ab

Chief Investment OfficeGlobal Wealth Management

US edition

Investment Strategy Guide August 2019

UBS House View

Ignore, adjust, or abort

House View Website: Visit our mobile-friendly website, ubs.com/houseview, to experience our monthly publication online.

This month’s Feature article investigates the outlook after a particularly powerful year-to-date gain in both stocks and bonds. We remain in an environment that is supportive of risk assets, but investors cannot afford to fully ignore the alarms coming from falling rate expectations and continuing trade tensions between the US and China.

Our In Context article reassesses the current status of the market cycle and expansion, both of which are now in uncharted territory. Expansions have been growing longer, and a bit slower, as the US economy has moved toward a service-based economy. The Federal Reserve appears committed to support ongoing growth and reinvigorate inflation expectations, so this month we are adding an allocation to Treasury Inflation-Protected Securities (TIPS), funded from traditional US government bonds.

In this month’s Asset allocation implementation section, we detail important considerations for investors looking to implement our tactical tilts, including the new TIPS position, into various strategies across risk profiles. Starting this month, the tables from our Detailed asset allocation section have been moved to a separate standalone report, available at ubs.com/houseview.

This month’s Thematic Spotlight gives a tour of several of CIO’s sustainability-linked Longer Term Investment (LTI) themes, from vertical gardens and floating farms to temples made of recycled beer bottles.

Dear reader,

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

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Mike Ryan, CFAChief Investment Officer Americas, Global Wealth Management

Regards,

Mike Ryan

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August 2019 UBS House View 3

CIO Preferences

04 Feature

10 In context

12 Asset allocation

implementation

14 Bull market monitor

15 Questions we‘re tracking

16 Top themes

18 Global outlook

26 Key forecasts

26 US sector allocation

This is a visual summary of our preferences. For the full detailed asset allocations see our full detailed asset allocation tables report.

Overweight Tactical recommendation to hold more of the asset class than specified in the moderate risk strategic asset allocation.

Underweight Tactical recommendation to hold less of the asset class than specified in the moderate risk strategic asset allocation.

Neutral Tactical recommendation to hold the asset class in line with its weight in the moderate risk strategic asset allocation.

Also in this report

4 UBS House View August 2019

FEATURE

Ignore, adjust, or abort

After a decade of work, it all came down to an “ignore, adjust, or abort” decision in the final moments. As Neil Armstrong and the Apollo 11 crew prepared for their descent to the moon’s surface, an alarm sounded. A quarter of a million miles away, Mission Control worked out the problem and deduced that the alarm could be safely ignored. The result was the historic lunar landing, 50 years ago this month.

Markets had a successful lift-off in the first half of 2019. Total returns for global and US equities were 15% and 17.6%, respectively, the best since 1997. US investment grade (IG) bonds returned 7% and their high yield (HY) counterparts 10%, while European IG and HY bonds delivered mid-to-high-single-digit percentage returns. In emerging markets, total returns for equities were 11.7% and 11% for USD-denom-inated sovereign bonds. Overall, it was the best first half for balanced portfolios since 1998. But now a number of alarms are sounding.

First, long-term rate expectations have fallen dramatically. “Japanification” looks increasingly plausible for the developed world. Second, markets may be overestimat-ing central bank rate cuts, when economic data still has the potential to change course. Third, despite a truce in the US–China trade dispute, the broader conflict looks set to continue.

When alarms go off investors must also decide to ignore, adjust, or abort. We don’t think the alarms should be ignored. But we also think the long-term opportunity cost of aborting is likely to be too high. With a recent turn toward easing, central banks are signaling they intend to continue to try and support economic growth. In practice, that means they continue to support risk assets by driving down the returns on safe assets like bonds and cash. So we adjust our strategy rather than underweight risk.

In our view, a lower for longer rate environment will support carry trades and income enhancement strategies. In our tactical asset allocation we introduced an overweight in Treasury Inflation-Protected Securities (TIPS) versus US government bonds and in our FX strategy increased the size of our overweight positions in select emerging market foreign exchange. We maintain our overweight in equities and hold a large under-weight in low-yielding US government bonds. But with uncertainty about the effec-tiveness of central bank easing, and the risk of unpredictable shifts in the US-China trade dispute, we also hold countercyclical positions. These include an overweight in long-maturity treasuries, and a relative value position in US equities versus interna-tional developed equities.

The recent turn toward central bank easing should support risk assets by driving down the returns on safe assets.

Mark HaefeleGlobal Chief Investment OfficerWealth Management

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Lower rates

A Federal Reserve rate cut raises the question of “Japanification.” Yet markets may be overestimating how much central banks will cut.

Trade truce

The trade conflict is impacting economic data and global supply chains. However, we don’t expect a resolution in the near term.

Asset allocation

We add an overweight to TIPS versus US government bonds. In our FX strategy, we also add more carry through high yielding emerging market currencies.

Carry opportunities

In our view, a lower-for-longer rate environment will be supportive of carry trades andi ncome enhancement strategies.

