a monthly guide to investing in emerging market financial ... › content › dam ›...

EM assets rising amid high volatility and dispersion in 2019Special feature: Top 10 charts for 2019

EM Investment strategy:What the year ahead will bring

Focus:US sanctions: Another wall of worry to climb

Economy:Mexico vs. Brazil: Stock vs. Flow

Equities: Stuck in the Middle

Credit: Tactically constructive, structurally cautious

Currencies: Some stabilization, but no all-clear

This report has been prepared by UBS AG, UBS Financial Services Inc. (UBS FS), and UBS Switzerland AG. Please see important disclaimers and disclosures at the end of the document.

Investing in emerging marketsA monthly guide to investing in emerging market financial assets

Chief Investment Office GWM — December 2018

Investing in emerging markets

Editors-in-ChiefAlejo CzerwonkoMichael Bolliger

Project managementBrennan Azevedo

EditorsAbe De Ramos

Editorial deadline20 November 2018

Desktop PublishingSrinivas Addugula*

[email protected]

EditorialWill 2019 be a year of living less dangerously? ............................................ 3

Global investment views ......................................................................... 4

Top 10 Charts for 2019Figures illustrating the outlook for EM and the key countries we follow ...... 5

Emerging market investment strategyWhat the year ahead will bring ................................................................... 9

FocusUS sanctions: Another wall of worry to climb ............................................ 12

EconomyMexico vs. Brazil: Stock vs. Flow ................................................................ 13

EquitiesStuck in the middle .................................................................................. 14

USD bonds strategyTactically constructive, structurally cautious ............................................... 15

CurrenciesStabilization, but uncertainties still cloud the outlook ................................ 16

Key events in 2019 ................................................................................. 17

Emerging markets publications ............................................................ 18

Contents

* An employee of Cognizant Group. Cognizant staff provides support services to UBS.

Important disclosurePlease note there may be changes to our house view and tactical asset allocation strategies prior to the next edition of Investing in Emerging Markets. For all up-dated views, please refer to the latest UBS House View.

UBS CIO GWM December 2018 2

EditorialWill 2019 be a year of living less dangerously?

Mark HaefeleChief Investment Officer

Jorge Mariscal Emerging Markets Chief Investment Officer

As we approach the end of 2018, the sources of volatility that have afflicted financial markets all year still prevail – namely the continued removal of mon-etary stimulus by the US Federal Reserve and other major central banks, the pros-pect of further escalation of the trade dispute between the US and China, and uncertainty in Europe around the specif-ics of Brexit and the Italian budget. Yet, though some of these sources of volatility are likely to stay through next year, there have been some important changes in the backdrop that help balance the invest-ment outlook.

First, corporate earnings reports in the US for 3Q18 were very robust, posting double-digit year-on-year growth rates. And while guidance for next year was more muted (single-digit growth), the recent market correction, combined with the earnings performance, has rendered valuations more attractive. This led us to recently increase our tactical overweight recommendation on global equities in the portfolio.

Second, with the US midterm elections behind us, the market may focus more on fundamental economic and corporate performance and less on political uncer-tainty. At the margin, the new setup in Washington should produce more checks and balances in the US political process. We don’t expect significant policy shifts out of the new bipartisan Congress, other than a lower probability of another round of tax cuts by the Trump administration, which in any case was not priced in by the market.

Third, while we envision the recent im-provement in communication between China and the US to ultimately lead to a framework of negotiations, rather than a “deal,” it is good news that a dialogue between the two is taking place again. Against a backdrop of very low market ex-pectations on the resolution of the trade

and investment issues between the two countries, any positive development at the end-November G20 meetings in Argenti-na would likely be a positive catalyst for markets.

In emerging markets, it is worth noting how concerns around the fragile links such as Turkey, Argentina, and to a lesser extent South Africa and Indonesia, have not translated into contagion during the summer months. Investors rightly recog-nized differences across emerging mar-kets, and the fact that many have been pursuing prudent monetary and fiscal responses to a more challenging global environment.

As we peer into 2019, we see the follow-ing as necessary conditions for emerging markets’ resilience to turn into perfor-mance: a stable or moderately weaker US dollar, the peaking of expectations around US policy rates, evidence of traction in China’s reflationary efforts, a bottoming-out of emerging markets’ economic cycle, and the continuation of their prudent macroeconomic policies. The likelihood of these conditions being met is growing as we go into 2019. On the risk side, a significant slowdown in global growth is key to watch, as well as a more severe confidence crisis in Europe which could lead to further US dollar strength and therefore weigh on emerg-ing market assets. For now, our tactical overweight in hard-currency sovereign bonds gives us exposure to emerging markets while we monitor the drivers for a more favorable alignment. There is no denying, however, that volatility will like-ly be a core feature of asset markets in 2019.

This being our “year ahead” issue, our team has selected 10 charts that illus-trate our outlook for emerging markets as a whole and the main countries we follow. In the Strategy section, we dis-cuss our preferences and recommended

positioning within emerging markets for 2019. The Economy section discusses the impact of US sanctions, while the Focus section makes a side-by-side compari-son of Mexico and Brazil, where the two just-elected, antiestablishment govern-ments are choosing very different paths to tackle their country’s challenges. We also include a calendar of key 2019 events across developed and emerging markets at the end of the report.

We hope you enjoy this publication and find it useful in your investment strategy.

Jorge Mariscal Head of EM Investment Office

Mark HaefeleGlobal Chief Investment Officer


Global investment viewsAsset allocationGlobal equities fell about 7% in October, representing one of the worst-performing months for the asset class since the global financial crisis. Still, global leading indicators, especially for the service sector, point to robust economic growth. The US labor market remains robust and US earnings delivered slightly more than 25% year-over-year growth in the third quarter. This will slow in 2019 as the year-over-year lift from corporate tax cuts rolls off, but we continue to expect US earnings growth to be positive at 4%. In Europe, we look for mid-single-digit growth, and in the emerging markets 8%. Against this benign funda-mental backdrop, we recently increased our tactical overweight to global equities versus government bonds – a position we had reduced in the summer.

EquitiesVolatility picked up in October with US, emerging market, Euro-zone, and Japanese equities falling 6–9%. The defensive Swiss market held up better. Global leading indicators continue to sig-nal robust economic growth. In the 3Q earnings season, US com-panies delivered slightly more than 25% earnings growth. And as earnings improved globally, valuations became more attrac-tive. We keep our preference for Canadian stocks over Australian equities due to more compelling valuations. Earnings dynamics are also stronger in Canada than in Australia.

BondsWe hold an overweight on emerging market (EM) hard-currency sovereign bonds. EM fundamentals and the bonds' attractive yield of 6.9% support the position. We are also overweight 10-year US Treasuries, as we think this part of the curve has largely priced in the rate-hiking cycle, the carry is attractive, and this position will help offset equity risk in the rest of the portfolio. We also believe the Bank of Japan will allow 10-year Japanese government bond yields to move further upwards as inflation picks up, and that 2-year Italian bond yields will fall as markets realize that Italy has a low probability of defaulting over the com-ing years.

