1. Art and Diseño

UBS HouseView
Investment Strategy Guide
February 2015
On icy
roads
Also inside
In Context: Spreading the wealth
In Focus: The Decade Ahead: In front of the curve
US Edition
CIO Wealth Management Research
CONTENTS
A MESSAGE FROM THE REGIONAL CIO
TACTICAL PREFERENCES
1
FEATURE
2
On icy roads
by Mark Haefele
IN CONTEXT
7
Spreading the wealth
by Mike Ryan
PREFERRED INVESTMENT VIEWS
8
MONTH IN REVIEW
9
AT A GLANCE
9
GLOBAL ECONOMIC OUTLOOK
10
ASSET CLASSES OVERVIEW
12
Equities
Fixed income
Commodities
Foreign exchange
IN FOCUS
18
The Decade Ahead: In front
of the curve
by Stephen Freedman
and Andrea Fisher
TOP THEMES
20
Liability optimization
The rising Millennials
Transformational technologies
KEY FORECASTS
22
DETAILED ASSET ALLOCATION
23
PERFORMANCE MEASUREMENT
31
APPENDIX
34
PUBLICATION DETAILS
38
Dear reader,
In our “CIO Year Ahead” publication we argued that 2015 would be
marked by continued divergence in global economic and policy outlooks,
greater dispersion of returns within and across asset classes and increased
volatility in financial markets. Although we are barely a month into the
New Year, each of these themes has already begun to play out in fairly
dramatic fashion.
In this month’s Feature article, we offer some perspective on how to navigate this increasingly challenging investment backdrop. Although it remains our view that sharply lower oil prices are a net positive for global
growth, the negative effects on commodity producers and dampening impact on inflation have tended to dominate in the near term. Meanwhile,
the Swiss National Bank’s surprise decision to sever the franc’s peg to the
euro, coupled with the European Central Bank’s long-anticipated move to
embrace quantitative easing, suggests central banks will continue to impact investment outcomes in 2015.
But while we retain our pro-risk portfolio stance, we have looked to
“spread the wealth” a bit by reducing our dependence on the US. The
combination of a weaker euro, lower oil prices, improving bank credit conditions, easing sovereign-crisis fears, and a more expansive monetary policy represents a fairly strong tailwind for both the Eurozone economy and
equity markets. While there have been more than a few “false dawns” for
Europe over the past several years, we view the current environment as
more sustainable.
In our Focus article, we set our sights a bit longer and discuss the most recent “refresh” of our Decade Ahead themes. By focusing on a multivariate
set of structural drivers, we seek to identify the sorts of themes that we
believe will have a meaningful impact on wealth opportunities over the
next decade. We highlight three of these themes this month: rising millennials; transformational technologies; and liability optimization. While the
first two focus on how best to grow the asset side of the balance sheet,
the last addresses how best to manage the liability side.
So whether your focus is set on the year ahead or on the Decade Ahead,
there is something for you in this month’s report. Enjoy!
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.
2
UBS HOUSE VIEW FEBRUARY 2015
Mike Ryan, CFA
Chief Investment Strategist, WMA
Regional CIO, Wealth Management US
TACTICAL ASSET ALLOCATION
Tactical preferences
With US growth remaining solid and central banks still providing plenty of liquidity, we
continue to recommend a preference for equities over bonds. We prefer US over foreign stocks
and high yield to government bonds.
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THIS
MONTH
1) Equities
We upgrade international developed markets to
overweight and
trim US equities.
2) Fixed income
We prefer high
yield corporate
and investment
grade credit to
Treasuries and
emerging debt.
3) Foreign
exchange
We close our
preference for
the Canadian
dollar over the
Swiss franc.
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)
There has been a change in the methodology for displaying the overweight and underweight recommendations since the 21 November 2015 edition of “UBS House
View.” As of this publication, 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
FEBRUARY 2015 UBS HOUSE VIEW
1
On icy roads
 Global markets have served up an avalanche of events in 2015, from a
plunging oil price and euro, to rallying government bonds, to the removal
of the Swiss franc floor.
 The diverging world brings into focus why maintaining a long-term and
disciplined approach to investment is so important.
Mark Haefele
Global Chief Investment Officer
Wealth Management
 By following the key tenets of diversification, rebalancing and considered
asset-class selection, CIO portfolios were only marginally impacted by the
recent turmoil.
 We believe the underlying environment of low oil prices, low government
bond yields, and improving economic growth should continue to provide
a supportive backdrop for global equities.
If you start to slide on icy roads, make sure you keep looking ahead to where you want to go.
That was the advice my father gave me many years ago. I was reminded of it again in the first
week of January as unusually snowy weather blanketed Zurich. But the slippery conditions have
extended beyond the Swiss streets. Global markets have already served up an avalanche of
events in 2015, from a plunging oil price and euro, to rallying government bonds, to a dramatic
change in gears by the Swiss National Bank (SNB) that shifted the franc sharply higher.
Those of you who read our CIO Year Ahead: The Diverging World will know that divergences in
policy could drive a year of higher volatility and greater dispersion in asset prices. Still, January’s
blizzard of news surpassed expectations.
The diverging world brings into focus why maintaining a long-term and disciplined approach to
investment is so important. To our minds this means following the principles of diversification,
rebalancing and considered asset-class selection. I am pleased that by following these key tenets, CIO portfolios were only marginally impacted by the recent turmoil. From a shorter-term
tactical perspective, the European Central Bank’s (ECB) recently enhanced quantitative easing
(QE) program is the latest confirmation that the SNB’s decision does not reflect a wider shift
among central banks to reverse their policies. We believe the underlying environment of low oil
prices, low government bond yields, and improving economic growth (in developed markets in
particular) should continue to provide a supportive backdrop for global equities.
This diverging world is posing challenges, but it will also offer opportunities to generate returns.
By focusing on the road ahead, we can find the best way to navigate forward.
Looking ahead
All eyes are on Europe. Last week’s SNB decision, the announcement of quantitative easing by
the ECB on 22 January, and the upcoming Greek election mean that European markets will
likely be setting the tone for global risk appetite in the weeks ahead.
2
UBS HOUSE VIEW FEBRUARY 2015
FEATURE
>> The ECB has finally found a
genuine means of expanding its balance sheet
I’ll begin with the announcement from the ECB. President Mario Draghi has pledged to purchase EUR 60bn of investment grade-rated securities each month until September 2016.
There is also the option to extend the program if the inflation outlook hasn’t improved by
then. Some of you may recall my letter from last year entitled Draghi’s Dominoes where I
looked at the three “dominoes” that needed to fall before we can see sustained growth in
the Eurozone. The first one – the ECB finding a genuine means of expanding its balance
sheet (see Fig.1) – has now fallen.
>> QE will pressure the euro,
and provide a tailwind for
Eurozone equities
We recently upgraded Eurozone equities to overweight. While the market’s preliminary reaction to Draghi’s plan has only provided a marginal boost, we believe a sustained bout of QE
will continue to pressure the euro, and also provide another tailwind for Eurozone equities.
European growth may still be weak, but European firms now enjoy an enviable combination
of a highly competitive currency, falling energy prices, and record low government bond
yields.
>> A default in Greece is
unlikely
As ever, political discord is causing apprehension; this time, it’s the Greek election. We think
the chance of Greece “diverging” its way out of the Eurozone is low. Greece does not face
large interest payments to the private sector in the months ahead, with just EUR 0.6bn due
on 24 February. So, based on Greece’s reported cash balance, a default is unlikely. Other
creditors, like the ECB and the International Monetary Fund, should be willing to let the
Greek political process play out. Furthermore, both of the leading Greek political parties have
reiterated their commitment to the euro in recent weeks.
Meanwhile, the dust is still settling after the SNB’s dramatic about-turn decision to abandon
the CHF 1.20 per euro minimum exchange rate. Two of the tactical asset allocation positions
that we have been recommending to global investors – an overweight in Swiss equities and
an underweight in the Swiss franc – have been negatively affected.
>> Swiss franc strength will
damage the prospects for
Swiss equities
From here, the franc’s strength will undoubtedly damage the prospects for Swiss equities,
which we downgraded to neutral. Swiss corporate earnings, which consensus forecasts had
Fig. 1: The ECB balance sheet will grow once again
ECB balance sheet (EUR, bn)
3500
3000
2500
2000
1500
Jan 15
Jul 14
Jan 14
Jul 13
Jan 13
Jul 12
Jan 12
Jul 11
Jan 11
Jul 10
1000
Jan 10
>> The ECB has announced it
will buy EUR 1.2 trillion of
bonds over 20 months
Source: Bloomberg, UBS, as of 22 January 2015
FEBRUARY 2015 UBS HOUSE VIEW
3
FEATURE
seen rising 10–12% in 2015, are now likely to decline by 5–7%. Within Swiss equities, a
low-yield environment should at least prove supportive for those companies that can grow
their dividends despite the strength of the franc. With respect to the currency, we retain an
underweight position in the Swiss franc. We believe that the franc is overvalued at current
levels, and government bond yields with a tenor as long as almost 15 years have a negative
yield. That said, we note that in the near term its perception as a “safe-haven” could attract
flows into the currency, and we have therefore halved the size of our underweight position.
>> The outlook is improving
for UK equities
Elsewhere, we believe the outlook is also starting to brighten for UK equities. While the British pound has been rising against the euro, it has also been falling against the US dollar.
Since British-listed companies earn a greater share of their revenues in dollars than in euros,
the level of sterling is turning from a curse into a blessing for the UK market. We therefore
closed our underweight position in UK equities.
While the stormiest market news of late has been concentrated in Europe, this has not
meant lower volatility globally. It’s worth remembering that last year the S&P500 ended January down more than 3%, only to enjoy approximately 14% total return for the year. So,
while this year’s start says little about where we are going to end, we still don’t expect it to
be a smooth ride.
>> Lower oil prices should be
positive for US equities
and the US economy
Fundamentally, we still believe that a lower oil price will be positive for US equities and the
economy (see Fig.2), even if weak recent retail sales figures suggest it has been slow to filter
through to consumer spending. We remain confident in our overweight position in US equities, and expect the market to end the year up around 7–8%. We also remain overweight in
US high yield (HY) credit. The credit market is exposed to oil prices, with 13% of the US HY
index in the energy sector. But with energy sector spreads now implying a default rate of
10% over the next 12 months, we believe risks are priced in. Bearing in mind the potential
for sector consolidation and cost cutting, we believe the current yield pickup over government bonds of approximately 540 basis points is attractive.
Fig. 2: Low US gasoline prices should boost consumer spending
US average unleaded gasoline price (USD per gal)
4.5
4.0
3.5
>> US gasoline prices are
at a six-year low
3.0
2.5
2.0
1.5
Source: Bloomberg, as of 22 January 2015
4
UBS HOUSE VIEW FEBRUARY 2015
Jan 15
Jul 14
Jan 14
Jul 13
Jan 13
Jul 12
Jan 12
Jul 11
Jan 11
Jul 10
Jan 10
1.0
FEATURE
The decline in oil is also likely to be firmly on the radar at the Federal Reserve, which formally
begins its 2015 meetings next week. It is worth noting that central banks across the world,
from the Bank of Canada to the Bank of England, have been growing more dovish thanks to
lower headline inflation prints. In theory, they should ignore the impact of lower energy
prices, but this has not proved to be the case for many so far. So while we do not expect any
major policy shift at the Fed meeting, we will be listening closely for the committee’s response to the impact of energy prices on inflation, as well as the rapid decline in market-implied medium-term inflation expectations, the reason for which remains something of a
mystery.
