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UBS HouseView

Investment Strategy Guide


June 2015

Next steps for


central banks
Also inside
In Context: Shifting gears
In Focus: US housing market a slow but steady recovery

US Edition
CIO Wealth Management Research

CONTENTS

A MESSAGE FROM THE REGIONAL CIO

TACTICAL PREFERENCES

FEATURE

Next steps for central banks


by Mark Haefele
IN CONTEXT

Shifting gears
by Mike Ryan
PREFERRED INVESTMENT VIEWS

MONTH IN REVIEW

AT A GLANCE

GLOBAL ECONOMIC OUTLOOK

10

ASSET CLASSES OVERVIEW

12

Equities
Fixed income
Commodities
Foreign exchange
IN FOCUS

18

US housing market a slow but steady


recovery
by Jon Woloshin and Brian Rose
TOP THEMES

20

Eurozone comeback
Liability optimization
North American energy independence:
Reenergized
KEY FORECASTS

22

DETAILED ASSET ALLOCATION

23

PERFORMANCE MEASUREMENT

31

APPENDIX

34

PUBLICATION DETAILS

38

Dear reader,
With news services breathlessly reporting on each and every utterance
from the lips of Fed Chairman Janet Yellen and Mario Draghi alternately
deified and demonized for the extraordinary and unprecedented actions
taken by the ECB its pretty clear that central bank policy still matters
a great deal for both the real economy and financial markets. So in this
months Feature article, we debate the next steps to be taken by central
banks, and the implications these will have for investors. We argue that
while the path is narrowing and policy choices from here are not without
risks, the just-right goldilocks economic recovery provides central bankers ample latitude to retain an accommodative policy mix overall.
Against this backdrop we remain overweight risk assets, with preferences
for both Eurozone equities and high yield credit.
We recognize, however, that some adjustments to our tactical market positioning are required amid changes in the economic backdrop, shifts in policy
outlook, and/or re-pricing within and across asset classes. So this months
In Context section outlines a shifting of gears, specifically: upgrading
REITS; downgrading retailers; extending out on the corporate credit curve;
and recommitting to our North American energy independence theme.
One of the developments that has likely added to the uncertainty around
the Feds decision-making process has been the recent economic soft
patch including some disappointing housing data. We argue in the
In Focus article this month that the weakness in housing has largely been
weather related and that the overall backdrop for housing activity remains
constructive (pun intended). In fact, we look for housing starts to eventually reach the 1.31.4 million units per year level.
One thing is for sure, as policy makers continue to sort through the mixed
signals on the economy and plot out the proper policy path, this summer
is likely to be anything but boring
Regards,

This report has been prepared by


UBS Financial Services Inc. (UBS FS)
and UBS AG.
Please see important disclaimers and
disclosures beginning on page 35.

UBS HOUSE VIEW JUNE 2015

Mike Ryan, CFA


Chief Investment Strategist, WMA
Regional CIO, Wealth Management US

TACTICAL ASSET ALLOCATION

Tactical preferences
We favor stocks over bonds. Eurozone equities are more attractive than US markets.
Within fixed income, we prefer US corporate bonds.

me
o
c
n
di
e
x
Fi
vt
Go

US HY
Corp

Intl
Developed
Emer
Markets
gi
Mark ng
ets

Tot
al

US
Mid cap

EUR

US
Large cap
Value

GBP

Asset Classes
Tactical asset allocation

l
Tota

CHF

cap
Large
th
Grow

JPY

sh
Ca

al
Tot

Oth
er

ities
u
q
E
US

hange
ign exc
Fore

USD

US
Smal
l cap

tal
To

Int
Dev l
e
Ma lope
rke d
ts
Em
Ma ergi
rke ng
ts

US

Com
mo
dit
ies
nal
itio
rad
nt
No

tal
To

uni
US M

US IG
Corp

THIS
MONTH

1) Equities
The Eurozone is
our favorite market. In the US we
favor small-caps
over large-caps.

2) Fixed income
We favor US
corporate bonds
over government
bonds.

3) Foreign
exchange
We add a new
preference for
the British pound
over the Australian dollar.

LEGEND

Overweight: Tactical recommendation to hold more of the asset class than specified in the moderate risk strategic asset allocation (see page 23)
Underweight: Tactical recommendation to hold less of the asset class than specified in the moderate risk strategic asset allocation (see page 23)
Neutral: Tactical recommendation to hold the asset class in line with its weight in the moderate risk strategic asset allocation (see page 23)
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

JUNE 2015 UBS HOUSE VIEW

The next steps for


central banks
More than six years into quantitative easing, central bankers are warning

that the path is narrowing and that the policy is not without risks.
Mark Haefele
Global Chief Investment Officer
Wealth Management

Our base case remains that just-right Goldilocks economic recoveries

allow central bankers to retain loose policy before steadily pulling back.
But investors will need to remain conscious of alternative scenarios, includ-

ing a possible tightening tantrum or QE infinity.


In our tactical asset allocation, we remain positive on equities and high

yield credit, and initiate an overweight position in the British pound relative
to the Australian dollar.

Since the financial crisis, the US Federal Reserve, the Bank of England, the Bank of
Japan (BoJ), and the European Central Bank (ECB), have printed a combined USD
5.7trn. Thats enough to build a six-lane freeway out of USD 100 bills that circles the
globe twice.
Perhaps unsurprisingly, given the extent of the easing, global central bank policy has
been the key factor in determining investment performance in that period.
Again this year, the general idea that investors should follow the lead of central banks
has worked. The Eurozone and Japan, both running aggressive quantitative easing
(QE) schemes, have been the best-performing developed markets. Chinese equities
have also responded very well to easing from the Peoples Bank of China (PBoC).
The fix has been in for risky assets and investors expect it to remain in place. At our
recent Davos investor forum, investors overseeing a combined USD 11trn unanimously
agreed that policy would continue to support risky assets this year. Still, nothing lasts
forever.
More than six years into QE, central bankers are warning that the path is narrowing
and it is not without risks. ECB President Mario Draghi and Fed Chair Janet Yellen
have both recently warned that the possible threats arising from QE need to be carefully monitored. So while policy is likely to remain stimulative through 2015, we need
to examine how this outlook might alter based on changes in such variables as
growth, inflation, employment, wages, asset prices, and inequality.
I see three paths central banks can take in the near term. The most comfortable path,
and our base case, is one in which just-right Goldilocks economic recoveries with
low inflation, gradually improving growth, and modest wage increases allow central
bankers to retain accomodative policy before steadily pulling back. This environment
2

UBS HOUSE VIEW JUNE 2015

FEATURE

should prove supportive of risky assets like equities and high yield credit. But on either
side of our base case are the more troubling paths of a tightening tantrum and QE
infinity.
Lets look at some of the signposts that might indicate which path we are heading
down.

>> The Fed should continue

to support growth

>> But this could change if

we see a pickup in
inflation

>> There are some early

signs of higher wage


growth...

>> ...and stagflation risks

need to be closely
monitored

Tightening tantrum: Fast-track interest rate hikes


In our base case, we expect the Fed to start increasing rates in September. Uncertainty
about the precise path of rate hikes may increase equity volatility from current low
levels. But with the Fed continuing to support growth, we think the rewards of staying
positive on the likes of equities and high yield credit will more than make up for the
risks.
One development that could cause our confidence to fade would be evidence that
the Fed is falling behind the curve in containing inflation. This would likely lead to a
more rapid rise in interest rates than we currently expect raising the threat of a
tightening tantrum similar to the bond and equity sell-off we saw in mid-2013
when the Fed hinted at tapering QE. A larger-than-anticipated Fed rate hike could
occur in one of two ways: inflation with growth or inflation without growth.
The key signpost pointing to the first and more benign outcome will be wage growth.
Most data suggest salary pressures are low. Overall average hourly wages grew by a
modest 2.2% year-on-year to April. That isnt notably higher than the 2% average
rate of the past five years, despite a near halving of unemployment since its 2009
peak. But this figure may be depressed by the creation of more low-paid positions.
Other data that better reflect existing individual worker situations, rather than a simple aggregate, suggest that wage demands could be rising. The Employment Cost
Index data released this month hints that existing workers are succeeding in extracting
slightly higher pay packets: it rose 2.6% in the year to March (see Fig. 1). While such
early signs of wage inflation have proven misleading before, we will need to remain
vigilant if this index rises any further.
More troubling still would be stagflation: a pick-up in price pressures without greater
accompanying growth. The wage-price spirals typical of the 1970s seem unlikely

Fig. 1: Tightening tantrum? Early signs of US wage growth have emerged


Employment Cost Index, y/y growth in %
3.5

>> Existing US employees are

3.0

winning the largest pay


increases since 2008

2.5
2.0
1.5
1.0
2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: Bloomberg, UBS, as of 20 May 2015

JUNE 2015 UBS HOUSE VIEW

FEATURE

today. However, a different type of stagflation asset-price stagflation is worth


monitoring. As I described in my last letter, markets fueled by QE are producing assetprice inflation that could continue until excess leverage and speculation suck too
many resources from productive sectors of the economy. Then the Fed or other central
banks may pull the stimulus despite sluggish growth.

>> So far, however, central

banks do not need to


prick asset-price bubbles

>> QE may also fail to

generate an economic
lift-off

>> The Eurozone economy

has not yet achieved


self-sustaining growth

>> Indefinite QE increases

the risk of over-leveraging, speculation and


excessive inequality

I dont think developed market central banks are poised to start pricking bubbles, real
or imagined. Major equity markets are not cheap for sure, but neither are they dramatically overpriced. The MSCI All Country World Index currently trades on 16.9x
price-to-forward-earnings, relative to a 15-year average of 14.8x. We also currently
see few signs of overheating in wages, growth, or consumer spending.
QE infinity: An endless road
Another concern is that stimulus fails to generate sufficient growth. Even in the flexible US economy, there is a non-negligible chance that policymakers could be forced
to resume easing. The US has, for the third time in succession, appeared to stall
shortly after the end of a QE program. In structurally weaker economies like the Eurozone, there is an even greater danger that QE will not stimulate enough growth, leading to monetary easing stretching out into infinity. Japan provides a cautionary tale on
how this can happen (see Fig. 2).
Ultra-low bond yields, a weak euro, and low oil prices have given the Eurozone a temporary boost. But convincing evidence of a self-sustaining recovery is still missing, and
recent market moves have shown how quickly such temporary effects can swing into
reverse. Lifting growth on a lasting basis will require measures such as liberalizing labor markets and opening up industries to competition. Unfortunately, the pace of
productivity-enhancing structural reform in the Eurozone continues to disappoint
notably in Italy and France.
Without a sustained pickup in growth, the ECB could be forced into further bouts of
QE. This need not be bad for equities in the near term: the QE fix has helped to fuel
these markets the past six years and will remain a powerful force. But the longer QE

Fig. 2: QE-infinity: in the footsteps of Japan?


Japan 3-month LIBOR, in %
9

>> Japan has been stuck

with interest rates near to


zero since the late 1990s

8
7
6
5
4
3
2
1
0
1990

1995

Source: Bloomberg, UBS, as of 20 May 2015

UBS HOUSE VIEW JUNE 2015

2000

2005

2010

2015

FEATURE

drags out, the greater are the chances that some of its adverse side effects, such as
speculation, over-leveraging, and excessive inequality, will materialize.

>> Still, global data outlook

gives grounds for


optimism that central
banks can continue on
their current path

Staying the course


Over the past few years, it could be said that the greatest challenge for investors was
staying the course, and betting that central banks were determined to make the fix
work. This challenge could become greater still in the months ahead if the volatility
gripping currency and bond markets since the beginning of the year extends to the
equity market. Still, overall, we believe that much of the data leads toward a benign
outlook for central bank policy over our tactical horizon. Growth should be sufficient
for risky assets to perform well (see Fig. 3).
In the US, GDP growth, though slightly below par, is heading for 2.3% this year. Prices
remain under control, and there may be more scope for non-inflationary job growth
as discouraged workers return to the labor market.
In Europe, growth has surprised positively so far this year, and with unemployment still
elevated, the ECB should be able to maintain loose monetary policy without fearing a
sharp rise in inflation. The ECBs willingness to be proactive about addressing potential
market disruptions, as demonstrated again in the past week, is a further positive especially if the Greek situation deteriorates.
Japan is also making some progress. BoJ Governor Haruhiko Kuroda recently claimed
that the nations output gap has closed to about zero and inflation will soon start
to rise to healthier levels.
In addition, there are grounds for optimism about the Chinese economy, in the near
term at least. The PBoC has extended some local government debt maturities and
already cut borrowing costs three times over the past six months. The Chinese governments ability to influence economic activity should not be underestimated.

