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Page 1: UBS House View - Family Office Geneva · PDF fileUBS House View Mark Haefele Global Chief Investment Officer ... Product management ubs-cio-wm@ubs.com ... global equities in our tactical

ab

UBS House ViewInvestor’s GuideSeptember 2017

SwitzerlandChief Investment Office WM

With recommended solutionsFor investors domiciled in Switzerland Waldorf salad

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04 Tactical preferences

06 Monthly Letter

12 Economy

14 Key financial market drivers

16 Asset class overview: Key forecasts Equities Bonds Currencies Commodities and alternative investments

24 Spotlight

26 Investment ideas: Preferred investment views Investment ideas

35 Disclaimer

UBS House ViewMark HaefeleGlobal Chief Investment OfficerWealth ManagementDaniel Kalt, Regional CIO Switzerland

Recommended solutionsNicole MarconiPeter MünzhuberMario DangelInvestment Platforms and Solutions

Product [email protected]

Desktop publishingCIO Content DesignUBS Switzerland AG

Cover pictureiStock | Cogent-Marketing

If you wish to subscribe, please contact your UBS client advisor. This report has been prepared by UBS AG, UBS Switzerland AG and UBS Financial Services Inc. Please see important disclaimer at the end of the document.

Contents

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Editorial

Dearreaders,

Daniel KaltRegional CIO Switzerland

Mark HaefeleGlobal Chief Investment Officer Wealth Management

This year saw the equity markets once again deliver better- than-average performance. Like us, you may well be asking yourselves how much longer this will last. After eight years of growth without any major or prolonged setbacks, this ques-tion has to be on the mind of every forward-looking and risk-conscious investor.

We are definitely now in the late phase of the prolonged recovery following the financial crisis, and there is no doubt that an increased level of vigilance for signs of an imminent trend reversal on the markets is now necessary. Nevertheless, we continue to see no immediate danger or risks.

In the article on page 6, we explain why we have maintained our overweight in global equities in our tactical position, which has an investment horizon of six months. The article also sheds some light on what investing and Waldorf salads have in com-

mon. Furthermore, we explain on page 24 how we have grad-ually made our investment portfolio slightly more defensive since the start of the year. We are thus well-positioned for this emerging late phase of the financial market rally.

As long as we see that the bull market will likely continue for some time, we – and probably you too – will wish to remain in this market, and so we are maintaining our overweight in equities.

I hope you enjoy reading this issue.

Live conference – German elections A new impulse for Europe?CIO Live stream – 25 September, at 10.30am CET on www.ubs.com/cio

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UBS House View Investor’s Guide – September 20174

Tactical preferencesAsset allocationConcerns about a potential nuclear conflict with North Korea weighed on risk assets recently. We still see a military conflict as a low-probability tail risk, and hold onto our moderate risk-on position-ing, with an overweight position in global equities against high grade (HG) bonds, and an overweight on Eurozone stocks against UK equities. Global eco-nomic growth remains solid, earnings trends are positive in all regions, while financial conditions remain easy and valuations are not yet overly expensive. Within currencies, we recently took prof-its on our overweight positions in the euro against the US dollar and the Swiss franc, since the single currency has risen markedly in recent weeks. We expect the ECB in September or October to announce an exit from its quantitative easing pro-gram next year, and the Fed to raise rates once more later this year.

EquitiesWe maintain our overweight position on Eurozone equities against UK stocks. We believe consensus expectations for UK corporate earnings growth of about 20% this year are too high. The benefit from a weak pound should disappear by 4Q17, while the UK equity market is less sensitive to global eco-nomic growth. We expect earnings growth of Euro-zone companies to catch up with UK peers. The recent rapid appreciation of the euro might be a concern for exporters, but we don’t expect this pace of strengthening to continue. We maintain an overweight position on global equities (and US high grade bonds) against euro high yield bonds.

BondsWe think equities provide better risk-adjusted returns than credit at this stage of the business cycle. We are overweight global equities and US HG bonds against euro HY bonds. Euro HY spreads are close to their post-crisis low, and the yield level is at an all-time low of 3.2%, which does not adequately compensate medium-term risks, in our view. We don’t see much upside from current valuations, while the ECB tapering announcement could lead to volatility before year-end. We are opening an under-weight position in two-year US Treasury bonds vs. USD cash. We believe the US Fed will hike rates more quickly than the market is pricing, as labor market slack has been substantially used up and financial conditions are relatively easy.

Foreign exchangeWe recently closed our overweight positions in the euro against the US dollar and the Swiss franc. The euro has rallied strongly against both currencies, narrowing the previous valuation gap. While we think the euro may rise further over the long term, the short-term upside we foresaw earlier has now materialized. We are still overweight on the Swed-ish krona (SEK) against the CHF and the Canadian dollar against the Australian dollar. Sweden’s Riks-bank should become more hawkish due to strong growth and firming inflation. The Bank of Canada is likely to become more hawkish this year, while the Reserve Bank of Australia should remain on hold given the ongoing rebalancing of the econ-omy.

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UBS House View Investor’s Guide – September 2017 5

ASSET CLASSESTactical asset allocation

as of 24/08/2017

Strategic Asset Allocation

Tactical Asset Allocation

Highlight

Previous Allocation

Swi

tzer-

E

merging

High EM EM

Liqui

dity

Equi

ties

Bonds**

CommoditCurrencies

Tota

l

T

otal

G

loba

l

U

S

E

uroz

one

U

K

land

J

apan

mark

ets

Total

High grade US TIPS Corporate yield* sovereign corporate USD EUR GBP

CHF SEK NOK CAD AUD

* Includes –2% underweight of EUR HY.

** Within bonds we recommend a moderate underweight in 2-year US Treasuries vs USD cash.

Overweight: Tactical recommen -dation to hold more of the asset class than specified in the strategic asset allocation

Neutral: Tactical recommendation to hold the asset class in line with its weight in the strategic asset allocation

Underweight: Tactical recommen-dation to hold less of the asset class than specified in the strategic asset allocation

Tactical preferences

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UBS House View Investor’s Guide – September 20176

Market threatsSome investors have become concerned by tensions related to North Korea and the possibility of swifter rate hikes from the Fed.

Opportunity costInvestors who flee risk assets can miss out on returns if risk events never materialize or if they occur later than expected. Over the coming six months, we believe the probability is low of a major escalation in North Korean tensions or a sharp Fed tightening.

Strong fundamentalsWe remain confident that markets can grind higher thanks to solid fundamentals. Earnings growth in the second quarter was robust in both the US and Eurozone, while economic data has been positive.

Tactical asset allocationWe add a tactical underweight in 2-year US Treasuries versus cash this month. Following its significant appreciation, we also recently took profits on our overweight position in the euro relative to the US dollar and Swiss franc.

Mark HaefeleGlobal Chief Investment OfficerWealth Management

Follow me on LinkedInlinkedin.com/in/markhaefele

Follow me on Twittertwitter.com/UBS_CIO

People will think about the 10-year anniversary of the financial crisis in many ways. My thoughts turn to New York’s Waldorf-Astoria Hotel. In the years before the crisis it was the home of investment conferences, was the home away from home of US Presidents (complete with a not-so-secret underground escape train), and, of course, is the birthplace of the Waldorf salad.

Today, investment conferences are held elsewhere, and presidents no longer stay there (reportedly in part because it is owned by “China”). But, no matter, because the Waldorf salad probably has more to teach us about investing than most investment conferences and presidential pronouncements anyway. Because, as the old saying goes, the difference between a great salad and garbage is timing.

Late = wrong, early = wrongTiming is critical for investors. While we all fear staying in an investment until it’s rotten, being too early can also be sickening for a portfolio. Remember all those who successfully predicted the 2011 Eurozone crisis? If they were more than 10 months too early, they would still have underperformed a passive “buy and hold” investor in global equities.

No investment manager can promise to time every risk on and risk off move correctly, so we endeavor to build robust portfolios that assume we won’t always be right. But we believe that through a disciplined approach to risk management we stand a good chance of benefiting from long-term upside, while also navigat-ing some of the potential shocks along the way. This letter looks at two promi-nent risks – a North Korea conflict, and Fed rate hikes – to explain how we think about timing our exposure to markets.

Our current assessment of the overall risk and reward picture keeps us overweight global equities in our tactical asset allocation. Earnings and economic growth are strong enough, and central bank policy is still sufficiently loose to suggest that, in the absence of a shock, markets are likely to trend higher over the next six months.

Waldorf salad

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Monthly Letter

UBS House View Investor’s Guide – September 2017 7

And we don’t believe that the probability of a major conflict between the US and North Korea, or an aggressive withdrawal of monetary support, is yet high enough to compensate for the opportunity cost of a risk-off stance. That said, we will continue to monitor incoming data to assess whether the disadvantages of sitting on the sidelines are falling, or if the risks of staying invested are rising.

Thinking about opportunity costsAs we think about risks, we first try to assess the opportunity cost of disengaging from equity markets.

Currently, corporate earnings growth is strong: the past quarter confirmed annual growth of 12% in the US and around 10% in the Eurozone. Global economic activity is robust and is showing particular momentum in the Eurozone, which expanded at an annual rate of 2.2% in the second quarter, up from 1.9% in the first. And despite this solid economic and corporate performance, central banks are still providing crisis levels of support to the economy: the Japanese and European central banks added USD 483bn of stimulus in the second quarter of this year alone.

While equity valuations have risen, they remain close to long-term averages (global e quities trade at a price-to-earnings ratio (P/E) of 17.4 times versus a 20-year aver-age of 18x), and are at levels consistent with continued rallies. Historically, the MSCI AC World Index has returned 6% over the subsequent six months when valuations have been in the 18–23x range, versus an overall average of 5%. Relative valua-tions of equities also suggest long-term outperformance versus bonds, with an S&P 500 equity risk premium of 4.5% versus a long-term average of 3.6% (Fig 1).

These supportive underlying factors bolster our view that those who disengage from equity markets will likely miss out on further gains, and in our base case we expect global equities to outperform bonds by 3% to 5% over our six-month investment horizon. To earn 5% in high grade bonds, it would take more than two years in the US, and more than 10 in the Eurozone or Switzerland.

