The Treasurer's Forum The Investment Landscape · The Treasurer's Forum ... 1994 1995 1996 1997...

transcript

The Treasurer's Forum The Investment Landscape

Jonathan Arthur Executive Director UBS Wealth Management

Wealth Management

19 November 2013

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Table of contents

Section 1 Macro Overview________________________________________________ 3

Section 2 Equities________________________________________________________ 28

Section 3 Fixed Interest___________________________________________________39

Section 4 Commodities___________________________________________________48

Section 5 UK Housing_____________________________________________________54

Section 6 Food For Thought______________________________________________ 61

Section 7 Summary_______________________________________________________64

Section 1

Key financial market drivers

The Major Influences Still in Power but……………….

………………………A Few New Faces on the World Scene

Global: Financial market volatility declined sharply Bond (in bps) and equity (in %) market implied volatility indices

Source: Bloomberg, UBS CIO WM Global Investment Office, as of 24.10.2013

May.09 May.10 May.11 May.12 May.13

Equity Volatility (VIX Index) Bond Volatility (MOVE Index, rhs)

Please see important disclaimer and disclosures at the end of the document.

Leading indicators signal economic expansion Manufacturing PMIs

2000 2002 2004 2006 2008 2010 2012

US EMU China

Expansion

Contraction

However, global growth to remain below long term trend of 3.7%

Global growth (finally) set to pick up in 2014

Global GDP growth to accelerate in 2014 for first time since 2010

2.8 2.5

2010 2011 2012 2013 F 2014 F

Real GDP growth %

Source: UBS Investment Bank

US: Job growth stable

Source: Thomson Reuters, UBS CIO WM Global Investment Office, as of 25.09.2013

Non-farm payrolls (m/m, in '000)

-1,000

1990 1993 1996 1999 2002 2005 2008 2011

Non-farm payrolls (mom) 6 month moving average

US: Unemployment rate declining

Unemployment rate, sa, in %

Both Construction and Real Estate Employment Trending Up

Source: DB Global Markets Research

US: House prices are recovering strongly

S&P/Case-Shiller 20 City Home Price Index (yoy change, in %)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

S&P/Case-Shiller Composite-20 City Home Price Index

Wage rises in the US

Source: BLS, DB Global Markets Research

US: Inflation currently well below target of 2% US headline and core PCE price index, year-on-year in %

Source: Thomson Datastream, UBS; as of October 2013

Jan.01 Jan.03 Jan.05 Jan.07 Jan.09 Jan.11 Jan.13

PCE price index Core PCE price index

Note: Shaded area indicates UBS CIO forecast

Fracking – a key driver to US energy prices

US Natural Gas Industrial Price

Germany: The recovery is back on track

German Ifo index vs. GDP growth

Germany: Wage growth declining

German total gross wage growth (yoy change in %)

China: Credit growth moderates Credit growth (y/y), in %

Source: CEIC, UBS CIO WM Global Investment Office as of 24.10.2013

2007 2008 2009 2010 2011 2012 2013

Bank lending Outstanding total social financing

China: Core-inflation in check Chinese consumer price inflation (y/y)

Overall

Source: Thomson Reuters, UBS CIO WM Global Investment Office as of 24.10.2013

China: Retail sales stable

China, Retail Sales of Consumer Goods, Constant Prices, SA, YoY % Change

China Retail Sales, constant prices (2004=100)

Source: Thomson Reuters, UBS CIO WM Global Investment Office as of 24.10.2013

Japan's Abenomics – The Three Arrows

1. Aggressive Monetary Policy

2. Flexible Fiscal Measures

3. Economic Growth by deregulating the economy

What has happened so far?

• Doubling the monetary base in 2 years – a huge commitment • Weaker Yen

• Higher Equity Market

• Limited volatility in JGB yields

Japan: Early signs of inflation turn-around Core consumer price index, yoy change in %

Japan: Tokyo house prices away from deflation

Source: Tokyo Stock Exchange, UBS CIO WM Global Investment Office as of 24.10.2013

Change in % y/y

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Tokyo House Price Index

Japanese Yen versus GBP 1976- 2013

Source: Bloomberg

Japanese Yen versus GBP - 2011-13

Source: Bloomberg

Solid economic environment in G3 while EM is slowing

Source: OECD, UBS CIO WM Global Investment Office, as of July 2013

OECD Leading Indicators: EM vs. US/EMU/JP

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013EM average G3 (US, EUR, JP)

Section 2

Asset class views - Equities

Earnings improving strongly in Japan Change in trailing EPS, in %, ordered according to 6m change

Source: Thomson Reuters, UBS CIO WM Global Investment Office, as of September 2013

Japan: Earnings in Japan clearly improving Trailing operating earnings per share (I/B/E/S)