Asset allocation
So where does this leave us? We will remain vigilant for any signs that central banks
will be forced away from their preferred path of pro-growth policies. But over our
tactical six-month investment horizon, we do not currently see economic pressures

Fig. 3: Economic growth should be sufficient for risky assets to perform

>> US GDP is expected to

grow by 2.3% this year,


against 1.6% in the
Eurozone and 0.7% in
Japan

Full-year GDP growth forecasts for 2015, in %


3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
World

US

Eurozone

Japan

Source: UBS, as of 20 May 2015

JUNE 2015 UBS HOUSE VIEW

FEATURE

emerging that will cause central bankers to deviate. While the threat of deflation has
abated, there are no immediate indications that inflation is accelerating too fast. The
growth trajectory looks relatively promising in the US, Europe, and Japan, without any
immediate signs of overheating.

>> We remain overweight

risky assets, both equities


and high yield credit

We therefore remain overweight risky assets, both equities and high yield credit, with
our largest overweight position in Eurozone equities. They should continue to benefit
from policies of the ECB, which seems to be the central bank most committed to staying the course with its QE program.
To become incrementally more positive on risky assets, we would like to see greater
low-inflation growth in the major economies ideally including some combination of
a pickup in US consumer spending, a sustained improvement in Eurozone domestic
demand, greater global earnings momentum, and a rise in business confidence that
translates into stronger capital spending.

>> We are adding a tactical

overweight position in
the British pound relative
to the Australian dollar

>> Eurozone equities are

our most preferred asset


class over our tactical
investment horizon

In our tactical asset allocation this month, we are initiating an overweight position in
the British pound relative to the Australian dollar. We believe the recent strengthening
of the British economy and the weakening of commodity-reliant Australia will lead to
a divergence in monetary policy. An unwinding of existing carry trades in the AUD has
yet to be fully priced into the market. AUDGBP is currently overvalued by 18%, in our
view. We also look to take advantage of the most recent backup in rates and pick up
some incremental yield by extending out the credit curve and shifting from shorter- to
longer duration investment grade corporate bonds.
Elsewhere, we maintain our overweight positions in equities and high yield credit.
Global economic growth should remain underpinned by central bank policies that
support near-term growth. Eurozone companies in particular are well placed to
benefit from a weak euro, low debt-refinancing costs and the regions accelerating economy. Eurozone equities are our most preferred asset class over our sixmonth investment horizon.

Mark Haefele
Global Chief Investment Officer
Wealth Management

UBS HOUSE VIEW JUNE 2015

IN CONTEXT Perspective from the Regional Chief Investment Officer US

Shifting gears
Anyone who has driven a car with a stick shift on the north shore of Long Island understands that
careful attention and frequent action are required to deal with the varying weather conditions
and topography. Downshifting is necessary to save the brakes on a steep decline, while lower
gear operations help navigate snow drifts or Noreasters.
Mike Ryan
Regional Chief Investment Officer
Wealth Management US

>> While much of the


economic drag during
the first quarter was
due to temporary factors, the economy has
still failed to meaningfully break out.

As investors, we are periodically required to do a bit of gear-shifting of our own amid changes
across the investment landscape. This month is a good example as we opt to make a number of
adjustments to our tactical positioning in light of the following environmental shifts:
While much of the economic drag during the first quarter was due to temporary factors, the
economy has still failed to meaningfully break out of the slow-growth channel that has
persisted since the recovery began.
The minutes from the last FOMC meeting suggest that while the Fed is edging ever closer to
normalization, the path will be a deliberate and cautious one. So although we still view September as the most likely date for a rate hike, the Fed could well opt to defer such action until
December or even later.
Despite the economic soft patch and temporary earnings stall in 1Q, equity markets have
continued to grind higher. While valuations are by no means overextended, the prospects for
further re-ratings of equities are now more limited in our view. Further market gains will
therefore require a reacceleration in earnings.
After having fallen sharply through the end of the first quarter, crude prices have since rebounded by nearly 25% thus far in 2Q. We look for energy prices to stabilize further going
forward.
Although the recent backup in US rates has been more modest than the abrupt rise in global
bond yields, 10-year Treasury rates have still risen by 50 basis points just since the end of
January. We now look for yields to remain more range bound for the balance of the year.
Against this backdrop, we recommend that investors make the following tactical shifts to position portfolios for the second half of the year:
We are reducing our exposure to the consumer discretionary sector, by downgrading the retailers to neutral. After having outperformed the S&P 500 by nearly 1,400 basis points since
October 2014 due in part to falling gas prices and improving consumer fundamentals
performance prospects will likely be more modest since positive earnings revision momentum
has stalled and valuations appear stretched.
We are increasing the financial sector to an overweight, by closing our underweight position
in real estate investment trusts (REITs) and retaining our overweight to the banks. A more favorable earnings outlook, coupled with the backup in yields, deliberate pace to Fed rate hikes,
and recent underperformance of REITs, suggests that the downside risks for this industry
group are more limited and a neutral stance is now warranted. With bonds expected to remain within narrower trading ranges for the rest of the year, we look to take advantage of
the recent backup in rates and pick up some incremental yield by extending out the credit
curve and shifting from shorter- to longer-duration investment grade corporate bonds.
Finally, we have upgraded our North American energy independence theme to preferred
status amid the recent stabilization of energy prices.
Mike Ryan, CFA
JUNE 2015 UBS HOUSE VIEW

PREFERRED INVESTMENT VIEWS


As of 21 May 2015

Asset Class

Most preferred

Least preferred

Equities

US small caps
Eurozone
The rising Millennials
North American energy independence ()
US capex
Cancer therapeutics

Emerging markets
UK

Bonds

US high yield
US investment grade
Mortgage interest-only
US senior loans
Beyond benchmark fixed income
investing

Government bonds

Foreign
exchange*

GBP ()

AUD ()

Alternative
investments
Cash
Recent upgrades Recent downgrades
*For more information on recent changes, see CIO Note: EURUSD risks now more balanced, 5 May 2015

UBS HOUSE VIEW JUNE 2015

MONTH IN
REVIEW
Nonfarm payrolls grew by 223,000
in April, broadly in line with consensus and an improvement over
the weak data from March. Unemployment claims over the past four
weeks were recorded at a 15-year
low. Other US data were mixed,
with the April ISM non-manufacturing index rising to 57.8 and
housing starts hitting their highest
level since the financial crisis, while
retail sales were disappointing. US
Treasury bond yields moved higher,
although minutes from the latest
FOMC meeting suggest that a
June rate hike is unlikely. Fed Chair
Janet Yellens remarks on high
stock valuations sent some waves
through the market, but the S&P
500 still reached a record high.
Across the Atlantic, recoveries in
the euro and oil prices have caused
Eurozone equities to decline from
a mid-April peak; however, the
earnings outlook remains positive
and the ECBs announcement that
it would front-load some of its QE
bond purchases provided a boost.
On 12 May, Greece avoided a default by completing a EUR 750m
repayment to the IMF.
Brent crude recently climbed to
its highest level of 2015, ending
a yearlong price slump, as US rig
counts declined further.
Emerging markets continued to
generate gain, led by Chinese equities, which have been among the
best-performing in the world yearto-date. Emerging bond markets
have also performed well despite
higher volatility.

At a glance
Economy
Recent data suggest that US economic growth fell into negative territory in the
first quarter. While industrial production and retail sales continued to disappoint in
April, the crucial labor market remained on an improving path. The Fed is still expected to hike its policy rate toward the end of the year, but the path will likely be
less steep than in past cycles. Meanwhile, ECB President Mario Draghi reiterated his
commitment to pursue quantitative easing as long as there is no material pickup in
investment, consumption and inflation in the Eurozone. In China, the government
is pursuing large multi-year infrastructure projects and easing monetary policy in an
attempt to stabilize economic growth.
Equities
The Eurozone is our most preferred equity market for the next six months.
Eurozone companies benefit from a weak euro and low debt refinancing costs.
The ECBs large bond-buying program will likely keep both factors in place.
Furthermore, domestic earnings are supported by the acceleration of the
Eurozones economy. On the other hand, we are holding underweight positions in
emerging market and UK equities. In both regions, earnings are still suffering. A
relatively strong pound as well as low commodity prices weigh on large parts of
the UK stock market. Emerging market companies are still faced with a challenging fundamental backdrop, as growth is decelerating in many emerging
economies.
Fixed income
The surprisingly strong rise in government bond yields over the past month especially for German Bunds has been supported by technical factors, such as overextended investor positioning and thin market liquidity. Total returns turned
sharply negative, in particular for bonds with long maturities. While we do not expect the sell-off in government bonds to continue at the same pace over the next
six months, we are maintaining our preference for corporate bonds. In particular,
high yield bonds both in USD and EUR held up well during the recent episode,
as falling spreads compensated for part of the rise in government yields. Within investment grade corporate bonds, we recommend avoiding bonds with very long
maturities of 15 years or more.
Foreign exchange
While we still expect fundamental factors to support the US dollar and weigh on
the euro in the medium term, rising short-term risks made us close our USD overweight position on 5 May. A remarkable rise in German Bund yields has made the
euro slightly more attractive, and a rise in oil prices weighs on the USD at the margin. We are opening an overweight in the British pound against the Australian dollar. The GBP should ultimately benefit from rising policy rates. The outcome of
Mays general elections has reduced political uncertainty in the UK. The AUD is still
overvalue in our view and the Australian economy is facing headwinds from low
commodity prices.

JUNE 2015

UBS HOUSE VIEW

KEY FINANCIAL MARKET DRIVERS

Global economic outlook


Brian Rose, PhD; Ricardo Garcia, CFA; Gary Tsang

Global growth has been somewhat disappointing so far in 2015 despite support from extremely loose monetary policy. In the US, a steep decline in energy-related investment and the
stronger USD have weighed on growth. Consumer spending has also fallen short of our expectations. However, the labor market continues to improve and we still believe that the Fed
will start raising rates before the end of the year. Among the other big economies, China has
been struggling to maintain growth despite fiscal and monetary stimulus, while the
Eurozone finally appears to have achieved escape velocity. Inflation remains subdued in
most countries. Global growth in 2015 will likely be similar to 2014.

US rebound from a weak


start

Eurozone to grow solidly


in 2015

Brian Rose, PhD

Ricardo Garcia, CFA

CIO VIEW Probability: 70%

CIO VIEW Probability: 70%

Robust expansion
We expect robust US growth for the rest of 2015 after
temporary weakness early in the year. Core inflation will
likely stay well below the Feds target of 2% over the next
six months. We expect the first Fed rate hike later this year
and the pace of tightening to be gradual.

Solid growth in 2015


Despite recent oil price increases and Greek-related risks,
economic growth in 2015 is set to be robust. Inflation is
expected to move up only slowly to about 1% toward the
year-end. The ECBs expansionary policy is expected to
support the economic acceleration in 2015.

POSITIVE SCENARIO Probability: 10%


POSITIVE SCENARIO

Strong expansion

Better-than-expected growth and fiscal stabilization

US real GDP growth accelerates to 4% or more, propelled


by an expansive monetary policy, a more rapidly fading
fiscal drag, improved business and consumer confidence,
strong housing investment, and subsiding risks overseas.
The Fed raises policy rates several times in 2015.

Oil prices and the euro decline more than expected, with
loan demand and the economy recovering faster than envisaged. France and Italy follow a credible reform path and
speed up fiscal consolidation. Political risks fade further.

NEGATIVE SCENARIO Probability: 20%



Growth recession

US growth fails to pick up after the weakness in 1Q15.


Consumers save rather than spend the windfall from lower
energy prices, while businesses lack enough confidence
to hire workers and boost investment spending. The Fed
remains on hold throughout 2015.

10

UBS HOUSE VIEW JUNE 2015

NEGATIVE SCENARIO

Probability: 20%

Probability: 10%

Deflation spiral

The Eurozone slips into a deflation spiral due to a shock


such as Greece leaving the Eurozone, a sharp escalation
in the Ukraine conflict, or China suffering a severe economic downturn.

GLOBAL GROWTH EXPECTED TO BE


IN 2015

US
Canada
Brazil
Japan
Australia
China
India
Eurozone
UK
Switzerland
Russia
World

Real GDP growth in %


2014
2015F
2016F
2.4
2.3
2.8
2.4
2.9
2.8
0.1
-0.5
1.3
0.0
0.7
1.8
2.7
2.2
2.8
7.4
6.8
6.5
7.3
7.5
8.3
0.9
1.6
2.0
2.6
2.4
2.9
2.0
0.5
1.1
0.6
-4.5
0.0
3.4
3.3
3.8

3.3%
Inflation in %
2014
2015F
1.6
0.0
2.1
2.2
6.4
7.9
2.8
0.8
2.5
1.7
2.0
1.2
5.9
5.3
0.4
0.1
1.5
0.2
0.0
-1.0
7.8
15.4
3.3
3.0

2016F
2.5
2.0
5.2
0.9
2.8
1.6
5.0
1.5
1.7
0.2
5.6
3.3

Source: Reuters EcoWin, IMF, UBS CIO WMR, as of 21 May 2015


Note: 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.