>> Interest rate cuts in China
should cushion the slowdown in growth
Finally, volatility has also been elevated in China, and the onshore equity market is continuing
its speculative gyrations. Against this backdrop, UBS recently hosted our Greater China Conference in Shanghai. Sentiment there was that, regardless of what the onshore market does,
Chinese growth is clearly likely to be slower this year than last, but the question remains by
how much. We think the government’s interest rate cuts will prevent the kind of slowdown
that would shock the global growth story.
More broadly in emerging markets (EM), we maintain an underweight position in EM equities and in EM US dollar-denominated bonds. While EM equities trade on a hefty, approximately 30% discount to developed markets, we don’t think this valuation gulf is likely to
close any time soon. Emerging markets in general continue to face headwinds such as declining commodity prices, a stronger US dollar, slowing growth in China, and difficult business
conditions in Brazil and Russia.
>> A disciplined investment
process is crucial in a
diverging world
Driving discipline
As recent events have shown, sticking to a disciplined investment process is more important
in the diverging world. The following are the most important principles that have driven our
longer-term portfolio performance:
>> Portfolios should be well
diversified
First, remain well diversified. Individual price moves have gotten larger as consensus expectations have narrowed and policies diverge. For investors seeking to sidestep uncompensated
volatility, it will be critical that they avoid overexposure to any individual asset, asset class, or
region. They should also consider diversifying into alternatives where we have recently increased allocations.
>> Portfolios should be
rebalanced regularly
and systematically
Second, rebalance portfolios regularly and systematically. A disciplined approach to rebalancing a portfolio toward a target allocation allows investors to systematically “buy on dips” and
“take profits” without falling into behavioral traps that often lead even professional investors
to buy too late or sell out at the bottom.
Finally, seek the shorter-term opportunities on offer in our diverging world, but do so in a
measured way, keeping the primary focus on the long term.
Investors trying to avoid skidding off the road will need to adhere to the basic principles of
long-term asset allocation: diversification, rebalancing, and careful risk management. When
looking to the road ahead, these principles are likely to prove essential.
FEBRUARY 2015 UBS HOUSE VIEW
5
FEATURE
Final note
I write to you from the World Economic Forum in Davos, where policymakers and business leaders have gathered to consider the new global context and the possible long-term drivers of the
world economy. I, along with UBS colleagues from the Investment Bank and Asset Management, have contributed to a White Paper exploring the potentially transformative impact of
changes in energy, environmental, and technological policy on the world in the years ahead.
For those of you who are interested, I hope you find it a thought-provoking read.
It is available at ubs.com/followubs.
Mark Haefele
Global Chief Investment Officer
Wealth Management
6
UBS HOUSE VIEW FEBRUARY 2015
IN CONTEXT Perspective from the Regional Chief Investment Officer – US
Spreading the wealth
Mike Ryan
Regional Chief Investment Officer
Wealth Management US
While the term “spreading the wealth” is typically associated with either redistributive tax policies or philanthropic activities, we instead want investors to consider it in the context of making
asset allocation decisions. For much of 2014, we maintained a strong domestic preference with
overweight to the dollar, US equities, and US credit. It was our view that an improving US
economy, gradual “tapering” of Fed bond purchases, and solid earnings growth would both
support risk assets in the US and lead to a further strengthening of the greenback. With the
exception of our high yield call, those positions tended to work out well for investors last year.
While we continue to favor US assets in 2015, we believe it now makes sense to reduce our dependence on domestic positions and look to “spread the wealth” a bit more globally.
> While emerging markets might appear
cheap on the surface,
subdued growth momentum will continue
to pressure earnings,
at the same time that
tighter Fed policy
weighs upon
currencies.
Keep in mind that US equity valuations continued to rise in 2014 amid an improving cyclical
backdrop, still-supportive policy approach, and continued a benign interest-rate environment.
The S&P 500 currently trades at just over 16 times earnings – about one full multiple-point
above the 50-year average. Although not necessarily expensive from a historical perspective, US
stocks are now more “fully valued,” which suggests gains from here will be more measured and
driven largely by earnings growth. We therefore opted to trim our overweight to US equities.
The dilemma, of course, is where else in the world do we shift those funds?
At first blush, emerging markets (EM) might seem a potentially good candidate. After having
significantly underperformed developed market equities over the past two years, EM now trade
at about a 27% discount to developed markets and are among the “least loved” asset classes
among institutional investors. But while EM might appear cheap on the surface, subdued
growth momentum will continue to pressure earnings, at the same time that tighter Fed policy
weighs upon currencies. This suggests that prosepects for returns within the emerging market
space will once again underwhelm.
We therefore turned our attention – and our affections – toward Europe.
It’s true that Eurozone equities also badly lagged the US market in 2014, as hopes for a longawaited economic recovery failed to materialize and deflationary pressures intensified.
Meanwhile, the approach of the Greek elections threatened to cast fresh doubts over the longer-term viability of the Eurozone while the lack of consensus among policymakers has repeatedly hamstrung the best intentions of the European Central Bank.
So what’s so different this time around?
First off, the macro backdrop has brightened amid the combination of a weak euro, lower oil
prices, and an improvement in bank lending conditions. This, in turn, should lead to stronger
earnings growth for Eurozone-domiciled companies. Second, and perhaps of even greater importance, is the shift in policy by the ECB. As we point out in this month’s Feature article, quantitative easing represents both a significant tailwind for Eurozone equity markets and a tacit admission that European policymakers are finally prepared to act in tandem.
Mike Ryan, CFA
FEBRUARY 2015 UBS HOUSE VIEW
7
PREFERRED INVESTMENT VIEWS
As of 22 January 2015
Asset Class
Most preferred
Least preferred
Equities
•US1 ()
• US small and mid caps1 ()
•Eurozone1 ()
• Transformational technologies2 ()
• The rising Millennials2 ()
•E-Commerce
• Cancer therapeutics
• US capex
• Emerging markets
Bonds
• US investment grade3 ()
• US high yield3 ()
• Mortgage interest-only
• US senior loans
• Government bonds
• Emerging market corporate bonds
• Emerging market sovereign bonds3 ()
Foreign
exchange
•USD
•GBP
•EUR
•CHF1 ()
Alternative
investments
Cash
 Recent upgrades  Recent downgrades
Changes made on 19 January 2015
Added on 12 January 2015
3
Changes made on 15 December 2014
1
2
8
UBS HOUSE VIEW FEBRUARY 2015
MONTH IN
REVIEW
At a glance
Economy
Adjusted 3Q14 GDP levels in the
US exceeded expectations, and
January’s consumer confidence
report reached an 11-year high.
Nevertheless, uncertainty remains
as the Fed changed its tune from
taking “considerable time” in raising rates to “be(ing) patient.” In
the interim, Fed Chair Janet Yellen
encouraged investors that the drop
in energy prices would be a net
positive for the economy.
Global economic growth is set to accelerate in 2015 compared to 2014. The US is
expected to contribute the most to this acceleration, as it should see its economy
expand by more than 3% – the fastest pace since the financial crisis. We also
foresee increasing economic growth in the Eurozone, albeit on a much lower level
of around 1%. Fiscal headwinds are fading, credit conditions are gradually improving, and the ECB’s expansionary monetary policy will lend further support. The
strong fall in oil prices since mid-2014 is an additional positive driver for both US
and Eurozone growth. Emerging economies are expected to experience a further
gradual deceleration of growth. Russia and Brazil look particularly weak given their
lack of reform momentum.
In a surprising move, the Swiss
National Bank abandoned the
floor on the Swiss franc, freeing
the euro exchange rate that had
been constrained since 2011. The
euro immediately plunged, adding
to the drop in prior weeks after
ECB President Mario Draghi stated
that the ECB was “making technical preparations” for a potential
start to quantitative easing in
2015. Tensions around a “Gre-exit”
remain high as Greece failed to
confirm the presidential nominee,
forcing a snap election at the end
of January. Elsewhere in Europe,
Spain shows slow recovery as solvency is restored, but the outlook
remains cautious as the biggest
risk lies in upcoming elections.
US equities outperformed most other regions in 2014, with a total return of
13.5%, and we expect them to keep up their momentum in the months to come.
Positive drivers – most important, solid earnings growth of around 7% and a robust economic backdrop – will likely remain in place. Swiss earnings face massive
headwinds following the strong appreciation of the Swiss franc, and are therefore
no longer attractive, in our view. We are neutral Swiss equities. We believe the underperformance of UK equities that we saw in 2014 has come to an end, and we
upgrade the market to neutral. In the Eurozone, accelerating economic growth
and a weaker euro should support earnings in 2015. We therefore introduced an
overweight in Eurozone equities.
The oil market remains shaky as
prices continue to hit new lows,
and OPEC has not indicated any
intention to cut production. Crude
indexes rallied slightly after hitting
the USD 45 per barrel low, as new
buyers entered the market. In Asia,
the Indian central bank surprised
investors by cutting rates for the
first time in two years as inflationary worries had eased.
Equities
Fixed income
The strength of the US economy will allow the Fed to hike policy rates in the second half of 2015, leading to gradually rising US Treasury yields. In the Eurozone,
monetary policy easing, low inflation,and modest economic growth will keep
rates very low. The low starting level of yields will likely lead to low returns on government bonds in the next six months. In particular, government bonds in euros or
Swiss francs provide very limited upside. We therefore prefer positions in investment grade corporate bonds, offering a yield pickup. Fundamentals in emerging
markets (EMs) have deteriorated further and we are holding underweights in EM
corporate and government bonds against US high yield, which is pricing in a substantial pickup in default rates in the large energy sector.
Foreign exchange
The US dollar remains our favorite currency, and we hold an overweight relative to
the euro as the divergence in growth rates, monetary policy, and bond yields favor
the US currency. The surprising decision by the Swiss National Bank to suspend the
exchange rate floor against the euro has led to an extreme appreciation of the
Swiss franc, and we expect EURCHF to trade close to parity in the coming six
months. We are overweight GBPCHF as we expect the Bank of England to raise
policy rates in the second half of the year, which stands in stark contrast to the
negative rates offered in Switzerland. With oil prices having fallen further over recent weeks, we remove our Canadian dollar overweight against the franc.
FEBRUARY 2015
UBS HOUSE VIEW
9
KEY FINANCIAL MARKET DRIVERS
Global economic outlook
Thomas Berner, CFA; Ricardo Garcia, CFA; Gary Tsang
Global growth is on the mend. The US economy continued to show very strong growth, with
real consumption accelerating toward annualized 4% in 4Q14, in part fueled by lower energy
prices. In Japan and China, growth indicators stabilized somewhat and in some cases even
accelerated, while Eurozone growth surprises continued to disappoint on balance. But with
the ECB launching an enhanced quantitative easing program of EUR 1.14trn that will include
sovereign bond purchases, the outlook in the euro bloc has brightened. Overall, we feel more
confident that global real GDP growth can reach our 3.5% target this year.
Robust US expansion
Thomas Berner, CFA
CIO VIEW Probability: 70%
Robust expansion
We expect US growth to remain robust, driven by stronger
private-sector demand. Inflation will likely rise toward the
Fed’s target of 2% over the next six months. We expect
the first Fed rate hike in mid-2015 at the earliest and the
pace of tightening to be gradual.
POSITIVE SCENARIO Probability: 15%

Strong expansion
US real GDP growth accelerates to around 4%, propelled
by an expansive monetary policy, a more rapidly fading
fiscal drag, improved business and consumer confidence,
strong housing investment, and subsiding risks of a China
hard landing and Russia-Ukraine tensions. The Fed raises
policy rates sooner than mid-2015.