Fig. 1: Equities still offer value relative to bondsEquity risk premium (12m trailing earnings yield of S&P 500 - real high grade bond yields 5 to 7 years), in %

–2

0

2

4

6

12

8

10

19921990 1994 20021996 1998 2000 20162010 201420122006 20082004

Source: Thomson Reuters, UBS WM CIO

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Monthly Letter

UBS House View Investor’s Guide – September 20178

This potentially high opportunity cost of cutting our equity position means we would only do so if we become much more sure that, for example, a North Korea-US conflict or a rapid tightening in monetary policy is likely to happen soon.

North Korea riskThere is little doubt that the probability of a conflict between the US and North Korea occurring over our six-month investment horizon has increased in recent weeks. Following missile tests, heated rhetoric, and press reports of enhanced missile technology, we have upgraded our risk assessment of a US–North Korea conflict within that time frame to 10–20% from <10%.

But we still see the overall risk to markets from North Korea in the next six months as low. As I review below, key indicators that would suggest a conflict is imminent are not yet apparent. While it might seem somewhat complacent to wait until hostilities appear likely before acting, historical precedent suggests that markets may not react significantly until shots are actually fired. The maximum drawdown over the infamous “13 Days” of the 1962 Cuban missile crisis was around 5% (Fig. 2). As such, we do not believe that waiting for more certainty is likely to be too costly.

So what will we be monitoring to assess a rising threat level?

First, we will be checking reports and actions suggesting increased North Korean technological readiness. Credible press reports of nuclear missile development, further intercontinental ballistic missile testing (in particular if conducted close to Japan or Guam) and/or new nuclear tests could signal that the country is getting closer to (or has reached) nuclear ICBM capability.

Second, we will be looking for signs of conflict preparation. Raising the US’s Defcon status (currently at 4, the second-lowest state of readiness), travel warn-ings for US citizens in South Korea or Japan, and/or signs of more activity or changed travel plans by senior US government or military staff might indicate that

Risks arising from North Korea have increased as the nation moves closer to being able to threaten the US mainland with a nuclear attack.

We will be on the alert for three red flags that the danger is rising: technological progress in North Korea’s weapons program, signs of military preparedness in the US, and sanctions that strike more broadly at US-China relations.

Fig. 2: The Dow Jones and the Cuban Missile CrisisThe Dow Jones Industrial Average in the build up to the crisis and subsequent recovery

500

550

600

650

700

750

Source: Bloomberg Finance L.P, UBS WM CIO

Cuban missile crisis – from 16 Oct to 28 Oct 1962

31/0

3/62

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Monthly Letter

UBS House View Investor’s Guide – September 2017 9

conflict is likelier. Similarly, in Asia, troop movements by China or North Korea, or large-scale evacuation drills in South Korea or Japan, could indicate a higher actual or perceived possibility of conflict.

Third, we will be watching for moves in diplomatic and economic sanctions. Although North Korea probably cannot yet credibly threaten the US mainland with a nuclear attack, each new missile test, or bout of heated rhetoric, brings us closer to the US seeing North Korea as a clear and present danger. Should the US begin to feel genuinely imperiled, it will likely put more pressure on China to try and talk North Korea down. China is unlikely to want sanctions on North Korea that would risk regime collapse, yet the US may be unwilling to settle for less. This could raise tensions on all sides, with the US potentially threatening increased protectionism with China itself as a negotiating card.

Should some of these indicators begin to point to a higher likelihood of conflict we will review our stance, but for now staying invested and awaiting further developments is our view.

Higher Fed rates riskThe risk of tighter Fed policy is more familiar than the threat of nuclear conflict, but it is in some ways more difficult to manage because higher rates do not always spell problems for markets. Indeed, although the Fed has raised interest rates four times since December 2015, global stocks have rallied 18% – thanks in part, we think, to the Fed’s investor-friendly and growth-supportive stance.

If we saw signs of an ideological shift among policymakers away from supporting growth toward controlling prices (at the cost of growth), we would become more concerned. Such a shift was exemplified in extremis by former Fed Chair Paul Volcker, whose large rate hikes to cut inflation helped trigger the 1980–82 reces-sion and a rapid sell-off in US stocks.

So what might lead us to suspect such an ideological shift is forthcoming or underway?

Global stocks have rallied more than 18% since the Fed started raising rates in December 2015.

Fig. 3: Muted inflation gives little reason for aggressive Fed rate hikesCore US personal consumption expenditure inflation year-on-year, in %

0

1

2

3

4

5

Source: Bloomberg Finance L.P, UBS WM CIO

1987

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Monthly Letter

UBS House View Investor’s Guide – September 201710

First, we’ll be watching for sharp increases in inflation. The Fed’s supportive stance has no doubt been helped by inflation repeatedly falling short of expecta-tions. But with unemployment at 4.3%, it seems likely that prices will rise more quickly at some point, potentially leading the Fed to shift its focus from boosting employment toward curbing inflation.

Second, we’ll follow developments in the nomination of the new Fed chair. If a perceived hawk such as John Taylor or Kevin Warsh starts to gain the inside track as a potential Fed chair, markets could become more concerned about how long the growth-supportive environment will last. Taylor’s own eponymous rule would suggest that rates should be at 3% already.

Third, we will be watching expectations for real interest rates. The Fed estimates that the current “neutral” policy stance is for nominal rates to equal the rate of inflation. But if the Fed starts to indicate it is leaning toward moving interest rates materially above the rate of inflation, it could suggest: a) a shift toward a less growth-supportive stance, or b) its belief that the neutral rate is rising. Either could be damaging for the equity market (Fig. 3).

If the data starts to point toward a fundamentally more hawkish Fed, we would need to think again about our positioning, but with a growth-supportive Fed in evidence for the moment, we are staying invested against a backdrop of steady rate hikes.

Tactical asset allocationWe make one change to our global tactical asset allocation:

We introduce an underweight position on two-year US Treasuries. Early this year bond markets started to price in an acceleration in the pace of monetary tighten-ing from the Fed, based partly on expectations of fiscal stimulus from the Trump administration. But recently, the bond market has swung in the opposite direction and is now, we believe, too pessimistic on the trajectory of rate rises. Fed funds futures currently imply just two 25 basis-point hikes over the coming three years. Even a growth-supportive Fed is likely to raise rates more quickly with US unem-ployment at a post-2001 low: we expect the Fed to tighten once more this year and to hike twice next year. We believe the best way to play this mispricing is by underweighting two-year Treasuries since we expect their yield to rise (and prices to fall) as the market adjusts again to a more realistic pace of Fed rate hikes.

We also recently closed our overweight positions in the euro versus the US dollar and Swiss franc. The euro had rallied around 12% year-to-date versus the dollar and 3% over the prior month versus the franc, taking both pairings close to our six-month targets. While we think further gains by the euro are possible over the longer term, its near-term rally has probably run its course now that the market has adjusted to the idea that the European Central Bank (ECB) is laying the ground to taper monetary easing. In contrast, investors may be underestimating near-term support for the dollar. If bond markets are indeed underpricing the Fed’s rate trajectory, hawkish statements from Fed officials could lift it.

But markets could react adversely if inflation rises more swiftly than expected, forcing the Fed to tighten more aggressively.

Markets could also suffer if investors start to worry that President Trump will nominate a hawk as the next Fed chair.

We introduce an underweight position on two-year US Treasuries.

We recently removed our overweight position in the EUR versus the USD and CHF.

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Monthly Letter

UBS House View Investor’s Guide – September 2017 11

UBS Investor Forum Insights

At this month’s investor forum, we asked delegates their view on the outlook for equity markets.

• Some delegates expressed the view that geopolitical developments, espe-cially in North Korea, could present headwinds. The UK’s Brexit talks with the European Union could also represent a source of uncertainty over co-ming months.

• One participant argued the case for an overweight in Eurozone stocks, supported by continued positive economic surprises. Another participant stressed that a stronger euro has not historically been a negative for Euro-zone stocks over a sustained period.

Meanwhile, we maintain our other tactical positions:

We overweight global equities. As described above, a combination of earnings momentum, global growth, and loose monetary policy keeps us confident in the outlook for stocks in the absence of geopolitical events.

We overweight the Swedish krona versus the Swiss franc. In July, Swedish infla-tion exceeded the Riksbank’s 2% target for the first time since 2011. The central bank is therefore likely to tighten policy, supporting the krona. By contrast, we expect the Swiss franc to remain under pressure due to excess franc liquidity after years of intervention by the Swiss National Bank.

We overweight the Canadian dollar versus the Australian dollar. The Canadian economy is regaining strength after a 2015 lull, while we expect Australia’s invest-ment and consumption to suffer due to weaker Chinese demand.

Mark HaefeleGlobal Chief Investment OfficerWealth Management

We are overweight global equities.

We are overweight the SEK versus the CHF.

We are overweight the CAD versus the AUD.

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UBS House View Investor’s Guide – September 201712

EconomyEurozone

Short-term tailwinds to abateHouse ViewProbability: 60%*

Ricardo Garcia, economist

We expect economic growth of close to 2%, and inflation to consolidate and average 1.5% for 2017. However, the economy is likely to lose some steam over the course of the year as the euro strengthens and the anticipated rise in oil prices affects consumption. We expect the ECB to announce in September or October its intention to wind down the QE program over 6–9 months, starting in January 2018.

In Germany, fundamentals such as consumer confidence, construction, and capital-expenditure planning remain robust, but the euro’s anticipated rise should limit this year’s economic growth potential. We see a 60% chance of a grand coalition, and a 75% chance of Merkel staying as the chancellor. In France, a healthier construction sector and more corporate investment, given a business-friendly government, should help accelerate economic growth this year.

Italian economic growth should consolidate at lower rates, supported by a stabilizing construction sector. We expect a general election in early 2018. Spain is still posting strong growth, but the momentum is likely to moderate.

US

Moderate growth in the USHouse ViewProbability: 70%*

Brian Rose, economist

We expect the US economy to grow at a moderate pace over the next 12 months. The labor market is still improving, with the unemployment rate at 4.3% and signs that labor short-ages are becoming more widespread. Rising household income should enable robust consumer spending.

Housing starts and home prices should remain on an upward trend, contributing modestly to overall economic growth.

The outlook for business investment varies by industry, and overall should grow at a moderate pace.

Inflation data has been weak in recent months, but we expect a gradual upward trend in the quarters ahead. A tight labor market and rising producer prices will eventually feed through into consumer price inflation.