Moderating Chinese
growth
CIO VIEW Probability: 65%
Moderating Chinese growth
The growth momentum has been weak in recent months
and the government will likely step up its efforts to support growth. Export growth is expected to improve in the
coming quarters, helped by the recovery in the Eurozone
and reacceleration of US growth. Intensifying policy support will likely lead to a temporary improvement in economic growth in 2Q15.
Probability: 10%

Growth acceleration

Annual growth accelerates in 2015 as a result of more


substantial policy stimulus measures from the government
or a strong pickup in external demand.
NEGATIVE SCENARIO

>

1 JUNE 2015

>

5 JUNE 2015

US ISM manufacturing for May


The manufacturing index remained unchanged
in April, with some lingering effects from the
West Coast port strike. Production and new orders improved from March, making the details
of the report slightly more favorable for growth.
We expect the index to gradually recover in the
months ahead.

US labor market report for May
Nonfarm payrolls increased by 223,000 jobs in
April, while March was revised lower to 85,000.
Overall the labor report was slightly weaker
than expected due to the downward revision
to March payrolls and soft earnings growth.
Payrolls have slowed year-to-date, averaging
slightly less than 200,000. We expect payroll
growth to remain strong enough for the Fed to
raise rates later in the year.

>

 11 JUNE 2015

Gary Tsang

POSITIVE SCENARIO

KEY DATES

Probability: 25%

Sharp economic downturn

Annual growth falls by more than one percentage point


in 2015 due to a sharp downturn in property investment,
more widespread credit events, or tighter liquidity as the
government reins in shadow-banking activity.

US retail sales for May


Overall retail sales were flat month-on-month in
April, due in part to weaker auto sales. At least
so far, consumers have saved the windfall from
lower energy prices. The improving labor market
should support spending in the months ahead.

>

16 JUNE 2015

>

18 JUNE 2015

US housing starts for May


Housing starts surged in April, making up for
some of the weather-induced weakness in the
first quarter and reaching the highest level in
more than seven years. While it is still difficult
to judge the underlying trend in housing
starts, for the rest of 2015 we expect to see
solid gains over 2014 levels.

US CPI for May


The core consumer price index (excluding food
and energy) has risen by at least 0.2% every
month so far in 2015. Housing rent remains the
biggest driver of inflation, while the strong dollar is keeping downward pressure on goods
prices. Low inflation in the months ahead
would make it more difficult for the Fed to start
hiking rates.

JUNE 2015 UBS HOUSE VIEW

11

ASSET CLASSES OVERVIEW

Equities
Jeremy Zirin, CFA; Brian Nick, CAIA; David Lefkowitz, CFA; Manish Bangard, CFA; Markus Irngartinger, PhD, CFA

The Eurozone is our most preferred equity market for the next six months. Eurozone companies benefit from a weak euro and
low debt refinancing costs. The ECBs large bond-buying program will likely keep both factors in place. Furthermore, domestic
earnings are supported by the acceleration of the Eurozones economy. On the other hand, we are holding underweight positions in emerging market and UK equities. In both regions, earnings are still suffering. A relatively strong pound as well as low
commodity prices weigh on large parts of the UK stock market. Emerging market companies are still faced with a challenging
fundamental backdrop, as growth is decelerating in many emerging economies.

Global equities
Emerging Markets

Eurozone 
We are overweight Eurozone equities. Corporate earnings growth has
started to improve, supported by solidly advancing revenues. Positive
economic momentum differentiates the Eurozone from other developed
as well as emerging markets and should help accelerate earnings growth.
In the unlikely event of Greece exiting the euro, we do not anticipate a
permanent or a significant drawdown in Eurozone equities. Our most
preferred sectors are financials, consumer discretionary and consumer
staples.
EURO STOXX (index points, current: 380)

six-month target

House view

397

Positive scenario

430

Negative scenario

300

We are underweight emerging market (EM) equities. The consensus expectation is for EM earnings to grow around 9% over the next 12 months.
We are more cautious, however, and expect around 57% growth. We
forecast the trailing price-to-earnings (P/E) to will move slightly below
its current level of 13.3x. We prefer India, the Philippines and Taiwan to
South Korea, Malaysia and Thailand.
MSCI EM (index points, current: 1,036)

six-month target

House view

1,060

Positive scenario

1,165

Negative scenario

800

UK
Japan
We are neutral on Japanese equities. We forecast earnings growth of
15% in FY2015 and 4% in FY2016. A lower oil price and corporate tax
cut in 2015 should help domestic consumer companies earnings to recover as well. The state pension funds increased equity purchases and
the BoJs potential further monetary easing should limit the downside
risk on Japanese equities. Companies recent move to buy back more
shares to increase return on equity should also limit the downside. The
Tokyo Stock Exchange plans to implement Japans corporate governance
code in June, and we believe this will result in higher share buybacks and
ROE. However, the Topix trailing P/E is likely to re-rate from 18.1x currently
to 17.2x in the next six months, despite the solid earnings growth in
FY2015. Overall, we think the Topix is fairly valued and will move in line
with global equity markets over the next six months.
TOPIX (index points, current: 1,643)
House view

six-month target
1,675

Positive scenario

1,850

Negative scenario

1,300

12

UBS HOUSE VIEW JUNE 2015

We have an underweight stance on UK equities. Earnings dynamics remain weaker in the UK than in other countries. Lower commodity prices
weigh on trailing company earnings and the currency is not a tailwind like
in other regions. In the UK market, the energy sector has a 15% weighting and the materials sector 8%. Due to its defensive sector stance, the
market will likely benefit less from an improving economic outlook in
developed markets. Within the UK, our preferred investment strategy
is UK value, which tends to outperform in periods of strong economic
performance ahead of interest rate rises.
FTSE 100 (index points, current: 7,007)
House view

six-month target
7,125

Positive scenario

7,650

Negative scenario

5,700

ASSET CLASSES OVERVIEW

US equities
US stocks are poised for further gains over the next six months, but upside potential appears greater in European equities.
US economic indicators have downshifted somewhat recently, likely due to temporary factors such as weaker exports due to
a strong dollar, and lower oil and gas drilling activity. These economic headwinds should abate in the second half of the year.
Corporate profit growth, excluding the severe slump in the energy sector, has remained resilient and provided market support.
Market valuation is fair to somewhat elevated, but stocks remain attractively valued relative to low-yielding bonds. We continue
to favor technology stocks, but we trim our overweight in the consumer discretionary sector and upgrade financials to overweight. Small-caps remain most preferred among US size segments.
US Equities overview
US stocks continued to reach new all-time highs, but do not confuse
record highs with market peaks. S&P 500 earnings per share (EPS)
are also at all-time highs and continued profit growth can justify further
share price gains. While first quarter profit growth was flattish for US
large-caps in aggregate, S&P 500 EPS, excluding the energy sector, rose
nearly 10% year-on-year. There is no evidence of a broad-based profit
slowdown. Small- and mid-cap earnings growth was even stronger in
the first quarter. We expect that the drag from lower energy profits and
the strong dollar will fade as the year progresses. We forecast 2015 and
2016 S&P 500 EPS of USD 124 (+4%) and USD 138 (+11%) respectively.
We roll forward our six month S&P 500 price target to 2,200.
S&P 500 (index points, current: 2,126)

six-month target

House view

2,200

Positive scenario

2,450

Negative scenario

1,825

US Sectors
This month, we upgrade financials to a moderate overweight by raising
the real estate subsector from underweight to neutral. This leaves us
overweight the banks and neutral on each of the other financial subsectors (diversified financials, insurance, real estate). The recent rise in
bond yields, if sustained, should boost bank profitability. And after underperforming the S&P 500 by nearly 15% since late January, we choose
to close our underweight allocation to real estate. We also trim our sector
overweight in the consumer discretionary sector by downgrading retailers
to neutral. Year-to-date, the retail subsector has outperformed the S&P

500 by 7% and valuations now appear somewhat stretched. Within


consumer discretionary, we favor the consumer durables subsector.
Finally, we continue to overweight technology and transportation (within
the industrials sector) and underweight utilities, telecom and materials.
US Equities size
There has been very little performance differentiation within size segments
thus far in 2015. As of 19 May, large-, mid- and small-caps have all gained
approximately 4% year-to-date. Smaller companies (both small-caps and
mid-caps) outperformed large-caps earlier in the year, likely driven by falling
oil prices (small-caps have higher consumer exposure) and a rising dollar
(small-caps have lower global exposure). As these trends have reversed
over the past few weeks oil prices have rebounded and the dollar rally
has faded large-caps have gained ground relative to small- and mid-caps.
Looking ahead, we expect stronger profit fundamentals for smaller companies to trump currency and oil price fluctuations. Further, we maintain
our preference for small-caps.
US Equities style
Growth stocks have outperformed value stocks year-to-date, but all of
the outperformance occurred in the first two months of the year. Since
the end of February, these style segments have largely moved together.
We currently do not see a compelling investment case to favor either
style segment. Growth stocks do appear inexpensive relative to value,
but sector influences play a strong role in the relative performance between growth and value. Our upgrade of financials (a value dominated
sector) incrementally favors value but this is offset by our tech sector
overweight, which favors growth. We remain neutral.

Fig. 1: S&P 500 EPS growth ex-energy remains solid

Fig. 2: Small-cap growth outpacing larger size segments

S&P 500 EPS ex-energy, year-on-year growth, in %

1Q15 revenue and EPS growth year-on-year, ex-energy, in %

16

25

14

22

20

12
10

15

10

10

6
4

2
0

6
3

Source: FactSet, UBS, as of 20 May 2015

1Q15

4Q14

3Q14

2Q14

1Q14

4Q13

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

0
Large-caps Mid-caps Small-caps
Revenue growth YOY

Large-caps Mid-caps Small-caps


EPS growth YOY

Source: FactSet, UBS, as of 20 May 2015

JUNE 2015 UBS HOUSE VIEW

13

ASSET CLASSES OVERVIEW

Fixed income
Leslie Falconio; Thomas McLoughlin; Barry McAlinden, CFA; Achim Peijan, PhD, CEFA; Philipp Schoettler; Thomas Wacker, CFA

We prefer developed market investment grade (IG) corporate bonds and high yield (HY) to government bonds, as the yield
pickup allows for carry gains. Moderate economic growth and inflation, as well as expansionary monetary policy in the
Eurozone and the US, support IG corporate bonds, with the ECBs easing measures lending particular support. HY bonds generally have a lower rate-sensitivity and during the recent rise in benchmark rates, HY held up very well. We expect the negative correlation between rates and HY spreads to continuously support HY returns in times of rising rates. Sentiment toward
EM bonds has improved in recent months on the back of a more dovish interpretation of the Fed and stabilizing EM growth
expectations. We recommend a neutral allocation to EM sovereign and EM corporate bonds.

US Investment Grade Corporate Bonds

Government Bonds
We expect the 10-year US Treasury yield to trend moderately higher as
the Feds first rate hike in nearly a decade approaches. US rates have
been steadily increasing over the past month despite benign payroll data.
The rising rates in Europe and an increase in government bond supply
have been contributors to the recent yield increases. Rates remain well
above the lows seen in January, and our forecast remains for a gradual
longer-term rise as we see a reacceleration in 2Q15.
US 10-YEAR YIELD (Current: 2.25%)
House view

Six-month target
2.3%

Positive scenario

2.73.1%

Negative scenario

1.62.0%

US High Yield Corporate Bonds

Six-month target

House view

400bps

Positive scenario

325bps

Negative scenario

900bps

14

UBS HOUSE VIEW JUNE 2015

US IG SPREAD (Current: 128bps*)


House view

Six-month target
115bps

Positive scenario

75bps

Negative scenario

250bps

*Data based on Barclays Corporate Aggregate Indexes.

High yield (HY) bonds held up well against the rise in benchmark rates
over the past month, as tighter spreads compensated for part of the
rate rise. We expect the negative correlation of rates and spreads to
persist as long as rising rates come along with a strengthening global
growth backdrop. We continue to hold a tactical overweight in HY as
we expect spreads to tighten further on the back of low default rates
and investors continued search for yield. We expect defaults of 3% over
the next year, which remains below average. With a total yield-to-worst
of 6%, HY offers attractive risk-return prospects, in our view.
USD HY SPREAD (Current: 499bps)

While credit spreads remained by and large unchanged over the past
month, the sharp rise of benchmark yields weighed on investment grade
(IG) bond total returns. An influx of supply pressured long-dated IG bonds
(30% of the index has a maturity of 10 years or more). We see tightening
potential in the long end as supply pressures fade and the Treasury curve
flattens. However, our preferred maturity segment lies in IG bonds with
medium maturities of 5-10 years. Within financials, we prefer bonds lower
in bank and financial issuer capital structures; in non-financials, we favor
select issuers that are deleveraging.