87 89 91 93 95 97 99 01 03 05 07 09 11 13

MSCI Japan trailing earnings per share

US: Earnings advance supports US equities Trailing operating earnings per share (I/B/E/S) for MSCI US index

Earnings growth expected to accelerate in 2014

Operating margins remain high

Improving growth & high operating margins should result in rising revenue and earnings growth in 2014

Dec-99 Dec-02 Dec-05 Dec-08 Dec-11

Average Profit Margin (S&P 500, FTSE Eurofirst 300,…

Source: UBS Investment Bank, Citigroup & Bloomberg Earnings growth based on consensus bottom-up forecasts for MSCI indices

12% 11% 11%

Global US UK Europe-ex-UK

2013 F

UK and Switzerland more defensive than Eurozone equities Weights by market capitalization, in %

Source: Thomson Reuters, UBS CIO WM Global Investment Office as of Oct 2013

Note: Defensive consists of Cons. Staples, Energy, Healthcare, Telecom, Utilities; Cyclical encompasses Cons. Discr., Industrials, IT, Materials

EMU: Earnings per share (EPS) below trend 12m trailing and forward EPS

EMU: Margins with tentative signs of stabiliziation Margins for EMU companies ex financials, in %

Source: Thomson Reuters, UBS CIO WM Global Investment Office, as of 24 Sep 2013

EMU: Trailing P/E compared to US P/E based on 12m trailing earnings per share (I/B/E/S), EMU relative to US

Emerging Markets: Margins still falling EM ex Financials, in %

Source: Thomson Reuters, UBS CIO WM Global Investment Office, as of August 2013

Equity markets: Overview P/E ratios and their 10-year average Price-to-earnings (P/E) ratio for I/B/E/S indices based on realized earnings

Source: Thomson Reuters, UBS CIO WM Global Investment Office, as of October 2013

Section 3

Asset class views – Bond Markets

Government bond yields somewhat lower recently

10 year government bond yields, in %

Jan.13 Feb.13 Mar.13 Apr.13 May.13 Jun.13 Jul.13 Aug.13 Sep.13

EUR Japan US

Spreads of peripheral bonds have been stable recently

Yield over German 10 year government bond yield, in %

Jan.2011 Jul.2011 Jan.2012 Jul.2012 Jan.2013 Jul.2013

Spain 10y Italy 10y

Credit spreads relatively stable over the last month Credit spreads, in basis points

Jan.13 Feb.13 Mar.13 Apr.13 May.13 Jun.13 Jul.13 Aug.13 Sep.13

US High Yield EM Corporates EM Sovereigns US Investment Grade (rhs)

US high yield bonds: Attractive from a total yield perspective

Source: BoAML, UBS CIO WM Global Investment Office, as of 25.09.2013

US HY yield-to-maturity and yield-to-worst, in %

Jan.10 Jul.10 Jan.11 Jul.11 Jan.12 Jul.12 Jan.13 Jul.13

US HY yield-to-maturity US HY yield-to-worst

US high yield bond spread

US HY bond spread, in basis points

Sep.12 Dec.12 Mar.13 Jun.13 Sep.13

US HY bond spread May low

US corporate balance sheets remain solid Interest coverage ratio is 20% above its pre-crisis average (EBITDA to interest expense)

Source: Thomson Reuters, Moody's, UBS CIO WM Global Investment Office, as of August 2013

HY primary market activity accelerated since July

US HY new issuance in bn USD

The HY default rate is expected to remain very low Dollar-weighted US HY default rate and model output, in %

Source: Thomson Reuters, Moody's, UBS CIO WM Global Investment Office, as of September 2013

Implied default rate based on four variables (all with a 12 months lead): US bank lending standards (Senior Loan Officer Survey) US non-financial corporate liquid assets / short-term liabilities US GDP growth US high yield rating trend

Section 4

Commodities/Property

Gold: ETF outflows have moderated but remain negative Gold ETF flows in million ounces

Source: various ETFs; UBS CIO WM Research; Date: October 2013

Values are in million ounces

Gold: Opportunity costs for gold have declined recently Gold price in USD/oz and US 10y real rate in %

Source: Bloomberg, UBS CIO WM Research, as 24.10.2013

3.50600

Jan.08 Jan.09 Jan.10 Jan.11 Jan.12 Jan.13

Gold price (USD/oz) Real Rate 10y (rhs, inverted scale)

Crude oil: Firm non-OPEC supply growth

North America South America Europe Africa Asia/Oceania Middle East

2013 2014

In mbpd, yoy

Source: EIA, IEA, UBS CIO WM Research, as of 24.10.2013

REITs are still offering an attractive yield over gov't bonds

Source: Bloomberg, UBS CIO WM Global Investment Office as of 23.10.2013

Dividend yield for REITs and 10y market-weighted government bonds

US REITs: Occupancy rates at post-crisis high Occupancy rate across the US

Source: Citi, UBS CIO WM Global Investment Office as of 23.10.2013

94.5%1Q

Historical Average = 92.6%

Section 5

UK Housing

Housing slightly less affordable than long run average Average house price/ average earnings (x)

Source: HBOS, UBS.