August 2019 UBS House View 5

FEATURE

Lower for longerFor the first time ever this month, German 10-year yields briefly fell below the ECB’s deposit rate, currently –0.4%, suggesting the market is anticipating a sustained period of rates at ultra-low levels. A record USD 11.7tr of global debt now has a sub-zero yield (see Fig. 1). And markets are pricing an average annual inflation in the Eurozone of around 1.1% over the coming decade, implying a persistent failure by the ECB to approach its 2% target.

A record USD 11.7tr of government debt now has a yield below zero.

What were once seen as temporary cyclical phenomena now look increasingly struc-tural. The combination of low growth, inflation, and yields is drawing comparisons with Japan’s experience after the collapse of its asset bubble at the end of the 1980s.

We think it is too early to say the rest of the world is going down the debt-deflation route that has plagued various Japanese asset prices. Since the 2008 financial crisis, inflation has mostly remained positive, even in Europe, whereas Japan experienced several periods of outright deflation. For the last 25 years, nominal GDP in Japan has averaged zero inflation, while it has been around 1.8% in the US and 1.7% in Europe. Government debt levels relative to GDP, while high by historical standards, are also significantly lower than in Japan.

That said, while Europe and the US are not necessarily destined to repeat the Japanese economic experience, we may need to prepare for an extended period of low returns on safe assets. Returns on bonds have been very strong over the past decade as markets have adjusted to the idea that growth, inflation, and cash rates will remain low for the foreseeable future. But with 10-year Bund yields already at –0.3% at the time of writing, we expect lower investment returns in the future. There is a Japan parallel here too. Japanese Government Bonds (JGBs) performed very strongly through the 1990s and 2000s, but poorly in more recent years. Since the beginning of 2013, annualized returns on 10-year JGB’s have been just 1.3%, and for the last three years returns have been close to zero. For comparison, German Bund yields this month fell below JGB yields.

We think it’s too early to say the rest of the developed world is headed towards a Japan-style period of deflation.

But investors may need to prepare for an extended period of low returns on safe assets.

Jan-19Jan-17 Jan-18Jan-16Jan-15

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

0

Negative yielding debt is at a record USD 11.7tr

Source: Bloomberg, UBS as of July 2019

Figure 1

Debt with a yield below zero in the ICE BofAML Global Broad Market Index (USD millions)

Read more on ubs.com/houseview

6 UBS House View August 2019

FEATURE

With safe asset returns likely to be limited, we hold a large underweight position in low-yielding US government bonds, and overweight various higher-yielding carry strategies to generate income. In our FX strategy, we overweight a basket of higher-yielding emerg-ing market currencies (Indonesian rupiah, Indian rupee, South African rand) against a basket of lower-yielding currencies (Australian, New Zealand, and Taiwan dollars). We keep a thematic focus on a number of dividend strategies, particularly in Europe, where the gap between dividend yields and government bond yields is 4%, back to peak levels reached since the end of the financial crisis. (see Fig. 2). And investors can also consider alternative strategies to boost income such as buy-write strategies, in which investors earn option premia in exchange for reducing their exposure to upside in the market.

The central bank “put”A key catalyst for the adjustment in rate markets this year has been the shift in central bank policy away from “normalization” and toward easing. Since the financial crisis, central banks have generally made the right decisions to keep growth and inflation stable, and their stimulus has consistently supported asset prices. As such, the policy shift raises the question as to whether investors should go beyond trades to generate income and instead position more aggressively for capital gains in equities.

Stocks do look attractively valued relative to bonds—with a global equity risk premium of 5.8% compared with a long-term average of 3.5%. And, clearly, looser monetary policy is more supportive of asset prices than tighter monetary policy. But while we think equities probably will move higher from here, we are conscious that expectations for loose policy are already high, and so markets could be vulnerable to repricing, par-ticularly in the event of higher-than-expected growth or inflation data. Furthermore, low earnings growth expectations might limit the scope for equity multiples to re-rate—we forecast just 1% earnings growth in the US and 0% in Europe this year.

We therefore take a more nuanced view. In our tactical asset allocation, we hold over-weight positions in US, Japanese, and emerging market equities versus US govern-ment bonds, but we combine this with countercyclical positions which could be expected to perform well if central banks disappoint market expectations. We hold an

To adjust to this situation we have adopted various carry strategies to generate income.

Central bank stimulus has supported asset prices.

We believe expectations of lower rates remain susceptible to repricing, particularly in the event of higher-than-expected inflation.

We balance our overweight to equities versus US government bonds with countercyclical positions in the event central banks disappoint investors.

20122010 201120092007 20182008 20172016201520142013 2019

5

–1

–2

0

4

3

2

1

Dividend yields have become more attractive relative to government bonds

Source: Thomson Reuters, UBS

Figure 2

Trailing dividend yield minus 10-year benchmark bond yield,%

EMU CH

UK

August 2019 UBS House View 7

FEATURE

underweight in short- to intermediate-maturity government bonds versus cash, an overweight in long-maturity Treasuries, and long exposure to the yen, implicitly in our Japan equity overweight and explicitly in our FX strategy.