Emerging Market Bonds


We recommend a neutral preference for EM sovereign and corporate
bonds denominated in USD as the improved sentiment toward EM bonds
balances the gradual weakening of corporate and sovereign fundamentals. From a valuation perspective, EM bonds are fairly valued relative to
fundamentals, in our view. The fragile economic recovery and financial
vulnerabilities pose headwinds for corporate issuers. Credit rating downgrades accelerated in recent months and reflect the challenging funding
and operating environment. We continue to expect a gradual deterioration of the credit quality, a modest increase of corporate default rates
from the currently very low levels.
EMBI / CEMBI SPREAD (Current: 330bps / 315bps) Six-month target
House view

350bps / 350bps

Positive scenario

260bps / 250bps

Negative scenario

480bps / 470bps

ASSET CLASSES OVERVIEW

Municipal Bonds 

Non-US Developed Fixed Income 

Month-to-date, munis (-0.8%) are holding up better than their taxable


fixed income counterparts. By comparison, US Treasuries and investment
grade corporate bonds are down 1.2% and 1.3%, respectively. We
attribute this reversal in muni relative performance in large part to rates.
Munis often lag the yield movements occurring in the Treasury bond
market. On the credit side, the city of Chicago was downgraded dramatically in the wake of the Illinois Supreme Courts decision on pension
reform. Muni redemptions are set to rise, increasing demand from investors interested in reinvesting in municipals.
Current AAA 10-year muni-to-Treasury yield ratio: 103.1% (last month: 101.5%)

Government bond yields reversed course and moved higher in many countries over the past month. Investors began to question the extremely low
yield levels and market momentum took over, bringing yields back near
where they were at the start of the year. However, the dollar also reversed
course, weakening against many other currencies, which helped to boost
returns on non-US bonds when measured in dollars. As a result, despite
the drop in bond prices, non-US developed fixed income has been one
of the best-performing asset classes in dollar terms over the past month.
We expect non-US bond yields to stay near current levels over the next
six months, but in our view the dollar is likely to strengthen over that time
period, hurting returns in US dollar terms.

Additional US taxable fixed income (TFI) segments


Agency Bonds
Agency debt spreads continue to trade in a relatively narrow range of
incremental spreads versus matched maturity Treasury notes, largely
mirroring the movement in the Treasury yield curve (e.g., spreads widen
as curves flatten) and market volatility. Thus, despite their respectable
total return performance year-to-date, it follows that our forecast for
rising rates, flatter curves and more volatility does not augur well for
the product. Thus, our recommendation continues to be that investors
underweight the market within the context of their US taxable fixed
income portfolios.

spread range has been 90-105bps. Although the carry and liquidity are
attractive, the asset class is not cheap at these levels. Hence, we remain
neutral on MBS. One factor we continue to watch is the Feds commitment to reinvest monthly mortgage payments back into the product.
Reinvestments remain today, but probably not by the next summer.
Current MBS spread of 100bps over the blend of 5-year and 10-year
Treasuries (versus +101bps last month)

Preferred Securities 

The TIPS outperformance we witnessed last month has cooled off a bit given
the current fixed income market volatility. With oil and gold showing some
price increases this past month, TIPS are still on investors radar. However,
they have taken a back seat to the next FOMC guidance on the start of the
hiking cycle. We maintain negative on the TIPS index due to its long duration
and would remain in the shorter 2-year and 5-year areas of the curve.

Rates and spreads turned abruptly in mid-April, resulting in a marginal


loss for the month of -0.1% for the broad BoA Core Plus preferred index.
However, spreads have snapped back since early May and with rates
stabilizing, the sector has rebounded sharply and is on track to post a
slightly positive return for the month. With the yield-to-worst for the index
at 5.2% and OAS spreads near the low end of the trailing 24-month
range, we consider valuations to be fair. We believe the volatility in recent
weeks validates our defensive positioning, as the occasional market spasm
could still recur over the next few quarters. Thus, we favor preferreds with
fixed-to-floating rate structures that pay back-end spreads and high fixedrate coupons with near-term call dates.

Current 10-year break-even inflation rate of 1.88% (1.88% last month)

Current spread of +280bps over 10-year UST (+321bps last month)

Current agency benchmark spread of +15bps over 5-year UST (versus


+15bps last month)

Treasury Inflation-Protected Securities (TIPS)

Mortgage-Backed Securities (MBS)


Mortgage spreads continue to trade in a range-bound manner. Current
coupon MBS sits at 100bps versus the 5-year/10-year blend. Year-to-date,

Fig. 2: The shape of the yield curve has shied in the


past month
Spread between the 30-year and 5-year Treasuries in bps

Fig. 1: CIO WMR interest rate forecasts


In %
Americas

18 May-15

3 months

6 months

USD 3M Libor

0.3

0.7

0.9

12 months
1.5

USD 2Y Treas.

0.6

0.9

1.1

1.6

USD 5Y Treas.

1.5

1.6

1.8

2.0

USD 10Y Treas.

2.2

2.2

2.3

2.4

USD 30Y Treas.

3.0

2.9

2.9

2.9

Source: Bloomberg, UBS CIO WMR, as of 18 May 2015


300
275
250
225
200
175
150
125
100
May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15
Spread
Average
Source: Bloomberg, UBS, as of 18 May 2015

JUNE 2015 UBS HOUSE VIEW

15

ASSET CLASSES OVERVIEW

Commodities and other asset classes


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

April saw a reversal of fortunes for commodity prices. Broadly diversified commodity indices rose around 6%, erasing all the
weakness seen in the previous month. However, we believe the price rally is running out of steam, as the strength in energy
and some base metal prices does not fully match the fundamental supply-and-demand backdrop we see. This leaves room for
temporary price setbacks. Considering the roll-yield cost of 2% over the next six months, we expect the asset class to deliver
negative returns in the mid-single digits. As such, we regard broadly diversified commodity investments as unattractive. We see
the most downside risk to commodity exposure in precious metals and energy. While the negative expected performance in
precious metals is spot driven, high single-digit roll-yield costs should weigh on the energy sector. For base metals, the run-up
in prices has reduced the positive expected return to less than 2% over the next six months. The outlook for agricultural prices
remains negative in the mid-single digits, driven by grains, whereas prices for softs should be more stable.

Commodities
Precious metals
The latest US labor data suggest that the Fed is likely to raise policy rates
in September. With the unemployment rate falling toward 5% and the
fixed income market only pricing in a modest increase in short-term interest
rates, we expect the gold price to come under renewed downward pressure once market expectations shift higher. Soft demand from Asia (China
and India) adds to an unfavorable price outlook for gold and silver.
GOLD (Current: USD 1,210/oz)

six-month target

House view

USD 1,100/oz

Positive scenario

USD 1,450/oz

Negative scenario

USD 900/oz

Crude oil
We expected crude oil prices to trough in 2Q15; but so far, it seems Brent
found its low in January and WTI in late March. Strong demand from financial investors via the futures market has played a key role in prices
early recovery. Investor interest has been sparked by expectations of a
peak in US crude production in late March and the first weekly drop in
crude inventories at Cushing/Oklahoma at the end of April. Marginal price
support came from a weaker USD in recent weeks. Fundamentally, the
crude oil market has yet to rebalance. We think it will be oversupplied by
almost 2mbpd in 2Q15, so prices are still vulnerable to setbacks during
this period. However, we do expect the market to rebalance steadily in
2H15, with demand seasonally accelerating and non-OPEC supply growth
stalling versus 1H15. We therefore expect the Brent crude oil price to trade
at USD 65/bbl in six months.
BRENT (Current: USD 65.2/bbl)
House view

six-month target
USD 65/bbl

Positive scenario

USD 8595/bbl

Negative scenario

USD 3040/bbl

Base metals
Base metal prices rallied sharply in April. While we still see further price
upside in copper, aluminum and nickel; zinc and lead prices are likely to
consolidate. Expectations of additional Chinese stimulus via the fiscal
16

UBS HOUSE VIEW JUNE 2015

and monetary policies fueled the price increase, besides seasonal demand
considerations. We believe Chinas efforts aim to stabilize growth, but
not to accelerate it. As such, demand-driven expectations for base metals
leave room for disappointments at some stage in 3Q15. Our preference
for copper and aluminum is due to supply challenges, and production
cost considerations for the latter.

Agriculture
Northern hemisphere spring conditions improved over April. EU crop reports, the US spring planting pace and US winter wheat crop tours provided plenty of optimism for yields in 2015/16, particularly as wheat prices
fell nearly 9% over April. In addition, price weakness followed Russias
announcement that it intends to lift early the export duty on wheat, which
was introduced in February. While wheat markets look well supplied,
renewed warnings that the El Nio phenomenon could strengthen in
2H15 could add to production risks. However, in the near term, accelerating palm oil production and good US spring weather is negative for vegetable oil and feed grain prices. Soybean plantings in the US are expected
to set a new record and the Brazil harvest has been bumpy; hence we see
further downside as seasonal impacts start to weigh heavily on prices.

Other asset classes


Listed real estate
Listed real estate has strongly rebounded from its October 2014 low. After
reaching a peak around end-January, the index has traded sideways due
to a lack of near-term fundamental improvements and increased volatility
in the bond markets. The asset class is currently trading at unattractive
high levels and sees easing price momentum. The expected Fed rate hike
is not fully priced in, in our view. We see higher price volatility in the
coming months and expect total returns to be slightly negative over six
months. However, over 12 months, net asset values may grow 9% and
dividend yields 3.7%.
FTSE EPRA/NAREIT Developed
TR USD (Current: 4,405)

six-month target

House view

USD 4,250

Positive scenario

USD 4,500

Negative scenario

USD 4,100

ASSET CLASSES OVERVIEW

Foreign exchange
Katie Klingensmith; Thomas Flury

The US dollar has come under pressure as a spate of data suggested that the soft patch in the economy in the first
quarter may have been deeper and less ephemeral than expected. However, there are signs of hope, and we expect
that the US recovery will justify a Fed hike this year. Over the next six months, we foresee the large and the rising yield
differential and political uncertainties in the Eurozone pushing the EURUSD somewhat lower. Financial markets seem
increasingly impervious to the ongoing Greek saga, and we expect that even if Greece exits the Eurozone the official
response and market readiness will limit but not eliminate contagion. We add an overweight in the British pound,
as we think the currency will retain its post-election strength. We finance this with an underweight in the Australian
dollar, which is overvalued in our view given a structurally weakening economy.

USD
The US dollar has dropped since March when data started painting an
uglier picture of US economic momentum. Keep in mind that this dollar
softness comes only after a rapid period of appreciation since early 2014;
the USD index (DXY) remains a full 20% stronger than a year ago even
after the dollar has come off recent highs. We think the US expansion
will pick up again going into the second half of the year and expect the
greenback to recover, but not beyond highs seen earlier this year.

EUR
The European economy appears to be picking up steam, with the ECBs
expansive monetary policy at least partly taking credit. Cheap financing
costs and a lower currency have helped European companies. Inflation
seems to have found a bottom. We think the risk that the ECB will limit
its QE program is small, especially in 2015. Markets seem relieved that the
Greek saga is no longer front and center and looks increasingly like a
turbulent sideshow; if anything, the EUR could gain in a relief rally once
the Greek debt issue has been resolved. We look for the EURUSD to
continue to trade in a 1.051.15 range this year.

franc continues to appeal due to its negative correlation to risk events. Should
a disorderly default in Greece or other geopolitical troubles occur, the CHF
could appreciate sharply.

Other developed market currencies


Commodity-exporter and Scandinavian currencies remain under pressure due to low commodity prices, the resulting drag on these economies, and low inflation. The Australian dollar should remain under
particular pressure in the coming months as a weak domestic economy,
slowing Chinese activity, lower commodity prices and US rate hike
expectations all depress the appetite for the AUD as a carry trade. The
New Zealand dollar too may fall prey to a reduction in carry trading.
The Canadian dollar may be an exception as the Bank of Canada becomes less dovish and the economy recovers. The Norwegian NOK also
has limited upside as oil prices remain low enough to keep the Norges
Bank considering cuts. The Swedish SEK has rebounded lately after
suffering from the Riksbanks expansionary monetary policy. As we
expect the policy to persist, we remain cautious on the SEK.

GBP
The GBP has seen a decent rebound thanks to the very clear election
outcome in the UK. The alternative election result could have presented
persistent political uncertainty. We expect the focus to shift back to the
strong UK economic data. Inflation is currently close to zero but is expected
to pick up sharply in th coming months. In addition to further strengthening of the labor market, this should eventually lead to rate hikes, which
should continue to support the GBP.

JPY
The USDJPY has stabilized around 120 in recent months as the Japanese
economy has performed better than initially expected, leading many
market participants to scale back expectations for further QE from the
Bank of Japan. However, as the BoJ is still far away from its 2% inflation
target, we believe it is likely to introduce further expansionary policies
to eventually lift the USDJPY toward 124.

