-17 Markit US Services PMI October 9:45 AM level 55.0 55.3

25-Oct-17 Durable Goods Orders September 8:30 AM m/m 1.3% 2.0%

25-Oct-17 Durable Goods Orders less transportation September 8:30 AM m/m 0.4% 0.5%

25-Oct-17 Core capital goods September 8:30 AM m/m 0.2% 1.1%

25-Oct-17 New Home Sales September 10:00 AM level 550k 560k

26-Oct-17 International Trade Balance September 8:30 AM level 64.0bn 63.3bn

26-Oct-17 Jobless Claims For week, October 21 8:30 AM m/m 240k 222k

26-Oct-17 Pending Home Sales September 10:00 AM m/m 0.3% 2.6%

27-Oct-17 Gross Domestic Product 3Q 2017 8:30 AM q/q 2.5% 3.1%

27-Oct-17 Personal Consumption 3Q 2017 8:30 AM q/q 2.2% 3.3%

27-Oct-17 Consumer Sentiment October 10:00 AM level 101.0 101.1

Source: Bloomberg, UBS, as of 20 October 2017


UBS forecast estimates are published on Friday evenings in Economic Perspectives by economists employed by UBS Investment Research, a part of UBS Investment Bank.
m/m = monthovermonth. q/q = quarteroverquarter. y/y = yearoveryear. k = thousand. mn = million. bn = billion.

7
UBS House View Weekly 23 October 2017

Investing in Emerging Markets

Investors should be aware that Emerging Market assets are subject to, amongst 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 liquidity conditions can abruptly worsen. CIO-A WM generally recommends only those securities it believes
have been registered under Federal U.S. 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, CIO-A WM may
from time to time recommend 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 CIO-A WM Education Notes, Emerging Market Bonds: Understanding Emerging
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 ratings (in
the investment grade band). Such an approach should decrease the risk that an investor could end up holding bonds on which the sovereign has
defaulted. Sub-investment grade bonds are recommended only for clients with a higher risk tolerance and who seek to hold higher yielding bonds
for shorter periods only.

Disclaimer

Research publications from Chief Investment Office Americas, Wealth Management are published by UBS Wealth Management and UBS
Wealth Management Americas, Business Divisions of UBS AG or an affiliate thereof (collectively, UBS). In certain countries UBS AG is referred to
as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment
or other specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particular
investment objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Dif-
ferent 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
legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information
and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or war-
ranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS). All information and opinions as
well as any 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 securities) made by UBS and its employees may differ from or be con-
trary to the opinions expressed in UBS research publications. Some investments may not be readily realizable since the market in the securities
is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on
information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates
of UBS. Futures and options trading is 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 Valores Mobiliarios Ltda, UBS Asesores Mexico, S.A. de C.V., UBS Securities Japan Co., Ltd,
UBS Wealth Management Israel Ltd and UBS Menkul Degerler AS are affiliates of UBS AG. UBS 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 distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected
through a US-registered broker dealer affiliated with UBS, and 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.
UBS accepts no liability whatsoever for any redistribution of this document or its contents by third parties.

Version as per September 2017

UBS 2017. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

ab
8