UBS House View United Weekly 30 December 2015 States CIO WM Research Year in review: S&P 500 annotated p. 2 The Year Behind We welcome your feedback. Thoughts from CIO WMR strategists p. 3 Market moves Market comments a b Level 1 w chg YTD chg S&P 500 2078 1.95% 3.07% DJIA 17,721 1.74% 1.91% Nasdaq 5,108 2.16% 9.25% Nikkei 225 18,982 0.51% 8.78% Eurostoxx 50 3,314 3.11% 5.33% MSCI EM 800 0.64% -16.38% Gold $1069/oz -0.31% -9.73% Brent crude oil $37.8/bbl 4.65% -34.08% US 10 year yield 2.305% +7bps +13bps VIX 16.10-0.5pts -3.1pts Source: Bloomberg, as of 29 December 2015, EST 4:30 pm. Note: All returns are in local currency Global equities were largely flat in US dollar terms in an abbreviated week of trading. Oil closed the year in appropriately volatile fashion, slipping 3% on a report of a 2.9 million barrel increase in stockpiles. US Treasury yields rose across the board in light trading with the 2-year hitting 1.1% for the first time since 2010. The US dollar strengthened marginally, mainly against currencies of energy producer like Russia and Norway. As we close 2015, we wanted to provide some color on the key events of the year and how they impacted financial markets. It was a year marked by a handful of risk events but fortunately nothing catastrophic enough to take investors far off the path to realizing their long-term financial goals. As we look back, one thing that strikes us is how important it was to be fully invested starting on 1 January. Those investors who took longer to put money to work ended up missing most of the years gains, such as they were. 22 January: Q-ECB Nearly six years after the Federal Reserve first began Quantitative Easing, the European Central Bank started its own program shortly after the start of the year. The ECB opted for open-ended balance sheet expansion to address sluggish growth and inflation. The euro plunged against the dollar and Eurozone equities rallied sharply, gaining a lead over their US counterparts that they retained throughout the year. 10 June: Peak Oil WTI Crude prices began to rally in the spring, topping out at USD 61 before plunging to as low as USD 34 in December. The global supply glut continues to put downward pressure on the oil price and, as we ve seen, the effects of falling oil prices reverberate loudly in equity, credit and currency markets, creating stark categories of winners and losers. 5 July: Greeks reject austerity (before accepting it) The Greek populace surprised observers by voting down a referendum seeking approval to accept a fiscal bailout from the European Union. It was financial markets first big risk-off event of the year as it threatened the integrity of the euro. In the end, the Greek government was forced to accept a bailout package that was stricter than the one voted down, forestalling another Greek crisis for at least a few years. 11 August: China lets its currency fall The Chinese government allowed its currency peg against the US dollar to weaken by 3% over several days, alarming markets and leading to the first 10% drop in US equity markets since 2011. Fears that the move was a signal of severely-weakening Chinese growth fueled the selloff, but subsequent data releases seemed to indicate the panic was overdone. Developed market risk assets recovered the majority of the losses by the end of October. 13 November: Terror in Paris Gunmen operating under the banner of ISIS murdered 130 people across Paris and wounded hundreds more in the worst terrorist attack in Europe in ten years. While the initial market reaction was muted, the attacks brought a simmering debate over Syrian refugees to a boil and, along with a similar but smaller-scale attack in California, created new urgency over the global response to the spread of ISIS in the Middle East. Notably, global risk assets have failed to stage a sustained rally in the wake of the attacks. 16 December: The Fed finally hikes Close to seven years after slashing its policy rate to zero, the Federal Reserve was finally able to raise it again by a quarter point. The Fed cited improved labor market conditions and a belief that inflation will accelerate in the medium-term as reasons for the move. Markets had largely priced in the hike after a series of good employment reports, and attention now turns to whether the Fed will find economic conditions appropriate to hike four times next year, as it says it plans to. Brian Nick, Head of Tactical Asset Allocation, US WMR This report has been prepared by UBS Financial Services Inc. Please see important disclaimer on page 7.
