UBS House View. In focus

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1 UBS House View United Weekly 16 June 2016 Deeper dive UK EU referendum one week to go p. 2 Regional view What do you think your LinkedIn account is worth? p. 3 Market moves Level 1 w chg YTD chg S&P 500 2, % 2.42% DJIA 17, % 2.61% Nasdaq 4, % -2.79% Nikkei , % % Eurostoxx 50 2, % % MSCI EM % 1.77% Gold $ 1281/oz 0.89% 20.73% Brent crude oil $ 47.1/bbl -9.30% 26.39% US 10 year yield 1.575% 0bps -69bps VIX pts +1.2pts Source: Bloomberg, as of 16 June 2016, EST 4:30 pm. Note: All returns are in local currency MSCI EM as of 15 June 2016 Market comments Equities broadly declined on the week on heightened global risk aversion. US stocks shed 2.2% and European equities 5.7% Japanese shares slid 7.4%, hurt by a stronger yen. In fixed income, government debt made gains as longer-dated yields in Germany, the UK and Japan plumbed new lows. High yield bonds declined in Europe (1%) and the US (1.2%). In foreign exchange markets, the Japanese yen rose 2.4% against the US dollar due to monetary policy inaction. Gold climbed 3.4%, helped by falling US Treasury yields and dovish US Federal Reserve commentary. In focus Steady at the Fed. The US central bank decided to leave interest rates unchanged, in line with market expectations. Perhaps the biggest change was to the dot plot, which shows each committee member s views on appropriate future interest rates. It now indicates a more gradual pace of rate hikes, though the majority still foresees two hikes this year. CIO agrees the Federal Reserve will likely raise rates by 25 basis points in both September and December. Little relief for the yen as the Bank of Japan (BoJ) made no changes to monetary policy. USDJPY fell from before the announcement to settle around 104 after Governor Haruhiko Kuroda s press conference. The uncertain global outlook may have stayed the hand of the BoJ, which judged Japan s economy to be on a moderate recovery trend. CIO maintains its USDJPY target at 105 (three and six months) and 110 (12 months). MSCI shuns China again. The world s largest index provider has refused to include China s domestic A-shares in its international benchmark for the third year in a row. MSCI indicated that international institutional investors wanted to see further progress toward accessibility. Given the size of China s market, which is second only to New York, CIO believes inclusion in the index is a matter of when and not if. ECB explores blurred line of investment grade. Just one day into its corporate bond buying program, the European Central Bank (ECB) was already pushing the limits of its self- imposed rules by interpreting investment grade to mean debt rated so by only one agency. Reported purchases included the bonds of States CIO WM Research The UBS House View will be published on 24 June. As such, the next edition of UBS House View Weekly will be published on 30 June. We welcome your feedback. an Italian telecom company rated high yield by Moody s and S&P but investment grade by Fitch. That underlines ECB President Mario Draghi s reputation for doing whatever it takes. Robust US consumption. Since the release of weak jobs figures earlier this month, US economic data has been positive. The latest encouragement came from a 0.5% rise in retail sales for May following a bumper 1.3% gain in April. That sets the US up for a rebound after a weak first quarter. CIO is overweight US equities and with a preference for the consumer discretionary sector. Decline and fall. Ten-year German Bund yields joined the company of bonds from Japan and Switzerland by falling below 0% on Tuesday. Yields on global sovereign debt securities have fallen following a lackluster US jobs report earlier this month, and ahead of a busy summer of uncertain political events in Europe. Tenyear UK gilt yields also plumbed new lows this week. Sub-zero yields offer investors little cushion when global growth and inflation stage a firmer recovery. CIO is underweight on government debt. Oil s balancing act not yet done. The International Energy Agency expects a balanced oil market in the second half of this year, followed by a return to surplus in the first half of next year. High inventory overhangs and possible returns to production in Canada may weigh on crude prices in the coming quarters. CIO believes that oil is vulnerable to short-run price pullbacks as temporary supply disruptions abate, and extended long speculative positioning normalizes. a b This report has been prepared by UBS Financial Services Inc. and UBS Switzerland AG. Please see important disclaimer on page 7.

