0831 Why Invest in A Balanced Portfolio Now

Why invest in a balanced portfolio now?
Kiran Ganesh Strategist, UBS AG London Branch
This report has been prepared by UBS AG, and UBS AG London Branch.
Please see important disclaimer at the end of the document.
31 August 2022
Why invest in a balanced portfolio?
1
Investors face an environment where good news is bad news
Job openings to unemployed (ratio)
1.5
0.5
0
2012 2014 2016 2018 2020 2022
• In a high-inflation environment, good news is bad news for both equities and bonds.
• The jobs per unemployed ratio remains stubbornly high, giving the Fed more room to hike rates.
• This creates a very challenging environment for investors, putting a typical 60/40 portfolio under pressure.
Source: Bloomberg, UBS as of August 2022
Charts and scenarios are for illustrative purposes only. Historical performance and forecasts are no guarantee for future performance. 2
But a bull scenario is also possible
A possible capex boom Seasonally adjusted business applications

Private non-residential fixed investment, cumulative change from Q4 2019, in in thousands units
USD billions
600
500 550
400
500
300
200 450
100 400
0
350
-100
-200 300
-300 250
-400
200
1Q 2020
2Q 2020
3Q 2020
4Q 2020
1Q 2021
2Q 2021
2Q 2021
3Q 2021
4Q 2021
1Q 2022
2019 2020 2021 2022
Current average Pre-pandemic
• Capital expenditures have increased substantially over the past year, in the US and elsewhere, and capital spending intentions remain high as production
supply tries to keep up with demand.
• New business formation is surging. For over a year, the number of new businesses being formed in the US is running 50% greater than pre-pandemic levels,
averaging about 450,000 per month.
• These are some of the factors that make a bull case a real possibility. We advise investors to stay invested.
The Liquidity. Longevity. Legacy. framework
Now ₋
The next 3- 5 years ₋
5 years beyond your
lifetime
lifetime
Liquidity Longevity Legacy

Cash flow for short- For longer-term For needs that go
term expenses needs beyond your own
To help maintain your lifestyle To help improve your lifestyle To help improve the lives of others
• Entertainment and travel • Retirement • Giving to family
• Taxes • Healthcare and long-term care • Philanthropy
expenses
• Purchasing a home • Wealth transfer over generations
• Second home
Source: UBS. Timeframes may vary. Strategies are subject to individual client goals, objectives and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will
be achieved.
Why invest? Valuations have improved following recent correction
S&P 500 and MSCI ACWI P/E based on trailing 12-month earnings
40
35
30
25 A 30-45% drop in valuations
20
15
10
5
0
1995 2000 2005 2010 2015 2020
MSCI ACWI S&P 500
• After a significant de-rating over the past year, the S&P 500 is now trading on a trailing price-to-earnings ratio of 18.7x, in the 60th percentile of valuations
over the past decade down from 26.8 in February 2021, the peak of the past decade.
• The MSCI AC World, meanwhile, is trading on a trailing P/E ratio of 16.6x, down from 31.2x in February 2021.
Source: Bloomberg, FactSet, UBS as of August 2022

Why invest? Outlook has brightened for longer-term investors
S&P 500 returns and P/E based on trailing earnings, since 1960
• Valuations are not a good short-term indicator of future performance. However, they have historically proven to be a relatively good guide for the rate of
long-term returns.
• Based on historical data, a trailing P/E of 18.7x on the S&P 500 has been consistent with annualized returns in the 7 -10% range over the next decade. This is
a significant improvement versus end-2021, when a trailing P/E of 24.4x was consistent with subsequent returns in the 1-4% range.
Source: Bloomberg, FactSet, DataStream, UBS as of August 2022

Charts and scenarios are for illustrative purposes only. Historical performance and forecasts are no guarantee for future performance.
6
Why invest? Among the highest bond yields since the GFC
US 5-year Treasury yield, Bloomberg Barclays Treasury Intermediate subsequent 5-year return, annualized, in %
7
6
5
4
3
2
1
0
2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
5-year yields Subsequent 5-year returns
• Bond markets have delivered very poor performance so far in 2022, with US investment grade bonds down by more than 10% year-to-date.
• But yields have risen to the highest level since 2018 and 5-year US Treasury yields, at ~3%, are in the 90th percentile in the past decade. Historically, the
starting level of yields has provided a good guide to future returns, suggesting that the outlook now is much stronger than it has been for most of the post-
GFC era.