Truce, but no dealThe G20 summit last month saw the US and China reach a temporary truce in trade negotiations, and both sides have strong incentives to avoid further rounds of retalia-tion. While existing tariffs have not been cut, the resumption of talks may allow the time and space for global growth to gain some traction.

That said, uncertainty over trade is already disrupting business investment and has slowed global growth (see Fig. 3). The realization that the dispute could continue is prompting more companies to change their supply chains to mitigate the risk of future restrictions. This will create a few winners. An increasing focus on innovation and the greater need to move up the value chain should support our “Enabling technologies” Long Term Investment theme. Furthermore, companies with high concentration in China may consider automation-related greenfield projects outside China to lower costs and enhance productivity. Our “Automation & robotics” Long Term Investment theme could benefit here. But in contrast, companies with deeply embedded US-China supply chains could face disruption. Please see our recent report How global supply chains are reacting to trade tensions for more details on the stocks that could be rela-tive winners, or challenged, by these supply chain adjustments.

Presidents Trump and Xi also retain significant discretion over tariff policy, and sudden shifts in negotiating positions have been hard to predict in the past. So investors need to remain braced for a bumpy ride toward any future deal. This is another reason why we continue to recommend countercyclical positions in our tactical asset allocation.

Asset allocation In our tactical asset allocation this month we increase the size of some “carry” posi-tions to reflect our view that renewed easing by central banks creates a favorable environment for income strategies. We also introduce an overweight position in Tre-asury Inflation-Protected Securities (TIPS) in response to central bank easing and make various adjustments to our foreign exchange trades to account for recent shifts in central bank policy and market pricing.

The trade truce between the US and China has supported markets.

Trade uncertainty remains and we expect more companies to change their supply chains to mitigate the risk of future restrictions.

Jun-18Jun-17Jun-15 Jun-16Jun-14Jun-13

92,000

80,000

78,000

82,000

90,000

88,000

86,000

84,000

Trade tensions have taken a toll on capital spending

Source: US Census Bureau, Bloomberg, UBS, as of July 2019

Figure 3

US capital goods shipments, USD (millions)

8 UBS House View August 2019

FEATURE

We overweight TIPS versus US government bonds. The Fed is likely cutting rates more than what’s needed to support growth in an attempt to raise inflation expectations, which have dropped to a level suggesting market skepticism over the Fed's ability to hit its 2% target in the future. Rate cuts would send a strong signal that the Fed is serious about getting inflation back to target. Buying TIPS versus government bonds provides exposure to market-implied inflation expectations, which the Fed is aiming to push higher.

In our FX strategy, we increase the size of our overweight in a basket of high-yielding emerging market currencies (Indonesian rupiah, Indian rupee, South African rand) against a basket of lower-yielding currencies (Australian, New Zealand, and Taiwanese dollars). We think these currencies should benefit from a favorable carry environment, as well as from steady global and EM economic activity.

We close our underweight Australian dollar versus the US dollar. The weakened Australian economy prompted the Reserve Bank of Australia to cut rates by 25 basis points (bps) in both June and July. We expect a further cut in November 2019, but the scope for further cuts is limited with Australian rates already at a record low 1%. In contrast, we expect the Fed to cut rates at the end of July and it has more room for further easing.

We close our overweight position in the euro versus the Swiss franc. We expect the Swiss National Bank to wait for the ECB to change policy before acting itself. With the ECB becoming more dovish and potentially following the Fed in easing policy soon, underweight Swiss franc positions are at risk and so we have closed our position.

We overweight the British pound but now versus the US dollar instead of the Australian dollar. The British pound has been the worst performing G10 currency versus the US dollar over the past three months, down close to 5% at the time of writing. At USD 1.24 the pound is now significantly below our fair value estimate of 1.59. While much of this is due to uncertainty surrounding Brexit, the UK economy has been holding up well and inflation is at the Bank of England’s target. We do not believe it is possible to forecast the ultimate outcome of the Brexit process, and we don’t attempt to do so. But we estimate that the market is now pricing a roughly 50% chance of a no-deal exit from the EU by the end of October. This is excessive, in our view. We now overweight sterling relative to the US dollar rather than the Australian dollar because we think scope for Australian dollar depreciation is now more limited.

We also continue to hold the following positions:

We overweight US equities versus international developed equities. We believe that Eurozone stocks are more vulnerable in an environment of heightened uncertainty over global trade and weaker global growth. The region also faces political headwinds in the form of Brexit. We expect the US market to be more resilient. The Fed has more ammunition than the ECB to combat slowing growth should trade tensions escalate.

We overweight emerging market and Japanese stocks versus US government bonds. Since the start of the year, Japanese stocks are up just 7.6% and emerging markets 11%, compared to around 18% for global equities. Both are heavily geared to the global cycle, and we think neither has priced in a macro recovery compared to other regions. Continued uncertainty about the global growth outlook will likely weigh on sentiment in the near term. But assuming the US-China trade truce holds, these equities offer the most potential upside, in our view.