CHF
The Swiss franc seems to have found a new equilibrium against the EUR
around 1.04 after the removal of the 1.20 floor. We expect the EURCHF
exchange rate to remain around the current level for the next few months.
Deeply negative interest rates and lackluster economic activity make
Switzerland a relatively unenticing investment opportunity. However, the

UBS CIO FX forecasts


20-May-15

3M

6M

12M

PPP*

EURUSD

1.110

1.05

1.08

1.10

1.28

USDJPY

121.2

124

124

120

76

USDCAD

1.223

1.22

1.18

1.15

1.19

AUDUSD

0.788

0.75

0.70

0.70

0.69

GBPUSD

1.556

1.52

1.56

1.58

1.63

NZDUSD

0.731

0.71

0.70

0.70

0.57

USDCHF

0.939

0.98

0.97

0.95

1.02

EURCHF

1.042

1.03

1.05

1.05

1.30

GBPCHF

1.460

1.49

1.52

1.51

1.66

EURJPY

134.6

130

134

132

97

EURGBP

0.714

0.69

0.69

0.70

0.78

EURSEK

9.279

9.40

9.40

9.20

9.12

EURNOK

8.407

8.30

8.60

8.60

9.68

Source: Thomson Reuters, UBS CIO WMR, as of 20 May 2015


Note: Past performance is not an indication of future returns.
*PPP = Purchasing Power Parity

JUNE 2015 UBS HOUSE VIEW

17

IN FOCUS

US housing market a slow but


steady recovery
and we expect only a gradual rise over the next 12 months.
Higher rates should therefore not prevent the housing market
from strengthening further. To put mortgage rates in perspective, based on a current median existing home price of USD
213,500 and a down payment of 10%, a 50bps rise in mortgage rates would add only USD 55 to the monthly pre-tax
mortgage payment while a 100bps increase would add
around USD 125. We believe these are manageable levels for
the median homebuyer given current household income
levels.

Jon Woloshin, CFA


Brian Rose, PhD
Co-Head of US Sector Research
US economist
CIO Wealth Management Research CIO Wealth Management Research

Housing starts rebounded strongly in April, rising more than


20% sequentially to a new post-crisis high rate of 1.14 million
units (Fig. 1). Some of this strength appears to be making up
for starts that were delayed earlier in the year due to bad
weather. Although future months are unlikely to see such
sequential strength, we do believe the backdrop for housing
starts remains biased to the upside, particularly given the
strong demand for multifamily units and the gradual return of
the entry-level buyer. Based on our projections for population
and the number of households, we expect housing starts to
eventually reach 1.31.4 million units.
Interest rates have recently moved higher, which would normally be considered negative for housing demand because of
the impact on monthly mortgage payments. However, in the
short term, rising rates can act as a stimulus, encouraging buyers who are on the fence to act before rates go up even further. From a historical perspective, mortgage rates are low,
18

UBS HOUSE VIEW JUNE 2015

From the January 2012 low, existing home prices have staged
a strong recovery, appreciating more than 38% nationally. In
our view, there are two key contributing factors to this
strength. The first is the emergence of the institutional buyer
of single-family homes. We estimate that over the course of
the recovery, institutions purchased more than 550,000
homes, the majority of which were in severely distressed markets. The institutions were instrumental in absorbing distressed inventory and putting price floors in markets that previously were in free fall. This ultimately led to increased
market confidence and rising prices. The second factor is the
supply-constrained market that continues to persist today.

Fig. 1: Housing starts rebounded in April


Housing starts, seasonally adjusted annual rate, in 000s
1600
1400
1200
1000
800
600
400
200
0
Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Single family
Multifamily
Source: US Census Bureau, UBS, as of 19 May 2015

Jan-12

Jan-13

Jan-14

Jan-15

IN FOCUS

Nationally, the supply of available inventory is good for approximately 4.5 months, well below the long-term average of
7.5 months and pre-crash levels of nine months. At some
poin, supply will eventually catch up to the rising demand for
housing. However, the slow thaw in available inventory is
likely to help keep prices rising above long-term averages over
the next several years.
Although unemployment is down and jobless claims are at
significantly reduced levels, the housing market is challenged
by relatively stagnant wage growth. Preceding the housing
bubble, there was a strong relationship between home price
and wage growth. This relationship clearly splintered during
the housing boom only to retrace to historical norms post the
bursting of the bubble. However, the solid price recovery beginning in 2012 has once again distorted the relationship between prices and wages (Fig. 2). Unless wages break their
stagnant trend, affordability could become a bigger issue for
housing, particularly if interest rates begin to rise.
Another issue facing housing is the continued decline in
homeownership rates (Fig. 3). After retracing the bubble-era
rise, homeownership rates have continued to decline, breaking below the long-term average of just over 65%. We believe there are a number of factors that explain this decline
including the demographic forces of the Millennials, the

explosion in student debt, the new conforming mortgage


rules which have led to more restrictive mortgage lending,
and the need for flexibility in a more globally integrated
world. The clear beneficiary of these trends has been the multifamily sector. In our view, the demand for multifamily housing will remain robust owing to a combination of the aforementioned factors negatively influencing homeownership
rates, as well as the re-urbanization trend that we are witnessing with both the Millennial generation and many of the
retiring baby boomers who are not yet ready for senior housing and no longer desire the responsibilities of suburban living. Thus, we believe it is essential that when evaluating the
housing market, we consider the market in its totality
single-family ownership, single-family rental and multifamily
rental as declining rates of homeownership can mask strong
trends in overall demand for shelter.
An improving housing market would have a positive impact
on the overall health of the economy. For every new singlefamily house built, it is estimated that four new jobs are created, and house buyers typically spend thousands of extra
dollars in the first year on furnishings, appliances, etc. Rising
housing starts would help to use up the remaining slack in
the labor market, and would be a signal to the Fed that the
economy is strong enough to withstand higher interest rates.

Fig. 2: Home prices elevated relative to income

Fig. 3: Homeownership rates continue falling

Household income and home prices, index 1990 = 100

In %

240

70

220

69
68

200

67

180

66

160

65
63

100

62

Median household income


Home prices
Source: NAR, US Census Bureau, UBS, as of 19 May 2015

1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Current

64

120
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Current

140

Homeownership Rates
Average
Source: US Census Bureau, UBS, as of 19 May 2015

JUNE 2015 UBS HOUSE VIEW

19

Top themes
Highlights from our monthly selection of highest conviction investment themes across the asset class spectrum

Eurozone comeback

Liability optimization

Brian Rose, PhD

Michael Crook

Portfolio context
Non-US equity

u 
Economic

rebound
boosting earnings

u 
Medium-term:

6 to 12 months

u
Portfolio

integration

Funds tracking the broad


Eurozone equity market
are available, and
Germany-only country
funds are an option to
consider.
u
Full

report

European equities:
Eurozone comeback

Investors looking for something outside


the US to put into their portfolios might
find that Eurozone equities are an attractive choice. The Eurozone economy
was hit hard by the global financial crisis. GDP is still below its pre-crisis peak
and corporate earnings are at depressed
levels. However, recent data have surprised on the upside and we are seeing
encouraging signs that the credit crunch
that has restrained growth is starting to
ease.
Another positive factor is the weak euro
which, along with the ECBs QE, will
provide a tailwind for the economy and
earnings. Given that economic conditions in Germany are much stronger
than in the rest of the Eurozone, an option to consider is investing in Eurozone
equities using a fund that focuses on
Germany. The situation in Greece presents a risk for all Eurozone assets, but
we believe that the fallout from a Greek
default would be limited.

Context planning

u
Utilize

lending

u 
Multi-year

decade

theme

u
Portfolio

integration

Historically low interest


rates create an opportune time for investors
to extend the duration of
their liabilities and take
advantage of low rates.
u
Full

report

Balance sheet
optimization

We view the current market environment as an opportune time for investors to optimize their liabilities in
order to add potential alpha to their
balance sheets. The main monetary
policy response to the financial crisis
of 20072008 was clear and direct in
its intention to reduce interest rates.
Indeed, the last remaining vestige of
the financial crisis can be seen today
in the low levels of prevailing rates.
Low rates provide an excellent opportunity on the liability side of the balance sheet to lock in low borrowing
costs and express views on interest
rates and inflation.
Additionally, utilizing low-rate debt
while keeping investment assets productive could significantly impact a
households net worth over a longer
time horizon. Looking forward, portfolio returns are likely to outpace the
current cost of debt which, after years
and decades of compounding, could
lead to enhanced investment returns.

Eurozone earnings comeback beginning

Interest rates continue to decline

12-month trailing Eurozone EPS

Treasury rates, in %

15

10
8

14

13

12

11

10

2
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

9
2012

2013

Source: Datastream, IBES, UBS, as of 14 May 2015

20

UBS HOUSE VIEW JUNE 2015

2014

2015

10-year Treasury
10-year TIPS
Source: Bloomberg, UBS, as of 19 May 2015

Top themes
Highlights from our monthly selection of highest conviction investment themes across the asset class spectrum

North American energy independence:


Reenergized
Nicole Decker; David Lefkowitz, CFA

Portfolio context
US equity

u
Equity

growth and
income

u 
Multi-year

decade

theme

u
Portfolio

integration

We have identified a list


of stocks that are poised
to benefit from positive
trends related to North
Americas burgeoning
energy independence.
u
Full

report

North American energy


independence:
Reenergized

North America continues to make progress in achieving greater energy independence. We expect more self-sufficiency by the end of the decade and
that the US will soon be a net exporter
of natural gas. Trends such as robust
drilling activity for oil and natural gas,
infrastructure build-out, and widespread availability of reliable and affordable energy supplies are driving opportunities for investors.
Technologies for extracting oil and gas
are driving improved well productivity
and reducing costs. We believe the US
competitive landscape favors the stronger operators. A potential shakeout
among US shale operators could enable
the more efficient operators to benefit
from industry consolidation and come
out even better positioned to capture
future growth opportunities.
Meanwhile, we expect energy consumers to enjoy the ongoing benefits of
lower-cost energy.

Top themes
Thematic investment ideas from CIO Wealth Management Research
June 2015

Reenergizing North American


energy independence

ab

The investment themes highlighted in


this section are among our highest conviction
thematic recommendations. The full list of
most preferred themes (see below) is
discussed in our monthly publication
entitled Top themes.

Preferred themes
Adding value(s) to investing:
Sustainable investing
Beyond benchmark fixed income investing
Capex rising...finally
Eurozone comeback
Liability optimization
Major advances in cancer therapeutics

US crude oil inventory builds are subsiding

MBS IOs Positive returns when rates rise

In millions of barrels

N
 orth American energy independence:
Reenergized

500
475
450
425
400
375
350
325
300
275
250

The rising Millennials


US senior loans

Ask your Financial Advisor for a copy


of this publication.
Mar
10yr range
10yr average

Jun
2013
2014

Sep

Dec

2015

Source: Energy Information Administration, UBS, as of 18 May 2015

JUNE 2015 UBS HOUSE VIEW

21

KEY FORECASTS

KEY FORECASTS

Overweight
Neutral

As of 21 May 2015

Asset class

Underweight

TAA1

Change

6-month forecast
Positive
Negative
House View
scenario
scenario

Benchmark

Value

m/m perf.
in %2

2126

2.1%

2200

2450

1825

EQUITIES

USA

S&P 500

Eurozone

Euro Stoxx

380

0.7%

397

430

300

UK

FTSE 100

7007

0.2%

7125

7650

5700

Japan

Topix

1643

3.4%

1675

1850

1300

Switzerland

SMI

9320

0.8%

9500

10170

8000

Emerging Markets

MSCI EM

1036

-0.6%

1060

1165

800

BONDS

US Government bonds

10yr yield

2.25%

-1.8%

2.3%

2.7-3.1%

1.6-2.0%

US Corporate bonds

Spread

128 bps

-2.7%

115 bps

75 bps

250 bps

US High yield bonds

Spread

449 bps

0.1%

400 bps

325 bps

900 bps

EM Sovereign

Spread

330 bps

0.0%

350 bps

260 bps

480 bps

EM Corporate

Spread

315 bps

-0.6%

350 bps

250 bps

470 bps

Commodities

DJUBS ER Index

103

1.1%

NA

NA

NA

Listed Real Estate

EPRA/NAREIT DTR

4405

-0.4%

4250

4500

4100

NA

NA

NA

NA

NA

OTHER ASSET CLASSES

CURRENCIES

Currency pair

USD

EUR

EURUSD

1.11

2.7%

1.08

1.00

1.15

GBP

GBPUSD

1.55

3.8%

1.56

NA

NA

JPY

USDJPY

121

2.1%

124

125

110

CHF

USDCHF

0.94

-1.6%

0.97

NA

NA

Source: UBS CIO WMR, Bloomberg


1
TAA = Tactical asset allocation, 2 Month over month
For more information on recent changes, see CIO Note: EURUSD risks now more balanced, 5 May 2015
Past performance is no indication of future performance. Forecasts are not a reliable indicator of future performance.