Charts and scenarios are for illustrative purposes only. Historical performance and forecasts are no guarantee for future per formance. 7
Why invest? Combination of above-average yields and below-average valuations rare in
recent history
S&P 500 P/E based on trailing earnings, and 5-year Treasury yield in %. Semi-annual data, past 30 years
Yield low, valuation high Yield high, valuation high

35 Subsequent 5-year annualized performance average Subsequent 5-year annualized performance average
Bond return av: 2.5% Bond return av: 5.6%
Eq return av: 13.6% Eq return av: 2.7%
30 60:40 weight av: 9.6% 60:40 weight av: 5.0%
25
20
15
10 Yield low, valuation low Yield high, valuation low

Subsequent 5-year annualized performance average Subsequent 5-year annualized performance average
Today
5 Bond return av: 2.0%
Eq return av: 14.0%
Bond return av: 5.9%
Eq return av: 11.6%
60:40 weight av: 9.6% 60:40 weight av: 10.4%
0
0 1 2 3 4 5 6 7 8 9
‘High’ and ‘low’ defined by 30 year median 5-year Treasury bond yield (3.04%) and S&P500 trailing P/E ratio (17.7x).
Subsequent 5-year annualized performance for S&P500 total return and US Intermediate Treasury index.
Datapoints since H2 2017 (for which no 5-year subsequent performance data is available) disregarded when calculating averages (it is likely that calculated average equity returns in the ‘yield low, valuation high’ quadrant will fall in future years as more recent data is included)
• A combination of above-average bond yields and below-average equity valuations is, unsurprisingly, the best for subsequent longer-term returns of balanced
portfolios.
Source: Bloomberg, FactSet, DataStream, UBS as of August 2022
8
Why invest? Cash rates are likely to fall when inflation reaches target
Fed funds futures are pricing policy rate of 3.7% by year-end US headline inflation may ease from highs but stay elevated this year
Federal funds effective rate, in % US CPI y/y, effective fed funds rate, in %
10.0
6.0 9.0
8.0
5.0 7.0
6.0
4.0
5.0
3.0 4.0
3.0
2.0 2.0
1.0
1.0 0.0
0.0
2003 2008 2013 2018
US CPI y/y Effective Fed Funds Rate
• The outlook for cash has also improved. Fed funds futures are pricing that US interest rates will end the year at 3.7%, the highest level since 2008.
• And we think it is important to have 3-5 years of cash in a liquidity strategy. But more than that, you run the risk of long-term wealth destruction.
• The real value of cash is still dropping – real interest rates in the US are currently -6%. Although real cash interest rates are likely to rise as inflation falls, we
expect cash rates to fall as soon as inflation moves closer to target. Real cash yields are unlikely to stay very positive for very long.

Charts and scenarios are for illustrative purposes only. Historical performance and forecasts are no guarantee for future per formance. 9
Why invest in a balanced portfolio now?
10
Why now? It’s usually good to put cash to work straight away
An all-at-once approach has outperformed 12-month phase-in 81% of Market timing can do more harm than good
the time, by an average of 4.4ppt Growth of USD 100 invested in the S&P 500 in 1960, versus a “buy low, sell
Relative performance of 12-months phase-ins to 60/40 stock/bond portfolio, high” market timing strategy (buy stocks after 10% corrections, sell stocks at
versus an all-at-once approach all-time highs), since 1960
40% All-at-once outperforms phase-in
100’000 43’392
30%
10’000
20%
1’000 536
10%
0%
100
-10%
10
-20% All-at-once underperforms phase-in 1959 1969 1979 1989 1999 2009 2019
1945 1955 1965 1975 1985 1995 2005 2015 Buy-and-hold Wait-for-10%
• Some investors consider strategies to manage timing risk, such as a ‘phase in’ strategies or waiting for a further pullback before investing. Psychologically,
such strategies can allow investors to build exposure over time and minimize the risk of ‘regret’ – in case markets fall in the days or weeks after a lump sum
investment.
• However, historically, there’s no time like the present. Strategies investing ‘all-at-once’ have usually outperformed phase-in strategies. Those that involve
waiting for a bigger selloff before investing tend to perform poorly over the long term because in some cases the selloff never comes, leaving investors out of
the market for an extended period.
Source: Morningstar Direct, Bloomberg, UBS as of August 2022
11
Charts and scenarios are for illustrative purposes only. Historical performance and forecasts are no guarantee for future per formance.
Why now? Stocks usually don’t stay weak for long
S&P 500 maximum drawdowns, time to recovery from bear markets, since 1960
0.0%
-10.0%
-20.0%
1.2 0.2
years 1.8 1.6
-30.0% years 0.4 year
0.6 years years
-40.0% year 5.8 years 4.6 4.1
years years
-50.0%
-60.0%
1960 1970 1980 1990 2000 2010 2020
• Stocks tend not to trade at deep discounts to prior highs for very long.
• Since 1960, US equities have traded at a >20% discount to their prior highs for a median period of 1.6 years. The longest stretch was 5.8 years in the late
1970s, the shortest were just 2.4 months in 1982 and 4.8 months in early 2020.
12
Why now? Stocks tend to do better than average following periods of high volatility
S&P 500 total returns, forward returns when VIX is above 25
16.3%
11.0%
9.7%
5.3% 5.2%
2.5%
Next 3 months Next 6 months Next 12 months