New buyer enquiries imply a big increase in house prices RICS new buyer enquiries, net balance, and HBOS y/y house prices

Source: Royal Institute of Chartered Surveyors, HBOS, UBS.

Rental yields on UK residential property Reaching levels well above historic average

Source: Office of National Statistics, Credit Suisse

Housing completions and house prices are inter-linked GB housing completions and HBOS house price growth 3m y/y, quarterly

Source: ONS, UBS

Expect a 10% increase in house prices next 12 months HBOS y/y rolling house price change, UBS house price forecast

Source; HBOS, UBS

Conclusion: Lending a hand to the recovery UK housing market recovery could add up to 0.9% to UK GDP

Source: UBS

• We forecast a 10% increase in average UK house prices in the next 12 months.

• We believe a housing market recovery could add up to 0.9% to UK GDP over time.

• Of this 0.2% comes from construction, and 0.7% via wealth effect.

• The mortgage market is a key driver of UK housing. We believe credit markets will continue to recover from a weak base, driven by

• an improving economic outlook,

• reduced bank leverage ratios,

• the Funding for Lending

• and the Help to Buy schemes.

Section 6

Food For Thought

Workers Expect to Retire Later

Youth Unemployment Rate in Euro Area - September 2013

Section 7

Summary

Equities overview

• We recommend an overall overweight allocation to equities, expressed by an overweight in US and Japanese equities. Global economic growth is forecast to improve further in the coming quarters. US consumption is holding up well and the US housing market continues to improve. Company earnings are expected to gradually advance further globally.

• We are overweight US equities. The housing market recovery supports domestic demand and financial sector profits. Company earnings are expected to gradually move higher. Revenues benefit from solid domestic demand and stabilizing global demand.

• We have a neutral stance on Eurozone equities. The Eurozone economy exited recession in 2Q13. Leading indicators have improved further over the summer. Nevertheless, company earnings still do not show signs of stabilization. Eurozone company earnings have continued to decline in sharp contrast to those of the US and Japan.

• We are neutral on emerging market equities. Economic growth shows a tentative improvement in Asia but not yet broad based in EM. Downside risks to growth remain especially in countries with current account deficits. Company earnings show first signs of stabilization.

• We are overweight Japanese equities. Earnings are recovering strongly as the economy continues to improve.

Source: UBS CIO WM Global Investment Office as of 26.09.2013

Bonds overview

• Global benchmark rates, especially in the US, retreated from their recent highs as the US Fed left its bond purchases unchanged. Over the next six months we expect rates to increase only moderately. QE3 will likely not be phased out completely before 3Q14, and the first rate hike is still further out. We hold a large underweight in high grade bonds as we find a better return outlook in developed market corporate credit.

• Investment grade corporate (IG) bond spreads were broadly stable over the last month, both on EUR and USD bonds. Over the next 6 months, we expect IG bonds to outperform high grade bonds due to their yield pickup and our expectation that credit spreads will tighten slightly. Persistently negative net issuance and solid corporate balance sheets support IG bonds. We thus recommend an overweight position.

• The credit spread of US high yield (HY) bonds declined over the past month, leading to a solid performance over the month. The US HY default rate declined to 1.3% in August and is expected to stay below 2% for the next 12 months due to solid corporate finances. We recommend an overweight allocation to US HY bonds.

• EM sovereign and corporate bonds (in USD) benefitted most from the Fed decision not to taper. Credit spreads decreased over the last month and delivered a solid performance. However, the fundamental backdrop for EM bonds remains difficult as financial vulnerabilities in countries with a weak external position still need to be addressed. EM bond funds experienced large outflows over the last 3 months. However, given the better performance and the Fed decision, inflows to EM bond funds are likely to return in the coming weeks. We recommend a neutral stance to EM bonds as valuations already reflect the weak economic environment.

Source: UBS CIO WM Global Investment Office, as of 26.09.2013

Disclaimer

UBS AG 3 Finsbury Avenue London EC2M 2AN Tel: +44-20-7567-5757 www.ubs.com/uk

This document is issued by UBS Wealth Management, a business division of UBS AG which is authorised and regulated by the Financial Market Supervisory Authority in Switzerland. In the United Kingdom, UBS AG is authorised by the Prudential Regulation Authority and is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. Where products or services are provided from outside the UK, they will not be covered by the UK regulatory regime or the Financial Services Compensation Scheme.

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The Treasurer's Forum The Investment Landscape · The Treasurer's Forum ... 1994 1995 1996 1997...

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