NEGATIVE SCENARIO Probability: 15%
à
Growth recession
US growth momentum fades as Fed stimulus is curtailed,
the Eurozone crisis reescalates, China’s growth decelerates
significantly, or Russia-Ukraine geopolitical tensions intensify. Real GDP growth deteriorates, raising the fiscal deficit
and leading to another round of bond purchases by the
Fed.
10
UBS HOUSE VIEW FEBRUARY 2015
Eurozone recovery to
accelerate
Ricardo Garcia, CFA
CIO VIEW Probability: 60%
Improving economic momentum
We expect economic momentum to improve in 1H15. The
fall in oil prices has pushed the inflation outlook much
lower. The expansionary policy of the ECB is expected to
support the economic acceleration going forward.
POSITIVE SCENARIO

Probability: 20%
Strong growth and fiscal stabilization
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
à
Probability: 20%
Shock
Disappointing growth and weak inflation rattle bank
bonds; the Eurozone slips into a deflation spiral; ruling on
OMT severely limits ECB asset purchases; political uncertainty rises sharply due to the Ukraine conflict or Greece;
China suffers 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 %
2014F
2015F
2016F
2.4
3.1
2.8
2.4
2.9
2.8
0.3
0.6
1.8
0.1
1.2
1.6
2.7
2.8
3.2
7.3
6.8
6.5
5.5
5.8
6.5
0.8
1.2
1.6
3.0
2.6
2.8
1.9
0.5
1.1
0.5
-4.5
0.0
3.3
3.5
3.7
KEY DATES
3.5%
Inflation in %
2014F
2015F
1.6
0.6
2.1
2.2
6.4
6.8
2.9
1.8
2.6
2.5
2.0
1.5
6.5
5.6
0.4
0.3
1.5
0.4
0.0
-0.6
7.8
13.0
3.4
3.0
2016F
2.8
2.0
5.8
1.4
2.6
1.8
5.0
1.3
1.7
0.9
5.4
3.3
Source: Reuters EcoWin, IMF, UBS CIO WMR, as of 22 January 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.
>
30 JANUARY 2015
>
2 FEBRUARY 2015
Eurozone CPI for January
Eurozone CPI inflation continued to fall in
December to -0.2% year-on-year but core inflation remained at 0.7%. As we expect the ECB to
start quantitative easing measures in 1Q15, we
expect inflation to gradually trend higher over
the next several years.
US ISM Manufacturing Index for January
The ISM Manufacturing Index, a barometer
of national manufacturing activity, dropped
in December to 55.5 after hitting a multi-year
high in October. Consensus expectation is for
it to remain at a solid level that indicates sturdy
manufacturing sector growth.
>
6 FEBRUARY 2015
Moderating Chinese
growth
Gary Tsang
CIO VIEW Probability: 65%
Moderating Chinese growth
The recent pickup in loan growth and housing sales in
major cities will likely lead to a mild growth rebound in
2Q15. China’s external demand is expected to improve
modestly in 2015, helped by global recovery. Macro policy
will maintain its easing bias in light of low inflation and
the housing sector correction.
POSITIVE SCENARIO

Probability: 10%
Growth acceleration
Annual growth accelerates above 7.5% in 2015 as a result
of more substantial policy stimulus measures from the
government or a strong pickup in external demand.
NEGATIVE SCENARIO
à
Probability: 25%
Sharp economic downturn
US labor market report for January
Although less than December, January payroll
growth remained strong with 252,000 new
jobs. Job gains remained healthy and steady,
which is a continued positive sign for the
economy. We expect nonfarm payrolls to be
solid over the next several months and estimate the unemployment rate to be at 5.4% by
end-2015.
>
12 FEBRUARY 2015
>
26 FEBRUARY 2015
US retail sales for January
Core retail sales, which exclude sales at gas stations, auto dealers, and building materials,
dropped in December by -0.4% month-onmonth. This was a surprisingly negative outcome. Given solid and improving household fundamentals, we expect real consumption growth
to rebound to its previous solid trend of close to
3% annualized.
US CPI
The consumer price index for December continued to fall to 0.8% year-on-year. We expect
CPI inflation to trend higher in 2H15 but average 0.8% in 2015.
Annual growth falls below 6% in 2015 due to a sharp
downturn in property investment, more widespread credit
events, or tighter liquidity as the government heavily reins
in shadow-banking activity.
FEBRUARY 2015 UBS HOUSE VIEW
11
ASSET CLASSES OVERVIEW
Equities
Jeremy Zirin, CFA; Stephen Freedman, PhD, CFA; David Lefkowitz, CFA; Manish Bangard, CFA; Markus Irngartinger, PhD, CFA
We remain overweight equities relative to bonds. US equities outperformed most other regions in 2014, with a total return of
13.5%, and we expect them to keep up their momentum in the months to come. Positive drivers – most importantly solid
earnings growth of around 7% and a robust economic backdrop – will likely remain in place. Swiss earnings face massive
headwinds following the strong appreciation of the Swiss franc, and are therefore no longer attractive, in our view. We are
neutral Swiss equities. We believe the underperformance of UK equities in 2014 has come to an end, and we now advise a
neutral position. In the Eurozone accelerating economic growth and a weaker euro should support earnings in 2015. We therefore introduced an overweight in Eurozone equities. We remain underweight emerging markets, where profit margins and
earnings are still falling and lagging those of the US.
Global equities
Emerging Markets
Eurozone We have an overweight stance on Eurozone equities. Earnings should
recover over the next six months, driven by an improvement in economic
data, the significant depreciation of the euro, the decline in the Brent oil
price, and very easy monetary policy. Political risks related to Greece’s
upcoming parliamentary election are limited, in our view. Consumer
discretionary and industrials benefit from increasing global demand,
which supports earnings growth. We also like the consumer staples and
financials sectors.
EURO STOXX (index points, current: 333)
six-month target
House view
345
 Positive scenario
400
à Negative scenario
We are underweight emerging market (EM) equities in our global portfolio. Overall profit margins and earnings continue to fall and lag those
of the US. We need to see a pickup in EM earnings to support future
performance, especially versus the US, where earnings momentum continues to trend higher. The consensus expectation is for EM earnings to
grow around 11% over the next 12 months. We are more cautious,
however, and expect around 7% growth. We forecast the trailing P/E to
move slightly below its current level of 12.3x. We prefer India, Taiwan,
and Mexico to Indonesia, Malaysia, and South Africa.
265
MSCI EM (index points, current: 976)
House view
 Positive scenario
à Negative scenario
Japan
We are neutral on Japanese equities. We forecast corporate earnings
growth of 8% in FY2014 and 11–13% in FY2015. The yen’s recent weakness and the sharp oil price decline benefit Japanese manufacturing
companies, exporters and US dollar earners in particular. A lower oil price
and wage increases in 2015 should help Japanese domestic consumer
companies’ earnings to recover as well. The increased equity purchases
by the Government Pension Investment Fund and potential further easing
by the BoJ will limit the downside risk of equities, in our view. However,
the Topix trailing P/E is likely to rerate from 15.6x currently to 15.2x in
the next six months, given its relatively rich valuation premium. Overall,
we think the Topix will move in line with global equity markets over the
next six months.
TOPIX (index points, current: 1,391)
six-month target
House view
1,425
 Positive scenario
1,580
à Negative scenario
1,070
12
UBS HOUSE VIEW FEBRUARY 2015
six-month target
990
1,100
770
UK
We have a neutral stance on UK equities. With the British pound having
weakened more than 10% against the US dollar over the last six months,
the exchange rate has turned from a drag into a modest tailwind for
earnings. The drop in commodity prices – crude oil in particular – remains
a headwind for UK earnings. Further downward revisions to earnings
seem likely. In the UK market, the energy sector has a 15% weighting
and the mining sector 8%. Still, the relative performance of the UK in
recent months already partly reflects this earnings development.
FTSE 100 (index points, current: 6,728)
six-month target
House view
6,850
 Positive scenario
7,400
à Negative scenario
5,650
ASSET CLASSES OVERVIEW
US equities
Similar to 2014, stocks are off to a bumpy start in the new year. Volatility has risen over the past few weeks on concerns that
global growth is faltering, primarily driven by the speed and depth of the fall in commodity prices. However, there is little evidence of a material, broad-based growth slowdown, particularly in the US. Job gains are accelerating, business spending is
ramping up, consumer and small-business sentiment is rising briskly, and lower oil prices are net positive for US economic
growth. Lower oil prices will drive a decline in energy sector profits, but non-energy earnings growth momentum remains
solid. US stocks should continue to benefit from the equity-friendly combination of steadily improving economic growth amid
muted inflationary pressures (i.e., “Goldilocks”).
US Equities overview
The 4Q14 earnings season should allay fears of a material profit slowdown
for S&P 500 companies. While plunging energy sector earnings and a
strong dollar will reduce headline S&P 500 EPS growth in the current and
coming quarters, non-energy sector earnings remain healthy. Similar to
the past few quarters, the median S&P 500 company should report net
income growth of about 9% in 4Q14. Moreover, leading profit indicators
remain favorable: bank lending standards continue to loosen and business
confidence is increasing. Market valuations are near historical norms and
may inch higher as a greater proportion of S&P 500 EPS will come from
higher P/E (non-energy) sectors. We raise our six-month S&P 500 target
to 2,125.
S&P 500 (index points, current: 2,032)
six-month target
House view
2,125
 Positive scenario
2,375
à Negative scenario
1,775
US Sectors
We prefer sectors with strong earnings momentum that are leveraged
to the US economic expansion. We are upgrading consumer discretionary
to our largest sector overweight alongside information technology.
Additionally, we are reducing our overweight in Industrials to a moderate
overweight (from overweight), upgrading consumer staples from underweight to neutral, and downgrading materials to a moderate underweight
(from neutral). We are also downgrading Financials to neutral (from
Fig. 1: Non-energy earnings (accounting for ~90% of
S&P 500 profits) estimates continue to grow
moderate overweight), but maintain our preference for Banks over REITs
within the sector. Finally, we remain underweight Telecom and Utilities
due to high valuations and challenging fundamentals. See page 29 for
a complete listing of our US sector strategy allocation.
US Equities – size
We continue to favor small- and mid-cap stocks over large-caps. Falling
energy sector profits and a rising dollar will be less of an earnings headwind for small- and mid-cap stocks given lower energy sector exposure
and a greater proportion of sales derived domestically. Small-caps derive
18–20% of earnings outside the US compared to 30–35% for large-caps.
Historically, when small-cap earnings estimates are rising at a faster rate
than earnings estimates for large-caps, small-caps have outperformed.
Following last year’s underperformance, small-cap valuations (relative to
large-caps) are now attractive relative to the last five years.
US Equities – style
We remain neutral across the style segments of growth and value stocks.
In 2014, the Russell 1000 Growth and Value indices both generated a
total return between 13–13.5%. We see little evidence that suggests
either style segment is poised to materially outperform over the next six
months. Relative valuation and our sector positioning (favoring technology over financials) would modestly favor growth stocks, while accelerating US GDP growth momentum historically would favor value.
