1. Art and Diseño

UBS HouseView
Digest
February 2015
On icy
roads
US Edition
CIO Wealth Management Research
On icy roads
Mark Haefele
Global Chief Investment Officer
Wealth Management
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.
Mark Haefele
Global Chief Investment Officer
Wealth Management
This Digest contains excerpted material. To read the full version, please see
the UBS House View Investment Strategy Guide.
This report has been prepared
by UBS Financial Services Inc.
(“UBS FS”) and UBS AG.
Please see important disclaimers and disclosures beginning
on page 5.
FEBRUARY 2014 UBS HOUSE VIEW: DIGEST
1
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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i
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US
Mid cap
EUR
US
Large cap
Value
GBP
Asset Classes
Tactical asset allocation
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US IG
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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
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UBS HOUSE VIEW: DIGEST FEBRUARY 2015
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
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2
FEBRUARY 2015 UBS HOUSE VIEW: DIGEST
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Asset class overview
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.
Equities
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.
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.
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UBS HOUSE VIEW: DIGEST FEBRUARY 2015
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
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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
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assumptions. Different assumptions could result in materially different results. We recommend that you obtain financial and/or tax advice as to the
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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.
FEBRUARY 2015 UBS HOUSE VIEW: DIGEST
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