Foreign exchangeWithin our FX strategy, we are overweight the Japanese yen (JPY) versus the Taiwan dollar (TWD). The long JPY position should benefit from either rising Japanese inflation prompting the Bank of Japan to allow yields to move further upwards, or a downturn in global financial markets creating demand for the JPY's safe-haven function. Meanwhile, Taiwan is exposed to risks arising from US trade policy disputes.


Top 10 Charts for 2019Figures illustrating the outlook for EM and the key countries we follow

EM growth: Not yet the time to get excited about growthAfter a year full of headlines on emerging markets, it’s important to take a step back and look at fundamental drivers again. Historically, the attractive-ness of emerging market assets is highly dependent on economic growth. This year, emerging economies have started to slow – a trend we expect to continue in 2019 (we forecast GDP growth of 4.8% versus 5.1% in 2018). Growth rates in emerging markets are still higher than in advanced econo-mies, mainly thanks to Asia, but the differential is set to narrow further. A closer look at regions and individual countries, however, shows important differences across markets.

Although somewhat lower than this year, growth in Asia is set to remain the highest in 2019, lifted by India (7.3%) and China (6%). Latin America should accelerate from subdued levels, mainly due to Brazil as political uncertainties fade and investments pick up. The CEEMEA region remains fragmented: Tur-key will likely move into recession due to the shock to private sector balance sheets and sentiment, as well as tighter liquidity conditions. On the other hand, South Africa may accelerate again after the recession earlier this year. After solid growth in recent quarters, Central and Eastern Europe will likely see lower growth in 2019.

Investors therefore have to differentiate growth prospects between individ-ual emerging economies, but we think it’s not yet the time to get excited about overall growth. Uncertainties are high around key factors like tensions between the US and its trading partners, a further tightening of financial conditions, and the impact of commodity prices. In this environment, a tac-tical investment approach will remain key.

– Jonas David

China: Slowing down to a “new normal”We expect GDP growth to moderate to 6.5% in 2018 from 6.9% in 2017 on slower investment and consumption, before further moderating to 6% in 2019 on rising trade tensions. Investment has grown at a record low pace in 2018, and the trend will likely continue but with the cushion of fiscal support on in-frastructure. Retail sales should continue to slow down as consumers look to downgrade rather than upgrade, with consumer staples more resilient than con-sumer discretionary. Export growth should slow notably starting 2019 as more US tariffs kick in. Inflation has been mild at 2.2% in 2018 and should remain sta-ble around 2% in 2019. Policy easing should continue to shield against internal and external headwinds. Stable monetary policy provides ample liquidity, with the expectation of another 100–200bps of cuts in bank reserve requirement ratios in 6–12 months. We see fiscal policy focusing on supporting infrastructure projects.

Sino-US relations are entering a “new normal” marked by a long-lasting war beyond trade, with cycles of talk-fight-talk. The second-round effects of US tariffs should be closely monitored. The trade spat is likely to splinter supply chains. The US should benefit from core high technology and innovation output, and China from its vast skilled labor, superior infrastructure, and high degree of industrialization. The rest of the world will capitalize on both for their own interests.

– Yifan Hu

EM growth soer in 2019 – still a mixed bag

Source: UBS, as of November 2018.

Figure 1

Expected GDP growth in 2019 compared to 2018 (in %), regions and selected countries

Turkey

South Africa

Poland

Russia

KoreaTaiwan

Indonesia

India

China

Argentina

MexicoBrazil

LATAMCEEMEA

ASIA

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(201

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Change in GDP growth (2019–2018 forecast)

Chinese growth is on a secular downtrend

Source: CEIC, as of November 2018.

Consumption (% share to GDP growth, YTD, rhs)Gross capital formation (% share to GDP growth, YTD, rhs)Net exports (% share to GDP growth, YTD, rhs)

Figure 2

Year-to-date GDP growth and component contributions, quarterly

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Brazil: A more robust recovery aheadAfter close to three years of recession between 2014 and 2016, the Brazilian economy has moderately recovered, but recent growth rates have stood far below potential. As a result, the country’s GDP is almost 5% below where it could be if the recession had not taken place. To be sure, like other emerging markets, Brazil will face external headwinds in the year ahead, but these are manageable in our view considering that the country’s external accounts are balanced. If, as we expect, the incoming government continues to take policy steps in the right direction, growth in Brazil could experience a sub-stantial acceleration. Importantly, Brazil’s banking system has deleveraged relative to emerging market peers. Today, banks’ balance sheets are in good shape and enjoying historically low levels of nonperforming loans (especially on the consumer side). This is important for banks’ ability to further extend credit and add fuel to the recovery. In this favorable context, we see several opportunities in Brazilian stocks and bonds.

– Ronaldo Patah and Alejo Czerwonko

Mexico: López Obrador and MORENA in controlThe July election represented a tectonic shift in Mexico’s political landscape. Ac-cording to our estimates, the now ruling, left-leaning MORENA party and its al-lies control 340 seats in the Lower House (68%) and 76 in the Senate (59%), i.e. a qualified majority in the former and just eight seats short of one in the latter. President-elect López Obrador’s party can continue to gain support in Congress without any formal electoral process taking place, as small parties and members of the larger parties that emerged weaker from the election, such as PRI, PAN, and PRD, have incentives to join MORENA to guarantee their survival. MORENA’s legislative agenda has so far proven market-unfriendly and uncertainty-inducing, as recent proposals to reduce banking sector fees and impose restrictions in the mining sector illustrate. Congress could also shake up the political status quo for the long term, by approving public referendums as a constitutionally valid way of enforcing changes in the future, or reshaping the composition of country’s central bank board. In this new political environment, our outlook on Mexican macro dynamic and assets prices remains cautious.

– Alejo Czerwonko

LatAm: Fragile and uneven improvementThe year ahead for LatAm from a macroeconomic perspective can be best described as one of fragile and uneven improvement. We do envision an acceleration in aggregate GDP growth in the region in 2019, but the head-line number masks large discrepancies under the hood. The only meaningful source of faster economic activity expected for next year is Brazil, which we think can grow twice as fast as in 2018. Colombia’s expected acceleration will be milder, with a year-over-year expansion of slightly over 3%. Argentina will contribute to aggregate numbers by merely contracting at a slower pace, while Chile and Peru will likely maintain a respectable growth rate near 4%. Mexico’s potential 2.2% growth next year faces downside risks. Important-ly, LatAm countries and governments continue to live beyond their means, therefore exhibiting twin fiscal and current account deficits which need to be financed at least partly externally. In the context of shifting global liquid-ity conditions, this reality leaves the region more exposed to changes in the external environment than others in the emerging world.