Political uncertainty is high and is threatening to become a drag on growth. We expect a fierce fight over the FY18 budget this fall. Deregulation should provide some benefit over time. We do not expect the Trump administration to cause any severe disruptions to trade.

The Fed hiked by 25bps on 14 June. We expect the Fed to begin gradually shrinking its balance sheet in October, and another 25bps rate increase in December.

In developing the CIO WM economic forecasts, CIO WM economists worked in collaboration with economists employed by UBS Investment Research. Forecasts and estimates may change without notice.

*Scenario probabilities are based on qualitative assessment.

Global growth in 2017 expected to be: 3.8%Real GDP growth in % Inflation in %2016 2017F1 2018F1 2016 2017F1 2018F1

US 1.6 2.2 2.2 1.3 2.2 2.2China 6.7 6.8 6.4 2.0 1.6 2.0Eurozone 1.7 2.0 1.6 0.2 1.5 1.5Germany 1.8 2.1 1.7 0.4 1.7 1.9France 1.1 1.7 1.7 0.3 1.1 1.2Italy 1.0 1.3 1.0 –0.1 1.4 1.3Spain 3.2 3.1 2.3 –0.3 2.1 1.3UK 1.8 1.4 0.7 0.7 2.6 2.8Switzerland 1.3 1.4 1.6 –0.4 0.4 0.9Russia –0.2 1.6 1.7 7.0 4.1 4.1World 3.2 3.8 3.8 2.6 2.7 2.8

Sources: Reuters EcoWin, IMF, UBS; as of 21 August 2017 1 UBS Forecasts

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UBS House View Investor’s Guide – September 2017 13

Economy

China

Deleveraging re-emphasizedHouse ViewProbability: 90%*

Yifan Hu, economist Kathy Li, economist

2Q17 GDP grew 6.9% y/y, surprising on the upside, boosted by strong June activity data partly linked to large liquidity injec-tion in June. Strong 1H GDP growth has eased concerns about the 2017 growth target, and provided more room for delever-aging efforts in 2H. Strong momentum in 1H to moderate on cooling real estate, slowing infrastructure investment and dele-veraging.

NFWC set a tone of deleveraging to prevent a financial crisis amid a prudent monetary policy. A supervision committee will be set up to drive regulatory coordination. Deleveraging efforts will expand from the financial sector to the real economy.

The first Sino-US Economic Dialogue by the Trump administra-tion sputtered before the 100-day trade plan deadline, casting a shadow on bilateral trade relations. This recalls our earlier scenario, with risk of a Sino-US trade war as possible, but of limited scope.

2017 CPI inflation keeps below 2% while PPI inflation moder-ates further in the coming months. July CPI inflation edged down to 1.4% y/y from 1.5% y/y in June, while PPI inflation stayed at 5.5% y/y for the third straight month on moderating commodity inflation.

Switzerland

Manufacturing PMI remains above 60House ViewProbability: 60%*

Alessandro Bee, economist Sibille Duss, economist

The manufacturing PMI for July remained above the 60 mark for a second consecutive month, implying a healthy pick-up in economic activity ahead.

However, hard data did not match the upbeat soft data from sentiment indicators. 1Q17 GDP only grew 0.3% q/q.

We expect Swiss GDP to grow 1.4% in 2017. The economic recovery is likely to broaden, but GDP growth will not acceler-ate strongly. We only expect GDP growth to return to trend (1.6%) in 2018.

Employment growth accelerated slightly in 1Q17. The slight downtrend in unemployment remains intact. As the recovery is set to broaden in the coming quarters, the jobless rate is likely to fall to 3.2% in 2017 from 3.3% last year.

The improvement in the Swiss labor market is reflected by a rise in the SECO consumer confidence as households are upgrading their assessment of the labor market situation.

CPI inflation rose 0.3% y/y in July as inflation in the service industry picked up. We expect inflation to average 0.4% in 2017 – supported by a weaker Swiss franc in the second half of the year.

Thanks to a significant depreciation of the Swiss franc against the euro in the last few months, the SNB was able to reduce its FX interventions. However, a rate hike is not in the cards until mid–2018. The SNB will not raise rates before the ECB has slowed down its QE program markedly.

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UBS House View Investor’s Guide – September 201714

Key financial market driversCentral bank policyHouse ViewProbability: 75%*

Brian Rose, economist Ricardo Garcia, economist Paul Donovan, Global Chief Economist, UBS WM

The Fed has set out its intention to reduce the size of its bal-ance sheet by not reinvesting all of the proceeds of maturing bond holdings. This should begin in 2H17, with the language of the recent FOMC minutes suggesting September as the likely start date. An interest rate increase is more likely than not, but is likely to depend on inflation anomalies fading, allowing inflation indicators to rise slightly.

The ECB is still pursuing its predetermined quantitative policy path, with bond buying staying at EUR 60bn a month. The lan-guage of the ECB statement has shifted subtly, and an announcement at the September ECB meeting that bond pur-chases will taper in 2018 seems likely, although ECB President Draghi may seek to soften the language.

The BoE is expected to leave policy unchanged, although dis-agreements within the monetary policy committee are likely to continue. Other central banks have been more inclined to dis-cuss policy with a bias to tightening rather than easing; this coincidence of views more likely reflects the general improve-ment in global growth data rather than any overt coordina-tion.

Political risksHouse ViewProbability: 70%*

Paul Donovan, Global Chief Economist, UBS WM

Political uncertainty still has a high profile in the media, but it still has a relatively limited impact on financial markets. Only very significant events with the potential to change the medium-term outlook are likely to impact asset prices in a meaningful way.

Investor focus in the US is likely to be on the cluster of policy decisions (debt ceiling, etc.) that need to occur during a rela-tively short period of time during the autumn. The extent to which the administration can provide leadership to Congress creates some uncertainty about the scope of policy change.

The economic causes of anti-establishment politics remain. The market may turn complacent about the economic drivers of inequality.

Syria, Qatar and North Korea remain the key international political risks for the near term. North Korea has assumed greater prominence, but markets are unlikely to attribute any meaningful probability to disaster scenarios.

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UBS House View Investor’s Guide – September 2017 15

Key financial market drivers

Key datesSolid US earnings growthHouse ViewProbability: 60%*

Jeremy Zirin, strategist David Lefkowitz, strategist

The earnings growth outlook remains healthy, driven by solid US consumer spending, a rebound in US manufacturing activ-ity (as energy investment spending and emerging market demand bottom out), and a more favorable environment for financials. Leading indicators of profit growth, such as bank lending standards and capital spending intentions, remain sup-portive.

The Trump administration’s policies may further boost earnings growth through lower taxes (corporate, individual, and the repatriation of overseas cash), infrastructure spending, less regulation, and a steeper yield curve (which benefits banks). These policies may boost earnings by 5–15% over the next few years, with the bulk of the benefits stemming from corpo-rate tax reform (~10%).

We estimate S&P 500 EPS of USD 132.50 (11% growth) for 2017, and USD 145 (9% growth) for 2018. These estimates include USD 2.50 (for 2017) and USD 5 (for 2018) in tax reform benefits. The prospects for tax reform remain uncer-tain. Therefore, our estimates include roughly half of the expected benefits from tax reform, in line with the UBS Office of Public Policy’s prediction that tax reform is enacted. If it does succeed, EPS may reach USD 150 by 2018.

Fears that high profit margins will decline in the near term appear overblown. Margins are not higher than normal, excluding the tech sector. Also, margins typically only decline when the economy enters a recession. Finally, the recent pickup in wages is unlikely to crimp profitability. Labor costs do not have a strong correlation with profit margins.

1 September 2017SwitzerlandManufacturing PMI (August)

1 September 2017USUS employment report

5 September 2017Switzerland2Q17 GDP release

5 September 2017SwitzerlandCPI (August)

7 SeptemberEurozoneECB meeting

14 September 2017SwitzerlandSNB policy meeting

20 September 2017USUS Federal Reserve meeting

24 September 2017EurozoneGerman federal election

1 October 2017EurozoneProposed Catalan independence vote

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Asset class overview

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Key forecasts23 August 2017

6 month forecast

Asset class TAA1 BenchmarkHouse View

Positive scenario

Negative scenario

EquitiesUS S&P 500 2,525 2,850 2,025

Eurozone Euro Stoxx 395 450 315

UK FTSE 100 7,600 8,150 6,200

Japan TOPIX 1,665 1,850 1,350

Switzerland Swiss Market Index 9,200 9,800 7,500

Emerging markets MSCI EM 1,115 1,225 900

Listed real estate RUGL Index 4,600 4,850 4,200

BondsUS high grade bonds USD High Grade: Eurodollar AA+ 5–7y

yield2.80 (yield) 1.80 (yield) 3.20 (yield)

European high grade bonds EUR High Grade: EuroAgg AA+ 5–7y yield

0.20 (yield) –0.20 (yield) +0.50 (yield)

US corporate bonds Bloomberg Barclays US Intermediate Corp. spread

90–110bps 60bps 250bps

Euro corporate bonds Bloomberg Barclays EuroAgg Corporate spread

105–120bps 70bps 250bps

US high yield bonds BoAML US high yield spread 380–420bps 350bps 1,100bps

Euro high yield bonds BoAML Euro High Yield Index spread 310–350bps 240bps 1,200bps

Emerging Market Sovereign Bonds in USD

EMBI Diversified 300bps 280bps 500bps

Emerging Market Corporate Bonds in USD

CEMBI Diversified 300 bps 250bps 530bps

Alternative investmentsGold (6 months) USD/oz USD

1,250/ozUSD

1,400/ozUSD

1,100/ozBrent crude oil (6 months) USD/barrel USD

60/bblUSD

65–70/bblUSD

35–40/bbl

Currencies Currency pair

USD USDCHF 0.97USDJPY 113

EUR EURUSD 1.18EURCHF 1.14EURGBP 0.89

GBP GBPUSD 1.32GBPCHF 1.28

Past performance is no indication of future performance. Forecasts are not a reliable indicator of future performance.

