Outlook to Action: UBS CIO Strategy Update

Transcription

1 UBS WMA Chief Investment Office Outlook to Action: UBS CIO Strategy Update December

2 Our outlook for the balance of 2015 into 2016 Will happen o Global growth continues apace, led mainly by developed economies o The Fed tightens gradually while other central banks stay easy o US earnings growth improves as headwinds dissipate Won't happen o Inflation becomes a global problem o The Federal Reserve tightens monetary policy too soon, too much, too fast o US economy enters recession & US equities enter a bear market Might happen o Gold and FX markets make one final lurch when the Fed finally hikes o Longer-term interest rates don't move much from current levels o Diversified portfolios deliver frustratingly low returns 1

3 2015 has been a "flattish" year on average Total returns YTD US large-cap EM USD bonds US municipals Int'l developed equity US mid-cap US government US high yield Cash US small-cap US IG credit Int'l dev FI EM equity EM local bonds Commodit ies -20% -10% 0% 10% Source: UBS CIO WMR, Bloomberg, 5 November

4 At long last, global monetary policy is diverging 6.0 Policy rate (%) with UBS forecasts US UK Sw it zerland Euro area Japan Source: UBS CIO WMR, UBS Investment Research, as of 5 November

5 US private sector expanding, adding jobs 600 Payrolls Change (000s) Purchasing M anagers Index Non-Farm Privat e Payrolls US Economy-w eight ed ISM Source: UBS CIO WMR, Bloomberg, as of 6 November

6 US consumers back in the driver's seat US GDP Growth (YoY %) US Consumption Growth (YoY %) Source: UBS CIO WMR, Bloomberg, as of 30 September

7 Chinese growth is not slowing rapidly Source: UBS CIO WMR, Bloomberg, as of 30 October

8 Low inflation the last major concern for the Fed 6% 5% PCE (YoY %) Core PCE (YoY %) Fed Inflation Target 4% 3% 2% 1% 0% -1% Source: UBS CIO WMR, Bloomberg, as of 30 October

9 Global rate divergence being pushed to the limit 250 Treasury-Bund 10yr Yield Spread in bps Source: UBS CIO WMR, Bloomberg as of 30 October

10 So where is the real danger? 3.5 % yr UST yr UST 1.5 5yr UST m USB 2yr UST Today 6-mont h 12-mont h 2-year Source: UBS CIO WMR, Bloomberg, as of 2 November

11 Investors' biggest risk: low yields forever 20% 17% Barclays Agg Yield to Worst 3-year Forw ard Ret urn (Annualized) 14% 11% 8% 5% 2% -1% Source: UBS CIO WMR, Barclays, as of 30 October

12 US equity valuations point to decent returns Cyclically-adjusted PE ratio & 10yr S&P 500 returns 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% <10x 10-15x 15-20x 20-25x 25-30x 30-35x >35x Source: UBS CIO WMR, Ibbotson, as of 30 October

13 Valuation much more attractive outside the US " Shiller" P/E ratios for major country equity markets, * US France Germany It aly Spain EM Current Shiller PE M edian Shiller PE 25th Percentile Shiller PE 75th Percentile Shiller PE Source: UBS CIO WMR, Research Affiliates, as of 30 September 2015; * Data for EM starts in

14 Don t get too used to the last 25 years of returns Average annual ret urn 12% 1990-Present 10% 9.7% 8.6% Current UBS Capital Market Assumptions 8% 6% 7.5% 5.6% 7.0% 6.1% 4% 2% 3.5% 2.2% 3.7% 2.5%* 0% US Large-cap High Yield Bonds Corporat e Bonds Government Bonds Cash Source: UBS CIO WMR, Bloomberg; * Cash assumption is long-term estimate of risk-free rate. See Portfolio Analytics in Appendix. 13

15 A modest outlook with moderate risks US economy is growing at or ove its potential and sorbing remaining lor slack o Eurozone growth set to accelerate further in 2016 o China & EM slowing but stle Muted asset returns given rich starting points o Bonds are expensive, stocks aren't cheap, the US dollar is still strong o International investments offer better long-term value o US credit now cheaper but the cycle is well past the mid-point Risks to our Outlook o US growth turns over for lack of investment and foreign demand o Oil prices remain low as supply remains high, demand weak o The "random" stories all break negative, especially in EM 14

16 $ / bb Risks can come from unexpected places $110 NYMEX WTI $/bb Median Forecast vs. Actual Price $100 $90 $80 $70 $60 $50 $40 YE Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 Q4 Last price M edian f orecast Source: UBS CIO WMR, Bloomberg; 15

17 Some are clear ahead of time 20% 17% Barclays Agg Yield to Worst 3-year Forw ard Ret urn (Annualized) 14% 11% 8% 5% 2% -1% Source: UBS CIO WMR, Barclays, as of 31 August

18 Some we can't control Cost of $1 of retirement spending Source: UBS, Bloomberg 17

19 Others are self-created 18

20 Daily Ret urn How did you feel on Friday, August 28 th? 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% Monday Tuesday Wednesday Thursday Friday Full Week Source: Bloomberg, UBS. Data covers 8/24/2015 8/28/

21 Bad decisions cost us dearly Investors underperform simple benchmarks Dollar-weighted relative to buy-and-hold returns by country, in % Source: "What are stock investors' actual historical returns? Evidence from dollar-weighted returns" by Ilia Dichev, American Economic Review, UBS CIO WMR 20

22 Total Wealth Allocation for small business owner Asset Allocation Objectives Uncorrelated to investor's business Provide cash flow Lower total balance sheet volatility Likely very different than a "model" portfolio Source: Morningstar, UBS CIO WMR, as of 25 November