Fig. 2: Small- and mid-cap valuations are looking
increasingly attractive
Consensus 12-month-forward EPS estimates, indexed to 100 as of 1 January 2014
Forward P/E, small- and mid-caps relative to large-caps
110
1.30
1.18
108
1.25
1.16
106
1.20
1.14
104
1.15
1.12
102
1.10
1.10
100
1.05
1.08
98
1.00
Jan-14
Apr-14
S&P 500 EPS
S&P 500 non-energy EPS
Source: FactSet, UBS, as of 21 January 2015
Jul-14
Oct-14
Jan-15
1.06
2010
Small-cap (lhs)
Mid-cap (rhs)
2011
2012
2013
2014
2015
Small-cap avg (lhs)
Mid-cap avg (rhs)
Source: FactSet, UBS, as of 21 January 2015
FEBRUARY 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 expect the 10-year US Treasury yield to trend moderately higher. Recently, concerns over the deceleration in global
growth and the extreme fall in the price of oil, combined with the ECB’s quantitative easing and lower European rates, have
weighed on US rates. We think Treasury yields are now somewhat stretched relative to our macro outlook and so expect
yields to turn up in anticipation of the Fed hiking policy rates.
US Investment Grade Corporate Bonds
Government Bonds
We lowered our US Treasury forecasts across all maturities to reflect a
market that has grown increasingly skeptical about even moderate Fed
rate hikes in 2015, and ongoing downward pressure on yields from international developments. Despite a steady flow of solid US growth data,
the Fed funds futures market is now only pricing in one rate hike by
year-end. To some degree, international economic woes are to blame as
the Eurozone is struggling with deflation and Japan and China are working hard to revive their economies. We lowered our 10-year yield forecast
to 2.2% from 2.6% in six months.
So far in 2015, US investment grade bonds have performed well (+2.2%
year-to-date) due to the drop in Treasury yields. While total returns of IG
corporate bonds will likely be modest from current yield levels, their yield
carry and moderate spread tightening will likely lead to outperformance
over government bonds. Our forecast total return for the IG Corporate
Index is 1% over the next six months. Bonds from the lower investmentgrade rating segments (BBB) offer better return potential than higherrated issuers.
US IG SPREAD (Current: 138bps*)
US 10-YEAR YIELD (Current: 1.9%)
House view
Six-month target
2.2%
 Positive scenario
2.6–3.0%
à Negative scenario
1.6–2.0%
US High Yield Corporate Bonds
Spreads on high yield (HY) bonds moved sideways over the past month
and total returns are flat year-to-date. The key driver for US HY remains
oil prices, impacting the energy sector with a 15% weighting in the HY
Index. Low oil prices, if sustained, could cause energy company defaults
to rise above our base case expectations. Over the next year, we look
for the HY default rate to rise toward 3% in our base case (below historical average) and 5% in our risk case (above average). Given that HY
spreads are currently pricing in an uptick in defaults, we remain overweight HY bonds.
House view
Six-month target
100bps
 Positive scenario
75bps
à Negative scenario
250bps
*Data based on Barclay’s Corporate Aggregate Indexes.
Emerging Market Bonds
Six-month target
We recommend an underweight allocation to EM sovereign and corporate bonds denominated in USD. Credit spreads of both segments have
widened significantly in recent months and now already reflect a substantial deterioration of corporate and country fundamentals. Weak investor sentiment and EM bond fund outflows also weigh on EM bonds.
We continue to expect a gradual deterioration of credit quality and a
modest increase of corporate default rates in the next 6 to 12 months.
In addition, lower commodity prices put further pressure on EM bonds.
As long as the economic environment has not turned around, we maintain
a cautious stance on EM bonds.
House view
400bps
EMBI / CEMBI SPREAD (Current: 390bps / 390bps) Six-month target
 Positive scenario
300bps
à Negative scenario
900bps
USD HY SPREAD (Current: 536bps)
14
UBS HOUSE VIEW FEBRUARY 2015
House view
380bps / 380bps
 Positive scenario
260bps / 250bps
à Negative scenario
480bps / 470bps
ASSET CLASSES OVERVIEW
Municipal Bonds Non-US Developed Fixed Income The municipal market is off to a firm start to 2015. As of 21 January,
yields on high-grade AAA munis have fallen by 34bps to 24bps at the
front end of the curve for 5-year and 10-year bonds, respectively,
while yields on long-dated 30-year high-grade munis declined by 27bps,
to 2.59% from 2.86%. That said, munis (+1.4%) have underperformed
the stronger rally in US government bonds (+1.9%). As a result, tax-exempt munis now exhibit a high degree of relative value versus Treasury
securities.
Current AAA 10-year muni-to-Treasury yield ratio: 96.9% (last month: 93.6%)
Over the past month, bond yields fell to record lows in many countries,
spurred by policy changes from the European Central Bank and Swiss
National Bank. However, in foreign exchange markets, the dollar strengthened against many other currencies, hurting returns on non-US bonds
when measured in dollars. As a result, non-US developed fixed income
produced negative returns for dollar-based investors despite the decline
in yields. Subdued economic growth and loose monetary policy should
help prevent a dramatic rise in non-US bond yields going forward, but
in our view the dollar is likely to remain on a strengthening trend. We
therefore expect non-US developed fixed income to provide poor returns
in US dollar terms, and recommend maintaining an underweight
position.
Additional US taxable fixed income (TFI) segments
Agency Bonds
Agency spreads are marginally wider early in the New Year, thanks to
the combination of lower rates, higher volatility, and a flatter curve.
Unfortunately, the amount of widening does not translate into very
attractive projected total returns, assuming our interest-rate forecasts
are accurate. We continue to prefer the safety and liquidity of short-term
bullets. Finally, on the prospects for GSE regulatory reform, we continue
to believe that the odds of a comprehensive housing finance reform this
year are very low.
Current agency benchmark spread of +18bps over 5-year UST (versus
+16bps last month)
Treasury Inflation-Protected Securities (TIPS)
The TIPS market hit a multi-year low in breakeven inflation expectations
as disinflationary pressures from declining commodity prices came to the
forefront. TIPS had a very poor showing in 2014 and the wage inflation
anticipated by the Fed was below consensus. Given that the 5y-5y forward
inflation forecast has fallen over 60bps since November, it is now at a
level where buying inflation insurance may be the appropriate play. But
not quite yet – illiquidity and uncertainty prevail, and we believe it is best
to wait on the sidelines for better entry.
policy announcement that might raise GNMA prepayments threatened
to widen mortgage current-coupon spreads. So far, however, that threat
has mostly been an empty one. Indeed, spreads are now near the tightest
levels they’ve been since the 1980s, not counting the levels post-QE3
announcement. While not exactly good news for bottom-fishers, it is indicative of how strong the fundamental and technical backdrop remains.
Current MBS spread of 93bps to blend of 5-year and 10-year Treasuries
(versus +104bps last month)
Preferred Securities With a return of 1% year-to-date, preferreds continue to benefit from
the decline in long-term benchmark rates and solid investor demand.
We maintain a neutral weighting, keeping in mind the gains already
achieved and the prospects for volatility as the Fed pivots its policy
stance. Although CIO WMR recently lowered its rate forecast, we prefer
to take a more defensive posture as we expect rate and spread volatility
to increase in 2015. We prefer to gain preferred securities exposure with
lower-duration preferred coupons, favoring fixed-to-float structures over
fixed-for-life coupons.
Current spread of +340bps over 10-year UST (+294bps last month;
data based on the BoA Core Plus Fixed Rate Preferred Index
Current 10-year breakeven inflation rate of 1.61% (1.83% last month)
Mortgage-Backed Securities (MBS)
An a negative headwind has greeted the MBS market in 2015, as the
combination of a powerful rally to lower rates, higher volatility, and a
Fig. 2: The drop in forward inflation and oil is highly correlated
Regression of the 5yr–5yr forward inflation rate vs. oil prices
2.45
Fig. 1: CIO WMR interest rate forecasts
2.40
in %
Americas
USD 3M Libor
y = 0.0182x + 1.3673
R² = 0.81
2.35
20-Jan-15
3 months
6 months
12 months
0.2
0.5
0.7
1.7
USD 2Y Treas.
0.5
0.9
1.0
1.3
USD 5Y Treas.
1.3
1.6
1.8
2.0
USD 10Y Treas.
1.8
2.0
2.2
2.4
USD 30Y Treas.
2.4
2.6
2.8
2.9
Source: Bloomberg, UBS CIO WMR, as of 20 January 2014
2.30
2.25
2.20
45
47
49
51
53
55
57
59
Source: Bloomberg, UBS, as of 20 January 2015
FEBRUARY 2015 UBS HOUSE VIEW
15
ASSET CLASSES OVERVIEW
Commodities and other asset classes
Dominic Schnider, CFA, CAIA; Giovanni Staunovo; Thomas Veraguth
We expect commodity prices to come under pressure in 1H15 before recovering in 2H15. In this light, the total return
of the asset class is likely to be modestly negative over the next six months. This makes broadly diversified commodity
exposure an unattractive investment. Our spot price and return forecasts vary greatly across sectors. In the near term,
we reaffirm our view of further downside in energy and precious metal prices, while base metals and agriculture
deliver flat returns on average.
Commodities
Precious metals
We continue to have a negative outlook for gold and silver. The Fed remains on track to start raising policy rates this year, though a clear guidance would be needed to trigger a material decline in gold prices. We
think such a policy shift should become visible in 1H15. As the opportunity
costs for holding gold should rise, we expect the gold price to drop to
USD 1,100/oz in six months and USD 1,050/oz in 12 months. Among the
industrially oriented precious metals, palladium has the best fundamentals
with the largest market deficit, warranting a price above USD 900/oz in
the coming quarters. That said, a long position in palladium needs to come
with a stop-loss to limit losses given the metal’s volatility.
GOLD (Current: USD 1,285/oz)
six-month target
House view
USD 1,100/oz
 Positive scenario
USD 1,400/oz
à Negative scenario
USD 900/oz
Crude oil
Crude oil prices remain in a free fall with no imminent floor in sight. OPEC’s
decision to leave the oil market to itself is in full swing, and the likelihood
that OPEC will change its mind in the near term is small. Although current
prices are not sustainable, the short-term price outlook for crude oil remains negative in our view. Hence, we reiterate our recommendation to
avoid any direct exposure related to crude oil at this time. In the summer,
we expect crude oil prices to find a floor and trend higher again as supply
adjustments become visible.
BRENT (Current: USD 48.7/bbl)
House view
six-month target
USD 50/bbl
 Positive scenario
USD 80–90/bbl
à Negative scenario
USD 30–40/bbl
Base metals
Base metal prices also appear challenged in 1H15. Slowing economic
activity in China and a soft one in other emerging markets and Europe
make a broad price improvement unlikely. That said, zinc, nickel, lead,
and aluminum should see small market deficits in 2015, potentially supporting prices and, in the case of nickel and zinc, even triggering price
16
UBS HOUSE VIEW FEBRUARY 2015
increases. For copper, we expect prices to weaken further (to USD 4.900/
mt in 3–6 months) due to weakening demand, sufficient supply, and a
modest market surplus driving exchange inventories higher. That said,
supply growth is likely to slow toward the end of 2015, leading to a
potential price recovery in 2H15. The vastly different price performance
of base metals in 2014 is likely to persist in 2015.
Agriculture
A strong US dollar and diminishing supply constraints are likely to mark
the agricultural commodity market in 2015. We therefore expect the open
interest in agricultural commodities to continue to decline. With no
weather-related supply issues, easing market liquidity could add to the
overall volatility in prices. Nevertheless, some individual commodity stories
are compelling. Coffee remains vulnerable to weather events in Brazil, as
is winter wheat in Russia and the US, which have seen a portion of their
crop enter dormancy in less-than-ideal conditions. Uncertainty in Russian
export policies in 2015 is an additional risk for wheat. Soybean and corn
prices have recovered somewhat from mid-October lows. Chinese demand for US soybeans has been better than last year, which, alongside
some dryness in Brazil, should keep prices well supported at least for
another 4–6 weeks.