We overweight TIPS versus US government bonds.

In our FX strategy, we increase the size of our overweight in a basket of high-yielding emerging maket currencies

We close our underweight Australian dollar versus the US Dollar.

We close our overweight position in the euro versus the Swiss franc.

We overweight the British pound, but now versus the US dollar instead of the Australian dollar.

We overweight US equities versus international developed equities.

We overweight emerging market and Japanese stocks versus US government bonds

August 2019 UBS House View 9

FEATURE

We underweight short- to intermediate-maturity US government bonds ver-sus cash. Yields on two- to 10-year US treasuries have held steady over the past month, but are still below the yield on 3-month T-bills. We believe the market may be overstating the risk of sharp rate cuts (see Fig. 4). US unemployment at 3.6% is the lowest in decades, US economic growth remains around trend, and financial conditions are accommodative. The position serves as an effective hedge against the risk that the Fed surprises the market hawkishly, which could have a negative effect on risk assets.

We overweight long-duration US treasuries versus cash. We continue to recommend an overweight to long-duration treasuries as a hedge against equity market risk. While 30-year Treasury yields have already fallen over 40bps this year, they could fall at least that amount if growth continues to slow and the Fed cuts rates more aggressively.

In our FX strategy, we overweight the Norwegian krone versus the euro and Canadian dollar. With Norwegian inflation above the Norges Bank’s target and growth remaining well above trend, we expect the central bank to aim for yet ano-ther rate hike this year. This stands in contrast to the Eurozone, where the ECB has adopted a more dovish stance and could ease policy in the coming months. We are also cautious on the outlook for the Canadian dollar, given the continued weakness of the nation’s housing market and the risk for rate cuts in the US.

Mark HaefeleChief Investment OfficerGlobal Wealth Management

We underweight short- to intermediate-maturity US government bonds versus cash.

We overweight long-duration US Treasuries versus cash.

In our FX strategy, we overweight the Norwegian krone versus the euro and Canadian dollar.

Jul-2019 Jan-2020 May-2021Aug-2020 Mar-2021 Oct-2021

2.6

2.4

2.2

2.0

1.8

1.6

1.4

1.2

1.0

The market is pricing an aggressive pace of Fed easing

Source: Bloomberg, UBS as of July 17

Figure 4

Fed funds futures

Fed funds futures pricing

UBS forecast

10 UBS House View August 2019

IN CONTEXT

Uncharted territory

The US economy hit two milestones in July: The 10th anniversary of the start of the current expansion which be-came the longest expansion in US his-tory, according to the National Bureau of Economic Research. Normally such milestones are cause for celebration. Instead, they seem to be creating anxi-ety. If no other expansion has lasted this long, then that presumably can’t bode well for the current one. The recent slowdown in the US and global econo-my adds to that concern.

It’s a concern that we think is over-stated. That’s in part because the Fed, along with the expansion, is also about to embark on uncharted territory. Nor is economic weakness widespread, as the labor market and consumer spending continue to exhibit strength. A less ap-preciated point is that economic cycles have changed over the past 40 years, and what was once considered old may now only be middle-age for expansions. Collectively, we think these factors sup-port the “risk-on” tilt in our tactical as-set allocation (TAA), including a new position on inflation expectations.

Trending to a soft landing… As the economy enters the 11th year of recovery we consider it to be in late cy-cle. The good news is that cycles don’t die of old age. The better news is that the US economy appears to be headed for an extended soft landing. Growth has slowed to about 2%, the top end of the estimated range for US potential growth. While investment and manu-facturing activity have declined notably, this was expected as the tax reform and fiscal stimulus tailwinds faded, while the US-China trade conflict has com-pounded the drop. But there’s little evidence the economy is overheating, and there aren’t significant financial imbalances. Escalating trade tensions is

a near-term risk, but if that’s avoided as we expect then a soft landing could easily continue for two or more years.

…in a long, not necessarily old, ex-pansionThis possibility seems much more likely after recognizing that the US economy, and therefore the cycle, functions dif-ferently today than four decades ago. A direct consequence is that expan-sions have been getting longer. The last four are in the top six in longevity since 1854: From November 1982 until this July the economy was in recession less than 8% of the time versus 35% from 1854 to 1982 (Fig. 1). A number of fac-tors have contributed to this trend: In-creased policy flexibility to respond to slow growth; the ongoing shift toward a services-based economy that’s less re-liant on manufacturing; globalization; positive demographics; and a secu-lar decline in inflation since the early 1980s.

Add this all together and the current expansion doesn’t look as old as its re-cord-setting age implies. But the struc-tural changes to the economy that have extended expansions have also made it harder to interpret typical cycle indica-tors. Data points that could be sending a negative signal, such as an inverted yield curve, may be less worrying this time, but it’s hard to say with certainty.