Overweight

Neutral

Underweight

Source: UBS, Bloomberg1 TAA = Tactical asset allocation

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UBS House View Investor’s Guide – September 201718

EquitiesUS

Neutral

We expect equities to grind higher globally – including in the US – and are overweight global equities over government bonds. Corporate profit growth has rebounded and is now on solid footing, driven by healthy consumer fundamentals and a recovery in the industrial sector. Stimulative government policies – tax reform, deregulation, infrastructure spending – could boost the outlook further. If Fed rate increases remain gradual and in sync with improving nominal growth, equity markets will likely take them in their stride. Valuations are higher than average, but in line with the macro backdrop (low inflation and durable growth), and attractive versus bonds. Potential trade frictions and the execution of policy initiatives are downside risks.

David Lefkowitz, strategist Jeremy Zirin, strategist Edmund Tran, strategist

S&P 500

As of 23 August 2017: 2,444 Six-month target

House View 2,525

Positive scenario 2,850

Negative scenario 2,025

EurozoneOverweight

We are overweight on Eurozone equities. Earnings growth of Eurozone stocks remains upbeat following a prolonged period of dull growth. Global economic growth is on solid footing, supporting Eurozone equities as they are highly geared to the global growth cycle and valued on the cheaper side versus their long-term average. The trajectory of the recent euro strength is a concern for exporters. However, we do not expect the euro’s rise to continue at this pace. While the European Central Bank is expected to announce a reduction in its bond-buying program in autumn, we expect monetary conditions to remain loose as they are accompanied by solid domestic economic growth. Our most preferred sectors are energy, financials and telecoms.

Markus Irngartinger, strategist Adrian Sauter, strategist Bert Jansen, analyst

Euro StoxxAs of 23 August 2017: 374 Six-month target

House View 395

Positive scenario 450

Negative scenario 315

UKUnderweight

We underweight the UK against Eurozone equities. Trailing valuations are similar for both markets, but the UK trades at a modest premium to its long run average, and the Eurozone at a modest discount. We believe the balance of risks for the UK earnings outlook is to the downside, but to the upside for the Eurozone. The boost from the weak pound should end by the fourth quarter. Three quarters of the expected UK earnings growth will be driven by the earnings recovery in commodities. However, the weak start to the year for underlying commodity prices puts greater risks around the 2017 profit estimates. The UK economy has started to slow, holding back the 30% exposure to domestic revenues. Meanwhile Brexit negotiations are currently having limited impact on the currency or equity markets.

Caroline Simmons, strategist

FTSE 100

As of 23 August 2017: 7,383 Six-month target

House view 7,600

Positive scenario 8,150

Negative scenario 6,200

Asset class overview

OverweightTactical recommendation to hold more of the asset class than specified in the strategic asset allocation

NeutralTactical recommendation to hold the asset class in line with its weight in the strategic asset allocation

UnderweightTactical recommendation to hold less of the asset class than specified in the strategic asset allocation

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UBS House View Investor’s Guide – September 2017 19

Asset class overview

Emerging marketsNeutral

We are neutral on emerging market (EM) equities in our global portfolio. EM economic activity and manufacturing sentiment are improving. Corporate earnings growth is picking up across EM regions. EM equities are trading at a discount to their developed market counterparts. Geopolitical tensions, poten-tial trade friction and USD strength are downside risks. Our most preferred markets are China, Indonesia, Thailand, Russia and Turkey; our least preferred markets are Taiwan, Malaysia, the Philippines and South Africa.

Jorge Mariscal, CIO Emerging Markets Soledad Lopez, strategist Lucy Qiu, strategist

MSCI EM

As of 23 August 2017: 1,076 Six-month target

House View 1,115

Positive scenario 1,225

Negative scenario 900

SwitzerlandNeutral

We are neutral on Swiss equities in our global portfolio. After falling for two years, we expect corporate earnings to grow this year. Consensus expectations may be too optimistic; we expect mid-single-digit earnings growth this year and next. Due to the market’s defensive sector composition, other regions may benefit more from the robust global economic expansion. Exchange rates are a modest positive this year. Last year’s compression in margin and revenue growth for finan-cials, as well as cyclical consumer and industrial companies, set a lower base for this year. The dividend yield is attractive, but we believe the Swiss equity valuation is not very compelling.

Stefan R. Meyer, analyst

Swiss Market Index

As of 23 August 2017: 8,958 Six-month target

House View 9,200

Positive scenario 9,800

Negative scenario 7,500

JapanNeutral

We are neutral on Japanese equities. We forecast mid-single-digit earnings growth in FY17 (which ends in March 2018) after earnings grew 14% in FY16. We expect USDJPY to remain largely flat around 110 for the next 12 months. Currency movements are therefore unlikely to support corpo-rate earnings. However, we believe the downside risk for the Japanese equity market is limited by the relatively large equity purchases by domestic investors like the Bank of Japan. We prefer high dividend stocks and companies that benefit from the tightening labor market.

Toru Ibayashi, analyst Chisa Kobayashi, analyst

TOPIX

As of 23 August 2017: 1,600 Six-month target

House view 1,665

Positive scenario 1,850

Negative scenario 1,350

Listed real estate

Earnings growth for listed real estate companies should dip below 5% p.a. (ex. emerging markets) for 2017/18/19, due to a lack of external growth, despite internal growth opportuni-ties, some positive rental revision and still-diminishing refinanc-ing costs. The real estate cycle has matured since the peak in mid–2015. We do not expect a re-acceleration in property fundamentals amid unspectacular demand prospects. Increases in financing costs may hurt if they are not met with accelerat-ing rental growth. The circa 4% dividend yield remains the key driver. Stocks have delivered no capital growth for 32 months. A gradual de-rating is possible if high direct property market values erode. The universe is trading slightly below a 10% discount to net asset value versus 6.5% historically.

Thomas Veraguth, analyst Sandra Wiedmer, analyst Maciej Skoczek, analyst

RUGL Index

As of 23 August 2017: 4,788 Six-month target

House view 4,600

Positive scenario 4,850

Negative scenario 4,200

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UBS House View Investor’s Guide – September 201720

Asset class overview

BondsUS high grade bonds

Underweight

Yields are nearly unchanged over the past month. While the Fed projects one more hike this year, disappointing inflation increases the likelihood that it’s done for the year. Inflation is sure to be hotly debated by the FOMC at its next meetings. We expect USD yields to move higher, and the yield curve to flatten as monetary policy normalization slowly proceeds. We have initiated a short duration position in the US 2-year as we believe the FOMC will hike more than the market is pricing. The biggest risk to our forecast is continued below-target inflation. Other risks include US political instability, escalation with North Korea, and a slowing Chinese economy. We are underweight HG bonds versus global equities and overweight USD HG bonds and global equities versus euro HY.

Douglas S. Rothstein, Francesco Mandala and Patrik Ryff, strategists

USD High Grade: Eurodollar AA+ 5–7y yield

As of 23 August 2017: 2.35(yield) Six-month outlook

House view 2.80 (yield)

Positive scenario 1.80 (yield)

Negative scenario 3.20 (yield)

European high grade bondsUnderweight

Bund yields came down after peaking in mid-July. Eurozone HICP inflation was 1.3% y/y in July, according to the Eurostat flash estimate, unchanged from June and a notch down from 1.4% y/y in May. While underlying inflation pressures remain subdued, deflation risks have disappeared, according to ECB President Mario Draghi. We expect yields in EUR and CHF to move slightly higher over our six-month tactical horizon. Bunds remain supported by the steepness of the curve and demand for risk-free assets. The ECB kept interest rates unchanged at its July meeting and maintained its current quantitative easing program to buy EUR 60bn per month until December 2017, as expected. We expect the ECB to reduce the pace of its pur-chases next year. Swiss rates remain closely tied to EUR rates.

Francesco Mandala, Patrik Ryff and Douglas S. Rothstein, strategist

EUR High Grade: EuroAgg AA+ 5–7y yield

As of 23 August 2017: 0.03 (yield) Six-month outlook

House view 0.20 (yield)

Positive scenario –0.20 (yield)

Negative scenario +0.50 (yield)

US corporate bondsNeutral

Investment grade (IG) corporate bond spreads in USD were slightly higher over the past month on the back of rising tensions between the US and North Korea. At the same time, falling Treasury yields led to slightly positive returns. Year-to-date, corporate bonds with medium maturities (1–10 years) have achieved returns of 3.6% - in line with higher-rated bonds. The average yield-to-maturity has declined to 2.6%. We think spreads are now close to the bottom for this cycle. On the other hand, a meaningful widening is also unlikely over six months as corporate fundamentals remain solid and demand is still strong. Total returns will likely be driven by the carry and by the expected rise in US Treasury yields, leading to slightly positive returns over the next six months. We are tactically neutral.

Philipp Schöttler, strategist Carolina Corvalan, strategist

Bloomberg Barclays US Intermediate Corp. spreadAs of 23 August 2017: 88bps Six-month outlook

House view 90–110bps

Positive scenario 60bps

Negative scenario 250bps

Euro corporate bondsNeutral

Euro investment grade (IG) bond spreads were unchanged over the past month. But concerns around geopolitical risks (North Korea) and slightly dovish ECB comments led to falling government bond yields. As a result, total returns on euro IG corporate bonds have been quite strong, pushing the year-to-date return to 1.9%. The low starting level in terms of yields (0.7%), and our outlook that the ECB will become less accommodative and start the QE taper discussions later this year, limit total returns over the next six months. Meanwhile, corporate fundamentals remain solid, justifying tight spreads to some degree. But further spread tightening is unlikely from current levels. Our tactical view on the asset class is neutral.

Philipp Schöttler, strategist Carolina Corvalan, strategist

Bloomberg Barclays EuroAgg Corporate spreadAs of 23 August 2017: 97bps Six-month outlook

House view 105–120bps

Positive scenario 70bps

Negative scenario 250bps

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UBS House View Investor’s Guide – September 2017 21

Asset class overview

US high yield bondsNeutral

Rising tensions between the US and North Korea saw US HY spreads widen by roughly 40bps recently, thus moving into our forecast range. The move was compounded by a pick-up in issuance and low liquidity. Spreads have since retraced part of the move and are still 30bps tighter year-to-date. We are neutral on USD HY bonds. We see limited potential for further spread tightening, following the strong rally since early 2016 (total returns are above 30% from the low in February 2016). Near-term risks include renewed weakness in oil prices and rising rate volatility. The trailing 12-month default rate was broadly stable at 2.3% in July. We expect the default rate to remain steady over the next 12 months.