2 Deeper dive UK EU referendum one week to go Mark Dean Haefele Turner One week out, the event on every investor s mind is the UK referendum. The concerns about its outcome are not only being felt in the various markets sterling is reacting to every opinion poll but the potential for the UK public to deliver a surprise has likely been at the front of central bankers minds this week as well. Indeed, the US Federal Reserve, the Bank of England (BoE), and the Swiss National Bank explicitly discussed their concerns at recent policy-setting meetings. If the opinion polls are to be believed as we enter the final days of the campaign, the results could literally go either way. So investors are rightly concerned. The confusion is increased by the differences in forecast between that polls conducted online and those done over the telephone. Online polls typically reveal stronger support for the leave campaign, although it should be noted that the share of undecided voters is also higher. Telephone polls have up until recently shown the opposite, although this is starting to change. The late surge in support for leaving the EU has come as a surprise to us, but as yet it is far from clear that a victory is assured. Unfortunately, we won t know if the polls are reliable or fallible until after the official result is declared, by which time markets will have already reacted. What is an investor to do ahead of such an uncertain event sure to move markets whatever the outcome? Diversification in such times is a must, but in this instance extra attention should be paid to sterling exposure in assets and liabilities both. Beyond this, it may be prudent for investors to think about specific positioning. Should the UK vote to leave the EU, the only certainty for the markets will be more uncertainty. History tells us that investors tend not to reward greater uncertainty, so we would expect the initial reaction to be negative for the pound and UK equities. We see potential for the FTSE 100, with its large international exposure, to outperform the domestically focused FTSE 250. Negative sentiment in the banking sector could spread across the continent and hit those markets with a large exposure to the sector, such as Italy and Spain. Gilts are likely to outperform under a leave scenario, as questions about the economy and the path of interest rates come into question. If the UK decides to remain in the EU, it seems likely that uncertainty would decline, which should in turn lead to a recovery for sterling in the first instance. Elsewhere, we would expect the opposite reaction in markets to those mentioned above, but some of the moves may be tempered by the size of the victory. A narrow one may lead many to ask whether the question really has been settled. Whatever the result, questions will likely cloud the UK outlook for the time being. Even if the UK does choose to stay, domestic politics is likely to remain challenging, and markets will be looking to ascertain whether the referendum-related slowdown in the first half of the year is something more permanent. Our sense is that there should be a reasonably vigorous rebound in activity as delayed business investment and hiring resume. If they don t, then any gains in sterling may prove relatively short-lived as markets start to question the direction of BoE policy. Mark Haefele Global Chief Investment Officer Wealth Management Dean Turner Economist UBS Global Research is produced independently. All views expressed herein are the views of the named analyst(s) and were prepared in an independent manner including with respect to UBS. The views expressed by the analyst(s) do not necessarily represent the views of UBS as an institution. Neither the analyst(s) nor UBS is promoting or campaigning for any particular outcome in the Referendum to be held in the United Kingdom on 23 June Bottom line With just days of campaigning left before the UK referendum, the outcome of it remains highly uncertain. While this situation creates trading opportunities for investors with a high level of conviction, the event resists rational economic analysis. We believe the best way to mitigate risk from such events is an internationally diversified, multi-asset portfolio. 2