The Fed, also in uncharted territoryThat brings us to the Fed, which we ex-pect will cut rates at the 31 July FOMC meeting—50 basis points (bps), possibly spread between the July and September meetings. Policy easing isn’t unusual, but it is with labor market and financial conditions so strong. If anything, the Fed should be considering hiking rates under current conditions. These may be insurance cuts motivated by uncertain-

Jason Draho, PhD Head of Asset Allocation Americas, Chief Investment Office GWM

Leslie Falconio Senior Fixed Income Strategist AmericasCIO Global Wealth Management

August 2019 UBS House View 11

IN CONTEXT

ties about the trade outlook and the global economy. It’s also likely that the Fed wants to reverse the yield curve inversion, even if it’s a false signal, which a 50bps cut should achieve.

The Fed is also likely cutting rates beyond what’s needed in an attempt to raise inflation expectations. The personal consumption expenditures (PCE) price index has fallen sig-nificantly below the Fed’s 2% annual target. Market-implied inflation expectations have also dropped to a level suggest-ing market skepticism over the Fed’s ability to hit this target in the future. A rate cut now would send a strong signal that, after years of missing to the downside, the Fed is serious about getting inflation back to target.

“Don’t fight the Fed” positioningThe impact of rate cuts on the economy may be limited, but for risk assets it’s a clear positive. Since 3 June the S&P 500 is up 9%, while international developed and emerging market equities are both up about 5%. The rally was triggered when, on 4 June, Fed Chair Jay Powell indicated that rate cuts were coming. Other major central banks have also announced eas-ing intentions since then, which further supports our current US TAA recommendation to overweight equities versus fixed income—specifically the US, Japan, and emerging markets.

This month we also added a new position that should di-rectly benefit from the Fed’s attempt to lift inflation expecta-tions. It’s an allocation to Treasury Inflation-Protected Secu-rities (TIPS), funded by reducing the US government bond position. An outright purchase of a TIPS bond is rewarded if inflation rises, since the principal increases with inflation. But buying TIPS and selling government bonds in the TAA is roughly equivalent to a long position in market-implied infla-tion expectations, the very market price that the Fed is aim-ing to push higher by cutting rates. One measure of market expectations is the 5-year breakeven inflation rate (Fig. 2). In June it fell to 1.46%, its lowest level since the 2016 election. It has since risen to 1.6% but is still below its March peak of 1.9% and the 2% that it exceeded for much of 2018.

It’s reasonable to expect that a soft landing for the economy, a continually tightening labor market, oil prices (WTI) rising to the mid-USD 60s, and central banks globally turning more accommodative should be sufficient to get inflation expecta-tions back closer to or even above 2% in the next six-to-12 months. Plus, if there’s one lesson investors have learned since this expansion began a decade ago, it’s that it’s not prudent to fight the Fed. With that we concur.

86420 10

1854–1919

1982–Present

1919–1982

US economic cycles are getting longer

Source: NBER, UBS, as of 17 July 2019

Figure 1

Average expansion length in years, 1854 to present

Jul-17Jul-16Jul-15Jul-14Jul-13Jul-12Jul-11Jul-10Jul-09 Jul-18

2.3

2.0

1.8

1.5

1.3

1.0

2.5

Inflation expectations have fallen this year

Source: Bloomberg, UBS, as of 17 July 2019

Figure 2

Market implied 5-year inflation expectations (in %)

12 UBS House View August 2019

Asset allocation implementationThe UBS House View is our current assessment of the global economy and financial markets, with corresponding investment recommendations. The asset allocation implementation of this view can vary across model portfolios, depending on their objectives.

Our Tactical Asset Allocation (TAA) recommendations

Overweights• US equities• Emerging market equities • Japan equities• China and Brazil equities

(all-equity portfolio)• Long-maturity Treasuries • Treasury Inflation-Pro-

tected Securities (TIPS)• Cash

Underweights• US government bonds• International developed

equities

What’s changed

We introduced an alloca-tion to TIPS, funded by reducing US government bonds.

A note on TAA scalingUnless noted otherwise, the TAA percentages on this page refer to a Moderate risk profile. Generally speaking, we apply a scaling me-thodology to TAA tilts for lower-risk portfolios, so that a 2% overweight in the moderate risk profile reflects as a 1.5% and 1% overweight, respectively, in the Moderately Con-servative and Conservative profiles.

Implementation guidance

US economic growth appears to have stabilized just above long-term potential, US-China trade tensions have likely reached a prolonged ceasefire, and central banks not only have an easing bias but have indicated a proactive willingness to act to avert a more serious growth slowdown. All of this supports our continued preference for stocks over bonds but with some barbell positioning that should help in drawdowns. We have modestly increased our tactical allocation to risk, as central banks focused on lifting inflation ex-pectations should help asset price reflation.

Equities We maintain the current overall equity allocation, which includes a preference for the US over international developed equities, the Eurozone in particular. Stable US growth while the Eurozone continues to slow, coupled with a dovish Fed, should provide a favorable tailwind for US stocks, which also benefit from a relative growth and defensive bias in case economic conditions are more sluggish than we expect.