– Alejo Czerwonko

The Brazilian economy has delevered relative to EM peers

Source: UBS, The Central Bank of Brazil (BCB), as of November 2018.

Figure 3

Total and corporate credit, as a % of GDP

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Top 10 Charts for 2019

LatAm remains the most “imbalanced” region from a macro perspective


Figure 5

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LatAm Budget Balance

Asia Budget Balance

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Budget balance and current account balance, in % of GDP

AMLO’s party dominates the Mexican Congress

Source: UBS, Reforma, El Financiero, UBS as of November 2018.

Figure 4

MORENA

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Russia: Robust fundamentals provide cushion against external pressureThe lingering risks of further US sanctions against Russia will remain a key headwind for Russian assets next year. Russia’s fundamentals remain robust, however, which is likely to cushion the economy from external pressure. The country has solid public finances, with a fiscal surplus and low indebtedness. Its external position is sound as well: Russia is a net external creditor and holds USD 462bn of international reserves. We expect oil prices to recover after the recent sell-off. This should benefit exporters like Russia and support its current account balance; we expect a surplus upwards of USD 100bn this year and next (around 6% of GDP). We are neutral on Russia across asset classes and closely monitor geopolitics, oil prices, business cycle dynamics, and reforms.

– Tatiana Boroditskaya

Turkey: Walking on a thin lineTurkish assets have remained highly volatile this year. Since the failed coup in July 2016 the country has gone through various crisis episodes. Those were driven by major political and geopolitical developments, including snap elections, a constitutional referendum in 2017 and growing tensions with the West; rising macroeconomic imbalances, fueled by a pro-cyclical macro policy mix; and multiple credit rating downgrades. The momentum has im-proved of late thanks to more orthodox policy measures, favorable current account dynamics, and improving US-Turkey relations, but Turkey continues to walk on a thin line. With inflation above 20% y/y and a fast-decelerating economy, reining in price increases and maintaining lira stability while avoid-ing a deep economic recession won’t be an easy task for policymakers given tightening external liquidity conditions, municipal elections scheduled for 31 March and lingering geopolitical tensions. Credit is our asset class of choice.

– Jérôme Audran

South Africa: Weak growth, twin deficits, and the need for reforms in a critical yearAfter the recession in 1H18, we expect the South African economy to grow a mere 0.5% this year, followed by an acceleration to 1.5% in 2019. Some re-cent reform efforts are positive and the investment outlook should improve. Meanwhile, inflation should trend higher in the coming months but remain within the official target of 3–6% next year. Still, risks are skewed toward policy rate hikes than any cuts, in our view.

At the same time, the persistent current account and budget deficits as well as high unemployment rate require further structural reforms. In our view, policymakers will continue a reform-oriented agenda, but progress takes time – more than initially expected – and the upcoming general elections imply further uncertainties. While the exact date has yet to be decided, the election should take place no later than August 2019. As politicians move into pre-election mode, we might see further delays in the reform progress and renewed leadership fights. In this environment, South Africa’s financial markets will likely experience further bouts of volatility. For now, we keep a neutral positioning across asset classes given the lack of clear catalysts.

– Jonas David

Russian fiscal and external positons are sound

Source: IMF, UBS, November 2018.

Figure 6

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Budget balance and current account balance, as a % of GDP

Persistent twin deficits requires reforms and keep the South African economy vulnerable to external pressure

Source: UBS, Bloomberg, as of November 2018.

Figure 8

Current account and budget balance (in % of GDP)

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Clear signs of stabilization in Turkey, but challenge remain

Source: UBS, Bloomberg, as of 16 November 2018.

Figure 7

Exchange rate (incl. forward rates), CIO forecast and volatility range

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GCC: Reform momentum intact, but mind the stepsGulf Cooperation Council (GCC) countries have continued to issue Eurobonds and liberalize their capital markets this year, enlarging the investable universe for foreign investors. GCC bonds and stocks have also outperformed thanks to rising GDP growth (on the verge of reaching 2.4% this year, following a contraction in 2017), narrowing fiscal deficits (Saudi’s is down 85% year-on-year in 3Q18, for example), higher energy prices (the average Brent price is up 31% from a year ago), and continued reforms (e.g., 5% VAT introduced in the UAE and Saudi Arabia). We see room for further outperformance given far-from-stretched valuations, our bullish view on oil after the sell-off, the ongoing cyclical rebound, and new economic measures. The defensive nature of most GCC bonds is another interesting feature for investors, while GCC stocks may also benefit from long-term trends such as favorable demo-graphics, ongoing urbanization, and economic diversification. Key factors to watch are fiscal consolidation, oil prices, and geopolitics.

– Jérôme Audran and Tilmann Kolb

CEE: Life after the peak is still goodGone are the days of 4%+ real GDP growth in Central and Eastern Europe, but we don’t expect growth rates to fall off a cliff – they should hover at or above 3% in 2019. Upward pressure on prices should hold up given tight labor markets in the region, moving inflation rates closer to respective tar-gets. In this environment, we expect the Czech National Bank to continue its hiking cycle, an important reason for our long position on the koruna. Its Pol-ish and Hungarian counterparts are likely waiting for the ECB to move first, however. Romania’s economy showed signs of overheating amid pro-cyclical fiscal stimulus. We monitor if and how the government will reduce the bud-get deficit, and express our cautious view with an underweight in our credit model portfolio. The main risks to the region are softer European growth and adverse dynamics around the Italian budget, Brexit, and potential auto tar-iffs. Also, disputes with the EU over the rule of law, migration, and funding are likely to continue.

- Jérôme Audran and Tilmann Kolb

Czech Republic stands out amid overall tightening labor markets

Source: UBS, Bloomberg, as of November 2018.

Figure 10

Job vacancy rates (in % of all occupied and vacant posts)

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Reforms are paying off

* Converted from IMF crude oil basket to Brent crude price. An oil price at which the government budget (fiscal) or the current account (external) would be balanced.Source: Moody's, IMF, UBS, as of 2018.

Figure 9

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2018 Change 2018–2014



Emerging market investment strategyWhat the year ahead will bring

Tactical asset allocation deviations from benchmark*

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itie

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EM equities total

EM Asia

EM LatAm

EM EMEA

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EM corporate bonds (USD)

EM sovereign bonds IG (USD)

EM corporate bonds IG (USD)

EM sovereign bonds HY (USD)

EM corporate bonds HY (USD)

EM currencies / money market

EM government bonds

underweight neutral overweight

EM inflation-linked bonds

* Please note that the bar charts show total portfolio preferences. Thus, it can be interpreted as the recommended deviation from the relevant portfolio benchmark for any given asset class and sub-asset class. These charts were formulated at the Emerging Markets Investment Committee. These preferences are designed for global investors. For models that are tailored to US investors, please see our flag-ship publication, UBS House View.