Year in review: S&P 500 annotated Year in review UBS House View Weekly 30 December 2015 2,300 Jan 15 Switzerland drops the 3 year old cap on the CHF Mar 18 Fed removes the patience signifier on the timing of a rate hike June 17 FOMC statement confirms expectations for a rate hike in late 2015 Aug 11 China devalues the Yuan by almost 2% against the USD Oct 23 People s Bank of China cuts interest rates and banks reserve requirements to support slowing economy 2,200 Jan 22 ECB announces $1.1 trillion QE June 10 WTI crude reaches peak at $61.43 per barrel July 14 Iran nuclear deal signed Aug 25 US stocks face largest decline in 4 years a er the Shanghai Composite plunges 8.5% Dec 16 Fed raises interest rates by 25bps 2,100 May 7 Conservatives win the UK general election 2,000 Mar 9 ECB starts the first round of bond-buying, and the USD appreciates July 5 Greece votes no to referendum on whether to accept proposal from creditors Nov 3 New car sales in the US hit a 10-year high Dec 17 WTI crude falls below $35 per barrel 1,900 1,800 Feb 10 Apple Inc. becomes the first company to close with a market cap over $700 billion Jan 26 Le -wing, anti-austerity Syriza party wins in Greek election June 26 Governor Alejandro García Padilla admits the Commonwealth s inability to support its debt burden Sep 17 FOMC votes to delay rate-hike, citing recent global economic and financial developments Nov 13 Terrorist attacks take place in Paris 1,700 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 = Topic discussed in story on pg. 1. Source: UBS 2
Thoughts from CIO WMR strategists What might surprise investors? What worries you? What is your best 2016 investment idea? Mike Ryan EM equities bottom out and outperform DM equities Oil prices continue to decline and cause "collateral damage" across credit markets and EM Small caps finally shine Jeremy Zirin Oil prices rebound, HY stops bleeding and small-caps outperform large-caps Uncontrolled property and industrial slowdown in China leads to slumping global growth and investor confidence Technology and Healthcare for growth; Energy for value Brian Nick Longer-maturity, higher-quality bonds continue to deliver solid returns US investors having too little FX exposure with the US dollar so strong The Eurozone recovery: Italy & Financials Barry McAlinden HY bonds outperform US equities A liquidity event jolts the rates or credit markets for a prolonged period Investment grade corporate bonds Kristen Stephens Muni fund flows stay solid as investors don't react to taxable HY stress An unexpected muni credit event and the resulting contagion Munis Michael Crook Active managers underperform, on average Investors counting on higher interest rates to meet return objectives Swap adjustable rate liabilities to fixed rate liabilities Stephen Freedman OPEC cuts production EM woes worsen and darken the outlook for the US and Europe Sally Dessloch US recession Rapid slowdown in Chinese growth eroding global growth and risk appetites Energy efficiency plays Technology, Healthcare, Energy 3
Strategy and performance TAA and market returns: Cross asset and equities Asset classes US equity sectors Weekly Equity Fixed Income Commodities 0.5% 1.1% 4.4% 0.6% 3.1% 0.5% 2.5% 24.2% 17.9% 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 Equities US Large-Cap Value Large-Cap Growth Mid-Cap Small-Cap Int l Developed Emerging Markets 0.4% 2.2% 13.0% 0.7% 2.4% 13.9% 0.3% 7.5% 13.6% 1.2% 1.0% 13.6% 3.0% 2.3% 5.2% 0.5% 0.1% 4.8% 1.5% 14.3% 2.1% 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 2125 2014 earnings per share actual USD 119 2015 earnings per share estimate USD 120 2016 earnings per share estimate USD 130 Source: UBS CIO WMR, as of 29 December 2015 Cons. Discr. Cons. Staples Energy Financials Healthcare Industrials Technology Materials Telecom Utilities Note: S&P 500 Sector Indexes used to calculate returns. Source: UBS CIO WMR, as of 29 December 2015 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 29 December 2015 1.7% 1.1% 12.1% 10.1% 1.4% 4.4% 8.2% 15.9% 2.2% 8.8% 20.2% 6.9% 2.2% 0.5% 0.1% 15.7% 2.0% 3.1% 8.3% 25.3% 1.9% 0.6% 1.1% 10.3% 2.1% 0.1% 8.3% 21.0% 2.4% 2.4% 6.7% 7.2% 1.8% 3.6% 5.3% 2.9% 2.3% 3.4% 3.7% 29.3% 1.4% 0.9% 7.8% 2.4% 6.1% 4.9% 0.0% 9.5% 3.8% 2.8% 10.1% 2.9% 4.9% 21.9% 2.9% 2.5% 2.7% 0.3% Tactical deviations from : Scale for charts Symbol description/definition + ++ +++ moderate overweight vs. overweight vs. strong overweight vs. + Indicates +/ change moderate underweight vs. underweight vs. strong underweight vs. n Neutral, i.e. on