We maintain our preference for emerging market (EM) and Japanese equities. Both are relatively cheap and are positioned to outperform after the global cycle troughs. Within EM, China is attractive on the prospect of additional policy stimulus. We added a pre-ference for Brazil in the all-equity portfolio, based on an improving macro outlook after pension reform passed a first-round vote in Congress.

Among US equity sectors, we prefer to position for a cyclical recovery with an overweight to consumer discretionary (consumer spending is solid) and communication services (de-fensive growth). We balance this cyclical exposure with an underweight to industrials, which are exposed to the global cycle, and real estate, which has gotten rich and is vul-nerable to rising rates.

Fixed income We maintain a barbell strategy by overweighting cash and long-maturity treasuries (20+ years), while underweighting short- and intermediate-maturity US government bonds. We expect 50 basis points (bps) of Fed rate cuts, which is fully priced. If the Fed stops there, yields should gradually rise, especially if growth continues to improve and inflation ticks up toward 2%. Long-maturity treasuries can still be an effective counter-cyclical hedge, even after rates have declined. We added a preference for TIPS versus US government bonds to position for rising inflation expectations, one of the few market prices that looks inexpensive and is also a primary goal for the Fed.

In our Sustainable Investment (SI) portfolios we maintain a preference for green bonds versus high environmental, social and governance (ESG) corporate bonds. The former have similar duration, but they’re more defensive due to their sector composition.

Full detailed asset allocation tablesView our full set of asset allocation tables for guidance on positioning across different investor types, portfolio strategies, and risk tolerances.

ASSET ALLOCATION IMPLEMENTATION

August 2019 UBS House View 13

Risk profile implementation guidance

Tactical positioning for the Moderate portfolio is applicable for other risk profiles, with adjustments. In Conservative portfolios we retain the preference for Japan equities, but not EM stocks. If trade tensions persist and economic conditions deteriorate, the yen is likely to rally, as it has the past few months, cushioning weakness in Japanese equities, whereas the opposite currency effect is likely in EM.

In the Aggressive portfolio, we recommend 20-30 Treasury strips paying only principal in place of 20+-year Treasury bonds. The former has longer duration and thus offers more protection du-ring a sustained economic slowdown when rates are likely to fall.

In contrast, short-to-intermediate maturity Treasuries are suffi-cient for Conservative portfolios. We also recommend a smaller increase in the cash allocation for more aggressive portfolios, as long-duration bonds are a better hedge against the equity risk.

The TIPS allocation is appropriate for all risk profiles, but longer maturity TIPS (10+ years) are better for Aggressive portfolios be-cause of their longer duration. In Conservative portfolios shorter maturities (0-5 years) are recommended because they have lower rising rate risk.

Non-taxable investorModerate risk, without non-traditional assets

Strategic Asset Allocation (SAA)

Tactical tilt Tactical Asset Allocation (TAA)

Preferences

Cash 5.0 +2.0 7.0

Fixed Income 46.0 -4.0 42.0

US Gov't FI 16.0 -8.0 8.0

US TIPS 0.0 +2.0 2.0

US Treasuries (long) 0.0 +2.0 2.0

US Municipal 0.0 0.0

US IG Corp FI 21.0 21.0

US HY Corp FI 5.0 5.0

Int'l Developed FI 0.0 0.0

Emerging Markets FI 4.0 4.0

EM Local Currency FI 0.0 0.0

EM Hard Currency FI 0.0 0.0

Equity 49.0 +2.0 51.0

US All Cap 0.0 +2.0 2.0

US Large Cap Growth 9.0 9.0

US Large Cap Value 9.0 9.0

US Mid Cap 5.0 5.0

US Small Cap 3.0 3.0

Int'l Developed Markets 17.0 -2.0 15.0

Japan 0.0 +1.0 1.0

Emerging Markets 6.0 +1.0 7.0

Overweight: Tactical recommendation to hold more of the asset class than specified in the moderate risk strategic asset allocation. Underweight: Tactical recommendation to hold less of the asset class than specified in the moderate risk strategic asset allocation. Neutral: Tactical recommendation to hold the asset class in line with its weight in the moderate risk strategic asset allocation. Month-to-month change“Emerging Markets FI” is a blend of 50% local currency, 50% hard currency.Source: UBS

14 UBS House View August 2019

BULL MARKET MONITOR

Bull Market Monitor

Cycle statusWe think that the US business cycle has transitioned to the late stage. Growth decelerating from its peak toward long-term potential and Fed monetary policy being roughly neutral are the two characteristics typical of a late-cycle economy. The good news is that the economy can be late cycle for a long time. At one point last year the economy had been trending toward overheating, but the more recent data shows that growth is slowing to a more sustainable pace as fiscal and monetary stimulus fades. Subdued inflation has allowed the Fed to send more dovish signals, and risks that excessive monetary policy tightening will cause the cycle to end appear very low.