Philipp Schöttler, strategist Carolina Corvalan, strategist

BoAML US high yield spread

As of 23 August 2017: 395 bps Six-month outlook

House view 380–420bps

Positive scenario 350bps

Negative scenario 1,100bps

Euro high yield bondsUnderweight

Rising tensions between North Korea and the US recently led to some 25bps of spread widening. However, over the month euro high yield (HY) spreads overall tightened by 20bps. The yield level is at a low 3.2%. We don’t see much upside from current valuations and remain underweight on euro HY bonds against global equities and US high grade bonds. Still, contin-ued good economic growth data, fading political risks and stronger European banks have led us to trim our spread target range to 310–350bps. The trailing 12-month default rate was broadly stable at 1.2% in July. Germany’s second largest airline, AirBerlin, filed for insolvency, but it was not a part of the index and the issues were known to the market for some time. Defaults will likely remain below 2% over the next 12 months.

Philipp Schöttler, strategist Carolina Corvalan, strategist

BoAML Euro High Yield Index spread

As of 23 August 2017: 276bps Six-month outlook

House view 310–350bps

Positive scenario 240bps

Negative scenario 1,200bps

EM sovereign bonds in USDNeutral

Emerging market (EM) sovereign credit has delivered an 8% return this year based on tighter spreads and lower US Treasury yields. Our base case calls for credit spreads being supported around current levels by improving EM fundamen-tals, gradually recovering energy prices and a benign external backdrop. That said, the US administration raises risks associ-ated with US monetary and fiscal policies, global trade, immigration and geopolitics. We advise investors to remain neutral on EM credit in globally diversified portfolios. We favor credits from Brazil, Argentina, Indonesia, Kazakhstan, Turkey, Qatar, Côte d’Ivoire and Kenya. We also hold exposure to Venezuela on the increased likelihood of a regime change.

Michael Bolliger, analyst Alejo Czerwonko, strategist Jérôme Audran, analyst

EMBI Diversified

As of 23 August 2017: 307bps Six-month outlook

House view 300bps

Positive scenario 280bps

Negative scenario 500bps

EM corporate bonds in USDNeutral

Emerging market (EM) corporate credit has delivered a mid-single-digit return so far this year on tighter spreads and lower US Treasury yields. Over the next six months, we expect spreads to trend moderately higher given less appealing valuations. However, they will likely remain supported by improving EM macro fundamentals, stable-to-higher oil prices, lower EM corporate default rates and, more generally, a still-supportive external backdrop. We advise investors to remain neutral on EM credit in globally diversified portfolios and to be selective, as reflected in our model portfolio alloca-tion and segments highlighted in the preferences section.

Michael Bolliger, analyst Jérôme Audran, analyst Carolina Corvalan, strategist

CEMBI Diversified

As of 23 August 2017: 285 bps Six-month outlook

House view 300 bps

Positive scenario 250bps

Negative scenario 530bps

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UBS House View Investor’s Guide – September 201722

Asset class overview

CurrenciesThomas Flury, strategist Daniel Trum, strategist Wayne Gordon, strategist

EURUSD: Time to reconsider. The coming two months could turn out a little complicated for EURUSD. On the one hand, we want to see how the US administration passes its first budget and tackles the debt ceiling. The outcome of these negotia-tions is quite uncertain. Many investors are running above-average USD positions and should therefore continue to unwind USD on dips below 1.15. On the other hand, we wait for the ECB to announce its tapering plans. Tapering has to take place eventually, but it will be interesting to see how soft or hard the ECB will orchestrate the end of QE. We think a rise above EURUSD 1.20 is politically sensitive. We expect EURUSD to stabilize in the 1.15–1.20 range. USDJPY: Fixed JPY yield curve. The Bank of Japan (BoJ) is likely to stay with its expansionary monetary policy and not follow the Fed or the ECB on their path to normalization. The rise in global yields has pushed Japanese 10-year yields above zero, and a further increase could force the BoJ to step up its bond purchases to keep Japanese yields fixed. We expect the BoJ to eventually lift the target for the 10-year yield and for the JPY to strengthen moderately versus the USD while weakening relative to the euro. USDCAD: CAD to outperform. The Canadian recovery has gained speed in recent months and is likely to continue through this year. The Bank of Canada (BoC) reacted with a first rate hike in July and we see a high likelihood of another hike later in the year. We expect USDCAD to stabilize around 1.25 over the next three months. AUDUSD: RBA to turn from neutral toward dovish. With the Fed raising rates, and coal and iron ore prices likely to fall on rising supply, we expect the AUD to stay under pressure. In light of comparably low Australian inflation, Reserve Bank of Australia (RBA) policy could turn dovish again if the housing market weakens. Further US rate hikes will eat into the AUD’s attractive carry and should therefore prevent the AUDUSD exchange rate from moving higher. GBPUSD: Uncertainty around Brexit remains. UK economic data has weakened only slightly, supported by a highly undervalued pound. British Prime Minister Theresa May lost her majority in the snap election, but we still expect Brexit negotiations to eventually agree to terms that prevent a “cliff” situation when leaving the EU. Rising chances of a BoE rate hike should support GBPUSD around 1.30.

USDCHF: Stabilization just below parity. The Swiss National Bank (SNB) will likely try to stabilize the combined value of USDCHF and EURCHF. Safe-haven flows have started to leave Switzerland since the French election. We expect USDCHF to remain in a 0.95–1.00 range. EURCHF: Higher due to a stronger Europe. This autumn, we expect the ECB to announce the end its quantitative easing (QE) program, which should lift the EUR, which drives EURCHF higher. With tail risks of the French election gone, the CHF becomes increasingly attractive as a funding currency for carry trades. The SNB is unlikely to prevent EURCHF from rising – at least not at current levels. EURNOK: Turning negative on NOK. We expect oil price slump during 1H17 and oncoming Norwegian inflation and growth problems to weaken the NOK further; the recent downturn of house prices risks weakening household consumption. We expect EURNOK to rise to 9.60 over six months. EURSEK: A turning tide. After the recent EUR strength, investors started diversifying into SEK. We think the tide has turned for EURSEK and expect it to fall to 9.00 over six months. A more hawkish ECB should make it easier for the Riksbank to contemplate earlier rate hikes. The Swedish labor market is getting tight and inflation may soon rise above the central bank’s 2% target.

Foreign exchange forecasts

24.08.17 3M 6M 12M PPP

EURUSD 1.179 1.18 1.18 1.20 1.25

USDJPY 109.3 113 113 110 77

USDCAD 1.255 1.25 1.25 1.25 1.23

AUDUSD 0.788 0.74 0.74 0.72 0.69

GBPUSD 1.281 1.32 1.32 1.36 1.57

NZDUSD 0.720 0.71 0.71 0.71 0.56

USDCHF 0.965 0.97 0.97 0.97 0.97

EURCHF 1.139 1.14 1.14 1.16 1.22

GBPCHF 1.236 1.28 1.28 1.31 1.53

EURJPY 128.9 133 133 132 97

EURGBP 0.921 0.89 0.89 0.88 0.80

EURSEK 9.512 9.30 9.00 8.80 9.19

EURNOK 9.261 9.50 9.60 9.80 9.82

Sources: Reuters EcoWin, IMF, UBS; as of 24 August 2017PPP = Purchasing power parity

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UBS House View Investor’s Guide – September 2017 23

Asset class overview

Commodities and alternative investmentsCommoditiesGoldOur six- and 12-month gold forecasts are USD 1,250/oz. Despite our expectation for moderate US monetary policy rate rises, we see gold as insurance against a backdrop of US policy missteps, geopolitical risks and extremely low equity market volatility.We believe holding gold should help reduce the volatility of an equity-oriented portfolio and provide protection in the event of extreme financial market conditions, during which gold could trade above USD 1,300/oz.Holding gold should also incur minimal costs if benign macro conditions persist, as we expect gold to trade at USD 1,250/oz in six months.

Wayne Gordon, analyst Giovanni Staunovo, analyst Dominic Schnider, analyst

Gold (6 months)

As of 23 August 2017: USD 1,291/oz Six-month target

House view USD 1,250/oz

Positive scenario USD 1,400/oz

Negative scenario USD 1,100/oz

Crude oilOur positive price outlook remains unchanged. For 2H17, we still expect crude oil prices to reach USD 55–60/bbl. An oil market in deficit and large oil inventory drawdowns in 2H17 should set the tone for higher prices. OPEC and Russia are expected to largely stick to their agreement, which should keep overall supply growth modest at under 0.75mbpd this year. Meanwhile, oil demand should expand at a solid pace of 1.4mbpd in 2017, an almost 1.5% y/y increase. Thus, we believe global oil inventories should decline by more than 0.5mpbd in 2H17. The key risk to our positive view is a breakdown in the OPEC deal. We assign a 20–30% probability to such an outcome, which could translate into a short-term price drop to USD 30–35/bbl.

Brent crude oil (6 months)

As of 23 August 2017: USD 52.6/bbl Six-month target

House view USD 60/bbl

Positive scenario USD 65–70/bbl

Negative scenario USD 35–40/bbl

Hedge fundsHedge funds are a useful source of return and stability in a multi-asset portfolio, especially during market volatility. They offer superior risk-return characteristics and access to uncor-related investment opportunities, which provide downside protection and diversification benefits. They have been performing well this year. Heightened stock dispersion, low cross-asset correlation, rising interest rates, moderately higher volatility, and diverging monetary and economic policies are supporting performance. We anticipate returns of 4–6% for the asset class as a whole.

Karim Cherif, strategist Georg Weidlich, strategist

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UBS House View Investor’s Guide – September 201724

Spotlight

Invest in the late phase of the cycle

Daniel Kalt, Regional CIO Switzerland

Ten years on from the start of the financial crisis, hardly any-one would dispute the fact that the global economy has recov-ered in many areas from the setbacks it experienced. The mas-sive fiscal-policy stimuli as well as the monetary stimuli still in place have taken effect and prevented the global economy from drifting into a depression, which many had feared in early 2009. The US economy is in the eighth year of its up-swing and thus also in its second-longest ever growth phase since measurements began. Only the growth phase from the first quarter of 1991 to the first quarter of 2001 lasted for lon-ger – precisely 10 years. There is currently nothing to suggest that the economic rally in the US or in Europe or China will come to an abrupt halt or that the next recession is on the way. The world currently finds itself in a period of synchro-nized, broadly supported growth.