3 Regional view What do YOU think your LinkedIn account is worth? Kevin Dennean Sector Strategist If you have a LinkedIn account, Microsoft thinks you are worth USD 61. That s one way of interpreting Microsoft s proposed acquisition of the professional networking website for USD 26.2bn. With 433mn LinkedIn users as of March, USD 61 per user seems almost conservative compared with LinkedIn s valuation of 54x consensus 12-month-forward earnings. But the deal has set off alarm bells for investors concerned about the information technology (IT) sector. Some who perceive the proposed purchase as expensive recall the late 1990s technology bubble and worry that it signals a potential top in the market, with too-cheap capital chasing deals of dubious value. Others fear that LinkedIn s willingness to sell indicates that demand is not as healthy as perceived. Without opining on the merits or the valuation of the deal, we think Microsoft s acquisition of LinkedIn is emblematic of the rapid pace of change in the IT sector. And to be perfectly clear, we don t think the IT sector is expensive. At 16x P/E, it is in stark contrast to the tech bubble of the late 90s, when the sector traded at 60x P/E. Despite the potentially strong long-term growth opportunities for many tech companies, the sector faces some near-term challenges. Current spending on technology products and services by companies is running below most expectations. And after outperforming the S&P 500 by 6% in each of the past two years, the IT sector is running 2% behind the market so far in The biggest news for technology stocks more recently has been blockbuster deals rather than innovation or growth. So, what s going on with IT? Quite a lot, actually, and not all of it good but not all bad, either. We think it is worthwhile to distinguish between trends in the consumer space and the business technology market, which is roughly 75% of the USD 2tr IT market. On the consumer front, smartphones have been one of the biggest cultural and technological phenomena of the last 20 years. These devices have changed the way we communicate and, in tandem with the rise of social networks, have reshaped our daily interactions. However, the developed markets are largely saturated. Smartphone growth is now challenged by a lengthening replacement cycle in these markets. Smartphone unit demand is now driven much more by emerging markets, where the user base is growing. But phones sell at lower prices in these markets, which results in slower industry revenue growth. This slowdown is one of the reasons our Equity Strategy team trimmed last month its recommendation for the IT sector to modest overweight from overweight. The upshot is that there are approximately 2bn smartphone users creating an incredible amount of often deeply personal, highly valuable, and unique data. In our view, data is the new global commodity. It s the new oil. All the digital fingerprints that we leave as we surf the internet or post on social media are feedstock for digital marketers, who are Top of the Morning daily podcast Week in Review/ Preview with Leslie Falconio able to drive better returns on advertising dollars through more-relevant ads. On the corporate IT front, we think the transition to the cloud is a means of increasing efficiency and enabling more agility in IT operations. Cloud is now the single overarching issue in corporate IT; we think all companies will eventually work in the cloud in one way or another. But the process of transitioning to the cloud is often slow and painful for both customers and IT vendors. Businesses not only are faced with retooling their IT architectures, but often must retrain staff and rethink entire business processes. In our view, this has frozen spending as organizations have wrestled with the transition and caused a slower-than-expected uptake of cloud services. Still, we believe cloud has reached a tipping point as businesses increasingly have confidence and clarity in their cloud plans. However, IT companies face challenges of customer retention as new technology solutions evolve. And as cloud proves hyper-efficient for storage, computing, and other IT tasks, this serves to shrink some companies demand for IT products. Putting it all together, we remain optimistic on the prospects for IT spending, but believe selectivity will be critical as cloud cuts both ways. We expect continued M&A activity as established, legacy, or old tech companies buy assets to fill in portfolio gaps. We also see continued acquisitions based on the value of data or user bases that are deemed cheaper to buy rather than to build. So is LinkedIn worth USD 26.2bn? Are you worth USD 61? Time will tell. Kind regards, Kevin Dennean 3

4 Strategy and performance TAA and market returns: Cross asset and equities Asset classes Equity Fixed Income Commodities 2.1% 0.3% 2.4% 2.1% 8.1% 3.2% 3.3% 12.4% 24.7% Note: Indexes used to calculate returns are MSCI All Country World (for Equity), Barclays Capital Global Aggregate Index (for Fixed Income), Dow Jones UBS Commodity Index Total Return Equities US Large-Cap Value Large-Cap Growth Mid-Cap Small-Cap Int l Developed Emerging Markets 1.0% 2.3% 0.5% 1.1% 4.2% 3.8% 1.1% 0.6% 5.7% 0.8% 4.1% 2.4% 0.4% 1.9% 4.4% 4.6% 5.6% 0.8% 0.3% 2.6% 14.9% Note: Indexes used to calculate returns are MSCI All Country World (for Equity), Barclays Capital Global Aggregate Index (for Fixed Income), Dow Jones UBS Commodity Index Total Return S&P 500 forecast CIO WMR 6-month rolling price target earnings per share actual USD