What‘s new?The meeting between President Trump and President Xi at the G20 summit in Osaka produced an agreement to resume trade talks, but in recent days that agreement has started to look shakier amid com-plaints from both sides. Recent economic data has been mixed. Pur-chasing managers indexes (PMIs) have continued to move lower and are now at a level consistent with trend growth. Job growth rebound-ed strongly in June. Retail sales were better than expected in June and it now appears that 2Q19 was a strong quarter for consumption. We leave our growth indicator just above neutral. Recent inflation data has been stronger, with core personal consumption expenditures (PCE) inflation running at around a 2% pace in 2Q19. Credit spreads on corporate bonds were little changed over the past month. On the back of dovish comments from FOMC members, the market is now pricing in a high probability for the Fed to cut rates by 50 basis points at the next meeting on 31 July.

What are we watching?It appears that politicians are close to reaching a deal that would set budget caps for the next two years while also suspending the debt ceiling until after the 2020 elections. We await the 31 July FOMC meeting to see what the Fed does and, importantly, how they explain their actions. The drama over Brexit continues, although regardless of the outcome the impact on the US economy should be limited.

What are the investment implications?While now late cycle, we view the current growth, inflation, and mon-etary policy environment as still supportive for risk assets. We remain overweight equities in our tactical asset allocation.

Equity bull markets rarely end in the absence of a recession occurring, which is why we track key attributes of the business cycle to gauge how the expansion is evolving and calculate the risks of a recession.

Overheating indicators

Labor market

Weak Tight

Inflation (relative to 2%)

Financial indicators

Each indicator is evaluated relative to a neutral level that is sustainable over time in order to determine whether the economy is at risk of overheating or if financial conditions will start to restrict growth.

Key cycle indicatorsThe cycle indicators gauge whether the econ-omy is overheating and if financial conditions are restricting growth. These determine our assess-ment of where we are in the cycle.

Current month: Last month:

Yield curve

Steep Inverted

Credit conditions

Monetary policy

Accommodative Restrictive

Growth (relative to potential)

Below Above

Overall: Late cycle

Early Late

Below Above

Loose Tight

August 2019 UBS House View 15

The US and China resumed trade talks this month after Presidents Trump and Xi agreed to a cease fire at the G20 summit in late June. As negotiations continue, both sides have maintained their tough stanc-es. China reportedly reshuffled its negotiating team, giving more prominence to Commerce Minister Zhong Shan, who is regarded as a hard-liner. Meanwhile, President Trump has complained about Chi-na’s failure to resume purchases of US agricultural products, while citing China’s 2Q economic slow-down as proof that the US is win-ning the trade war.

Market expectations for central banks to cut rates have increased. Federal Reserve Chair Jay Powell testified before Congress on 10 July, maintaining that the Fed will act as necessary to sustain the eco-nomic expansion. Markets reacted by pricing in an increased probabil-ity of a rate cut of 50 basis points (bps) rather than 25bps at the 31 July FOMC meeting. Meanwhile in Europe, minutes from the Europe-an Central Bank’s (ECB) June meet-ing were also interpreted as paving the way for rate cuts later this year.

Driven largely by expectations of easier monetary policy, equity markets reached new highs this month. The S&P 500 breached the 3,000 threshold intraday on 10 July and closed above 3,000 for the first time on 12 July, coinciding with Powell’s testimony. 2Q earn-ings season is underway, which could provide an indication of whether stocks still have room to rally. Many expect a lull in earnings growth due to headwinds around the trade disputes and slowing global growth.

Month in reviewQuestions we‘re trackingWhat is the US equity market telling us?US equity markets hit a record high recently amid renewed optimism over a trade truce between the US and China and continued expectations for Federal Reserve rate cuts. With growth close to trend, inflation low, and monetary policy supportive, equity markets appear to believe this Goldilocks economic scenario—not too hot, not too cold—will continue. We remain overweight equities, but we also position to protect against a breakdown in trade talks and other downside risks.

What is the US bond market telling us?The US bond market seems to be pointing to weaker growth. But there is little sign of a sharp slowdown: US growth is close to trend, inflation is low, and monetary policy is accommodative. It makes more sense that the bond market is pricing pre-emptive Fed rate cuts. While the decision is finely balanced, we expect the Fed to cut rates at its July meeting. The risk remains that the Fed disappoints market expectation for more than 100 basis points (bps) of cuts by the end of 2020.

Can the US-China trade truce lead to a deal?The meeting between Presidents Donald Trump and Xi Jinping at the G20 succeeded in averting a breakdown of talks while failing to produce a breakthrough to reduce tariffs. The most likely outcome is a prolonged truce on trade, with neither an escalation nor a removal of tariffs. But neither side appears in a rush for a deal. Both Presidents Trump and Xi appear to be calculating that they have strong cards to play. Investors should remain braced for a bumpy ride toward a more conclusive deal.