22

UBS HOUSE VIEW JUNE


JUNE2015
2015

DETAILED ASSET ALLOCATION

Detailed asset allocation


taxable with non-traditional assets

0.0

Current allocation1

0.0 +0.0

Change this month

0.0

WMR tactical deviation

Strategic asset allocation

Aggressive

Current allocation1

0.0 +0.0

Change this month

Strategic asset allocation

0.0

WMR tactical deviation

Current allocation1

0.0 +0.0

Moderately
aggressive

Change this month

Strategic asset allocation

0.0

WMR tactical deviation

Current allocation1

Change this month

0.0 +0.0

WMR tactical deviation

Strategic asset allocation

Change this month

0.0

Moderate

Fixed Income

69.0 -1.5

67.5 57.0 -2.0

55.0 46.5 -2.5

44.0 41.0 -2.5

38.5 33.0 -2.5

30.5

US Fixed Income

62.0 +0.5

62.5 51.0 +0.0

51.0 40.5 -0.5

40.0 34.0 -0.5

33.5 26.0 -0.5

25.5

US Govt

7.0

-2.5

4.5

5.5

-3.0

2.5

4.0

-4.0

0.0

3.5

-3.5

0.0

2.0

-2.0

0.0

50.0

-1.0

49.0

39.0

-1.0

38.0

30.0

-0.5

29.5

24.0

-1.0

23.0

17.0

-2.5

14.5

US IG total market

4.0 +1.5 +1.0

5.5

3.5 +1.5 +1.0

5.0

3.0 +1.5 +1.0

4.5

2.5 +1.5 +1.0

4.0

2.0 +1.5 +1.0

3.5

US IG 15 years

0.0 +1.0

1.0

0.0 +1.0

1.0

0.0 +1.0

1.0

0.0 +1.0

1.0

0.0 +1.0

1.0

US HY Corp

1.0 +1.5

2.5

3.0 +1.5

4.5

3.5 +1.5

5.0

4.0 +1.5

5.5

5.0 +1.5

6.5

7.0 -2.0

5.0

6.0 -2.0

4.0

6.0 -2.0

4.0

7.0 -2.0

5.0

7.0 -2.0

5.0

US Municipal

p
q

0.0 +0.0

Moderately
conservative

Current allocation1

Cash

WMR tactical deviation

Change this month

All figures in %

Conservative

Strategic asset allocation

Investor
risk profile

Intl Fixed Income

-1.0

-1.0

-1.0

-1.0

-1.0

Intl Developed Markets

6.0

-2.0

4.0

4.0

-2.0

2.0

3.0

-2.0

1.0

3.0

-2.0

1.0

2.0

-2.0

0.0

Emerging Markets

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
US Equity

16.0 +1.5

17.5 27.0 +2.0

29.0 34.5 +2.5

37.0 45.0 +2.5

47.5 55.0 +2.5

57.5

9.0 +0.5

9.5 15.0 +0.0

15.0 20.0 +0.5

20.5 26.0 +0.5

26.5 31.0 +0.5

31.5

US Large cap Growth

2.5

-0.5

2.0

4.5

-1.0

3.5

6.0

-1.0

5.0

8.0

-1.0

US Large cap Value

2.5

-0.5

2.0

4.5

-1.0

3.5

6.0

-1.0

5.0

8.0

-1.0

US Mid cap

3.0 +0.0

3.0

4.0 +0.0

4.0

5.0 +0.0

5.0

7.0 +0.0

US Small cap

1.0 +1.5

2.5

2.0 +2.0

4.0

3.0 +2.5

5.5

3.0 +2.5

5.5

International Equity

7.0 +1.0

Intl Developed Markets

4.0 +1.5

5.5

7.0 +2.5

9.5

8.5 +3.0

Emerging Markets

3.0

-0.5

2.5

5.0

-0.5

4.5

6.0

4.0 +0.0

4.0

4.0 +0.0

4.0

Commodities
Non-traditional

11.0 +0.0

8.0 12.0 +2.0

11.0 12.0 +0.0

14.0 14.5 +2.0

16.5 19.0 +2.0


11.5

-1.0

5.0

4.0 +0.0

12.0 15.0 +0.0

11.0 +3.0
8.0

7.0

9.5

-1.0

8.5

7.0

9.5

-1.0

8.5

7.0

8.0 +0.0

8.0

4.0 +2.5

6.5

21.0 24.0 +2.0

26.0

14.0

-1.0

7.0

4.0

5.0 +0.0

15.0

14.0 +3.0
10.0

17.0

-1.0

9.0

5.0

5.0 +0.0

5.0

9.0 +0.0

9.0

7.0 +0.0

7.0

Hedge Funds

11.0 +0.0

11.0

12.0 +0.0

12.0

10.0 +0.0

10.0

3.0 +0.0

3.0

0.0 +0.0

0.0

Private Equity

0.0 +0.0

0.0

0.0 +0.0

0.0

5.0 +0.0

5.0

6.0 +0.0

6.0

7.0 +0.0

7.0

Private Real Estate

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

WMR tactical deviation legend: OverweightUnderweightNeutral Change legend: p Upgrade q Downgrade *Refers to moderate-risk profile.
1
The current allocation column is the sum of the strategic asset allocation and the tactical deviation column.
Source: UBS CIO WMR and WMA AAC, 21 May 2015. 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.

JUNE 2015 UBS HOUSE VIEW

23

DETAILED ASSET ALLOCATION

Detailed asset allocation


taxable without non-traditional assets

0.0

Current allocation1

0.0 +0.0

Change this month

0.0

WMR tactical deviation

Strategic asset allocation

0.0 +0.0

Aggressive

Current allocation1

0.0

Change this month

Benchmark allocation

WMR tactical deviation

Current allocation1

0.0 +0.0

Moderately
aggressive

Change this month

Strategic asset allocation

0.0

WMR tactical deviation

Current allocation1

Change this month

0.0 +0.0

WMR tactical deviation

Strategic asset allocation

Change this month

0.0

Moderate

Fixed Income

80.0 -1.5

78.5 66.0 -2.0

64.0 54.5 -2.5

52.0 44.0 -2.5

41.5 33.0 -2.5

30.5

US Fixed Income

72.0 +0.5

72.5 58.0 +0.5

58.5 47.0 -0.5

46.5 36.0 -0.5

35.5 26.0 -0.5

25.5

US Govt
US Municipal

p
q

0.0 +0.0

Moderately
conservative

Current allocation1

Cash

WMR tactical deviation

Change this month

All figures in %

Conservative

Strategic asset allocation

Investor
risk profile

8.0

5.5

7.0

-3.0

4.0

5.0

-4.0

1.0

3.0

-3.0

0.0

2.0

-2.0

0.0

-1.0

57.0

45.0

35.0

26.0

16.0

-1.0

44.0

-1.0

34.0

-2.0

24.0

-2.5

13.5

US IG total market

4.0

+1.5 +1.0

5.5

3.0 +2.0 +1.0

5.0

3.0 +2.0 +1.0

5.0

2.0 +2.0 +1.0

4.0

1.0 +1.5 +1.0

2.5

US IG 15 years

0.0

+1.0

1.0

0.0 +1.0

1.0

0.0 +1.0

1.0

0.0 +1.0

1.0

0.0 +1.0

1.0

US HY Corp

2.0

+1.5

3.5

3.0 +1.5

4.5

4.0 +1.5

5.5

5.0 +1.5

6.5

7.0 +1.5

8.5

8.0 -2.0

6.0

8.0 -2.5

5.5

7.5 -2.0

5.5

8.0 -2.0

6.0

7.0 -2.0

5.0

Intl Fixed Income

58.0

-2.5

-1.0

-1.0

-1.0

-1.0

-1.0

Intl Developed Markets

6.0

-2.0

4.0

5.0

-2.5

2.5

4.0

-2.0

2.0

3.0

-2.0

1.0

2.0

-2.0

0.0

Emerging Markets

2.0

+0.0

2.0

3.0 +0.0

3.0

3.5 +0.0

3.5

5.0 +0.0

5.0

5.0 +0.0

5.0

Equity
US Equity

16.0 +1.5

17.5 30.0 +2.0

32.0 40.5 +2.5

43.0 51.0 +2.5

53.5 62.0 +2.5

64.5

9.0 +0.5

9.5 18.0 +0.0

18.0 23.0 +0.5

23.5 29.0 +0.5

29.5 36.0 +0.5

36.5

US Large cap Growth

3.0

-0.5

2.5

5.0

-1.0

4.0

7.0

-1.0

6.0

9.0

-1.0

8.0

11.0

-1.0

10.0

US Large cap Value

3.0

-0.5

2.5

5.0

-1.0

4.0

7.0

-1.0

6.0

9.0

-1.0

8.0

11.0

-1.0

10.0

US Mid cap

2.0

+0.0

2.0

5.0 +0.0

5.0

6.0 +0.0

6.0

7.0 +0.0

7.0

9.0 +0.0

9.0

US Small cap

1.0

+1.5

2.5

3.0 +2.0

5.0

3.0 +2.5

5.5

4.0 +2.5

6.5

5.0 +2.5

7.5

24.0 26.0 +2.0

28.0

International Equity

7.0 +1.0

8.0 12.0 +2.0

14.0 17.5 +2.0

Intl Developed Markets

4.0

+1.5

5.5

7.0 +2.5

9.5

Emerging Markets

3.0

-0.5

2.5

5.0

-0.5

4.5

4.0 +0.0

4.0

4.0 +0.0

4.0

Commodities

10.0 +3.0
7.5

19.5 22.0 +2.0


13.0

-1.0

6.5

5.0 +0.0

5.0

12.5 +3.0
9.5

15.5

-1.0

8.5

5.0 +0.0

5.0

15.0 +3.0

18.0

11.0

-1.0

10.0

5.0 +0.0

5.0

WMR tactical deviation legend: OverweightUnderweightNeutral Change legend: p Upgrade q Downgrade *Refers to moderate-risk profile.
1
The current allocation column is the sum of the strategic asset allocation and the tactical deviation column.
Source: UBS CIO WMR and WMA AAC, 21 May 2015. 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.

24

UBS HOUSE VIEW JUNE 2015

DETAILED ASSET ALLOCATION

Detailed asset allocation

non-taxable with non-traditional assets

0.0

Current allocation1

0.0 +0.0

Change this month

0.0

WMR tactical deviation

Strategic asset allocation

Aggressive

Current allocation1

0.0 +0.0

Change this month

Strategic asset allocation

0.0

WMR tactical deviation

Current allocation1

0.0 +0.0

Moderately
aggressive

Change this month

Strategic asset allocation

0.0

WMR tactical deviation

Current allocation1

Change this month

0.0 +0.0

WMR tactical deviation

Strategic asset allocation

Change this month

0.0

Moderate

Fixed Income

68.0 -1.5

66.5 56.0 -2.0

54.0 46.5 -2.5

44.0 39.0 -2.5

36.5 33.0 -2.5

30.5

US Fixed Income

60.0 +0.5

60.5 49.0 +0.0

49.0 40.0 -0.5

39.5 32.5 -0.5

32.0 26.0 -0.5

25.5

US Govt

p
q

0.0 +0.0

Moderately
conservative

Current allocation1

Cash

WMR tactical deviation

Change this month

All figures in %

Conservative

Strategic asset allocation

Investor
risk profile

-4.0

43.0

US Municipal

0.0 +0.0

0.0

US IG total market

9.0 +2.0 +1.0

US IG 15 years

0.0 +1.0

US HY Corp
Intl Fixed Income
Intl Developed Markets
Emerging Markets

47.0

-7.0

21.0

0.0

0.0 +0.0

7.0 +2.5 +1.0

9.5

1.0

0.0 +1.0

4.0 +1.5

5.5

8.0 -2.0

6.0

6.0

-2.0

2.0 +0.0

-1.0

11.0

36.0

-5.5

30.5

0.0 +0.0

-7.0

12.5

0.0

0.0 +0.0

5.0 +3.0 +1.0

8.0

1.0

0.0 +1.0

6.0 +2.0

8.0

7.0 -2.0

5.0

4.0

4.0

-2.0

2.0

3.0 +0.0

-1.0

28.0

-7.0

6.0

0.0

0.0 +0.0

0.0

4.0 +3.0 +1.0

7.0

2.0 +3.0 +1.0

5.0

1.0

0.0 +1.0

1.0

0.0 +1.0

1.0

7.0 +2.5

9.5

9.0 +2.5

11.5

11.0 +2.5

13.5

6.5 -2.0

4.5

6.5 -2.0

4.5

7.0 -2.0

5.0

2.0

3.5

-2.0

3.0

3.0 +0.0

-1.0

19.5

1.5

2.5

-2.0

3.0

4.0 +0.0

-1.0

13.0

0.5

2.0

4.0

-1.0

-2.0

0.0

5.0 +0.0

5.0

Equity

17.0 +1.5

18.5 28.0 +2.0

30.0 34.5 +2.5

37.0 42.0 +2.5

44.5 53.0 +2.5

55.5

US Equity

10.0 +0.5

10.5 16.0 +0.0

16.0 20.5 +0.5

21.0 24.0 +0.5

24.5 31.0 +0.5

31.5

US Large cap Growth

3.0

-0.5

2.5

5.0

-1.0

4.0

6.0

-1.0

5.0

7.5

-1.0

6.5

9.5

-1.0

8.5

US Large cap Value

3.0

-0.5

2.5

5.0

-1.0

4.0

6.0

-1.0

5.0

7.5

-1.0

6.5

9.5

-1.0

8.5

US Mid cap

2.5 +0.0

2.5

4.0 +0.0

4.0

5.5 +0.0

5.5

6.0 +0.0

6.0

8.0 +0.0

8.0

US Small cap

1.5 +1.5

3.0

2.0 +2.0

4.0

3.0 +2.5

5.5

3.0 +2.5

5.5

4.0 +2.5

6.5

20.0 22.0 +2.0

24.0

International Equity

7.0 +1.0

8.0 12.0 +2.0

Intl Developed Markets

4.0 +1.5

5.5

7.0 +3.0

Emerging Markets

3.0

-0.5

2.5

5.0

4.0 +0.0

4.0

Commodities
Non-traditional

11.0 +0.0

14.0 14.0 +2.0


10.0

-1.0

4.0

4.0 +0.0

4.0

11.0 12.0 +0.0

8.0 +3.0
6.0

16.0 18.0 +2.0


11.0

-1.0

5.0

4.0 +0.0

4.0

12.0 15.0 +0.0

10.0 +3.0
8.0

13.0

-1.0

7.0

5.0 +0.0

15.0 14.0 +0.0

13.0 +3.0
9.0

16.0

-1.0

8.0

5.0

5.0 +0.0

5.0

14.0

9.0 +0.0

9.0

Hedge Funds

11.0 +0.0

11.0

12.0 +0.0

12.0

10.0 +0.0

10.0

8.0 +0.0

8.0

3.0 +0.0

3.0

Private Equity

0.0 +0.0

0.0

0.0 +0.0

0.0

5.0 +0.0

5.0

6.0 +0.0

6.0

6.0 +0.0

6.0

Private Real Estate

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

WMR tactical deviation legend: OverweightUnderweightNeutral Change legend: p Upgrade q Downgrade *Refers to moderate-risk profile.
1
The current allocation column is the sum of the strategic asset allocation and the tactical deviation column.
Source: UBS CIO WMR and WMA AAC, 21 May 2015. 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.