Source: UBS, as of 15 November 2018. Green/Red arrows indicate new upgrades/downgrades. Grey up/down arrows indicate increase/reduction to existing positions.

Most Preferred Least Preferred

• China

• Indonesia ()

• South Korea

• Taiwan

• Malaysia

• Philippines

• Sovereign bonds (index-level)

• High yield sovereigns

• Select LatAm corporates

• GCC sovereign and

quasisovereign bonds

• Corporate bonds (index-level)

• Investment grade sovereigns

• Asian bonds

• SGD ()

• CZK ()*

• TWD ()

With the new year just around the corner, we want to pro-vide an outlook of what 2019 might bring for emerging mar-ket investors. In a nutshell, we think the topics that kept us busy this year will remain highly relevant in 2019. We expect emerging market assets to drift higher in the quarters ahead amid high volatility and significant dispersion within asset classes. The distinction between fundamental trends and sentiment-driven corrections will be key. Investors will have to be agile, disciplined, and selective.

2019 will likely keep emerging market investors busy. Below we list what we consider to be the most important topics to monitor next year.

1. The Fed leads the way Rising US interest rates have been the most important driver

of emerging market assets in 2018 and will likely keep a top spot on investors’ radar in 2019. We expect US economic growth to slow to 2.4% from 2.8% this year, but labor mar-ket conditions are tight and upside risks to inflation linger. Countries that rely on foreign funding will have to either tighten their belts further or have strong reasons to attract capital, such as reforms or solid growth prospects. Vulner-

abilities appear highest in Argentina, India, Indonesia, the Philippines, South Africa, and Turkey. That said, after signif-icant underperformance in 2018, some assets have room to outperform in 2019. In our credit model portfolio, we remain overweight Argentina, Indonesia, and Turkey.

2. The US-China trade dispute Slowing Chinese growth due to weaker domestic demand

and declining exports to the US have had negative implica-tions for Asia and the rest of the emerging markets, given China’s role as an engine of growth. The trade conflict will possibly linger for longer and could involve disagreement about other matters that might have negative consequenc-es for global growth.

However, trade diversion could make winners out of other countries that have a similar export mix. Producers of agri-cultural goods in Argentina and Brazil are already benefiting from Chinese tariffs on US soybeans, and the production of auto parts, a target of US tariffs, could be shifted to Japan, Korea, or Mexico. A longer and deeper conflict could see a growing shift in foreign direct investments; in this case, mar-kets in Southeast Asia or Latin America might benefit as man-ufacturing destinations owing to geographical proximity and competitive labor costs.

Michael BolligerHead of EM Asset Allocation


We have a constructive view on selected bonds from Argen-tina and Brazil. We also see several opportunities in Brazilian stocks.

3. China’s policy response Unlike in previous crises, the Chinese policy response to

weakening domestic growth is more muted, focusing on measures to spur consumption via tax cuts instead of large infrastructure investments. We don’t expect Chinese poli-cymakers to announce a large stimulus program in 2019. Countries dependent on China will thus have to cope with fewer positive spillovers and lower global growth more gen-erally. How well they will manage this challenge remains to be seen, but those willing to progress with reforms are more likely to do well. Argentina, Brazil, Egypt, South Afri-ca, Thailand, Vietnam, and of course China are interesting markets to monitor.

4. Walk the thin line between reflation and reforms 2018 was a busy year, with important elections in a number

of countries. 2019 won’t bring much relief in this regard, with general elections scheduled in South Africa, India, Indonesia, and Thailand, among others. The challenge for incumbent parties will be to walk the thin line between re-flating the economy ahead of elections and showing com-mitment to reforms to avoid pressure on local assets.

The new governments in Mexico and Brazil will face similar challenges. In Brazil, President-elect Jair Bolsonaro has so far catered to the market’s taste, but pushing the social secu-rity reform through a fragmented Congress will be his key challenge in 2019, in our view. On the other hand, Mexico’s President-elect Andrés Manuel López Obrador might face growing pressure from financial markets as he continues to fulfill unorthodox campaign promises.

5. US foreign policy and the geopolitical pressure points The US administration imposed or increased sanctions

against several emerging countries in 2018. Geopolitical tensions are unlikely to disappear in 2019. Russia will likely remain in the limelight as possible new sanctions could hit Russian assets; North Korea is likely to remain a geopoliti-cal hotspot; and the situation in the Middle East will likely remain volatile. We advise investors to keep a close eye on these developments. That being said, geopolitical headlines are often of temporary relevance and bouts of underperfor-mance can present buying opportunities for investors with a medium- to longer-term investment horizon. In this context, we advise looking for opportunities in sovereign bonds from Gulf Cooperation Council nations.

Our expectations for 2019: A short outlook for asset classesCurrencies: Over our six-month investment horizon, we expect a flat to slightly positive total return for emerging market cur-rencies. In the near term, we think the case for a stronger US dollar remains intact. But once investors focus more on the US twin deficits, it may enable some appreciation in emerging mar-ket currencies due to their cheap valuations and improved carry after recent policy rate hikes. For a sustained rally, we look for a broad-based improvement in economic momentum, which seems unlikely for now. Hence, we prefer a neutral allocation to the asset class. Main downside risks include a sharp rise in glob-al yields, softer global growth, and escalating trade conflicts.

Bloodshed in EM currencies

Source: UBS, Bloomberg, as of 19 November 2018.

Figure 2

Performance of EM currencies vs the USD, year-to-date in %

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Gravitational forces at work

Source: UBS, Bloomberg, JPM, as of November 2018.

Figure 1

EM sovereign bonds, lhs

US Treasury bonds (10-year), rhs

Yields of USD-denominated bonds, in %

Emerging market investment strategy


Credit: We have a positive return outlook for a diversified bas-ket of emerging market bonds and favor a moderate risk-on al-location as we enter 2019. Challenging external conditions and headwinds from decelerating global growth mean more vola-tility, but current valuations already discount some of the risk, and the interest rate carry has increased by 150bps, to 6.8%. Credit fundamentals should remain resilient thanks to higher cash buffers, a lower dependency on foreign funding, and the more competitive valuation of most currencies. We think these factors should limit the downside. Risks to our view include a meaningful rise in US interest rates, a strong slowdown in glob-al growth, a slump in commodity prices, and rising geopolitical tensions.

Equities: Investors will need to wait for better macro indica-tors, especially from Asia, to turn more positive on emerging market equities. Until then, we expect the negative earnings momentum to continue and consensus earnings growth esti-mates of 11% for the next 12 months to fall. Valuation is more reasonable at close to 10.5x 12-month-forward P/E but not cheap enough to turn more constructive on equities. Relative to developed markets, however, emerging market equities are cheap, trading near a 30% discount.