Terms and Abbreviations EMU = European Monetary Union and is comprised of European countries that have adopted the Euro as their currency, Int l = international, MTD = month to date, USD = US dollar, YTD = year to date. Notes This represents 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 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 portfolio allocation. They reflect CIO WMR s assessment of market opportunities and risks in the respective asset classes and market segments. The allocation is not specified here. Please see the most recent UBS House View: Investment Strategy Guide for definitions/explanations of 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 reflect our views of the underlying equity and bond markets in combination with our assessment of the associated currencies. 4
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 0.6% 0.3% 5.9% 0.4% 0.7% 4.8% 0.7% 3.3% 9.0% 1.1% 1.1% 7.4% 2.6% 4.6% 2.5% 1.5% 5.8% 3.2% Emerging Markets 1.4% 0.2% 3.9% 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). T Foreign exchange Treasuries TIPS Agencies Agency MBS MBS/Securitized products IG Corporate HY Corporates Taxable Municipal Preferred Securities Bank Loans 0.4% 0.6% 6.0% 1.3% 2.2% 4.5% 0.4% 0.9% 4.1% 0.2% 1.2% 6.1% 0.8% 1.0% 4.3% 1.0% 0.8% 7.5% 2.7% 4.7% 2.5% 0.2% 0.7% 16.0% 0.4% 7.4% 15.4% 1.1% 0.7% 1.6% 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 29 December 2015 USD EUR GBP JPY CHF Other underweight neutral overweight 3.4% 9.7% 12.3% 1.6% 4.9% 5.6% 2.2% 0.6% 13.9% 3.5% 0.1% 12.0% Change against USD International Developed Fixed Income EMU UK Japan Other 2.2% 9.0% 2.7% 2.4% 4.3% 7.5% 2.9% 0.6% 8.7% Tactical deviations from : Scale for charts Symbol Description/Definition + ++ +++ moderate overweight vs. overweight vs. strong overweight vs. moderate underweight vs. underweight vs. strong underweight vs. n Neutral, i.e. on Notes This represents 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 allocation. Tactical time horizon is approximately six months. Emerging markets comprises corporate and sovereign bonds. In Foreign exchange, other refers to other developed currencies. 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. Note: BarCap Region or Country Indexes used to calculate returns. The overweight and underweight recommendations represent tactical deviations that can be applied to any appropriate portfolio allocation. They reflect CIO WMR s assessment of market opportunities and risks in the respective asset classes and market segments. The allocation is not specified here. Please see the most recent UBS House View: Investment Strategy Guide for definitions/explanations of 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 reflect our views of the underlying equity and bond markets in combination with our assessment of the associated currencies. The scale above does not pertain to the USD taxable fixed income table. The symbols in that table describe varying degrees of preference in a USD taxable fixed income portfolio. + Indicates +/ change Terms and Abbreviations EMU = European Monetary Union and is comprised of European countries that have adopted the Euro as their currency, HY = high yield, Int l = international IG = investment grade, MBS = mortgage backed securities, MTD = month to date, USD = US dollar, YTD = year to date. 5
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 7 Jan 2016 Gap, Inc. GPS KB Home KBH Walgreens Boots Alliance, Inc. WBA Source: Bloomberg, UBS, as of 29 December 2015 Key economic indicators Date Indicator Period Time (ET) Unit Consensus Previous 30 Dec 15 Pending Home Sales November 10:00 AM m/m 0.7% 0.2% 31 Dec 15 Milwaukee PMI December 9:00 AM level 48.5 45.3 31 Dec 15 Chicago PMI December 9:45 AM level 50.0 48.7 31 Dec 15 Jobless Claims For week, December 31 8:30 AM level 270k 267k 04 Jan 16 Manufacturing ISM December 10:00 AM level 49.0 48.6 04 Jan 16 Construction Spending November 10:00 AM m/m 0.6% 1.0% 06 Jan 16 ADP Private Employment December 8:15 AM level 198k 217k 06 Jan 16 Trade Balance November 8:30 AM level $44.0bn $43.9bn 06 Jan 16 Nonmanufacturing ISM December 10:00 AM level 56.0 55.9 06 Jan 16 Factory Orders November 10:00 AM m/m 0.3% 1.5% Source: Bloomberg, UBS, as of 29 December 2015 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, k = thousand, bn = billion, y/y = year over year, mn = million 6
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 2009. 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. 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