23 Allocation doesn't follow traditional path Source: UBS 22

24 Building a Goals-Based Allocation Liquidit y Time Horizon: 0 4 years Longevit y Time Horizon: 5 years life Legacy Time Horizon: Life expectancy + 100,000 10,000 1, Low er Risk Risk/ Return Spectrum Higher Risk Short er Term Time Frame Longer Term Source: UBS 23

25 Appendix Sources of strategic asset allocations and investor risk profiles Strategic asset allocations represent the longer-term allocation of assets that is deemed suitle for a particular investor. The strategic asset allocation models discussed in this publication, and the capital market assumptions used for the strategic asset allocations, were developed and approved by the WMA AAC. The strategic asset allocations are provided for illustrative purposes only and were designed by the WMA AAC for hypothetical US investors with a total return objective under five different Investor Risk Profiles ranging from conservative to aggressive. In general, strategic asset allocations will differ among investors according to their individual circumstances, risk tolerance, return objectives and time horizon. Therefore, the strategic asset allocations in this publication may not be suitle for all investors or investment goals and should not be used as the sole basis of any investment decision. Minimum net worth requirements may apply to allocations to non-traditional assets. As always, please consult your UBS Financial Advisor to see how these weightings should be applied or modified according to your individual profile and investment goals. The process by which the strategic asset allocations were derived is described in detail in the publication entitled UBS WMA s Capital Markets Model: Explained, Part II: Methodology, published on 22 January Your Financial Advisor can provide you with a copy. Deviations from strategic allocation The recommended tactical deviations from the strategic asset allocation or benchmark allocation are provided by the Global Investment Committee and the Investment Strategy Group within Wealth Management Research Americas. They reflect the short- to medium- term assessment of market opportunities and risks in the respective asset classes and market segments. Positive / zero / negative tactical deviations correspond to an overweight / neutral / underweight stance for each respective asset class and market segment relative to their strategic allocation. The current allocation is the sum of the strategic asset allocation and the tactical deviation. Overweight: Tactical recommendation to hold more of the asset class than specified in the strategic asset allocation on pages of the flagship publication UBS House View: Investment Strategy Guide. Underweight: Tactical recommendation to hold less of the asset class than specified in the strategic asset allocation on pages of the flagship publication UBS House View: Investment Strategy Guide. Neutral: Tactical recommendation to hold the asset class in line with its weight in the strategic asset allocation on pages of the flagship publication UBS House View: Investment Strategy Guide. Portfolio analytics The portfolio analytics for each risk profile s benchmark allocations are based on estimated forward-looking return and standard deviation assumptions (capital market assumptions), which are based on UBS proprietary research. The development process includes a review of a variety of factors, including the return, risk, correlations and historical performance of various asset classes, inflation and risk premium. These capital market assumptions do not assume any particular investment time horizon. The process assumes a situation where the supply and demand for investments is in balance, and in which expected returns of all asset classes are a reflection of their expected risk and correlations regardless of time frame. Please note that these assumptions are not guarantees and are subject to change. UBS has changed its risk and return assumptions in the past and may do so in the future. Neither UBS nor your Financial Advisor is required to provide you with an updated analysis based upon changes to these or other underlying assumptions. In order to create the analysis, the rates of return for each asset class are combined in the same proportion as the asset allocations illustrated (e.g., if the asset allocation indicates 40% equities, then 40% of the results for the allocation will be based upon the estimated hypothetical return and standard deviation assumptions). You should understand that the analysis shown and assumptions used are hypothetical estimates provided for your general information. The results are not guarantees and pertain to the asset allocation and/or asset class in general, not the performance of specific securities or investments. Your actual results may vary significantly from the results shown in this report, as can the performance of any individual security or investment. 24

26 Disclaimer Chief Investment Office (CIO) Wealth Management (WM) Research is published by UBS Wealth Management and UBS Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affiliate thereof. CIO WM Research reports published outside the US are branded as Chief Investment Office WM. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Different assumptions could result in materially different results. We recommend that you obtain financial and/or tax advice as to the implications (including tax) of investing in the manner described or in any of the products mentioned herein. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be relile and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and its affiliates). All information and opinions as well as any prices indicated are current only as of the date of this report, and are subject to change without notice. Opinions expressed herein may differ or be contrary to those expressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria. At any time, investment decisions (including whether to buy, sell or hold securities) made by UBS AG, its affiliates, subsidiaries and employees may differ from or be contrary to the opinions expressed in UBS research publications. Some investments may not be readily realizle since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is considered risky. Past performance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or income of an investment. This report is for distribution only under such circumstances as may be permitted by applicle law. Distributed to US persons by UBS Financial Services Inc. or UBS Securities LLC, subsidiaries of UBS AG. UBS Switzerland AG, UBS Deutschland AG, UBS Bank, S.A., UBS Brasil Administradora de Valores Mobiliarios Ltda, UBS Asesores Mexico, S.A. de C.V., UBS Securities Japan Co., Ltd, UBS Wealth Management Israel Ltd and UBS Menkul Degerler AS are affiliates of UBS AG. UBS Financial Services Incorporated of PuertoRico is a subsidiary of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-us affiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-us affiliate. The contents of this report have not been and will not be approved by any securities or investment authority in the United States or elsewhere. UBS Financial Services Inc. is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section 15B of the Securities Exchange Act (the "Municipal Advisor Rule") and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of the Municipal Advisor Rule. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS and UBS accepts no liility whatsoever for the actions of third parties in this respect. Version as per September UBS The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. 25