Emerging market investment strategy


FocusUS sanctions: Another wall of worry to climb

Sanctions as a policy tool have been playing a central role in modern di-plomacy for years, allowing geopolitical powers to penalize countries they consider errant without having to pursue military confrontation. Although the US has increasingly used sanctions in recent years, President Donald Trump has upped the ante by resorting to such measures with unprecedent-ed frequency. US sanctions are also becoming more unilateral in nature, that is, less coordinated with traditional allies. We see few reasons to expect a change in this trend under the current administration.

Developing countries are often the ones at the receiving end of the sanctions game, adding complexity to our job of formulating investment strategies in emerging markets. Sanctions are notoriously hard to price into assets once they are imposed. Although the expectation of sanctions can cause the potential-ly affected assets to underperform, much of the market impact occurs at the time of announcement. In our analysis of the last few years, we found that sanctions-related underperformance has been temporary, opening some buy-ing opportunities for investors with long-term horizons. Below we discuss some emerging markets most exposed to US sanctions risk, and review what the risk means for investors in the year ahead.

Turkey: Turkish assets suffered extreme volatility in 3Q18 as the imposition of US sanctions against two Turkish ministers – follow-ing a stand-off involving the fate of jailed American pastor Andrew Brunson – added to investors’ concerns over Turkey’s deteriorating economy and policy credibility. Brunson’s release and the subse-quent removal of the US sanctions – coupled with some orthodox economic policy measures by Turkish authorities – were taken pos-itively by the markets and helped stabilize Turkish assets. Although a number of issues remain unresolved, the removal of sanctions signaled an improvement in US-Turkey relations, something we think can be sustained into next year. In this context, we believe an overweight position on Turkey in our in credit model portfolio, expressed through carefully selected bonds, is justified.

Russia: Russian assets have gone through two bouts of sanc-tions-related volatility this year, triggered by the imposition of US sanctions in April, which had knock-on effects on global alumi-num markets, and by the US Senate’s consideration of several draft sanctions bills ahead of the US midterm elections. On both occasions, Russian assets partially recovered after an initial sell-off. Some geopolitical risk premium remains justifiably priced in giv-en the ongoing uncertainty. The Trump administration is expected to impose a second round of sanctions related to Russia’s alleged involvement in the attempted assassination of former spy Sergej Skripal in the UK. Meanwhile, US security agencies have 45 days to determine whether Russia had interfered during the midterms. But Senator Bob Corker, who sponsors a draft sanctions bill on deterring elections meddling, said the bill “would be missing the mark” as the elections appear not to have been targeted by Rus-sian interference. We expect the issue of sanctions against Russia to be postponed until the New Year, when the newly elected Con-gress swears in. Partly due to lack of clarity on the sanctions front, we maintain a neutral stance on Russian assets in our strategy.

Venezuela: The Trump administration has adopted a consid-erably more aggressive stance toward Venezuela than his pre-decessors. In August 2017, the Trump White House imposed wide-ranging sanctions on US persons dealing with Venezue-lan equity and debt securities. Most recently, on 1 November, the US Treasury targeted Venezuela’s domestic gold sector, and the US has reportedly considered turning up the heat and targeting its oil sector directly. Venezuela looks increasingly isolated as the right-leaning Bolsonaro-Pinera-Macri South-ern Cone trident looks likely to increase cooperation with the Trump administration to make President Maduro’s life harder. A sudden regime change in Venezuela under current econom-ic and geopolitical conditions cannot be ruled out. We rec-ommend investors with the willingness and ability to tolerate losses to maintain a small exposure to Venezuela’s bonds in the context of a broadly diversified portfolio.

Iran: In November, the US reimposed sanctions on Iran but agreed to provide “significant reduction exemptions” to eight countries that import oil from the country, including India, China, South Korea, Taiwan, and Turkey, for six months. The oil market viewed this as a bearish development for oil prices, which declined to a three-month low on the news. The exemp-tions are positive for the importing countries as they allow for a smoother transition to other energy suppliers, while lower oil prices are also broadly supportive of emerging economies. The markets will monitor closely if further exemptions will be given after the current ones expire in 2Q19. Taking into account the recent oil price slump, we retain our view that reduced Iranian oil exports from US sanctions and healthy oil demand growth should tighten the oil market and lift crude prices into 2019.

Other countries to monitor: Saudi Arabia, North Korea.

Alejo Czerwonko, Ph.D. Strategist

Tatiana Boroditskaya, Ph.D. Analyst


EconomyMexico vs. Brazil: Stock vs. Flow

Latin America’s economic heavyweights held presidential elections in the same year for the first time in history in 2018, both yielding outcomes that mark a stark departure from the status quo. In order to assess the economic and financial market outlook of Mexico and Brazil, it helps to distinguish the noticeable differences in their starting points (the “stock”) and the likely policy paths they will take moving forward (the “flow”).

Brazil’s elected president Jair Bolsonaro will inherit an economy with profound fiscal imbalances in need of repair, as well as a government that intervenes heav-ily in the economy and is mired in red tape that constrains productivity growth and private business activity. The picture from a “stock” perspective looks far from ideal. Given Bolsonaro’s policy agenda, however, the “flow” looks more promising. His is clearly a pro-business government that aims to cut and simplify the corporate tax system, accelerate the pace of privatizations, promote con-cessions and public-private partnerships, improve the functioning of regulatory agencies, open up the economy, and formalize the independence of the central bank, among other measures.

His government still has to define how it plans to address the pension reform, which is crucial to balancing the budget in the coming years. In a baseline sce-nario, we expect Bolsonaro’s government to be able to pass changes to Brazil’s social security system through Congress. A deep fix is unlikely, however, and risks of delays and outright failure exist given the politically complex nature of the task and the fragmentation of the Brazilian Congress.

The Mexican economy, on the other hand, enjoys a relatively healthy “stock.” True, deep-seated issues of corruption and poor public safety need to be addressed, but from a macro perspective its twin fiscal and current account deficits are small relative to the size of the economy, and its exposure to the US market remains a plus. President-elect Andres Manuel López Obrador’s policy agenda is, however, quite concerning to us and may walk the country down a treacherous path. Early warning signs came with the designation of political appointees, rather than qualified technocrats, to head key qua-si-sovereign companies Pemex and CFE. Then came his announced intention to undo the education reform and eliminate, among others, the evaluation of teachers. Late October brought a “popular consultation” that ultimately led to the cancellation of the new Mexico City International Airport, a USD 13bn project that is already more than 30% completed.

Most recently López Obrador, who will take office on 1 December, announced plans to “validate” referendums through a constitutional reform as well as the intention to hold new public consultations on two railway projects, a new oil refinery, and six social programs on 24–25 November. The 2019 budget ne-gotiations in December are the next big “flow” item to watch, as well as key nominations to the central bank’s board.

