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

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

2

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

6

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

0

20

40

60

80

100

120

140

160

180

200

0

10

20

30

40

50

60

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.

7

Leading indicators signal economic expansion Manufacturing PMIs


30

35

40

45

50

55

60

65

2000 2002 2004 2006 2008 2010 2012

US EMU China

Expansion

Contraction

8

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

4.3

3.3

2.8 2.5

3.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2010 2011 2012 2013 F 2014 F

Real GDP growth %

Source: UBS Investment Bank

9

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

-800

-600

-400

-200

0

200

400

600

1990 1993 1996 1999 2002 2005 2008 2011

Non-farm payrolls (mom) 6 month moving average

10

US: Unemployment rate declining


Unemployment rate, sa, in %

11

Both Construction and Real Estate Employment Trending Up

Source: DB Global Markets Research

12

US: House prices are recovering strongly


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

-25

-20

-15

-10

-5

0

5

10

15

20

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

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

13

Wage rises in the US

Source: BLS, DB Global Markets Research

14

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

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

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

15

US Natural Gas Industrial Price

16

17

Germany: The recovery is back on track


German Ifo index vs. GDP growth

18

Germany: Wage growth declining


German total gross wage growth (yoy change in %)

19

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

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

10

15

20

25

30

35

40

2007 2008 2009 2010 2011 2012 2013

Bank lending Outstanding total social financing


20

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


21

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


22

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

23


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

24

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

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

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

Tokyo House Price Index

25

Japanese Yen versus GBP 1976- 2013

Source: Bloomberg

26

Japanese Yen versus GBP - 2011-13

Source: Bloomberg

27

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

94

95

96

97

98

99

100

101

102

103

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

29

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

30

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


-10

0

10

20

30

40

50

60

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

MSCI Japan trailing earnings per share

31

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


32

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

8

9

9

10

10

11

11

12

12

13

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

Prof

it m

argi

n %

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

9% 7%

-1%

6%

9%

12% 11% 11%

14%

12%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Global US UK Europe-ex-UK

EM

2013 F

33

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


34

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


35

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

36

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


37

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

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

38

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

40

Government bond yields somewhat lower recently


10 year government bond yields, in %

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

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

EUR Japan US

41

Spreads of peripheral bonds have been stable recently


Yield over German 10 year government bond yield, in %

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

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

Spain 10y Italy 10y

42

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


80

90

100

110

120

130

140

150

160

170

180

200

250

300

350

400

450

500

550

600

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)

43

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 %

4

5

6

7

8

9

10

11

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

44

US high yield bond spread


US HY bond spread, in basis points

400

450

500

550

600

650

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

US HY bond spread May low

45

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

46

HY primary market activity accelerated since July


US HY new issuance in bn USD

47

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

49

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


50

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

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50600

800

1,000

1,200

1,400

1,600

1,800

2,000

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

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


51

Crude oil: Firm non-OPEC supply growth

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

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


52

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


53

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

90.0%

90.5%

91.0%

91.5%

92.0%

92.5%

93.0%

93.5%

94.0%

94.5%1Q

01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

Historical Average = 92.6%


Section 5

UK Housing

55

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

Source: HBOS, UBS.

56

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.

57

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

Source: Office of National Statistics, Credit Suisse

58

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

Source: ONS, UBS

59

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

Source; HBOS, UBS

60

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

62

Workers Expect to Retire Later

63

Youth Unemployment Rate in Euro Area - September 2013

Section 7

Summary

65

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


66

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



67

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.

UBS AG, Jersey Branch is authorised and regulated by the Jersey Financial Services Commission for the conduct of banking, funds and investment business, Where services are provided from outside Jersey, they will not be covered by the Jersey regulatory regime. UBS AG, Jersey Branch and UBS AG, London Branch (which is registered as a branch in England and Wales Branch No. BR004507) are both branches of UBS AG a public company limited by shares, incorporated in Switzerland whose registered offices are at Aeschenvorstadt 1, CH-4051 Basel and Bahnhofstrasse 45, CH 8001 Zurich.

This document 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. Although all information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to its accuracy or completeness. All information and opinions as well as any prices indicated are subject to change without notice and the asset classes, the asset allocation and the investment instruments are only indicative.

In accordance with the Financial Conduct Authority requirements, we should point out that with regard to any investments mentioned, values may fall as well as rise and that exchange rates may have a similar effect.

It should be noted that past performance is not an indication of future returns.

At any time UBS AG ("UBS") and other companies in the UBS group (or employees thereof) may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to the issuer of relevant securities or to a company connected with an issuer. Some investments may not be readily realisable 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. Futures and options trading as well as alternative investments are considered risky. Some investments may be subject to sudden and large falls in value and on realisation 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. Furthermore, performance information may be based on simulations and/or be for illustration only. We would recommend that you take financial and/or legal advice as to the implications of investing in any of the products mentioned herein, including tax matters. UBS does not provide tax advice. This document may not be reproduced or copies circulated without prior authority of UBS. This document is not intended for distribution into the US and / or to US persons or in jurisdictions where its distribution by us would be restricted.

.Copyright 2013

http://www.ubs.com/uk

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