The equity markets have also made a good recovery from the troughs they hit as a result of the financial crisis. In the US, the S&P 500 equity index has picked up by more than 260% since its nadir in March 2009, more than tripling in value and hitting new historical highs. Taking into account the dividend yield, the Swiss Market Index (SMI) has practically tripled in value, adding a good 170%.

Following eight and a half years on an uptrend, there is no doubt that we are now in the late phase of the current equity market rally. The big question now is how long the uptrend will last and how investors should organize their portfolios to make the most of this last upward phase. At the same time, investors want to be well positioned so that they can cushion the blow to the portfolio in the event of a downturn.

Stay invested, but with a more defensive portfolio The tactical shifts in exposure that we have made in our model portfolios in the last six to 12 months include initial late-cycle measures, which we took in spring. We reduced our over-weight in high-yield corporate bonds and are now even under-weight in such junk bonds from the Eurozone. Typically, risk premiums on high-yield bonds tumble in the final phase of an economic cycle, and bond prices shoot up to excessive levels.

In the Eurozone in particular, where the European Central Bank’s ongoing bond-buying program has pushed yields down and investors are struggling to find returns, the risk premiums on high-yield bonds have fallen to under 3% and are thus at historic lows. High-yield bonds generally react earlier and more strongly to the first signs of economic weakening, which is why this was one of the first riskier asset classes that we re-duced to neutral or even to below neutral.

In early summer, we took another step toward giving our in-vestment portfolio a more defensive focus when we discontin-ued our recommendation to give greater weight to mid caps in the Swiss equity market. Those in the Swiss Market Index Mid (SMIM) index have outperformed the entire Swiss equity mar-ket and hence also the large caps in the Swiss Market Index (SMI) by well over 20% since the end of 2015. Some securities have led by an even greater margin. Mid caps generally react more strongly to the economic cycle than the very big blue chip companies in the SMI. They also fluctuate more over time. This means that after the unusually strong uptick over the last two years or so they may also move just as sharply in the op-posite direction if the economy cools and the equity market rally comes to an end.

Shift from mid caps to high-quality dividend stocks We recommend taking profits on securities with above-aver-age valuations that have fared particularly well and shifting to more defensive equities. In the current late phase of the equity market cycle, we consider above all companies that can offer a stable or even a rising dividend to be particularly attractive. Dividends constitute an important and defensive component of stock market performance. Over the last 20 years, more than half of the total return on the Swiss Performance Index has come from dividends and the rest from stock price gains. The expected dividend yield on the Swiss equity market is currently 3.1%, which is greater than its 15-year average of 2.3%. And well above the level of returns that bonds have been offering for some time now – that is, hardly anything at all.

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UBS House View Investor’s Guide – September 2017 25

Spotlight

Instead of simply buying stocks with high dividend yields, in-vestors should select companies with high-quality dividends, as these generally beat the overall market over the course of the entire calendar year. Stocks with a high dividend yield but no additional attractive features normally perform better than the market a few weeks before the distribution season and during it, but then lag behind. The basis for our recommended strat-egy of investing in Swiss equities is the combination of long-term dividends, above-average dividend growth and a rela-tively attractive yield level. Such instruments are known as high-quality dividend stocks.

Focus on dividend growth We are therefore placing a special focus on the growth of fu-ture dividends. Given the central banks’ attempts to normalize their monetary policy, a gradual increase in yields cannot be excluded, even if the trend is still very slow. If yields do pick up, the return advantage of dividend stocks over bonds will fall – unless the selected companies are able to increase their dividends over time and thus retain a relative advantage over bonds. Hence, securities with dividend growth will likely re-main attractive in an environment with gently rising yields.

To determine the significance of dividend growth, we looked at the 100 largest companies listed on the Swiss stock ex-change and selected the 73 that had continually paid divi-dends in the past 10 years. We divided these companies into two equally sized groups. The group with the highest dividend growth achieved a much higher overall return than the group with the lowest dividend growth. The companies in the first group increased their dividends by 201%, posting an overall return of 148%, while the companies in the second group in-creased their dividends by 33%, generating an overall return of only 64%. To prevent our calculations from being affected by outliers, we used median values. You can find a selection of Swiss equities that, in our view, display these features in our publications entitled “High-quality Swiss dividend securities”.

Don’t call it a day too soon As Mark Haefele explains in his article (page 6), we do not rec-ommend reducing the equity component in an investment portfolio just yet. Many fundamentals still suggest that the eq-uity markets will continue to make gains beyond our tactical investment horizon of six months. We don’t want to give up this potential for value growth by reducing the equity compo-nent. Nonetheless, we think it makes sense to adopt a slightly more defensive overall focus and diversify as broadly as possi-ble in this newly initiated late phase of the market cycle.

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UBS House View Investor’s Guide –March 201726

Investment ideasRecommended solutions

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Recent upgrades

Recent downgrades

Recommended

solutions*

Sustainable investing

* All recommended solutions come in their entirety from entities outside of UBS Chief Investment Office WM. These enti-ties are not subject to the legal provisions governing the independence of financial research. It is therefore possible that the recommended solutions do not fully reflect the views of UBS Chief Investment Office WM.

Preferred investment views

Most preferred: Least preferred:

Equities• Global equities

• Eurozone equities

• Profit from US share buybacks and dividends

• US technology: Secular growth, on sale

• US energy stocks: Time to refuel

• Swiss high-quality dividends

• Sustainable value creation in

emerging markets

• US Smart Beta

• Eurozone in style: Value opportunities

• Riding the wave of Internet of Things

• Finding value in EM

• Long term investment themes

• UK equities

Bonds• Corporate hybrids

• US loans – Attractive floating yield

• Escape negative Swiss yields

• Developed market high grade bonds

• Euro high yield• 2 year US Treasuries (vs. USD cash)

Foreign exchange• SEK

• CAD

• CHF

• AUD

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UBS House View Investor’s Guide – September 201728

Investment idea

See recommended solutions on next page

US Smart Beta

Smart beta is one of the fastest growing investment styles. It offers low-cost exposure to academically supported and historically successful traditional risk pre-mium strategies.James Purcell, analyst André Bertolace, analyst

What is smart beta? In equities, smart beta is a semi-passive strategy that takes a regular market capitalization index (like MSCI USA) and tilts the stock composition to exploit investor behavior and to cap-ture traditional risk premiums.

Which portfolio tilts do you recommend?The most frequently cited smart beta factors with some of the best track records are momentum, quality, small capitalization, risk-weighted, value and yield. All six have over the long term outperformed market capitalization-weighted indices, but indi-vidually can suffer periods of underperformance. For US equi-ties, we recommend combining smart beta factors to improve performance.

What has driven historical smart beta outperformance?Each smart beta factor has different drivers – hence the benefit of diversification. For example, value (made famous by Benja-min Graham and Warren Buffet) exploits investor risk aversion to “cheap” stocks. Momentum has spawned a hedge fund style worth about USD 300bn and it works because investors have a tendency to buy what has already gone up. Small capi-talization is even simpler – smaller companies are riskier

because they are less diversified, and therefore offer excess returns to compensate.

How has the strategy performed?An equally-weighted portfolio of the six most frequently cited US smart beta factors has, on a back test since 2001, outper-formed MSCI USA by 2.6% a year. Furthermore, smart beta investing generally has lower fees than active management.

Recent developmentsSmart beta assets grew 15% in the first half of the year as the number of smart beta ETFs increased by 4%. Almost 40% of the outstanding smart beta ETFs are focused on the US market.

Time horizonLong term (>12 months)

Asset classEquities

Initiation date11 May 2017

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UBS House View Investor’s Guide – September 2017 29

Investment focus For marketing purposes onlyEquities

Recommended solutions

All recommended solutions on this page come entirely from entities outside of UBS Chief Investment Office WM. These entities are not subject to the legal provisions governing the inde-pendence of financial research. It is therefore possible that the recommended solutions do not fully reflect the views of UBS Chief Investment Office WM. Please refer to UBS Quotes or ask your client advisor for further information or complete documentation on these products.

UBS ETF MSCI USA Select Factor Mix UCITS UBS AdviceTM: USD 36006355

This newly-launched ETF expands the UBS range of alternative betas. The MSCI USA Select Factor Mix Index, a multi-factor benchmark, combines six components that are weighted according to specific long-term factors such as momentum, value, quality, volatility, yield and size. The multi-factor index is based on the MSCI USA IMI Index and tracks large, mid and small-cap companies from all US stock markets.

Factor investing has become established as an important investment approach for factor ETFs with global investment assets of over USD 500 billion. The multi-factor ETF offers investors access to US equities through an index that uses carefully designed factor indices to achieve higher returns, minimize risks, and achieve broader diversification. Raimund Müller, Head Passive & ETF Specialist Sales Switzerland & Liechtenstein: “The new product complements our broad range of single factor ETFs.”

UBS AdviceTM securities may only be bought under a UBS AdviceTM agreement. For alternatives outside a UBS AdviceTM agreement, please speak to your client advisor.

Key benefits• Clients enjoy both the flexibility of a listed investment and

the investor protection of a fund• Investors have access to this market segment with a single

transaction• The portfolio is diversified by equity factor and sector and so

has an optimized risk/return profile• The fund is highly transparent, cost effective and easily

traded• UCITS-compliant funds

RiskThis UBS exchange traded fund invests in equities and may therefore be subject to large fluctuations in value. An invest-ment in this fund is therefore only suitable for investors with an investment horizon of at least five years and corresponding risk tolerance and capacity. All investments are exposed to market fluctuations. Every fund has specific risks, which can increase under unusual market conditions. As a result, the net asset value of the fund’s assets is directly dependent on the performance of the underlying index. Losses that could be avoided via active management are not offset.

This page is for information and marketing purposes only. It does not constitute investment research, a sales prospectus, an offer or a solicitation of an offer for investment transactions. Please note that UBS retains the right to change the range of services, the products and the prices at any time without notice. All information contained herein, including without limitation benchmarks, asset classes, asset allocation and investment instruments, and opinions indicated are subject to change. All recommended solutions on this page come in their entirety from entities outside of UBS Chief Investment Office WM. These entities are not subject to the legal provisions governing the independence of financial research. It is therefore possible that the recommended solutions do not fully reflect the views of UBS Chief Investment Office WM. The above investment ideas and investment recommendations have not been tailored to your personal circumstances. Investment decisions should always be taken in a portfolio context and make allowance for your personal situation and consequent risk appetite and risk tolerance. As the above investment ideas and recommended solutions may have different risk characteristics, please read the specific product information and the brochure “Special Risks in Securities Trading” and consult your client advisor if you have any questions.