In light of these trends, we believe Brazil’s macroeconomic future looks brighter than Mexico’s. Asset prices tend to be more sensitive to unexpected changes in “flow” than to the preexisting “stock” conditions. Since we see greater room for Brazil to keep surprising to the upside and for Mexico to behave in opposite fashion, we are more constructive on the former’s as-sets than the latter’s. We express this view, for example, through our fixed income recommendations in the Emerging Markets Bonds List and credit model portfolio.

Alejo Czerwonko, Ph.D. Strategist

Ronaldo Patah Analyst

Table 1

Summary of “stock“ conditionsBrazil Mexico

Population, in thousands (2016) 206,102 122,273

GDP, in USD bn (2018) 1,927 1,229

GDP growth, 10yr average (2009–2018) 1.2% 2.2%

GDP per capita, in nominal USD (2018) 9,211 9,869

Inflation, 10yr average (2009–2018) 5.9% 4.1%

Government spending, as % of GDP (2018) 37.6% 24.4%

Exports, as % of GDP (2018) 12.2% 35.9%

Current account balance, as % of GDP (2018) –0.8% –1.8%

FX reserves, as % of GDP (2018) 19.7% 14.2%

Government debt, as % of GDP (2018) 78.0% 47.3%

FX-denominated government debt, as % of GDP (2018)

3.50% 17.5%

Average credit rating, Bloomberg composite (2018)

BB– BBB+

Ease of doing business rank (2018, 1=Best, 190=Worst)

109 54

Ruling party of upper house (%, 2018)PSL

(10%)Morena (68%)

Ruling party of lower house (%, 2018) PSL (5%)Morena (59%)

Source: Bloomberg, IMF, World Bank, UBS, as of November 2018.

Table 2

“Flow“ outlookCIO assessment of overall direction in key areas

Brazil Mexico

Monetary policy Stable, possible tightening towards 2H19

Tightening

Fiscal policy Gradual consolidation Likely slippage

Ease of doing business

Improving, micro reforms and less state intervention

Worsening, increased regulation and public sector involvement

SOE outlook Improving, professional management

Worsening, employed as policy tools

Quality of institutions

Stable, possible improvement in select areas such as public safety

Worsening, possible constitutional changes and abuse of “public consultation“ tool

Sovereign ratings Stable, very gradual improvement possible

Worsening, likely downgrades



Emerging market equities will likely remain range-bound with relief rallies limited to technical bounces until positive turning points materialize. To turn bullish, we need to see a fundamental improvement in the US-China trade standoff, a growth pickup in emerging economies, and a weaker dollar. Until then, we remain neutral on equities as lingering headwinds such as US liquidity tightening, volatile commodity prices, and slower ex-pected global growth will continue to keep the asset class under pressure.

Volatile and range-bound markets aheadThe MSCI Emerging Markets (EM) Index is down about 13% this year, un-derperforming MSCI World, the developed market benchmark, by 12%. P/E derating accounted for roughly 75% of this correction, currency weakness for the balance. After the October global equity sell-off, the trend started to reverse and MSCI EM has even outperformed MSCI World by 2% over the past month. Corrections are frequent in emerging markets. Since 1990, MSCI EM has corrected on average by 22% every 11 months. Following its 25% peak-to-through pullback since January, it is fair to expect some tech-nical rebound, similar to the one seen in early November. However, these technical rallies are unlikely to be sustainable, in our view.

Catalysts needed to turn bullish are still missingGoing into 2019, we believe the risk-reward is still neutral on a 12-month-for-ward basis. Our base case sees no market growth, our bull case a rise of 14%, and our bear case a decline of 15%. We therefore do not think the time is right to enter the market as global headwinds continue to intensify. Valuations at 10.5x 12-month-forward P/E and 1.5x P/B are close to previous troughs (10x and 1.4x, respectively), but just below their long-term averages. Hence they are still vulnerable to further earnings and political risks. Consen-sus earnings estimates for 2019 have adjusted downward (by 5% over the past six months) but we believe they will continue to fall as our estimates are still about 5% below. Relative to MSCI World, MSCI EM seems cheap at close to 30% discount.To turn bullish, we would need to see more stable growth in emerging econ-omies, a positive trade deal between the US and China, and a weaker US dollar. We therefore stay tactically neutral on MSCI EM but continue to be-lieve in emerging economies’ long-term story, as their growth differential with developed economies should reaccelerate in the next two years.

Our sector and country positioning We continue to prefer value over growth sectors in emerging markets due to the more attractive valuation and earnings trends of value-heavy sectors (fi-nancials, materials, energy, telecoms) versus their growth counterparts (tech, consumer discretionary and staples).

Within our country strategy, we remain positive on China and South Korea as trade tensions seem priced into their shares. We stay negative on Taiwan, Malaysia, and the Philippines. We turn neutral on Thailand and positive on Indonesia. We remain neutral on EMEA and Latin America due to earnings and political risks.

EquitiesStuck in the middle

Corinne de Boursetty, CFA Analyst


After positive double-digit returns in 2017, emerging market bonds have posted negative returns around 3–4% this year, triggered mainly by rising US interest rates in 1H18. Since then, performance has been volatile and widely dispersed across countries and sectors. We maintain a positive re-turn outlook for a diversified basket of emerging market bonds and favor a slight risk-on allocation. Challenging external conditions imply bouts of volatility in 2019 and require investment selectivity and agility.

We expect the environment to remain challenging for emerging market bonds next year. However, we expect positive returns of 2.5–4.5% in the next six months for an actively managed and well-diversified credit portfolio. Several drivers will shape the 2019 outlook and deserve close monitoring.

First, economic growth is likely to decelerate in both advanced and emerging economies. This is on the back of rising policy rates, lingering trade tensions, and slower demand from China.

Second, further Fed rate hikes and the likely tightening by the ECB in 2H19 will weigh on funding costs and liquidity. Default rates should remain low, but the rise in corporate debt may lead to future credit stress toward the end of the business cycle.

Third, global risks and market volatility will persist. The risks span within and across national borders, including trade tensions between the US and China, politics in Europe, sanctions risk against Russia, and rising populism worldwide. Social considerations should not be underestimated either, given ongoing fiscal consolidation, decelerating growth, and important elections in several countries.

Despite these headwinds, we see opportunities in emerging market credit, especially in selected high yield and sovereign bonds. The asset class still has a decent risk-reward, in our view, and positive surprises on the risks mentioned above offer additional upside given the level of bearishness in the market.

A key factor supporting our view is valuations. After this year’s sell-off, spreads are now back to long-term averages and close to the cheapest levels relative to US high yield corporates. In addition, the sharp rise in US Treasury yields has pushed emerging market bond yields higher, beyond the widening of credit spreads. Emerging market bond yields are now close to the highs last seen in 2010.