Other asset classes
Listed real estate
Listed real estate strongly outperformed global equities in 2014 due to
unexpectedly lower yields. The universe is unattractively priced compared
to historical levels. The asset class has rebounded very strongly after the
sharp correction in September 2014 and is now trading at unsustainably
high levels, in our view. The market has not yet priced in a first interest
rate hike by the Fed, which is why we expect higher price volatility in the
next six months; we also expect total returns to be slightly negative although net asset value is expected to grow 7.3%. Dividend yield should
be 3.6% over the next 12 months.
FTSE EPRA/NAREIT Developed
TR USD (Current: 4,477)
six-month target
House view
USD 4,150
 Positive scenario
USD 4,300
à Negative scenario
USD 3,800
ASSET CLASSES OVERVIEW
Foreign exchange
Katie Klingensmith; Thomas Flury
Currency markets have had a dynamic start to the year. The Swiss National Bank’s surprise decision to remove the
euro-franc exchange-rate floor led to a dramatic appreciation of the franc toward parity against the euro, pushing
currency-market volatility to a three-year high. In addition, markets had anticipated the European Central Bank’s announcement of a new quantitative-easing program; we expect the bold measures announced on 22 January to keep
the euro under pressure. The US dollar has strengthened against most currencies, bringing its trade-weighted gains to
more than 15% over the past six months. We remain overweight the dollar against the euro, and the pound against
the franc; we have closed our long Canadian dollar position against the Swiss franc after the SNB surprise.
USD
Economic data in the US remain strong enough for the Fed to hike rates
in 2015. We are holding an overweight in the US dollar against the euro
as the divergences in growth rates, monetary policy, and bond yields
favor the US currency. The expectation of Fed tightening should continue
to support the USD against many currencies. We think that the strong
dollar causes only a small drag on the US economy, which is currently
offset by lower oil prices. However, markets are very well positioned for
more USD strength, with virtually all market watchers expecting more
dollar appreciation and the IMM dollar speculative accounts at historic
highs. We caution that the dollar’s appreciation path may be bumpier
going forward.
EUR
The Eurozone remains in a very different situation than the US. The ECB
had little choice than to announce additional balance sheet measures after
prices started falling and expectations for long-term inflation became unanchored. These measures have not yet convinced the market that Eurozone
inflation will reach the ECB’s 2% target anytime soon, so the ECB can be
expected to do more, keeping the euro under pressure. We expect that
European corporations will soon benefit from the weaker currency, and
that growth will bottom out and begin to recover by the end of this year.
All this should slow the depreciation path of the euro.
GBP
We continue to hold an overweight in the British pound against the Swiss
franc as the UK economy remains on strong footing and monetary policy
is set to tighten in 2015. Growth and labor market dynamics in the UK
still speak for tighter Bank of England monetary policy in 2015, most
probably after the Fed hike. The elections in May could increase volatility,
but the UK’s strong economic fundamentals and prospects of monetary
policy tightening make the GBP one of the best alternative investment
opportunities besides the greenback.
JPY
The Bank of Japan’s expansionary monetary policy pushed USDJPY
higher over recent months before consolidation took place. The low yen,
which is critical to Japan’s fight against deflation, is unwelcomed by
Japanese consumers who do not enjoy the rising food and energy prices
that accompany the weaker currency. Lower oil prices reduce the pressure somewhat, but we still expect USDJPY to trade sideways around
120–125 with increased volatility from here.
CHF
At current levels, we believe the Swiss franc is strongly overvalued; we
estimate purchasing power parity for EURCHF at 1.28 compared to approximately 1.0 where it has settled since the SNB removed the EURCHF
floor. Negative yields across the Swiss yield curve speak for a weaker franc.
However, there remain investors who are still looking to diversify euro
holdings into Swiss francs. To reflect these diverging factors, we have kept
an underweight position in the Swiss franc, but halve its size. We removed
our overweight position in the Canadian dollar to fund this, but maintain
a CHF underweight relative to the GBP.
Other developed market currencies
While we have removed our overweight in the Canadian dollar, we still
believe economic data speak for a volatile yet ultimately stronger CAD,
in spite of lower oil prices and the recent rate cut by the Bank of Canada.
In contrast, climbing US rates and weaker Chinese growth should further weaken both the Australian and New Zealand dollars. The Swedish
krona remains relatively weak as the Riksbank has cut rates to zero and
pledged to keep them low. Swedish inflation is too low to let the currency appreciate. The Norwegian krone should strengthen slightly
against the EUR sometime in 2015, but will remain under pressure until
then due to lower oil prices.
UBS CIO FX forecasts
22-Jan-15
3M
6M
12M
PPP*
EURUSD
1.155
1.10
1.10
1.15
1.31
USDJPY
117.7
124
124
120
72
USDCAD
1.237
1.22
1.18
1.15
1.14
AUDUSD
0.810
0.77
0.80
0.80
0.74
GBPUSD
1.516
1.51
1.54
1.58
1.70
NZDUSD
0.754
0.72
0.74
0.76
0.60
USDCHF
0.861
0.91
0.91
0.91
0.98
EURCHF
0.994
1.00
1.00
1.05
1.28
GBPCHF
1.304
1.37
1.40
1.44
1.66
EURJPY
136.0
136
136
138
95
EURGBP
0.762
0.73
0.71
0.73
0.77
EURSEK
9.419
9.40
9.40
9.40
8.77
EURNOK
8.804
9.00
9.00
9.00
9.51
Source: Thomson Reuters, UBS CIO WMR, as of 22 January 2015
Note: Past performance is not an indication of future returns.
*PPP = Purchasing Power Parity
FEBRUARY 2015 UBS HOUSE VIEW
17
IN FOCUS
The Decade Ahead:
In front of the curve
publication Top themes. To identify the trends that we expect
to result in investment opportunities, we utilized a dynamic
framework that is built upon a set of structural drivers. These
drivers, in our opinion, capture the most influential sources of
change and include: technological innovation, demographic
changes, sources and uses of natural resources, trends in
globalization, government policy choices, economic normalization, and societal and cultural shifts (see Fig. 1). While any
attempt to peer into the future is bound to be as humbling as
it is enlightening, we believe looking ahead through this lens
reveals potential opportunities for individuals to generate excess returns, take advantage of financial industry trends, and
positively impact their wealth over time.
Stephen Freedman, PhD, CFA
Andrea Fisher, CFA
Head of Cross-Asset Strategy
Investment strategist
CIO Wealth Management Research CIO Wealth Management Research
With the 24-hour news cycle, quarterly reporting and instant
access to financial market quotes on smartphones, investors
would have plenty of reasons to shorten their investment time
horizon, and many do. Yet, we find that a critical element of
effective investment discipline lies, quite to the contrary, in
lengthening one’s time horizon. This can involve appreciating
the benefits of holding a long-term-oriented and diversified
strategic asset allocation to guide portfolio decisions. But it
can also mean understanding long-term trends that are likely
to drive investment returns not over the next quarters but
rather through the next business cycles. It is on the latter
aspect that we wish to focus here.
We recently launched a suite of three new long-term thematic ideas that we expect to play out in 10-year cycles (a.k.a.
“decade themes”). These three themes have been integrated
into our existing thematic research offering in the flagship
18
UBS HOUSE VIEW FEBRUARY 2015
The three decade themes recently launched are the following
(see pgs. 20-21 for more details). First, the Millennial generation, for example, is a unique and important population cohort to understand from an investment perspective because
of their growing consumer power. This subset of individuals
– currently between the ages of 16 and 35 years old – is very
large in size and given demographic trends, it is poised to
have an outsized impact of the US economy akin to the baby
boomers in their time. Since their large size represents significant spending power potential, we believe certain companies
and segments of the market stand to benefit as Millennials
increasingly enter the workforce and enter their peak earnings
and spending years.
The types of companies that should experience a growth tailwind are those that are catering to this generation’s unique
consumption needs and preferences. Though Millennials exhibit some behavioral traits in common with past generations,
different social influences and economic circumstances distinguish them. The bursting of the housing bubble and the
Great Recession, for example, have negatively impacted their
finances and altered perspectives toward home ownership,
which is resulting in higher rentership rates. On the other
hand, this generation is tech-savvy, health-conscious, and
well-educated. Given these considerations, we expect certain
innovative technology companies, wellness-focused brands,
IN FOCUS
and service-oriented industries to be the primary investment
beneficiaries of the rising Millennial generation.
The second decade theme we feature is a textbook example
of innovation-driven investment opportunities. Over the next
decade, we expect two transformational technologies to create a wave of innovation that should lead to rapid growth in
some parts of the economy but also disrupt others. Growth in
robotics and smart automation is being driven by rising wages
and challenging demographic developments in key emerging
economies. This creates cost pressures that will likely be alleviated through productivity-enhancing investments in smart automation by manufacturing companies in emerging markets,
thereby making it one of the fastest growing areas in the
technology and industrial sector.
Likewise, we believe digital data is set to expand exponentially
over the decade on the back of rising internet penetration
and greater average data usage in emerging markets. The
emergence and rapid growth of the Internet-of-Things – the
network of connected devices through which everyday objects like thermostats, watches, and cars are constantly sending and receiving data – means data growth will expand
faster than suggested by mere demographics and behavioral
considerations. The net result is that companies positioned to
benefit from the digital data expansion should exhibit attractive earnings growth.
Finally, we believe liability optimization is a compelling decade
theme to consider right now. Given monetary policy responses
to the financial crisis of 2007-2008, interest rates remain today at historically low levels and present an opportune time
to refinance liabilities and optimize balance sheets. While the
current tactical environment is a catalyst for the near-term
opportunity, liability optimization should be thought of in a
decade context as it has the potential to significantly impact a
household’s net worth as the potential benefit is accrued and
compounded over many years. Indeed, debt usage is expected
to result in greater wealth accumulation when the expected
return on invested assets exceeds the cost of borrowing.
For more information on these themes, ask your UBS Financial
Advisor for a copy of the report “Top themes: The Decade
Ahead,” 12 January 2015.
Fig. 1: Drivers behind decade themes
Resources
Innovation
P
P
Demographics
Globalization
Government
Normalization
Society
Themes
Transformational
technologies
P
The rising Millennials
P
P
P
Liability optimization
P
P
P
FEBRUARY 2015 UBS HOUSE VIEW
19
Top themes
Highlights from our monthly selection of highest conviction investment themes across the asset class spectrum
Liability optimization
The rising Millennials
Michael Crook
Andrea Fisher, CFA; Jonathan Rather
Context – planning We view the current market environ-
Portfolio context
u Utilize
lending
u Multi-year:
Decade theme
(>12 months)
u Portfolio
ment 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.
integration
Additionally, utilizing low rate debt while
Historically low interest
keeping investment assets productive
rates create an opportune time for investors to could significantly impact a household’s
net worth over a longer time horizon.
extend the duration of
Looking forward, portfolio returns are
their liabilities and take
likely to outpace the current cost of debt
advantage of low rates.
which, after years and decades of comu Full report
pounding, could lead to enhanced in“Balance sheet optimiza- vestment returns.
tion” as of 9 January
2015
Given their large size and earnings
potential, we believe companies with
positive exposure to the rising Millennial generation will experience a
growth tailwind. First, this is a generation of “digital natives,” having
grown up with cable TV and the internet. Their passion for and fluency
with technology is fueling growth in
e-Commerce, social media services,
and mobile applications.