In the area of equities, smart beta is a semi-passive strategy that shifts the composition of companies based on a regular market capitalization index (such as the MSCI USA) to take advantage of investor behavior and benefit from traditional risk premiums.

Sector exposure in %

Information Technology

Financial Services

Industrials

Consumer Discretionary

Health Care

Consumer Staples

Real estate

Utilities

Materials

Energy

Telecommunication services

0 5 10 15 20 25

Source: UBS Asset Management (July 31, 2017)

10 largest equity positions in %

APPLE

MICROSOFT CORP

JPMORGAN CHASE & CO

BANK OF AMERICA CORP

COMCAST CORP A (NEW)

IBM CORP

HOME DEPOT

UNITEDHEALTH GROUP

PFIZER

INTEL CORP

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

CHF hegded

share class will be

listed per

8 September 2017.

Valor 37839946

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UBS House View Investor’s Guide – September 201730

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Long-term investment themes

We expect companies that can solve the world’s food supply, healthcare, and urban transportation problems to benefit in the years ahead, given long-term population growth, urbanization and aging trends.Mark Haefele, Global Chief Investment Officer WM Philippe G. Müller, Head Global Investment Themes

Prediction is hard, especially about the future. And some pre-dictions are harder than others. But we can be more confident about how major trends such as urbanization, population growth and aging will play out:

– The global population is expected to reach almost 10 billion by 2050 from 7.3 billion currently. Most of this growth will occur in low- and middle-income countries.

– The UN estimates that by 2030 almost 9% of the world’s population will live in just 41 mega-cities.

– The number of people aged 60+ will exceed the number under 25 in developed countries by 2030.

Various investment themes can benefit from these trends, including agricultural yield. A growing population concen-trated in cities is highly likely to demand more calories. With the world’s landmass limited and 200,000 more people to feed per day, companies that can improve production effi-ciency – through soil sampling, localized weather forecasting or better use of fertilizers – are likely to become winners, in our view.

Urban infrastructure is another such theme. Anyone who has traveled to the world’s major cities knows the blight of con-gestion and the difference that efficient public transportation systems can make in alleviating it. In the coming decade, we expect Asian nations to spend over USD 200bn on new trans-portation infrastructure to address urbanization challenges.

And there is healthcare, which is likely to become a critical issue as more people live into their 70s, 80s and 90s. Scientific advances present opportunities in the fight against diseases like cancer, a major killer in developed and emerging markets alike.

Recent developmentsFor those looking to invest in the topics highlighted in the chart, it makes the most sense, we believe, to focus in a diver-sified way on companies benefiting from these slow-moving trends rather than hoping for the next moonshot innovation. The investment horizon should ideally be longer than an entire economic cycle.

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UBS House View Investor’s Guide – September 2017 31

Investment focus For marketing purposes onlyEquities

Recommended solutions

All recommended solutions on this page come entirely from entities outside of UBS Chief Investment Office WM. These entities are not subject to the legal provisions governing the inde-pendence of financial research. It is therefore possible that the recommended solutions do not fully reflect the views of UBS Chief Investment Office WM. Please refer to UBS Quotes or ask your client advisor for further information or complete documentation on these products.

This page is for information and marketing purposes only. It does not constitute investment research, a sales prospectus, an offer or a solicitation of an offer for investment transactions. Please note that UBS retains the right to change the range of services, the products and the prices at any time without notice. All information contained herein, including without limitation benchmarks, asset classes, asset allocation and investment instruments, and opinions indicated are subject to change. All recommended solutions on this page come in their entirety from entities outside of UBS Chief Investment Office WM. These entities are not subject to the legal provisions governing the independence of financial research. It is therefore possible that the recommended solutions do not fully reflect the views of UBS Chief Investment Office WM. The above investment ideas and investment recommendations have not been tailored to your personal circumstances. Investment decisions should always be taken in a portfolio context and make allowance for your personal situation and consequent risk appetite and risk tolerance. As the above investment ideas and recommended solutions may have different risk characteristics, please read the specific product information and the brochure “Special Risks in Securities Trading” and consult your client advisor if you have any questions.

UBS Equity Long Term Themes FundUBS AdviceTM: CHF hedged 30372562

This actively managed global equity fund invests all over the world in companies associated with long-term investment themes. The themes reflect three megatrends: population growth, increasing urbanization and an ageing population. The diversified portfolio of 40 to 80 titles covers a very wide variety of investment themes such as automation and robotics, energy efficiency, security and safety. This ensures the fund is broadly diversified and has an optimal portfolio risk profile. Within the investment themes the fund invests in attractively valued companies and has a strong sustainability profile. The unit class is hedged and so not subject to any USDCHF currency fluctuations. There remains the risk of the local currencies fluctuating against the dollar.

Special features• A global equity fund offering thematic diversification to

allow participation in long-term investment themes• Combines long-term investment themes identified by the

UBS Chief Investment Office with the portfolio management expertise of UBS Asset Management

• Optimized portfolio risk profile thanks to diversification effect

RiskThis fund invests in equities, which may be subject to high vol-atility. Investment in this fund is suitable for investors with an investment horizon of at least five years and with correspond-ing risk tolerance and capacity. All investments are subject to market volatility. Every fund has specific risks, which may increase significantly under unusual market conditions.

UBS AdviceTM securities may only be bought under a UBS AdviceTM agreement. For alternatives outside a UBS AdviceTM agreement, please speak to your client advisor.

We are maintaining our tactical position in global equities and are overweight in this asset class. Due to the combination of earnings momentum, global growth and loose monetary policy, we remain optimistic about the outlook for stocks, provided that no geopolitical event occurs. In addition, long-term trends such as population growth, ageing and increasing urbanization are opening up a large number of long-term investment opportunities.

Weighting by themes in %

Source: UBS Asset Management (July 31, 2017)

Retirement planningEnergy efficiency

OthersObesity

Water scarcitySecurity & safety

Emerging markets health careAutomation & robotics

Agricultural yieldClean air and carbon

Medical techOncology

0 5 10 15 20 25

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UBS House View Investor’s Guide – September 201732

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Swiss equitiesWe are neutral on Swiss equities in our global portfolio. After falling for two years, we expect corporate earnings to grow this year. Consensus expectations may be too optimistic; we expect mid-single-digit earnings growth this year and next. Due to the market’s defensive sector composition, other regions may benefit more from the robust global economic expansion. Exchange rates are a modest positive this year. Last year’s compression in margin and revenue growth for financials, as well as cyclical consumer and industrial companies, set a lower base for this year. The dividend yield is attractive, but we believe the Swiss equity valuation is not very compelling.

Stefan R. Meyer, Analyst

Positive drivers

Short-term (6 months)Accelerating Swiss sales growthWe expect organic sales growth to re-accelerate from the low point in 3Q16. Growth slowed in local-currency terms to an average of 2.2% in 2016. 2Q17 was 4.3% on preliminary data.

Sustainable dividendsDividends paid have been growing every year since 2009. We expect the overall amount of dividends paid to increase further this year and next.

Interest ratesAn additional US Fed rate hike this year could sustain investor interest for financials, although the banking industry environ-ment remains tough.

Long-term (5+ years)Well-diversified earnings baseSwiss companies are globally well diversified. They generate around 40% of their operating profits from Western Europe and about 30% each from emerging markets and North America.

Profit growthAfter remaining flat overall in Swiss franc terms for several years, Swiss corporate profits will now head upwards again in the coming years, in our view.

Negative drivers

Short-term (6 months)Slow Swiss earnings growthCorporate profits fell in 2016 for a second year in a row, but are expected to recover in 2017 and 2018. Profit growth may, however, lag that of more cyclical equity markets.

Chinese economic slowdownA likely slowdown in China’s economic growth in the second half of 2017 poses a risk to truly global Swiss companies; they generate close to a third of profits in emerging markets, including China.

Defensive sector compositionEconomic leading indicators for manufacturing activity have improved globally. The defensive Swiss market will benefit less from robust global growth than more cyclical equity markets.

Long-term (5+ years)Low cyclicalityAs defensive sectors have an above-average weight, the Swiss market tends to be less business cycle-sensitive, and may thus benefit less than others from a European and global economic recovery.

Expensive long-term valuationsSwiss corporates currently trade at a 12-month trailing P/E ratio, about 15% above their average since 1987. The high valuation caps the upside in the coming years.

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UBS House View Investor’s Guide – September 2017 33

Investment focus For marketing purposes onlyEquities

Recommended solutions

All recommended solutions on this page come entirely from entities outside of UBS Chief Investment Office WM. These entities are not subject to the legal provisions governing the inde-pendence of financial research. It is therefore possible that the recommended solutions do not fully reflect the views of UBS Chief Investment Office WM. Please refer to UBS Quotes or ask your client advisor for further information or complete documentation on these products.

This page is for information and marketing purposes only. It does not constitute investment research, a sales prospectus, an offer or a solicitation of an offer for investment transactions. Please note that UBS retains the right to change the range of services, the products and the prices at any time without notice. All information contained herein, including without limitation benchmarks, asset classes, asset allocation and investment instruments, and opinions indicated are subject to change. All recommended solutions on this page come in their entirety from entities outside of UBS Chief Investment Office WM. These entities are not subject to the legal provisions governing the independence of financial research. It is therefore possible that the recommended solutions do not fully reflect the views of UBS Chief Investment Office WM. The above investment ideas and investment recommendations have not been tailored to your personal circumstances. Investment decisions should always be taken in a portfolio context and make allowance for your personal situation and consequent risk appetite and risk tolerance. As the above investment ideas and recommended solutions may have different risk characteristics, please read the specific product information and the brochure “Special Risks in Securities Trading” and consult your client advisor if you have any questions.

Within the Swiss equity market, high-quality Swiss dividend securities remain the preferred investment theme. High-dividend Swiss stocks are attractive at present and offer a much higher yield than Swiss franc bonds.