JUNE 2015 UBS HOUSE VIEW

25

DETAILED ASSET ALLOCATION

Detailed asset allocation

non-taxable without non-traditional assets

0.0

78.0 -1.5

76.5 65.0 -1.5

63.5 55.0 -2.5

52.5 46.0 -2.5

43.5 36.0 -2.5

33.5

US Fixed Income

69.0 +0.5

69.5 57.0 +0.5

57.5 47.0 -0.5

46.5 38.0 -0.5

37.5 29.0 -0.5

28.5

US Municipal
US IG total market

55.0

-4.0

51.0

0.0

+0.0

0.0

10.0

+2.0 +1.0

US IG 15 years

0.0

+1.0

US HY Corp

4.0

Intl Fixed Income

-1.0

12.0

42.0

-5.5

36.5

0.0 +0.0

0.0

8.0 +3.0 +1.0


-1.0

-7.0

16.0

0.0

0.0 +0.0

6.0 +3.0 +1.0

9.0

1.0

0.0 +1.0

11.0

32.0

-7.0

25.0

0.0 +0.0

-1.0

23.0

-7.0

6.0

0.0

0.0 +0.0

0.0

4.0 +3.0 +1.0

7.0

3.0 +3.0 +1.0

6.0

1.0

0.0 +1.0

1.0

0.0 +1.0

1.0

-1.0

13.0

1.0

0.0 +1.0

-1.0

+1.5

5.5

7.0 +2.0

9.0

9.0 +2.5

11.5

11.0 +2.5

13.5

13.0 +2.5

15.5

9.0 -2.0

7.0

8.0 -2.0

6.0

8.0 -2.0

6.0

8.0 -2.0

6.0

7.0 -2.0

5.0

Intl Developed Markets

7.0

-2.0

5.0

5.0

-2.0

3.0

4.0

-2.0

2.0

3.0

-2.0

1.0

2.0

-2.0

0.0

Emerging Markets

2.0

+0.0

2.0

3.0 +0.0

3.0

4.0 +0.0

4.0

5.0 +0.0

5.0

5.0 +0.0

5.0

Equity

18.0 +1.5

19.5 31.0 +1.5

32.5 41.0 +2.5

43.5 50.0 +2.5

52.5 59.0 +2.5

61.5

US Equity

10.0 +0.5

10.5 18.0 +0.0

18.0 23.0 +0.5

23.5 28.0 +0.5

28.5 33.0 +0.5

33.5

US Large cap Growth

3.0

-0.5

2.5

5.5

-1.0

4.5

7.0

-1.0

6.0

8.5

-1.0

7.5

10.0

-1.0

9.0

US Large cap Value

3.0

-0.5

2.5

5.5

-1.0

4.5

7.0

-1.0

6.0

8.5

-1.0

7.5

10.0

-1.0

9.0

US Mid cap

3.0

+0.0

3.0

5.0 +0.0

5.0

6.0 +0.0

6.0

7.0 +0.0

7.0

9.0 +0.0

9.0

US Small cap

1.0

+1.5

2.5

2.0 +2.0

4.0

3.0 +2.5

5.5

4.0 +2.5

6.5

4.0 +2.5

6.5

24.0 26.0 +2.0

28.0

International Equity

8.0 +1.0

9.0 13.0 +1.5

Intl Developed Markets

4.0

+1.5

5.5

8.0 +2.5

Emerging Markets

4.0

-0.5

3.5

5.0

4.0 +0.0

4.0

Commodities

14.5 18.0 +2.0


10.5

-1.0

4.0

4.0 +0.0

4.0

10.0 +3.0
8.0

20.0 22.0 +2.0


13.0

-1.0

7.0

4.0 +0.0

4.0

12.0 +3.0
10.0

15.0

-1.0

9.0

4.0 +0.0

4.0

14.0 +3.0

17.0

12.0

-1.0

11.0

5.0 +0.0

5.0

WMR tactical deviation legend: OverweightUnderweightNeutral Change legend: p Upgrade q Downgrade *Refers to moderate-risk profile.
1
The current allocation column is the sum of the strategic asset allocation and the tactical deviation column.
Source: UBS CIO WMR and WMA AAC, 21 May 2015. 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.

26

Current allocation1

0.0 +0.0

Change this month

0.0

WMR tactical deviation

Strategic asset allocation

0.0 +0.0

Aggressive

Current allocation1

0.0

Change this month

Benchmark allocation

WMR tactical deviation

Current allocation1

0.0 +0.0

Moderately
aggressive

Change this month

Strategic asset allocation

0.0

WMR tactical deviation

Current allocation1

Change this month

0.0 +0.0

WMR tactical deviation

Strategic asset allocation

Change this month

0.0

Moderate

Fixed Income

US Govt

p
q

0.0 +0.0

Moderately
conservative

Current allocation1

Cash

WMR tactical deviation

Change this month

All figures in %

Conservative

Strategic asset allocation

Investor
risk profile

UBS HOUSE VIEW JUNE 2015

DETAILED ASSET ALLOCATION

Detailed asset allocation

all equity and all fixed income models

5.5

0.0 95.0 +0.0

95.0 95.0 -0.5

94.5

0.0 +0.0

0.0 82.0 +3.0

85.0 81.0 +3.0

84.0

0.0

9.0

-7.0

2.0

16.0

-3.5

Current allocation1

5.0 +0.5

Change this month

US Fixed Income

0.0 +0.0

5.0

WMR tactical deviation

0.0 +0.0

US Govt total market

Strategic asset allocation

Fixed Income

All fixed income,


non-taxable

Current allocation1

5.0 +0.0

Change this month

2.5

WMR tactical deviation

5.0 -2.5

Change this month

Cash

WMR tactical deviation

Strategic asset allocation

All fixed income,


taxable

Current allocation1

All figures in %

Strategic asset allocation

All equity

12.5

US Govt 1~3 years

0.0 +0.0

0.0

0.0 +0.0

0.0

6.0

-1.5

4.5

US Govt 3~7 years

0.0 +0.0

0.0

0.0 +0.0

0.0

14.0

-3.0

11.0

US Govt 7~10 years

0.0 +0.0

0.0

0.0 +0.0

0.0

10.0

-2.0

8.0

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 +0.0

28.0

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

9.0

10.5 +5.5

2.0

0.0 +2.0

10.0

15.5 +5.5

21.0

10.0 14.0 -3.5

10.5

US IG total market

0.0 +0.0

0.0

5.0 +4.0

US IG 1~5 years

0.0 +0.0

0.0

0.0 +2.0

0.0

7.0 +3.0

US High Yield
Intl Fixed Income
Intl Developed Markets
Emerging Markets

0.0 +0.0
0.0 +0.0

0.0 13.0 -3.0

0.0 +0.0

0.0

7.0

-3.5

p
q

3.5

7.0

-3.5

p
q

16.0
2.0

3.5

0.0 +0.0

0.0

6.0 +0.5

6.5

7.0 +0.0

7.0

Equity

95.0 +2.5

97.5

0.0 +0.0

0.0

0.0 +0.0

0.0

US Equity

54.0 +0.5

54.5

0.0 +0.0

0.0

0.0 +0.0

0.0

US Large-cap Growth

7.0

-1.0

6.0

0.0 +0.0

0.0

0.0 +0.0

0.0

US Large-cap Value

7.0

-1.0

6.0

0.0 +0.0

0.0

0.0 +0.0

0.0

19.0

-3.0

16.0

0.0 +0.0

0.0

0.0 +0.0

0.0

3.0

0.0 +0.0

0.0

0.0 +0.0

0.0

US Large-cap Total Market


IT sector

0.0 +3.0

0.0

0.0 +0.0

0.0

0.0 +0.0

0.0

US Mid-cap Equity

14.0 +0.0

14.0

0.0 +0.0

0.0

0.0 +0.0

0.0

US Small-cap Equity

7.0 +2.5

9.5

0.0 +0.0

0.0

0.0 +0.0

0.0

41.0 +2.0

43.0

0.0 +0.0

0.0

0.0 +0.0

0.0

23.5 +0.0

23.5

0.0 +0.0

0.0

0.0 +0.0

0.0

Consumer discretionary

International Equity
Intl Developed Markets
Eurozone currency hedged

0.0 +0.0

3.0

0.0 +0.0

0.0

0.0 +0.0

0.0

-7.0

10.5

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

Taiwan

0.0 +3.0

3.0

0.0 +0.0

0.0

0.0 +0.0

0.0

Global EM Equity

0.0 +3.0
17.5

Publication note
The All Equity and All Fixed Income
portfolios complement our balanced
portfolios and offer more granular implementation 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 complement their existing holdings. It is also
possible to combine the All Equity portfolio with one of the All Fixed Income
portfolios to generate a balanced portfolio. 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 portfolio is that it includes carve-outs:
3% allocations to our preferred sectors
within US large-caps as well as our preferred countries within both international 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 overweight/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 allocations to government bonds (Munis in
the taxable version, Treasuries in the
non-taxable version) of different maturities, allowing views on duration to
be expressed. Cash is set at 5% of the
portfolios, with small deviations possible due to rounding.

WMR tactical deviation legend: Overweight Underweight Neutral


1
The current allocation column is the sum of the strategic asset allocation and the tactical deviation column.
Source: UBS CIO WMR and WMA AAC, 21 May 2015. 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.

JUNE 2015 UBS HOUSE VIEW

27

Portfolio Analytics
The portfolio analytics shown for each risk profiles benchmark allocations are based on estimated forward-looking
return and standard deviation assumptions (capital market
assumptions), 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
performance of various asset classes, inflation and risk premium. These capital market assumptions do not assume any
particular 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 reflection of their expected risk and correlations regardless
of time frame. Please note that these assumptions are not
guarantees 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 ==>>

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 indicates 40% equities, then 40% of the results shown for the
allocation will be based upon the estimated hypothetical return and standard deviation assumptions shown below).
You should understand that the analysis shown and assumptions used are hypothetical estimates provided for your general 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.