Finally, we expect macro and credit fundamentals to remain resilient on ag-gregate. Emerging economies have stronger external accounts compared to previous years, their currencies are competitively valued in our view, and growth is holding up well across regions. All this should underpin funda-mentals in 2019. Fading risks in countries such as Turkey and Argentina and healthier corporate credit fundamentals (the current corporate default rate is 1.1%) may also provide downside protection in a more challenging back-drop.

USD bonds strategyTactically constructive, structurally cautious

Credit spreads on a rollercoaster

Source: UBS, Bloomberg, as of 17 October 2018.

Figure 1

Credit spreads, in bps

200

250

350

300

400

Oct-16 Apr-17 Oct-17 Apr-18 Oct-18

EM sovereigns

EM corporates

EM sovereigns average

EM corporates average

A sizable gap

Source: UBS, Bloomberg, JPM, as of November 2018.

Figure 2

Bond spreads of high yield bond market segements, in bps

250

350

750

650

550

450

850

2014 2015 2016 2017 2018

EM sovereign bonds

EM corporate bonds

US corporate bonds

Michael BolligerHead of EM Asset Allocation

Jérôme Audran, CFA, FRMAnalyst


Emerging market currencies traded roughly sideways over the past months. While long-term valuations remain attractive, fundamental con-ditions show little sign of broad-based improvement." Instead of "Emerg-ing market currencies have stabilized on aggregate in recent months. But while valuations remain attractive in many cases, local economic funda-mentals show little sign of a broad-based improvement

Emerging market currencies on aggregate escaped the tumultuous weeks in global equity markets relatively unscathed, trending roughly sideways in a nar-row range since mid-August. Over the past month, higher yielding Asian cur-rencies such as the Indian rupee and Indonesian rupiah recouped some of their losses, and the Turkish lira extended its rebound. The Mexican peso stood out as the worst performer after the cancelation of the new Mexico City airport shook investor confidence in the incoming administration.

We think further negative developments can push EM currencies even lower against already cheap valuations. These include global developments such as the US-China trade tensions, Fed rate hikes, and potential hits to risk senti-ment due to Italian budget and Brexit negotiations. But a resolution to these issues could also add vigor to markets, while locally the deluge of bad news has abated. Overall, while we think the risks are now more balanced than in the past months, we still don’t see the drivers in place for a sustainable recovery in emerging market currencies in the near term.

Heading into 2019, the direction of the US dollar will remain important for these currencies. We think the case for a stronger greenback in the near term remains intact based on the good performance of the US economy, the out-look for tighter US monetary policy, and the elevated yield in the USD money market. The outcome of the US midterm elections was in line with market expectations and shouldn’t lead to big shifts in policies. More infrastructure spending may be put on the agenda if agreement can be reached on funding; this could add to the already high US budget deficit. The potential for looser purse strings and a wider current account deficit later in 2019 should weigh on the US dollar, creating room for emerging market currencies to appreciate.

Real growth in emerging economies in 2019 is unlikely to exceed this year’s 4.7% (based on IMF data), and with trade tensions unresolved Asia may be headed for a rough start to the year. A broad-based improvement in growth momentum is necessary to sustainably push emerging market currencies higher, but we think this is unlikely for now. We therefore remain neutral on the asset class level, despite still attractive long-term valuations and local policy rate hikes in recent months.

In terms of individual currencies, we keep an overweight in the Czech koruna (CZK) against the euro (EUR), as we expect the koruna to get a boost from the Czech Republic’s tightening of monetary conditions. We also remain overweight the Singapore dollar (SGD) against the Taiwan dollar (TWD), as Sino-US trade tensions should hurt Taiwan more. Given the recent stabilization and improve-ment in the balance of risks, we close our long Mexican peso versus short Af-rican rand position, and our underweight in local-currency government bonds against their hard-currency peers.

Source: UBS, as of 15 November 2018. This chart shows our tactical positioning in EM currencies, usually over a six-month investment horizon. These are rela-tive value positions meant for those seeking investment opportunities in EM currencies. The views take into acount returns from interest rate differences. The length of the bars reflect risk-return considerations.

Tilmann KolbAnalyst

Jonas DavidCFA

EM currency preferencesFigure 1

Positioning over tactical investment horizon

New Old

underweight overweightneutral

LatAm

EMEA

Asi

a

BRLMXNCZKHUFPLNRUBTRYZARCNYIDRINR

KRWMYRPHPSGDTHB

TWDUSDEUR

CurrenciesStabilization, but uncertainties still cloud the outlook

Many EM central banks turned more hawkish or hiked policy rates in recent months

Source: Bloomberg, UBS, as of 14 November 2018.

Figure 2

EM central banks‘ policy rates on aggregate and in regions (in %)

0

2

8

6

4

10

12

2012 2013 2014 2015 2016 2017 2018

GEM

Asia

EMEA

LatAm


29-Nov US/China: President Trump meets with President Xi at G-20 meeting

18-DecUS: Fed FOMC meeting

01-Jan US/China: US set to increase tariffs from 10% to 25% on 200bn USD of Chinese goods01-Jan US: Congress inauguration

24-Jan EU: ECB monetary policy meeting30-Jan US: Fed FOMC meeting

Jan Japan: BoJ’s Outlook Report meetings

07-Mar EU: ECB monetary policy meeting07-Mar US: Fed FOMC meeting

29-Mar UK: Brexit day (UK scheduled to leave EU)

Mar/Apr UK: Spring Statement (budget speech)

01-Apr Japan: Nationwide local elections

10-Apr EU: ECB monetary policy meeting

Apr US: Treasury FX reportApr Japan: BoJ’s Outlook Report meetings

01-May US: Fed FOMC meeting02-May UK: Local elections

18-May Australia: Federal elections26-May Spain: Local and regional elections

May EU: Parliamentary election

Nov/DecIndia: State elections

01-DecMexico: AMLO Presidential inauguration06-DecOPEC: Oil Market meeting

15-DecMexico: 2019 budget

01-FebBrazil: Congress inauguration05-FebChina: Chinese New Year

07-FebSouth Africa: SONA (Parliamentary election date officially announced)

Feb/MarEl Salvador: Presidential elections (2nd round in March, if needed)Feb/MayThailand: General elections

01-JanBrazil: Jair Bolsonaro Presidential inauguration

Mar 1–9Brazil: Carnival (Markets closed March 4th and 5th)

31-MarTurkey: Municipal elections31-MarUkraine: Presidential elections

MarChina: National People’s Congress sets monetary and fiscal policy/targetsMar/AprIndia: Parliamentary elections

AprChina: Quarterly Politburo meeting

17-AprIndonesia: Presidential and Parliamentary elections

Apr/MayAsia: 34th ASEAN Summit

13-MayPhilippines: Congressional, regional and provincial elections

MayPanama: General elections

06-Jun EU: ECB monetary policy meeting19-Jun US: Fed FOMC meeting

27-Jun EU: ECB General Council meeting (elect new President of ECB)