US equity
u Growth
opportunities
u Multi-year:
Decade theme
(>12 months)
u Portfolio
Second, easy access to information
and larger online social networks has
created a young adult population
that has more choices, is more informed, and values a healthy lifestyle. This favors cost-competitive online retailers strongly plugged into
social media as well as companies
providing organic food and digital
fitness gadgets. Finally, Millennials
are an urban-renting generation due
to a confluence of cyclical and structural considerations, which favors
rental-related companies as well as
“sharing economy” services.
integration
As a core part of a US
equity portfolio, exposure
can be gained through
passively managed technology sector funds or
through actively managed
strategies with targeted
exposure.
u Full
report
“The rising Millennials” as
of 9 January 2015
Interest rates continue to decline
Generational breakdown of US population
Treasury rates, 1990–2014, in %
5,000,000
10
4,500,000
8
6
4,000,000
4
3,500,000
2
0
Millennials
3,000,000
Generation X
Baby boomers
–2
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
10-year Treasury
10-year TIPS
Source: Bloomberg, UBS, as of 19 December 2014
2,500,000
2,000,000
0
5
10
15
20
Source: US Census Bureau, as of 2010
20
UBS HOUSE VIEW FEBRUARY 2015
25
30
35
40
45
50
55
60
65
Top themes
Highlights from our monthly selection of highest conviction investment themes across the asset class spectrum
Transformational technologies
Stephen Freedman, PhD, CFA; Manish Bangard, CFA
Portfolio context
US equity
u Innovation-based
structural change
u Multi-year:
Decade theme
(>12 months)
u Portfolio
integration
As a portion of a global
equity portfolio, we’ve
identified a list of stocks
that are poised to benefit
from positive trends related to digital data, robotics, and automation.
u Full
report
Over the next decade, we expect a wave
of technological innovation to drive productivity growth, disrupt industries and
create substantial growth opportunities.
In particular, digital data is likely to experience exponential growth over the next
decade driven by a combination of demographic factors like rising global internet penetration and increased data usage
in emerging markets, and secular trends
like changing consumer digital lifestyles
and the rapid emergence of the Internetof-Things. This offers interesting longterm growth opportunities through data
enablers, and in data infrastructure
companies.
We believe smart automation is powering
an industrial revolution, combining the
innovation power of industrial and IT processes to drive global manufacturing productivity gains. It represents one of the
fastest growing segments in the broader
industrial and IT sectors.
Top themes
Thematic investment ideas from CIO Wealth Management Research
January 2015
The Decade Ahead
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
• Capex rising...finally
• e-Commerce: beyond Amazon
• Liability optimization
• Major advances in cancer therapeutics
• MBS IOs – Positive returns when rates rise
“US equities: Transformational technologies,”
8 January 2015
• The rising Millennials
• Transformational technologies
• US senior loans
Robot density by country
Ask your Financial Advisor for a copy
of this publication.
Robots per 10,000 employees
China
United Kingdom
Canada
France
Spain
USA
Italy
Sweden
Germany
Japan
Korea
0
50
100
150
200
250
300
350
400
Source: IFR World Robotics, UBS, as of 2012
FEBRUARY 2015 UBS HOUSE VIEW
21
KEY FORECASTS
KEY FORECASTS
Overweight
Neutral
As of 21 January 2015
Asset class
Underweight
TAA1 Change2
6-month forecast
Positive
Negative
House View
scenario
scenario
Benchmark
Value
m/m perf.3
in %
2032
-1.9%
2125
2375
1775
EQUITIES
USA
à
S&P 500
Eurozone
Þ
Euro Stoxx
333
4.7%
345
400
265
UK
Þ
FTSE 100
6728
2.8%
6850
7400
5650
–
Topix
1391
-1.3%
1425
1580
1070
à
SMI
8009
-10.8%
8050
8950
7150
Japan
Switzerland
Emerging Markets
–
MSCI EM
976
3.3%
990
1100
770
–
10yr yield
1.9%
1.8%
2.2%
2.6-3.0%
1.6-2.0%
BONDS
US Government bonds
US Corporate bonds
Þ
Spread
138 bps
1.9%
100 bps
75 bps
250 bps
US High yield bonds
à
Spread
536 bps
0.6%
400 bps
300 bps
900 bps
EM Sovereign
à
Spread
389 bps
0.5%
380 bps
260 bps
480 bps
EM Corporate
–
Spread
386 bps
2.2%
380 bps
250 bps
470 bps
Commodities
–
DJUBS ER Index
103
-5.6%
NA
NA
NA
Listed Real Estate
–
EPRA/NAREIT DTR
4477
5.5%
4150
4300
3800
NA
NA
NA
NA
NA
OTHER ASSET CLASSES
CURRENCIES
Currency pair
USD
–
EUR
–
EURUSD
1.16
-5.1%
1.10
1.10
1.25
GBP
–
GBPUSD
1.51
-3.1%
1.54
NA
NA
JPY
–
USDJPY
118
-1.3%
124
125
110
CHF
Þ
USDCHF
0.86
-12.6%
0.91
NA
NA
Source: UBS CIO WMR, Bloomberg
1
TAA = Tactical asset allocation, 2 All changes are relative to the last full, 3 Month-on-month performance edition of “House View” published on 21 November 2014.
Past performance is no indication of future performance. Forecasts are not a reliable indicator of future performance.
22
UBS HOUSE VIEW FEBRUARY
FEBRUARY2015
2015
DETAILED ASSET ALLOCATION
Detailed asset allocation
taxable with non-traditional assets
0.0 +0.0
0.0
Current allocation1
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
0.0
WMR tactical deviation
Strategic asset allocation
Moderate
Current allocation1
0.0 +0.0
Change this month
0.0
WMR tactical deviation
Change this month
Strategic asset allocation
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
Fixed Income
69.0 -2.0
67.0 57.0 -3.0
54.0 46.5 -3.5
43.0 41.0 -3.5
37.5 33.0 -3.5
29.5
US Fixed Income
62.0 +1.0
63.0 51.0 +0.0
51.0 40.5 +0.5
41.0 34.0 +0.5
34.5 26.0 +0.5
26.5
US Gov’t
7.0
-2.0
5.0
5.5
-2.5
3.0
4.0
-3.0
1.0
3.5
-3.0
0.5
2.0
-2.0
0.0
50.0
-1.0
49.0
39.0
-1.5
37.5
30.0
-0.5
29.5
24.0
-0.5
23.5
17.0
-1.5
15.5
US IG total market
4.0 +0.5
4.5
3.5 +0.5
4.0
3.0 +0.5
3.5
2.5 +0.5
3.0
2.0 +0.5
2.5
US IG 1–5 years
0.0 +2.0
2.0
0.0 +2.0
2.0
0.0 +2.0
2.0
0.0 +2.0
2.0
0.0 +2.0
2.0
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 -3.0
4.0
6.0 -3.0
3.0
6.0 -4.0
2.0
7.0 -4.0
3.0
7.0 -4.0
3.0
US Municipal
Int’l Fixed Income
Int’l 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
-1.0
0.0
2.0
-1.0
1.0
3.0
-2.0
1.0
4.0
-2.0
2.0
5.0
-2.0
3.0
Equity
US Equity
16.0 +2.0
18.0 27.0 +3.0
30.0 34.5 +3.5
38.0 45.0 +3.5
48.5 55.0 +3.5
58.5
9.0 +2.0
11.0 15.0 +3.0
18.0 20.0 +3.5
23.5 26.0 +3.5
29.5 31.0 +3.5
34.5
US Large cap Growth
2.5 +0.0
2.5
4.5 +0.0
4.5
6.0 +0.0
6.0
8.0 +0.0
8.0
9.5 +0.0
9.5
US Large cap Value
2.5 +0.0
2.5
4.5 +0.0
4.5
6.0 +0.0
6.0
8.0 +0.0
8.0
9.5 +0.0
9.5
US Mid cap
3.0 +0.5
3.5
4.0 +1.0
5.0
5.0 +1.0
6.0
7.0 +1.0
8.0
8.0 +1.0
9.0
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
4.0 +2.5
6.5
19.0 24.0 +0.0
24.0
International Equity
7.0 +0.0
Int’l Developed Markets
4.0 +0.5
4.5
7.0 +1.0
8.0
8.5 +1.0
9.5
Emerging Markets
3.0
-0.5
2.5
5.0
-1.0
4.0
6.0
-1.0
5.0
4.0 +0.0
4.0
4.0 +0.0
4.0
4.0 +0.0
12.0 15.0 +0.0
Commodities
Non-traditional
11.0 +0.0
7.0 12.0 +0.0
11.0 12.0 +0.0
12.0 14.5 +0.0
14.5 19.0 +0.0
11.0 +1.0
8.0
12.0
-1.0
7.0
4.0
5.0 +0.0
15.0
14.0 +1.0
10.0
15.0
-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: Overweight Underweight Neutral “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, 22 January 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.
The “Changes this month” column reflects changes since 19 January 2015. For information on recent changes, see our UBS House View Updates: Tactical adjustments for a diverging world, 19 Jan 2015,
and Oil prices fall further – tactical changes, 15 Dec 2014.
FEBRUARY 2015 UBS HOUSE VIEW
23
DETAILED ASSET ALLOCATION
Detailed asset allocation
taxable without non-traditional assets
Fixed Income
80.0
US Fixed Income
72.0 +1.0
US Gov’t
US Municipal
-2.0
78.0 66.0
-3.0
73.0 58.0 +1.0
63.0 54.5
-3.5
59.0 47.0 +0.5
51.0 44.0
-3.5
47.5 36.0 +0.5
40.5 33.0
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
0.0
WMR tactical deviation
Strategic asset allocation
Moderate
Current allocation1
0.0 +0.0
Change this month
0.0
WMR tactical deviation
Change this month
Strategic asset allocation
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
0.0
-3.5
29.5
36.5 26.0 +0.5
26.5
8.0
-2.0
6.0
7.0
-2.5
4.5
5.0
-3.0
2.0
3.0
-3.0
0.0
2.0
-2.0
0.0
58.0
-1.0
57.0
45.0
-1.0
44.0
35.0
-1.0
34.0
26.0
-1.0
25.0
16.0
-1.5
14.5
US IG total market
4.0
+0.5
4.5
3.0 +1.0
4.0
3.0 +1.0
4.0
2.0 +1.0
3.0
1.0 +0.5
1.5
US IG 1–5 years
0.0
+2.0
2.0
0.0 +2.0
2.0
0.0 +2.0
2.0
0.0 +2.0
2.0
0.0 +2.0
2.0
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
-3.0
5.0
8.0
-4.0
4.0
7.5
-4.0
3.5
8.0
-4.0
4.0
7.0
-4.0
3.0
Int’l Developed Markets
6.0
-2.0
4.0
5.0
-3.0
2.0
4.0
-2.0
2.0
3.0
-2.0
1.0
2.0
-2.0
0.0
Emerging Markets
2.0
-1.0
1.0
3.0
-1.0
2.0
3.5
-2.0
1.5
5.0
-2.0
3.0
5.0
-2.0
3.0
Int’l Fixed Income
Equity
US Equity
16.0 +2.0
18.0 30.0 +3.0
33.0 40.5 +3.5
44.0 51.0 +3.5
54.5 62.0 +3.5
65.5
9.0 +2.0
11.0 18.0 +3.0
21.0 23.0 +3.5
26.5 29.0 +3.5
32.5 36.0 +3.5
39.5
US Large cap Growth
3.0
+0.0
3.0
5.0 +0.0
5.0
7.0 +0.0
7.0
9.0 +0.0
9.0
11.0 +0.0
11.0
US Large cap Value
3.0
+0.0
3.0
5.0 +0.0
5.0
7.0 +0.0
7.0
9.0 +0.0
9.0
11.0 +0.0
11.0
US Mid cap
2.0
+0.5
2.5
5.0 +1.0
6.0
6.0 +1.0
7.0
7.0 +1.0
8.0
9.0 +1.0
10.0
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
17.5 22.0 +0.0
22.0 26.0 +0.0
26.0
11.0
13.5
15.0 +1.0
16.0
International Equity
7.0 +0.0
7.0 12.0 +0.0
Int’l Developed Markets
4.0
+0.5
4.5
7.0 +1.0
8.0
Emerging Markets
3.0
-0.5
2.5
5.0
-1.0
4.0
7.5
-1.0
6.5
9.5
-1.0
8.5
11.0
-1.0
10.0
4.0 +0.0
4.0
4.0 +0.0
4.0
5.0 +0.0
5.0
5.0 +0.0
5.0
5.0 +0.0
5.0
Commodities
12.0 17.5 +0.0
10.0 +1.0
12.5 +1.0
“WMR tactical deviation” legend: Overweight Underweight Neutral “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, 22 January 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.
