UBS WMA Chief Investment Office Outlook to Action: UBS CIO Strategy Update December 2015 0
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
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 2015. 2
At long last, global monetary policy is diverging 6.0 Policy rate (%) with UBS forecasts 5.0 4.0 3.0 2.0 1.0 0.0-1.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 US UK Sw it zerland Euro area Japan Source: UBS CIO WMR, UBS Investment Research, as of 5 November 2015. 3
US private sector expanding, adding jobs 600 Payrolls Change (000s) Purchasing M anagers Index 65 400 60 200 55 0 50-200 45-400 Non-Farm Privat e Payrolls 40-600 US Economy-w eight ed ISM 35-800 2001 2003 2005 2007 2009 2011 2013 2015 30 Source: UBS CIO WMR, Bloomberg, as of 6 November 2015 4
US consumers back in the driver's seat 6 4 2 0-2 -4-6 1990 1993 1996 1999 2002 2005 2008 2011 2014 US GDP Growth (YoY %) US Consumption Growth (YoY %) Source: UBS CIO WMR, Bloomberg, as of 30 September 2015. 5
Chinese growth is not slowing rapidly Source: UBS CIO WMR, Bloomberg, as of 30 October 2015 6
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% 1989 1992 1995 1998 2001 2004 2007 2010 2013 Source: UBS CIO WMR, Bloomberg, as of 30 October 2015 7
Global rate divergence being pushed to the limit 250 Treasury-Bund 10yr Yield Spread in bps 200 150 100 50 0-50 -100-150 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: UBS CIO WMR, Bloomberg as of 30 October 2015 8
So where is the real danger? 3.5 % 3.0 2.5 30yr UST 2.0 10yr UST 1.5 5yr UST 1.0 0.5 0.0 3m USB 2yr UST Today 6-mont h 12-mont h 2-year Source: UBS CIO WMR, Bloomberg, as of 2 November 2015 9
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% 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Source: UBS CIO WMR, Barclays, as of 30 October 2015 10
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 2015 11
Valuation much more attractive outside the US " Shiller" P/E ratios for major country equity markets, 1969-2015* 30 25 20 15 10 5 0 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 1994 12
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
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
$ / bb Risks can come from unexpected places $110 NYMEX WTI $/bb Median Forecast vs. Actual Price $100 $90 $80 $70 $60 $50 $40 YE 09 2010 Q1 Q2 Q3 Q4 2011 Q1 Q2 Q3 Q4 2012 Q1 Q2 Q3 Q4 2013 Q1 Q2 Q3 Q4 2014 Q1 Q2 Q3 Q4 2015 Q1 Q2 Q3 Q4 Last price M edian f orecast Source: UBS CIO WMR, Bloomberg; 15
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% 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Source: UBS CIO WMR, Barclays, as of 31 August 2015 16
Some we can't control Cost of $1 of retirement spending 18 16 14 12 10 8 6 4 2 0 05 06 07 08 09 10 11 12 13 14 15 Source: UBS, Bloomberg 17
Others are self-created 18
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 8/28/2015. 19
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, 2004. UBS CIO WMR 20
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 2015 21
Allocation doesn't follow traditional path Source: UBS 22
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 1,000 100 10 1 Low er Risk Risk/ Return Spectrum Higher Risk Short er Term Time Frame Longer Term Source: UBS 23
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 2013. 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 24-27 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 24-27 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 24-27 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
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