Jun G20: Leaders’ Summit in Osaka, JapanJun EU: European Council meeting

01-Jul Japan: Upper House election

25-Jul EU: ECB monetary policy meeting31-Jul US: Fed FOMC meeting

Jul Japan: BoJ’s Outlook Report meetings

02-JunMexico: Gubernatorial and local elections

JunArgentina: Formal start to Presidential political campaignsJunChina: China quarterly Politburo meeting

JunGuatemala: Presidential, legislative, and local elections

12-Sep EU: ECB monetary policy meeting

18-Sep US: Fed FOMC meeting

AugSouth Africa: Parliamentary elections (April/May possible)

AugArgentina: Primary elections

20-Oct Switzerland: Parliamentary elections31-Oct EU: Last day of Mario Draghi’s term

19-Oct US: Treasury FX report21-Oct Canada: Federal election24-Oct EU: ECB monetary policy meeting

30-Oct US: Fed FOMC meetingOct Japan: BoJ’s Outlook Report meetings

26-OctIndonesia: Cabinet announced27-OctColombia: Regional and local elections

27-OctUkraine: Parliamentary elections28-OctArgentina: Presidential and Con-gressional elections (first round)

OctChina: Quarterly Politburo meeting

24-NovArgentina: Presidential and Congressional elections (second round, if needed)

Before DecPoland: Parliamentary elections

NovAsia: 35th ASEAN summit

11-Dec US: Fed FOMC meeting

12-Dec EU: ECB monetary policy meeting

Fall Japan: Constitutional referendum

DecChina: Central Economic conference

DecChina: Quarterly Politburo meeting

2019Kazakhstan: Presidential elections (possible)

Developed markets Emerging markets

No

v/D

ec20

18Ja

n 2

019

Feb

2019

Mar

201

9A

pr 2

019

May

201

9Ju

n 2

019

Jul 2

019

Aug

201

9Se

p 2

019

Oct

201

9N

ov

2019

Dec

201

9Key events in 2019


Emerging Markets publications

Investing in emerging markets

This report has been prepared by UBS AG, UBS Financial Services Inc. (UBS FS), and UBS Switzerland AG. Please see important disclaimers and disclosures that begin on page xx.

EM assets rising amid high volatility and dispersion in 2019Special feature: Top 10 charts for 2019

EM Investment strategy:

What the year ahead will bring

Focus:

US sanctions: Another wall of worry to climb

Economy:

Mexico vs. Brazil: Stock vs. Flow

Equities:

Stuck in the Middle

Credit:

Be selective, and agile

Currencies:

Some stabilization, but no all-clear

A monthly guide to investing in emerging market financial assetsDecember 2018

21 November 2018 – 4:00 pm BSTChief Investment Office GWMInvestment Research

Regional investment themesLong term investments (LTIs)Thematic investments with a 5yr+ investment horizon

White PapersEconomic, social and financial market changes over the last 20 years and investment implications

AfricaCradle of Diversity

RussiaBack at Global Center Stage

Latin AmericaBeyond peak trade

Middle East Prosperity beyond oil

10 October 2018Chief Investment Office GWMInvestment Research

Economic, social and financial market changes over the last 20 years and investment implications

Thinking strategically about Emerging Markets

A previous version of this report displayed an incorrect version of the table in Figure 42.


Monthly flagshipInvesting in emerging marketsIncluding investment views across asset classes and regions

Asset class publicationsEquities• EM Equity Monthly describing county preferences

Currencies• EM FX Monthly including currency preferences• FX one-pagers (BRL, MXN, RUB, ZAR, TRY, CEE3, APAC)

AppendixNon-Traditional Assets

Non-traditional asset classes are alternative investments that include hedge funds, private equity, real estate, and managed futures (collectively, alternative investments). Interests of alternative investment funds are sold only to qualified investors, and only by means of offering documents that include information about the risks, performance and expenses of alter-native investment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alterna-tive investment fund is speculative and involves significant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same regulatory requirements as mutual funds; (2) may have performance that is volatile, and investors may lose all or a substantial amount of their investment; (3) may engage in leverage and other speculative investment practices that may increase the risk of investment loss; (4) are long-term, illiquid investments, there is generally no secondary market for the interests of a fund, and none is expected to develop; (5) interests of alternative investment funds typically will be illiquid and sub-ject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation information to investors; (7) gener-ally involve complex tax strategies and there may be delays in distributing tax information to investors; (8) are subject to high fees, including management fees and other fees and expenses, all of which will reduce profits.

Interests in alternative investment funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Prospective investors should understand these risks and have the financial ability and willingness to accept them for an extended period of time before making an investment in an alternative investment fund and should consider an alternative investment fund as a supplement to an overall investment program.

In addition to the risks that apply to alternative investments generally, the following are additional risks related to an investment in these strategies:

• Hedge Fund Risk: There are risks specifically associated with investing in hedge funds, which may include risks associated with investing in short sales, options, small-cap stocks, “junk bonds,” derivatives, distressed securities, non-U.S. securities and illiquid investments.

• Managed Futures: There are risks specifically associated with investing in managed futures programs. For example, not all managers focus on all strategies at all times, and managed futures strategies may have material directional elements.

• Real Estate: There are risks specifically associated with investing in real estate products and real estate investment trusts. They involve risks associated with debt, adverse changes in general economic or local market conditions, changes in governmental, tax, real estate and zoning laws or regulations, risks associated with capital calls and, for some real estate products, the risks associated with the ability to qualify for favorable treatment under the federal tax laws.

• Private Equity: There are risks specifically associated with investing in private equity. Capital calls can be made on short notice, and the failure to meet capital calls can result in significant adverse consequences including, but not limited to, a total loss of investment.

• Foreign Exchange/Currency Risk: Investors in securities of issuers located outside of the United States should be aware that even for securities denominated in U.S. dollars, changes in the exchange rate between the U.S. dollar and the issuer’s “home” currency can have unexpected effects on the market value and liquidity of those securities. Those securities may also be affected by other risks (such as political, economic or regulatory changes) that may not be readily known to a U.S. investor.


Research publications from Chief Investment Office Global Wealth Management, formerly known as CIO Wealth Management Research, are published by UBS Global Wealth Management, a Business Division of UBS AG or an affiliate thereof (collectively, UBS). 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 recom-mendation 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 prod-ucts mentioned herein. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unre-stricted 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 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 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 and its employees may differ from or be contrary to the opin-ions 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 infor-mation barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affil-iates of UBS. Futures and options trading is considered risky. Past performance of an investment is no guarantee for its future perfor-mance. 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 invest-ment. This report is for distribution only under such circumstances as may be permitted by applicable law.

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