earnings per share estimate USD earnings per share estimate USD 130 Source: UBS, as of 15 June 2016 US equity sectors Cons. Discr. Cons. Staples Energy Financials Healthcare Industrials Technology Materials Telecom Utilities Note: S&P 500 Sector Indexes used to calculate returns. Source: UBS, as of 15 June 2016 International developed equities EMU UK Japan Australia Canada Switzerland Other Note: MSCI Region or Country Indexes used to calculate returns. Preference in hedged terms (excluding currency movements). Source: UBS Chief Investment Office/WMR, as of 15 June 2016 Weekly 1.6% 1.6% 0.3% 9.7% 0.7% 1.9% 7.0% 5.3% 2.7% 0.3% 12.7% 21.7% 3.3% 4.4% 4.3% 2.7% 2.1% 0.7% 1.3% 5.8% 2.0% 0.0% 5.4% 3.5% 2.3% 2.3% 0.1% 4.7% 2.3% 0.2% 8.6% 9.3% 0.9% 2.9% 17.4% 2.1% 0.6% 2.7% 17.5% 6.6% 6.0% 6.5% 1.0% 6.3% 5.8% 7.1% 3.1% 6.0% 9.4% 2.4% 0.1% 10.1% 0.0% 14.9% 23.5% 3.4% 5.5% 0.7% Tactical deviations from benchmark symbols + Moderate overweight vs. benchmark ++ Overweight vs. benchmark +++ Strong overweight vs. benchmark n Neutral, i.e. on benchmark Moderate underweight vs. benchmark Underweight vs. benchmark Strong underweight vs. benchmark Notes These tables represent the tactical asset allocation for a moderate, taxable investor without alternative investments. See the latest UBS House View: Investment Strategy Guide for an interpretation of the tactical deviations and an explanation of the corresponding benchmark allocation. Tactical time horizon is approximately six months. Total return market performance is from Bloomberg as of close of business on source date, using representative indices, and is provided for information only. Past performance is no indication of future performance. The overweight and underweight recommendations represent tactical deviations that can be applied to any appropriate benchmark portfolio allocation. They reflect CIO WMR s assessment of market opportunities and risks in the respective asset classes and market segments. The benchmark allocation is not specified here. Please see the most recent UBS House View: Investment Strategy Guide for definitions/explanations of benchmark allocation. They should be chosen in line with the risk profile of the investor. Note that the Regional Bond Strategy is provided on an unhedged basis (i.e., it is assumed that investors carry the underlying currency risk of such investments). Thus, the deviations from the benchmark reflect our views of the underlying equity and bond markets in combination with our assessment of the associated currencies. + Indicates +/ change Terms and abbreviations EMU = European Monetary Union and is comprised of European countries that have adopted the Euro as their currency. Int l = international. YTD = year to date. MTD = month to date. USD = US dollar. TAA = tactical asset allocation. 4

5 Strategy and performance TAA and market returns: Fixed income and currencies Fixed income USD Taxable Fixed Income US Government Municipal IG Corporates HY Corporates Int l Developed Emerging Markets 1.1% 4.6% 0.5% 1.5% 4.5% 0.9% 1.0% 3.7% 3.3% 1.3% 6.5% 0.8% 0.4% 8.5% 4.5% 2.9% 10.9% 6.0% 1.1% 7.4% 0.1% Note: Indexes used to calculate returns are Barclays Capital (BarCap) US Aggregate, BarCap US Aggregate Government, BarCap Municipal Bond, BarCap US Aggregate Credit (for IG), BarCap US Aggregate Corp HY, BarCap Global Aggregate ex USD (for Int l Developed), BarCap Emerging Markets Government and BarCap Global Emerging Markets USD (50% of each for Emerging Markets). Foreign exchange USD EUR GBP JPY CHF Other underweight neutral overweight 0.3% 2.8% 10.6% 2.4% 4.1% 5.3% 5.7% 13.1% 0.6% 2.6% 3.4% 1.3% Change against USD Treasuries TIPS Agencies Agency MBS MBS/Securitized products IG Corporate HY Corporates Taxable Municipal Preferred Securities Bank Loans 1.6% 4.9% 0.8% 1.4% 5.8% 1.7% 0.9% 3.1% 1.0% 0.5% 2.8% 1.5% 1.1% 4.5% 1.1% 1.3% 6.6% 0.6% 0.3% 8.5% 4.6% 1.7% 8.5% 1.0% 0.1% 4.0% 7.6% 0.2% 4.7% 0.7% Note: Indexes used to calculate returns are Bank of America Merrill Lynch (BoA ML) US Treasury, BoA ML US Inflation Linked Treasury, BoA ML US Composite Agency, BoA ML US Mortgage Backed Securities, BoA ML US Corporate, BoA ML US High Yield Constrained, BoA ML Fixed Rate Preferred Securities. BoA ML CMBS Fixed Rate, S&P/ LSTA Leveraged Loan Index, Barclays Taxable Municipal Index. See the latest Fixed Income Strategist for more information. Source: UBS CIO WMR, as of 15 June 2016 International Developed Fixed Income EMU UK Japan Other 1.6% 7.3% 9.8% 0.5% 4.7% 4.5% 5.6% 20.6% 0.3% Note: BarCap Region or Country Indexes used to calculate returns. Tactical deviations from benchmark symbols + Moderate overweight vs. benchmark ++ Overweight vs. benchmark +++ Strong overweight vs. benchmark n Neutral, i.e. on benchmark Moderate underweight vs. benchmark Underweight vs. benchmark Strong underweight vs. benchmark Notes These tables represent the tactical asset allocation