VIX above 25 All periods
• Stocks also tend to perform better after periods of high uncertainty, a feature consistent with Warren Buffett’s mantra of being ‘greedy when others are
fearful’.
• 12-month returns following periods when the VIX index has been above 25 have averaged 16.3%, vs. 11% for all periods.

13
Why now? Markets have also done well historically after periods of weak x-asset performance
Stocks and bonds have rarely fallen at the same time Outside of the Great Depression, both stocks and bonds have tended
12-month rolling total returns for US stocks and bonds since 1926 to stage a strong rally after joint sell-offs
Performance during and after periods with simultaneous stock/bond losses
35% 23% of the time: bond 66% of the time: both
returns positive, stock stock and bond returns
returns negative are positive
30%
25%
20%
Intermediate Treasuries
15%
10%
5%
0%
-5%
Returns for the 12 9% of the time: stock
2% of the time: both
-10% months ended 30 April returns positive, bond
stock and bond returns
2022: stocks up 0.2%, returns negative
are negative
-15% bonds down 8.1%
-100% -50% 0% 50% 100% 150% 200%
US large-cap stocks
14
Why now? Balanced portfolios are a good way to navigate our scenarios
Scenarios that could drive the market
CIO estimates/targets for June 2023
Market targets
Current* Reflation Soft landing Slump/ ‘Head fake’
(June ‘23)
MSCI AC World 768 920 780 650
S&P 500 4,141 4,800 4,200 3,300
MSCI China 64 80 74 59
US 10y Treasury yield 3.10 3.5 2.75 1.5
US 10y breakeven
2.64 3.0 2.25 1.5
yield
US high yield
461bps 300bps 500bps 750bps
spread**
US IG spread** 118bps 60bps 115bps 200bps
EURUSD 1.00 1.08 1.00 0.95
Gold USD 1,751/oz USD 1,400-1,500/oz USD 1,650/oz USD 1,800-2,100/oz
* Spot prices as of market close of 24 August 2022
** During periods of market stress, credit bid-offer spreads tend to widen and result in larger ranges. Percentage changes refer to expected total return (t.r.) for the indicated spread levels
Note: asset class targets above refer to the respective macro scenarios. Individual asset prices can be influenced by factors not reflected in the macro scenarios
• Considering the current market environment, the outlook for equity markets over the next 6 to 12 months is uncertain.
• But balanced portfolios may be a better way of managing short-term risks than attempting to guess the direction of the equity market – either by waiting for
a pullback that may not materialize or by positioning for a rally in volatile markets.
• In a stagflation scenario, cash and alternatives would likely outperform. In a slump/’head fake’ scenario, bonds would likely rally sharply. Meanwhile, in a soft
landing or reflation scenario, equities would likely deliver positive returns. By diversifying across asset classes, investors can manage near-term risks, while
positioning portfolios for longer-term growth.
15
Summary
❑ The long-term outlook for balanced portfolios has improved
❑ History tells us uncertain times are often good ones to invest
❑ Balanced portfolios can help navigate market scenarios
Source: UBS as of July 2022

16
Risk information
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Generic investment research – Risk information:

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Why invest in a balanced portfolio now?

Kiran Ganesh Strategist, UBS AG London Branch

A possible capex boom Seasonally adjusted business applications

Liquidity Longevity Legacy

Source: Bloomberg, FactSet, UBS as of August 2022

Source: Bloomberg, FactSet, DataStream, UBS as of August 2022

Source: Bloomberg, UBS as of August 2022

Yield low, valuation high Yield high, valuation high

10 Yield low, valuation low Yield high, valuation low

Source: Bloomberg, UBS as of August 2022

Next 3 months Next 6 months Next 12 months

Source: Bloomberg, UBS as of August 2022

❑ The long-term outlook for balanced portfolios has improved

❑ History tells us uncertain times are often good ones to invest

❑ Balanced portfolios can help navigate market scenarios

Source: UBS as of July 2022

Generic investment research – Risk information:

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