The “Changes this month” column reflects changes since 19 January 2015. For information on recent changes, see our UBS House View Updates: Tactical adjustments for a diverging world, 19 Jan 2015,
and Oil prices fall further – tactical changes, 15 Dec 2014.
24
UBS HOUSE VIEW FEBRUARY 2015
DETAILED ASSET ALLOCATION
Detailed asset allocation
non-taxable with non-traditional assets
US Fixed Income
60.0 +1.0
61.0 49.0 +0.5
49.5 40.0 +0.5
47.0
-3.5
43.5
-5.0
31.0
US Municipal
0.0 +0.0
0.0
0.0 +0.0
US IG total market
9.0 +1.0
10.0
US IG 1–5 years
0.0 +2.0
US HY Corp
43.0 39.0
35.5 33.0
Current allocation1
Change this month
Strategic asset allocation
0.0 +0.0
WMR tactical deviation
Current allocation1
0.0
0.0
40.5 32.5 +0.5
33.0 26.0 +0.5
26.5
-6.0
22.0
-6.0
13.5
0.0
0.0 +0.0
0.0
0.0 +0.0
7.0 +1.5
8.5
5.0 +2.0
7.0
2.0
0.0 +2.0
2.0
0.0 +2.0
4.0 +1.5
5.5
6.0 +2.0
8.0
8.0
-3.0
5.0
7.0
-3.5
Int’l Developed Markets
6.0
-2.0
4.0
4.0
Emerging Markets
2.0
-1.0
1.0
3.0
19.5
-3.5
Change this month
Strategic asset allocation
0.0 +0.0
WMR tactical deviation
Current allocation1
0.0
Aggressive
29.5
28.0
-3.5
Change this month
Strategic asset allocation
53.0 46.5
WMR tactical deviation
Current allocation1
0.0 +0.0
Moderately
aggressive
-3.5
36.0
-3.0
0.0
68.0
Int’l Fixed Income
66.0 56.0
Change this month
0.0 +0.0
WMR tactical deviation
Change this month
0.0
Moderate
Fixed Income
US Gov’t
-2.0
Strategic asset allocation
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
13.0
-6.0
7.0
0.0
0.0 +0.0
0.0
4.0 +2.0
6.0
2.0 +2.0
4.0
2.0
0.0 +2.0
2.0
0.0 +2.0
2.0
7.0 +2.5
9.5
9.0 +2.5
11.5
11.0 +2.5
13.5
3.5
6.5
-4.0
2.5
6.5
-4.0
2.5
7.0
-4.0
3.0
-2.0
2.0
3.5
-2.0
1.5
2.5
-2.0
0.5
2.0
-2.0
0.0
-1.5
1.5
3.0
-2.0
1.0
4.0
-2.0
2.0
5.0
-2.0
3.0
Equity
17.0 +2.0
19.0 28.0 +3.0
31.0 34.5 +3.5
38.0 42.0 +3.5
45.5 53.0 +3.5
56.5
US Equity
10.0 +2.0
12.0 16.0 +3.0
19.0 20.5 +3.5
24.0 24.0 +3.5
27.5 31.0 +3.5
34.5
US Large cap Growth
3.0 +0.0
3.0
5.0 +0.5
5.5
6.0 +0.0
6.0
7.5 +0.0
7.5
9.5 +0.0
9.5
US Large cap Value
3.0 +0.0
3.0
5.0 +0.0
5.0
6.0 +0.0
6.0
7.5 +0.0
7.5
9.5 +0.0
9.5
US Mid cap
2.5 +0.5
3.0
4.0 +0.5
4.5
5.5 +1.0
6.5
6.0 +1.0
7.0
8.0 +1.0
9.0
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
7.0 +0.0
7.0 12.0 +0.0
18.0 22.0 +0.0
22.0
Int’l Developed Markets
4.0 +0.5
4.5
7.0 +1.0
8.0
8.0 +1.0
9.0
11.0
14.0
Emerging Markets
3.0
-0.5
2.5
5.0
-1.0
4.0
6.0
-1.0
5.0
8.0
-1.0
7.0
9.0
-1.0
8.0
4.0 +0.0
4.0
4.0 +0.0
4.0
4.0 +0.0
4.0
5.0 +0.0
5.0
5.0 +0.0
5.0
14.0
9.0 +0.0
9.0
International Equity
Commodities
Non-traditional
12.0 14.0 +0.0
14.0 18.0 +0.0
10.0 +1.0
13.0 +1.0
11.0 +0.0
11.0 12.0 +0.0
12.0 15.0 +0.0
15.0 14.0 +0.0
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: Overweight Underweight Neutral “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, 22 January 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.
The “Changes this month” column reflects changes since 19 January 2015. For information on recent changes, see our UBS House View Updates: Tactical adjustments for a diverging world, 19 Jan 2015,
and Oil prices fall further – tactical changes, 15 Dec 2014.
FEBRUARY 2015 UBS HOUSE VIEW
25
DETAILED ASSET ALLOCATION
Detailed asset allocation
non-taxable without non-traditional assets
69.0 +1.0
70.0 57.0 +1.0
58.0 47.0 +0.5
55.0
-3.5
51.5
-5.0
37.0
0.0
+0.0
0.0
0.0 +0.0
10.0
+1.0
11.0
US IG 1–5 years
0.0
+2.0
US HY Corp
4.0
42.5 36.0
Current allocation1
Change this month
WMR tactical deviation
Strategic asset allocation
0.0 +0.0
0.0
38.5 29.0 +0.5
29.5
-6.0
26.0
-6.0
17.0
0.0
0.0 +0.0
0.0
0.0 +0.0
8.0 +2.0
10.0
6.0 +2.0
8.0
2.0
0.0 +2.0
2.0
0.0 +2.0
+1.5
5.5
7.0 +2.0
9.0
9.0
-3.0
6.0
8.0
-3.5
Int’l Developed Markets
7.0
-2.0
5.0
5.0
Emerging Markets
2.0
-1.0
1.0
3.0
23.0
-3.5
0.0
47.5 38.0 +0.5
Int’l Fixed Income
51.5 46.0
Current allocation1
0.0 +0.0
Change this month
Benchmark allocation
WMR tactical deviation
Current allocation1
Change this month
Strategic asset allocation
US Fixed Income
32.0
-3.5
0.0
Aggressive
32.5
US IG total market
62.5 55.0
WMR tactical deviation
Current allocation1
0.0 +0.0
Moderately
aggressive
-3.5
42.0
-2.5
0.0
78.0
US Municipal
76.0 65.0
Change this month
0.0 +0.0
WMR tactical deviation
Change this month
0.0
Moderate
Fixed Income
US Gov’t
-2.0
Strategic asset allocation
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
13.0
-6.0
7.0
0.0
0.0 +0.0
0.0
4.0 +2.0
6.0
3.0 +2.0
5.0
2.0
0.0 +2.0
2.0
0.0 +2.0
2.0
9.0 +2.5
11.5
11.0 +2.5
13.5
13.0 +2.5
15.5
4.5
8.0
-4.0
4.0
8.0
-4.0
4.0
7.0
-4.0
3.0
-2.0
3.0
4.0
-2.0
2.0
3.0
-2.0
1.0
2.0
-2.0
0.0
-1.5
1.5
4.0
-2.0
2.0
5.0
-2.0
3.0
5.0
-2.0
3.0
Equity
18.0 +2.0
20.0 31.0 +2.5
33.5 41.0 +3.5
44.5 50.0 +3.5
53.5 59.0 +3.5
62.5
US Equity
10.0 +2.0
12.0 18.0 +2.5
20.5 23.0 +3.5
26.5 28.0 +3.5
31.5 33.0 +3.5
36.5
US Large cap Growth
3.0
+0.0
3.0
5.5 +0.0
5.5
7.0 +0.0
7.0
8.5 +0.0
8.5
10.0 +0.0
10.0
US Large cap Value
3.0
+0.0
3.0
5.5 +0.0
5.5
7.0 +0.0
7.0
8.5 +0.0
8.5
10.0 +0.0
10.0
US Mid cap
3.0
+0.5
3.5
5.0 +0.5
5.5
6.0 +1.0
7.0
7.0 +1.0
8.0
9.0 +1.0
10.0
1.0
+1.5
2.5
2.0 +2.0
4.0
3.0 +2.5
5.5
4.0 +2.5
6.5
US Small cap
International Equity
4.0 +2.5
6.5
22.0 26.0 +0.0
26.0
11.0
13.0
14.0 +1.0
15.0
9.0
12.0
-1.0
11.0
4.0
5.0 +0.0
5.0
8.0 13.0 +0.0
Int’l Developed Markets
4.0
+0.5
4.5
8.0 +1.0
9.0
Emerging Markets
4.0
-0.5
3.5
5.0
-1.0
4.0
8.0
-1.0
7.0
10.0
-1.0
4.0 +0.0
4.0
4.0 +0.0
4.0
4.0 +0.0
4.0
4.0 +0.0
Commodities
13.0 18.0 +0.0
18.0 22.0 +0.0
8.0 +0.0
10.0 +1.0
12.0 +1.0
“WMR tactical deviation” legend: Overweight Underweight Neutral “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 January 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.
The “Changes this month” column reflects changes since 22 January 2015. For information on recent changes, see our UBS House View Updates: Tactical adjustments for a diverging world, 19 Jan 2015,
and Oil prices fall further – tactical changes, 15 Dec 2014.