for a moderate, taxable investor without alternative investments. See the latest UBS House View: Investment Strategy Guide for an interpretation of the tactical deviations and an explanation of the corresponding benchmark allocation. Tactical time horizon is approximately six months. Total return market performance is from Bloomberg as of close of business on source date, using representative indices, and is provided for information only. Past performance is no indication of future performance. The overweight and underweight recommendations represent tactical deviations that can be applied to any appropriate benchmark portfolio allocation. They reflect CIO WMR s assessment of market opportunities and risks in the respective asset classes and market segments. The benchmark allocation is not specified here. Please see the most recent UBS House View: Investment Strategy Guide for definitions/explanations of benchmark allocation. They should be chosen in line with the risk profile of the investor. Note that the Regional Bond Strategy is provided on an unhedged basis (i.e., it is assumed that investors carry the underlying currency risk of such investments). Thus, the deviations from the benchmark reflect our views of the underlying equity and bond markets in combination with our assessment of the associated currencies. + Indicates +/ change Terms and abbreviations EMU = European Monetary Union and is comprised of European countries that have adopted the Euro as their currency. Int l = international. YTD = year to date. MTD = month to date. USD = US dollar. TAA = tactical asset allocation. 5

6 Earnings calendar The Earnings Calendar provides publicly announced reporting dates and times of companies covered by Wealth Management Research Americas. Reporting dates and times are subject to change by the reporting companies. Date Company Ticker Company Ticker Company Ticker 21-Jun-16 Lennar Corp. LEN Adobe Systems, Inc. ADBE KB Home KB 22-Jun-16 Red Hat, Inc. RHT 28-Jun-16 NIKE, Inc. NKE 29-Jun-16 General Mills, Inc. GIS 30-Jun-2016 Micron Technology, Inc. MU Source: Bloomberg, UBS, as of 15 June 2016 Key economic indicators Date Indicator Period Time (ET) Unit Consensus Previous 17-Jun-16 Housing Starts May 8:30 AM level 1150k 1172k 17-Jun-16 Housing Permits May 8:30 AM level 1145k 1130k 22-Jun-16 FHFA Home Prices April 9:00 AM m/m 0.5% 0.7% 22-Jun-16 Existing Home Sales May 10:00 AM level 5.50mn 5.45mn 23-Jun-16 Jobless Claims For week, June 17 8:30 AM level 270k 264k 23-Jun-16 Markit Manufacturing PMI June 9:45 AM level Jun-16 New Home Sales May 10:00 AM level 560k 619k 24-Jun-16 Durable Goods May 8:30 AM m/m -0.8% 3.4% 24-Jun-16 Durable Goods Orders less Transportation May 8:30 AM m/m 0.1% 0.5% 24-Jun-16 U. of Michigan Sentiment June 10:00 AM level Source: Bloomberg, UBS, as of 15 June 2016 UBS forecast estimates are published on Friday evenings in Economic Perspectives by economists employed by UBS Investment Research, a part of UBS Investment Bank. m/m = month over month. q/q = quarter over quarter. y/y = year over year. k = thousand. mn = million. bn = billion. 6

7 Investing in Emerging Markets Investors should be aware that Emerging Market assets are subject to, amongst others, potential risks linked to currency volatility, abrupt changes in the cost of capital and the economic growth outlook, as well as regulatory and sociopolitical risk, interest rate risk and higher credit risk. Assets can sometimes be very illiquid and liquidity conditions can abruptly worsen. WMR generally recommends only those securities it believes have been registered under Federal U.S. registration rules (Section 12 of the Securities Exchange Act of 1934) and individual State registration rules (commonly known as Blue Sky laws). Prospective investors should be aware that to the extent permitted under US law, WMR may from time to time recommend bonds that are not registered under US or State securities laws. These bonds may be issued in jurisdictions where the level of required disclosures to be made by issuers is not as frequent or complete as that required by US laws. For more background on emerging markets generally, see the WMR Education Notes, Emerging Market Bonds: Understanding Emerging Market Bonds, 12 August 2009 and Emerging Markets Bonds: Understanding Sovereign Risk, 17 December Investors interested in holding bonds for a longer period are advised to select the bonds of those sovereigns with the highest credit ratings (in the investment grade band). Such an approach should decrease the risk that an investor could end up holding bonds on which the sovereign has defaulted. Sub investment grade bonds are recommended only for clients with a higher risk tolerance and who seek to hold higher yielding bonds for shorter periods only. 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. 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