Moderately
Moderately
Conservative conservative Moderate 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 Return

4.0%

4.8%

5.5%

6.1%

6.8%

Estimated Risk

5.4%

7.5%

9.5%

11.5%

13.5%

Non-taxable with
non-traditional assets
Estimated Return

4.3%

5.0%

5.8%

6.4%

7.0%

Estimated Risk

5.5%

7.4%

9.5%

11.4%

13.4%

Non-taxable without
non-traditional assets

Asset Class

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%

10.0%

25.5%

Commodities

6.4%

18.9%

Hedge Funds

6.2%

6.7%

Private Equity

11.8%

24.4%

8.5%

11.8%

Emerging Markets Equity

Estimated Return

4.0%

4.8%

5.5%

6.1%

6.8%

Estimated Risk

5.4%

7.5%

9.5%

11.4%

13.5%

Private Real Estate

28

UBS HOUSE VIEW JUNE 2015

Capital Market Assumptions


Annual total return

DETAILED ASSET ALLOCATION

Additional Asset Allocation Models


US equity industry group allocation, in %
S&P 500
Benchmark
allocation1
Consumer Discretionary

CIO WMR Tactical deviation2


Numeric
Symbol
Previous
Current
Previous
Current

Current
allocation3

12.5

+2.0

+1.0

++

13.5

Auto & Components

1.1

+0.0

+0.0

1.1

Consumer, Durables & Apparel

1.4

+1.0

+1.0

2.4

Consumer Services

1.8

+0.0

+0.0

1.8

Media

3.5

+0.0

+0.0

3.5

Retailing

4.7

+1.0

+0.0

4.7

Consumer Staples

9.5

+0.0

+0.0

9.5

Food, Beverage & Tobacco

5.3

+0.0

+0.0

5.3

Food & Staples Retailing

2.4

1.0

1.0

1.4

Household & Personal Products

1.9

+1.0

+1.0

2.9

Energy

8.0

+0.0

+0.0

8.0

16.3

+0.0

+1.0

17.3

Banks

6.0

+1.0

+1.0

7.0

Diversified Financials

5.2

+0.0

+0.0

5.2

Insurance

2.7

+0.0

+0.0

2.7

Real Estate

2.5

-1.0

+0.0

2.5

15.0

+0.0

+0.0

15.0

HC Equipment & Services

5.1

+0.0

+0.0

5.1

Pharmaceuticals & Biotechnology

9.9

+0.0

+0.0

9.9

Financials

Healthcare

10.3

+1.0

+1.0

11.3

Capital Goods

Industrials

7.5

+0.0

+0.0

7.5

Commercial Services & Supplies

0.6

+0.0

+0.0

0.6

Transportation

2.1

+1.0

+1.0

Information Technology

20.0

+2.0

+2.0

++

++

22.0

3.1

Software & Services

10.6

+1.0

+1.0

11.6

Technology Hardware & Equipment

7.0

+1.0

+1.0

8.0

Semiconductors

2.4

+0.0

+0.0

2.4

Materials

3.2

-1.0

-1.0

2.2

Telecom

2.3

-2.0

-2.0

0.3

Utilities

3.0

-2.0

-2.0

1.0

Source: S&P, UBS CIO WMR, as of 21 May 2015


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.
1
The benchmark allocation is based on S&P 500 weights.
2
See Deviations from Benchmark Allocations 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 the Investment
Strategy Guide or the last Investment Strategy Guide Update.
3
The current allocation column is the sum of the S&P 500 benchmark allocation and the CIO WMR tactical deviation columns.

JUNE 2015 UBS HOUSE VIEW

29

DETAILED ASSET ALLOCATION

Additional Asset Allocation Models


The US Taxable Fixed Income Allocation table will no longer appear in this report. The 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.
International Developed Markets (Non-US) Equity Module, in %

EMU / Eurozone

Benchmark
allocation1
28.0

CIO WMR Tactical deviation2


Previous
Current
+30.0
+30.0

Current allocation3
58.0

UK

20.0

-15.0

-15.0

5.0

Japan

19.0

-6.0

-6.0

13.0

Australia

7.0

-3.0

-3.0

4.0

Canada

9.0

-3.0

-3.0

6.0

Switzerland

8.0

-3.0

-3.0

5.0

Other

9.0

+0.0

+0.0

9.0

WMR Tactical deviation2


Previous
Current
-10.0
+0.0

Current allocation3

Source: UBS CIO WMR, as of 21 May 2015

International Developed Markets (Non-US) Fixed Income Module, in %

EMU / Eurozone
UK

Benchmark
allocation1
42.0
9.0

+5.0

+5.0

42.0
14.0

Japan

32.0

+0.0

+0.0

32.0

Other

17.0

+5.0

-5.0

12.0

Source: UBS CIO WMR, as of 21 May 2015


The benchmark allocation refers to a moderate risk profile. For the second and third tables on this page, it represents the relative market capitalization weights of each country or region.
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 the Investment Strategy Guide.
3
The current allocation column is the sum of the benchmark allocation and the tactical deviation columns.
1
2

30

UBS HOUSE VIEW JUNE 2015

PERFORMANCE MEASUREMENT

Tactical Asset Allocation


Performance Measurement
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 assets 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 allocation). Performance is calculated utilizing the returns of the
indices identified in Table B as applied to the respective allocations in the SAA and the SAA with the tactical shift. For example, 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 deviations is reflected in the column in Tables A and C labeled
Excess return, which shows the difference between the
performance of the SAA and the performance of the SAA
with the tactical shift. The Information ratio is a riskadjusted 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 annualized excess return over a given time period and the
annualized 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, typically
upon publication of the Investment Strategy Guide on a
monthly basis. Occasionally, changes in the tactical deviations
are made intra-month when warranted by market conditions
and communicated through an Investment Strategy Guide
Update. The computations assume portfolio rebalancing
upon such intra-month changes as well. Performance shown
is based on total returns, but does not include transaction
costs, such as commissions, fees, margin interest, and interest
charges. Actual total returns adjusted for such transaction
costs will be reduced. A complete record of all the recommendations upon which this performance report is based is
available from UBS Financial Services Inc. upon written request. Past performance is not an indication of future results.

Table A: Moderate risk profile performance measurement (25 January 2013 to present)
SAA

SAA with
tactical shift

Excess
return

Information
ratio
(annualized)

Russell 3000
stock index
(total return)

Barclays Capital
US Aggregate bond
index (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 to date

1.32%

1.37%

0.05%

+0.8

2.67%

-1.25%

13.47%

14.57%

1.11%

+0.9

49.36%

4.41%

Since inception (25 January 2013)


Source: CIO WMR, as of 20 May 2015

JUNE 2015 UBS HOUSE VIEW

31

PERFORMANCE MEASUREMENT

Tactical Asset Allocation


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)


US Municipal Fixed Income (BarCap Municipal Bond)
US Investment Grade Fixed Income (BarCap US Agg Credit)

5.0
35.0
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: CIO WMR

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 investor,
and on prior SAAs with tactical shifts as published in the
Investment Strategy Guide during the same time period.
Performance is calculated utilizing the returns of the indices
identified 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
meanings of the Excess return and Information ratio columns and how the Information ratio column is calculated.

32

UBS HOUSE VIEW JUNE 2015

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
Developed Equities and Non-US Fixed Income were further subdivided into regional blocks. Only the cumulative recommendations at the level of Non-US Developed Equities
and Non-US Fixed Income were taken into account in calculating the performance shown in Table C opposite. Prior to
25 August 2008, WMR published tactical asset allocation recommendations 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.

PERFORMANCE MEASUREMENT

Tactical Asset Allocation


Performance Measurement
Table C: Moderate risk profile performance measurement (25 August 2008 to 24 January 2013)
Benchmark
Allocations (SAA)

Benchmark
Allocation (SAA)
with tactical shift

25 Aug 08 to 31 Dec 08

Excess Information ratio


return
(annualized)

Russell 3000
stock index
(total return)

Barclays Capital
US Aggregate bond
index (total return)

-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%

24.86%

24.10%

-0.76%

-0.1

31.81%

30.76%

Since inception
Source: CIO WMR

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)

Non-US Dev. Eq (MSCI Gross World ex-US)


Emerging Markets Eq. (MSCI Gross EM USD)
US Fixed Income (BarCap US Aggregate)

10.5

2.0

Developed Markets (MSCI Gross World ex-US)

10.0

2.0

Emerging Markets (MSCI Gross EM USD)

2.0

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)

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)

8.0

12.0

Source: CIO WMR

JUNE 2015 UBS HOUSE VIEW

33

APPENDIX

Investment Committee
Global Investment Process and Committee description
The UBS investment process is designed to achieve replicable, 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
Officer (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 composition
The GIC is comprised of 13 members, representing top market and investment expertise from across all divisions of UBS:
Mark Haefele (Chair)
Mark Andersen
Andreas Hoefert
Jorge Mariscal
Mads Pedersen
Mike Ryan
Simon Smiles
Tan Min Lan
Themis Themistocleus
Larry Hatheway (*)
Bruno Marxer (*)
Curt Custard (*)
Andreas Koester (*)
(*) Business areas distinct from Chief Investment Office/
Wealth Management Research

34

UBS HOUSE VIEW JUNE 2015

WMA Asset Allocation Committee description


We recognize that a globally derived house view is most effective when complemented by local perspective and application. As such, UBS has formed a Wealth Management
Americas Asset Allocation Committee (WMA AAC). WMA
AAC is responsible for the development and monitoring of
UBS WMAs 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 GICs House Views and the incorporation of US-specific asset class views into the USspecific tactical asset allocation models.
WMA Asset Allocation Committee composition
The WMA Asset Allocation Committee is comprised of five
members:
Mike Ryan
Michael Crook
Richard Hollmann (*)
Brian Nick
Jeremy Zirin
(*) Business areas distinct from Chief Investment Office/
Wealth Management Research

APPENDIX

Explanations about Asset Classes


Sources of strategic asset allocations and investor risk profiles
Strategic asset allocations represent the longer-term allocation of assets
that is deemed suitable for a particular investor. The strategic asset allocation models discussed in this publication, and the capital market assumptions used for the strategic asset allocations, were developed and approved 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 asset 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 investment 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
according to your individual profile and investment goals.
The process by which the strategic asset allocations were derived is described in detail in the publication entitled UBS WMAs 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 allocation


The recommended tactical deviations from the strategic asset allocation
or benchmark allocation are provided by the Global Investment Committee and the Investment Strategy Group within Wealth Management Research Americas. They reflect the short- to medium-term assessment of
market opportunities and risks in the respective asset classes and market
segments. Positive / zero / negative tactical deviations correspond to an
overweight / neutral / 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 International Equities page are
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 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 stated
earlier in the report.

Scale for tactical deviation charts


Symbol

Description/Definition

Symbol

Description/Definition

Symbol

Description/Definition

moderate overweight vs. benchmark

moderate underweight vs. benchmark

neutral, i.e., on benchmark

++

overweight vs. benchmark

underweight vs. benchmark

n/a

not applicable

+++

strong overweight vs. benchmark

strong underweight vs. benchmark

Source: CIO WM Research

JUNE 2015 UBS HOUSE VIEW

35

APPENDIX

Appendix
Emerging Market Investments
Investors 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 liquidity 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 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 WMR Education Notes Investing in Emerging Markets (Part 1): Equities, 27 August 2007, 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. Subinvestment grade bonds are recommended only for clients
with a higher risk tolerance and who seek to hold higher-yielding bonds
for shorter periods only.
Nontraditional Assets
Nontraditional asset classes are alternative investments that include hedge funds, private equity, real estate, and managed 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 investment 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 performance 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 investment
loss; (4) are long-term, illiquid investments; there is generally 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 information to investors; (7) generally involve
complex tax strategies and 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 obligations
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

36

UBS HOUSE VIEW JUNE 2015

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 generally, 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 futures 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 under the federal tax laws.
Private Equity: There are risks specifically associated with investing in
private equity. Capital calls can be made on short notice, 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 issuers 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 issuers 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

Disclaimer
Chief Investment Office (CIO) Wealth Management (WM) Research is
published by UBS Wealth Management and UBS Wealth Management
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, investment strategies, financial situation and needs of
any specific recipient. 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 legal restrictions and
cannot be offered worldwide on an unrestricted basis and/or may not be
eligible for sale to all investors. All information and opinions expressed
in this document were obtained from sources believed to be reliable and
in good faith, but no representation or warranty, express or implied, is
made as to its accuracy or completeness (other than disclosures relating
to UBS and its affiliates). 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 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 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., a subsidiary of


UBS AG. UBS Securities LLC is a subsidiary of UBS AG and an affiliate of
UBS Financial Services Inc. UBS Financial Services Incorporated of Puerto
Rico is a subsidiary of UBS Financial Services Inc. UBS Financial Services
Inc. accepts responsibility for the content of a report prepared by a nonUS 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 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 April 2015.
UBS 2015. The key symbol and UBS are among the registered and
unregistered trademarks of UBS. All rights reserved.

JUNE 2015 UBS HOUSE VIEW

37

Publication details
Publisher
UBS Financial Services Inc.
Wealth Management Research
1285 Avenue of the Americas, 20th Floor
New York, NY 10019
This report was published
on 22 May 2015.
Lead authors
Mark Haefele
Mike Ryan
Authors (in alphabetical order)
Manish Bangard
Michael Crook
Nicole Decker
Leslie Falconio
Thomas Flury
Ricardo Garcia
Markus Irngartinger
Katie Klingensmith
David Lefkowitz
Barry McAlinden
Thomas McLoughlin
Kathleen McNamara
Brian Nick
Brian Rose
Dominic Schnider
Philipp Schoettler
Giovanni Staunovo
Gary Tsang
Thomas Veraguth
Thomas Wacker
Jon Woloshin
Jeremy Zirin
Editors
Abraham De Ramos
Barbara Rounds-Smith
Project Management
Paul Leeming
Drew Gilmore
Daniel Feeney
Desktop Publishing
George Stilabower
Cognizant Group Basavaraj Gudihal,
Srinivas Addugula, Pavan Mekala
and Virender Negi

38

UBS HOUSE VIEW JUNE 2015

UBS House View


Monthly Call
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The next call will be on:
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June 2015

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