26
UBS HOUSE VIEW FEBRUARY 2015
DETAILED ASSET ALLOCATION
Detailed asset allocation
all equity and all fixed income models
Fixed Income
0.0 +0.0
0.0 95.0
US Fixed Income
0.0 +0.0
0.0 82.0 +6.0
-0.5
94.5 95.0
Current allocation1
5.0 +0.5
Change this month
5.5
WMR tactical deviation
Strategic asset allocation
All fixed income,
non-taxable
Current allocation1
5.0 +0.5
Change this month
2.0
WMR tactical deviation
Strategic asset allocation
-3.0
Change this month
5.0
All fixed income,
taxable
Current allocation1
Cash
WMR tactical deviation
All figures in %
Strategic asset allocation
All equity
5.5
-0.5
94.5
88.0 81.0 +6.5
87.5
US Gov’t – total market
0.0 +0.0
0.0
9.0
-5.5
3.5
16.0
-2.0
14.0
US Gov’t – 1~3 years
0.0 +0.0
0.0
0.0 +0.0
0.0
6.0
-1.0
5.0
US Gov’t – 3~7 years
0.0 +0.0
0.0
0.0 +0.0
0.0
14.0
-2.5
11.5
US Gov’t – 7~10 years
0.0 +0.0
0.0
0.0 +0.0
0.0
10.0
-1.5
8.5
US MBS
0.0 +0.0
0.0
0.0 +0.0
0.0
9.0 +0.0
9.0
US Munis – total market
0.0 +0.0
0.0
28.0 +1.5
29.5
0.0 +0.0
0.0
US Munis – short duration
0.0 +0.0
0.0
11.0 +0.0
11.0
0.0 +0.0
0.0
US Munis – long duration
0.0 +0.0
0.0
22.0 +1.0
23.0
0.0 +0.0
0.0
US IG – total market
0.0 +0.0
0.0
5.0 +2.0
7.0
10.5 +4.0
14.5
US IG 1~5 years
0.0 +0.0
0.0
0.0 +4.0
4.0
0.0 +4.0
4.0
US High Yield
0.0 +0.0
0.0
7.0 +3.0
10.0
15.5 +5.5
21.0
0.0 +0.0
0.0 13.0
-6.5
Int’l Fixed Income
6.5 14.0
-7.0
7.0
Int’l Developed Markets
0.0 +0.0
0.0
7.0
-3.5
3.5
7.0
-3.5
3.5
Emerging Markets
0.0 +0.0
0.0
6.0
-3.0
3.0
7.0
-3.5
3.5
Equity
95.0 +3.0
98.0
0.0 +0.0
0.0
0.0 +0.0
0.0
US Equity
54.0 +3.0
57.0
0.0 +0.0
0.0
0.0 +0.0
0.0
7.0 +0.0
7.0
0.0 +0.0
0.0
0.0 +0.0
0.0
7.0
0.0 +0.0
0.0
0.0 +0.0
0.0
12.5
0.0 +0.0
0.0
0.0 +0.0
0.0
US Large-cap Growth
US Large-cap Value
US Large-cap Total Market
7.0 +0.0
19.0
-6.5
IT sector
0.0 +3.0
Consumer discretionary
0.0 +3.0
Industrials sector
0.0 +0.0
p
q
3.0
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
0.0
0.0 +0.0
0.0
0.0 +0.0
0.0
US Mid-cap Equity
14.0 +1.0
15.0
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 +0.0
41.0
0.0 +0.0
0.0
0.0 +0.0
0.0
23.5
-2.0
21.5
0.0 +0.0
0.0
0.0 +0.0
0.0
0.0 +3.0
3.0
0.0 +0.0
0.0
0.0 +0.0
0.0
International Equity
Int’l Developed Markets
Eurozone currency hedged
Global EM Equity
-7.0
10.5
0.0 +0.0
0.0
0.0 +0.0
0.0
India
17.5
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
“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, 22 January 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.
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.
The “Changes this month” column reflects changes
since 19 January 2015. For information on recent
changes, see our UBS House View Updates: Tactical
adjustments for a diverging world, 19 Jan 2015, and
Oil prices fall further – tactical changes, 15 Dec 2014.
FEBRUARY 2015 UBS HOUSE VIEW
27
Portfolio Analytics
The portfolio analytics shown for each risk profile’s 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 FEBRUARY 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
13.9
11.9
+1.0
+2.0
+
++
Auto & Components
1.0
+0.0
+0.0
n
n
1.0
Consumer, Durables & Apparel
1.3
+0.0
+1.0
n
+
2.3
Consumer Services
1.7
+0.0
+0.0
n
n
1.7
Media
3.4
+0.0
+0.0
n
n
3.4
Retailing
4.3
+1.0
+1.0
+
+
5.3
Consumer Staples
10.2
-2.0
+0.0
––
n
10.2
Food, Beverage & Tobacco
5.5
-0.5
+0.0
–
n
5.5
Food & Staples Retailing
2.6
-1.0
+0.0
–
n
2.6
Household & Personal Products
2.1
-0.5
+0.0
–
n
2.1
Energy
8.3
+0.0
+0.0
n
n
8.3
16.0
+1.0
+0.0
+
n
16.0
Banks
5.6
+1.0
+1.0
+
+
6.6
Diversified Financials
5.1
+0.5
+0.0
+
n
5.1
Insurance
2.7
+0.5
+0.0
+
n
2.7
Real Estate
2.6
-1.0
-1.0
–
–
1.6
14.8
+0.0
+0.0
n
n
14.8
Financials
Healthcare
HC Equipment & Services
4.8
+0.0
+0.0
n
n
4.8
Pharmaceuticals & Biotechnology
10.0
+0.0
+0.0
n
n
10.0
Industrials
10.3
+2.5
+1.0
+++
+
11.3
Capital Goods
7.5
+1.0
+0.0
+
n
7.5
Commercial Services & Supplies
0.6
+0.0
+0.0
n
n
0.6
Transportation
2.2
+1.5
+1.0
++
+
Information Technology
19.5
+2.0
+2.0
++
++
21.5
3.2
Software & Services
10.3
+1.0
+1.0
+
+
11.3
Technology Hardware & Equipment
6.8
+1.0
+1.0
+
+
7.8
Semiconductors
2.5
+0.0
+0.0
n
n
2.5
Materials
3.2
+0.0
-1.0
n
–
2.2
Telecom
2.4
-2.0
-2.0
––
––
0.4
Utilities
3.4
-2.5
-2.0
–––
––
1.4
Source: S&P, UBS CIO WMR, as of 22 January 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.
FEBRUARY 2015 UBS HOUSE VIEW
29
DETAILED ASSET ALLOCATION
Additional Asset Allocation Models
US Taxable Fixed Income Allocation, in %
Benchmark
allocation1
CIO WMR Tactical deviation2
Previous
Current
Current allocation3
Treasuries
25
-5
-5
20
Treasury Inflation Protected Securities (TIPS)
19
-5
-5
14
Agencies
11
-2
-2
9
Agency Mortgage-Backed Securities
13
0
0
13
0
0
4
4
Investment Grade Corporates
13
4
4
17
High-Yield Corporates
14
8
4
18
5
0
0
5
Investment Grade Corporates 1 yr–5 yr
Preferred Securities
Source: UBS CIO WMR, as of 21 January 2015
Note: On 15 December 2014, the high-yield corporate bond allocation was reduced and an allocation for US investment grade corporate bonds (1 – 5 years) was introduced. For more information,
see “UBS House View Update: Oil prices fall further – tactical changes,” 16 December 2014.
International Developed Markets (Non-US) Equity Module, in %
EMU / Eurozone
Benchmark
allocation1
28.0
UK
20.0
Japan
CIO WMR Tactical deviation2
Previous
Current
+2.0
+10.0
-10.0
Current allocation3
38.0
-2.0
18.0
17.0
19.0
+2.0
-2.0
Australia
7.0
+2.0
-2.0
5.0
Canada
9.0
+2.0
-2.0
7.0
Switzerland
8.0
+2.0
-2.0
6.0
Other
9.0
+0.0
+0.0
9.0
WMR Tactical deviation2
Previous
Current
-10.0
-10.0
Current allocation3
Source: UBS CIO WMR, as of 21 January 2015
International Developed Markets (Non-US) Fixed Income Module, in %
EMU / Eurozone
UK
Benchmark
allocation1
42.0
32.0
9.0
+15.0
+15.0
24.0
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 January 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 or the last Investment Strategy Guide Update.
3
The current allocation column is the sum of the benchmark allocation and the tactical deviation columns.
1
2
30
UBS HOUSE VIEW FEBRUARY 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%
31 March 2013 to 28 June 2013
-2.18%
-2.14%
0.04%
+0.3
2.69%
-2.33%
28 June 2013 to 30 September 2013
3.60%
3.86%
0.26%
+2.4
6.35%
0.57%
30 September 2013 to 31 December 2013
3.05%
3.23%
0.18%
+2.9
10.10%
-0.14%
31 December 2013 to 31 March 2014
2.56%
2.50%
-0.06%
-0.3
1.97%
1.84%
31 March 2014 to 30 June 2014
3.44%
3.53%
0.08%
+0.5
4.87%
2.04%
30 June 2014 to 30 September 2014
-1.54%
-1.70%
-0.16%
-1.2
0.01%
0.17%
30 September 2014 to 19 November 2014
0.92%
1.12%
0.20%
+1.8
4.16%
0.89%
31 December 2014 to 22 January 2015
0.70%
0.62%
-0.09%
-1.6
0.24%
1.16%
10.95%
11.59%
0.63%
+0.6
41.44%
3.13%
Since inception (25 January 2013)
Source: CIO WMR, as of 22 January 2014
FEBRUARY 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 FEBRUARY 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
FEBRUARY 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 Höfert
• 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 FEBRUARY 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 WMA’s strategic asset allocation models and capital market assumptions. The WMA AAC sets parameters for the CIO
WMR Americas Investment Strategy Group to follow during
the translation process of the GIC’s House Views and the 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 six
members:
Mike Ryan
Michael Crook
• Stephen Freedman
• 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 WMA’s Capital Markets
Model: Explained, Part II: Methodology,” published on 22 January 2013.
Your Financial Advisor can provide you with a copy.
Deviations from strategic asset allocation or benchmark 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
n
neutral, i.e., on benchmark
++
overweight vs. benchmark
––
underweight vs. benchmark
n/a
not applicable
+++
strong overweight vs. benchmark
–––
strong underweight vs. benchmark
Source: CIO WM Research
FEBRUARY 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 FEBRUARY 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 issuer’s “home” currency can have unexpected effects
on the market value and liquidity of those securities. Those securities
may also be affected by other risks (such as political, economic or regulatory changes) that may not be readily known to a US investor.
APPENDIX
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 Inc. accepts responsibility for
the content of a report prepared by a non-US affiliate when it distributes
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mentioned in this report should be effected through a US-registered
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UBS specifically prohibits the redistribution or reproduction of this
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and UBS accepts no liability whatsoever for the actions of third parties in
this respect.
Version as per May 2014.
© UBS 2015. The key symbol and UBS are among the registered and
unregistered trademarks of UBS. All rights reserved.
FEBRUARY 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 23 January 2015.
Lead authors
Mark Haefele
Mike Ryan
Authors (in alphabetical order)
Manish Bangard
Thomas Berner
Michael Crook
Leslie Falconio
Andrea Fisher
Thomas Flury
Stephen Freedman
Ricardo Garcia
Markus Irngartinger
Katie Klingensmith
David Lefkowitz
Barry McAlinden
Thomas McLoughlin
Kathleen McNamara
Jon Rather
Brian Rose
Dominic Schnider
Philipp Schoettler
Giovanni Staunovo
Gary Tsang
Thomas Veraguth
Thomas Wacker
Jeremy Zirin
Editor
CLS Communication, Inc.
Project Management
Paul Leeming
John Collura
Drew Gilmore
Natalie Weinberg
Desktop Publishing
George Stilabower
Cognizant Group – Basavaraj Gudihal,
Srinivas Addugula, Pavan Mekala
and Virender Negi
38
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