UBS Swiss High Dividend FundUBS AdviceTM: CHF 20327022

Dividends are an important component of return. But simply buying the stocks with the highest dividend yields does not always result in quality. The UBS Swiss High Dividend Fund invests in Swiss companies and has a strict quality focus. The fund only invests in firms with attractive fundamentals that will likely pay high dividends over the long term. It is broadly diversified by market capitalization and sector with a maxi-mum of 60 positions. The maximum concentration in a single stock is 10%, ensuring better diversification than standard Swiss equity indices.

The strategy uses the following source of income:• Dividends

Indicative equity income is currently 3.27% (as at end-July 2017).

A quality focus is particularly important in light of the re-emer-gence of volatility on the equity markets. Companies with high dividend yields because their stock price has fallen heavily often have fundamental problems, and there is a considerable risk that they may not continue to pay the high dividend.

UBS AdviceTM securities may only be bought under a UBS AdviceTM agreement. For alternatives outside a UBS AdviceTM agreement, please speak to your client advisor.

UBS (CH) Equity Fund – Swiss Income UBS AdviceTM: CHF 19975028

The fund likewise invests in selected stocks of Swiss companies that pay a high and steady dividend yield. Firms must also meet high standards for their financial ratios and other strict quality criteria. Sector diversification is as broad as possible, and normally not more than 10% of the fund’s assets will be invested in a single stock. The fund generally holds a total of 25 to 45 stocks. In addition to dividends, call optionsare also used to generate income.

The strategy uses several sources of income:• Dividends• Premiums from selling call options (writing covered calls)

The covered call strategy can also help to cushion against losses from market corrections. The defensive positioning does mean, though, that the fund will likely lag slightly in rising markets.

Indicative equity income is currently 7.40% (as at end-July 2017).

RiskThese funds invest in equities, which may be subject to high volatility. Investment in these funds is suitable for investors with an investment horizon of at least five years and with corresponding risk tolerance and capacity. All investments are subject to market volatility. Every fund has specific risks, which may increase significantly under unusual market conditions.

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UBS House View Investor’s Guide – September 201734

Investment focus For marketing purposes onlyOverview

Recommended solutions

All recommended solutions on this page come entirely from entities outside of UBS Chief Investment Office WM. These entities are not subject to the legal provisions governing the inde-pendence of financial research. It is therefore possible that the recommended solutions do not fully reflect the views of UBS Chief Investment Office WM. Please refer to UBS Quotes or ask your client advisor for further information or complete documentation on these products.

This page is for information and marketing purposes only. It does not constitute investment research, a sales prospectus, an offer or a solicitation of an offer for investment transactions. Please note that UBS retains the right to change the range of services, the products and the prices at any time without notice. All information contained herein, including without limitation benchmarks, asset classes, asset allocation and investment instruments, and opinions indicated are subject to change. All recommended solutions on this page come in their entirety from entities outside of UBS Chief Investment Office WM. These entities are not subject to the legal provisions governing the independence of financial research. It is therefore possible that the recommended solutions do not fully reflect the views of UBS Chief Investment Office WM. The above investment ideas and investment recommendations have not been tailored to your personal circumstances. Investment decisions should always be taken in a portfolio context and make allowance for your personal situation and consequent risk appetite and risk tolerance. As the above investment ideas and recommended solutions may have different risk characteristics, please read the specific product information and the brochure “Special Risks in Securities Trading” and consult your client advisor if you have any questions.

Performance in %1

Valor 1 year 3 years 5 years

UBS Strategy & UBS Strategy Xtra Funds

UBS (Lux) Strategy Xtra SICAV – Yield (CHF) P-acc CHF 1796535 3.78 2.89 14.06UBS (Lux) Strategy Xtra SICAV – Balanced (CHF) P-acc CHF 1796537 6.75 5.95 23.54UBS (Lux) Strategy Fund – Fixed Income (CHF) P-acc CHF 618669 –0.79 0.69 1.63UBS (Lux) Strategy Fund – Income (CHF) P-acc CHF 22821930 1.96 3.29 n.a.UBS (Lux) Strategy Fund – Yield (CHF) P-acc CHF 601322 4.73 6.19 16.11UBS (Lux) Strategy Fund – Balanced (CHF) P-acc CHF 239657 7.88 9.16 25.95UBS (Lux) Strategy Fund – Growth (CHF) P-acc CHF 601320 11.41 11.45 35.14UBS (Lux) Strategy Fund – Equity (CHF) P-acc CHF 529255 14.64 14.23 49.91

UBS Suisse Funds

UBS (CH) Suisse – 25 P-dist CHF 10973898 3.12 8.78 20.38UBS (CH) Suisse – 45 P-dist CHF 10973899 7.00 13.46 33.40UBS (CH) Suisse – 65 P-dist CHF 10973900 10.67 17.47 47.021 Data as of 31 July 2017 (or latest available) Source: Morningstar

Past performance is not an indication of future returns.

Performance in %1

Valor 1 year 3 years 5 years

US smart Beta

UBS ETF MSCI USA Select Factor Mix UCITS USD 36006355 n.a n.a. n.a.

Long Term Themes

UBS Equity Long Term Themes Fund CHF 30372562 14.52 n.a. n.a.

Swiss equities

UBS Swiss High Dividend Fund CHF 20327022 22.39 n.a. n.a.UBS (CH) Equity Fund – Swiss Income CHF 19975028 18.78 n.a. n.a.

UBS Asset Allocation Funds UBS offers a broad range of multi asset funds with varying equity and bond components and corresponding risk/return characteristics. Our investment funds are well-diversified and actively managed with the aim to increase return potential. The portfolio management teams taking care of the funds are globally integrated and interlink investment specialists who are highly experienced in their respective fields of top-down and bottom-up research and risk management. They also leverage the UBS Wealth management investment process which combines the expertise of more than 900 investment experts from around the globe. covering all key markets and asset classes. This integrated and systematic process enables clients to profit from the UBS House View in a straightforward way through the UBS Strategy and the UBS Strategy Xtra Funds.

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Generic financial research – Risk information: UBS Chief Investment Office WM’s investment views are prepared and published by Wealth Management and Personal & Corporate Banking or Wealth Management Americas, Business Divisions of UBS AG (regulated by FINMA in Switzerland), its subsidiary or affiliate (“UBS”). In certain countries UBS AG is referred to as UBS SA. This material 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. 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 material 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). All information and opinions as well as any prices indicated are current as of the date of this report, and are subject to change without notice. The market prices provided in performance charts and tables are closing prices on the respective principal stock exchange. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. 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. UBS and any of its directors or employees may be entitled at any time to hold long or short positions in investment instruments referred to herein, carry out transactions involving relevant investment instruments in the capacity of principal or agent, or provide any other services or have officers, who serve as directors, either to/for the issuer, the investment instrument itself or to/for any company commercially or financially affiliated to such issuers. At any time, investment decisions (including whether to buy, sell or hold securities) made by UBS and its 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 not suitable for every investor as there is a substantial risk of loss, and losses in excess of an initial investment may occur. Past performance of an investment is no guarantee for its future performance. Additional information will be made available upon request. 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 foreign exchange rates may have an adverse effect on the price, value or income of an investment. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information. Tax treatment depends on the individual circumstances and may be subject to change in the future. UBS does not provide legal or tax advice and makes no representations as to the tax treatment of assets or the investment returns thereon both in general or with reference to specific client’s circumstances and needs. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of our individual clients and we would recommend that you take financial and/or tax advice as to the implications (including tax) of investing in any of the products mentioned herein. This material may not be reproduced or copies circulated without prior authority of UBS. UBS expressly prohibits the distribution and transfer of this material to third parties for any reason. UBS accepts no liability whatsoever for any claims or lawsuits from any third parties arising from the use or distribution of this material. This report is for distribution only under such circumstances as may be permitted by applicable law. In developing the Chief Investment Office (CIO) economic forecasts, CIO economists worked in collabora-tion 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. For information on the ways in which UBS CIO WM manages conflicts and maintains independence of its investment views and publication offering, and research and rating methodologies, please visit www.ubs.com/research. 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UBS Europe SE, Sweden Bankfilial is a branch of UBS Europe SE, a credit institution constituted under German Law in the form of a Societas Europaea, duly authorized by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). UBS Europe SE, Sweden Bankfilial is subject to the joint supervision of the BaFin, the central bank of Germany (Deutsche Bundesbank) and the Swedish financial supervisory authority (Finansinspektionen), to which this document has not been submitted for approval. Taiwan: This material is provided by UBS AG, Taipei Branch in accor-dance with laws of Taiwan, in agreement with or at the request of clients/prospects. Thailand: This material was provided to you as a result of a request received by UBS from you and/or persons entitled to make the request on your behalf. Should you have received the material erroneously, UBS asks that you kindly delete the e-mail and inform UBS immediately. The material may not have been reviewed, approved, disapproved or endorsed by any financial or regulatory authority in your jurisdiction. The relevant investments will be subject to restrictions and obligations on transfer as set forth in the material, and by receiving the material you undertake to comply fully with such restrictions and obligations. You should carefully study and ensure that you understand and exercise due care and discretion in considering your investment objective, risk appetite and personal circumstances against the risk of the investment. You are advised to seek independent professional advice in case of doubt. UAE: This research report is not intended to constitute an offer, sale or deliv-ery of shares or other securities under the laws of the United Arab Emirates (UAE). The contents of this report have not been and will not be approved by any authority in the United Arab Emirates including the UAE Central Bank or Dubai Financial Authorities, the Emirates Securities and Commodities Authority, the Dubai Financial Market, the Abu Dhabi Securities market or any other UAE exchange. This material is intended for professional clients only. UBS AG Dubai Branch is regulated by the DFSA in the DIFC. UBS AG/UBS Switzerland AG is not licensed to provide banking services in the UAE by the Central Bank of the UAE nor is it licensed by the UAE Securities and Commodities Authority. The UBS AG Representative Office in Abu Dhabi is licensed by the Central Bank of the UAE to operate a representative office. UK: Approved by UBS AG, 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 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. A member of the London Stock Exchange. This publication is distributed to private clients of UBS London in the UK. 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. USA: This document is not intended for distribution into the US, to US persons, or by US-based UBS personnel. UBS Securities LLC is a subsidiary of UBS AG and an affiliate of UBS Financial Services Inc., UBS Financial Services Inc. is a subsidiary of UBS AG.Version 07/2017.© UBS 2017. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

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