What’s next for Brexit?Boris Johnson, the former foreign secretary and leading advocate of Brexit in the 2016 referendum campaign, has emerged as the frontrunner to become the next British prime minister. Johnson has said he favors leaving the EU on 31 October 2019 with or without a deal. Whatever the outcome of the leadership contest, the next PM could continue to face a political impasse. We now see a rising chance that the UK will be compelled to ask the EU for a third delay to Brexit. This would, in turn, raise the prob-ability of a snap general election or second Brexit referendum.

How can entrepreneurs diversify their wealth?Entrepreneurs typically have much of their wealth tied up in their businesses. This concentration of capital can generate significant returns. But concentration can also re-duce liquidity to finance spending needs and lead to over exposure to a single country, currency, and asset class. Diversification can mitigate these risks and give entrepreneurs access to new sources of returns.

16 UBS House View August 2019

TOP THEMES

Heinekens, Cows, and Giants, oh my!

Laura Kane, CFA, CPAHead Thematic Research AmericasCIO Global Wealth Management

Michelle Laliberte, CFAThematic Investment StrategistCIO Global Wealth Management

1 United Nations

Are you in need of summer vacation plans? Around the world, we can observe numer-ous creative solutions aimed at improving the sustainability of global cities.

Among the most significant contributors to global challenges is the trend of urban-ization. By 2050, it’s estimated that nearly 70% of the world will live in cities.1 City dwellers tend to produce more waste and use more resources. Since 2008, estimates indicate the 50% of the world’s population living in cities have accounted for a dispro-portionate 75% of energy consumption and 80% of greenhouse gas emissions. Solving the challenges posed by rapid ur-banization is part of the core thesis un-derlying our Longer Term Investment (LTI) themes. The travel route below draws parallels between our LTI series and our fa-vorite examples of sustainable innovation around the world.

Wat Pa Maha Chedi Kaew, Sisaket, Thailand Need a reason to drink another Heineken this summer? Your used bottle could be recycled into the next building “block” in the Wat Pa Maha Chedi Kaew Temple in Thailand. The stunning emerald and earth-toned house of worship is constructed of about 1.5mn beer bottles—mostly Heineken, as well as local Chang and Singha bottles. What began as a “100 Bottles of Beer on the Wall” challenge from Buddhist monks to the Sisaket province residents has expanded to include roughly 20 structures made of recycled bottles, from prayer rooms to living quarters.

Besides putting your empty Heineken to good use, proper waste management can reduce methane emissions from landfills and improve living conditions. Supported by several megatrends, we forecast the waste management sector to grow at a high-single-digit rate for the next several years.

Floating Farm, Rotterdam, NetherlandsForty cows are now floating off the coast

of Rotterdam aboard the first floating dairy farm in Europe’s largest city port. The float-ing farm is a creative solution to the world’s escalating challenge of feeding more peo-ple with less arable land. Its close proximity to the city reduces transportation costs and allows for better recycling of urban food waste—80% of the cows’ feed comes from waste products from Rotterdam’s food in-dustry. The farm utilizes floating solar pan-els for all its energy needs, as well as an integrated rainwater collection and purifi-cation system for its water demands. As far as the quality of life on board, each cow has its own stall with soft rubber floors and can wander onto a nearby pasture for exercise.

In order to meet the intimidating challenge of feeding 200,000 more people every day, the agriculture industry all over the world is turning to technology and other new tech-niques to increase yields and efficiency.

Santalaia, Bogota, ColombiaA leafy green giant named Santalaia looms over the eastern edge of Colombia’s densely populated capital. Santalaia leads a double life as a multi-family residential tower and the world’s largest vertical gar-den. The tower boasts a lush green exterior comprising 115,000 plants and spans more than 33,000 square feet. A garden of this size filters harmful gases from the air and has the power to produce oxygen for thou-sands of people annually. This eco-friendly living space is also equipped with humid-ity and radiation sensors and a water treat-ment plant to optimize water consumption.

Globally, increasing demand for both water and energy creates an opportunity for the companies innovating to solve these chal-lenges. In fact, we see numerous opportu-nities to invest toward a more sustainable future economy. Our examples above show how improving recycling systems, green ar-chitecture, and rethinking urban food sys-tems are all part of a multi-faceted approach to building more sustainable cities. For re-lated investment opportunities, please see our LTI reports: Waste Management, Clear Air and Carbon Reduction, Energy Efficiency, Water Scarcity, and Agricultural Yield.

August 2019 UBS House View 17

TOP THEMESClick any theme title to go to the full report.

TechnologyAutomation and robotics A fourth industrial revolution is underway, which we believe will transform the future of manufacturing.

Digital dataCompanies that both enable digital data and invest its infrastructure will likely continue strong earnings growth over the coming years.

E-commerce E-commerce is altering the global retail land-scape and omnichannel companies should lead the way forward.

Enabling technologiesWe identify five enabling technologies that should offer solid long-term growth amid irre-versible technological disruption.

FintechThe global fintech industry is at an inflection point and set to drive a major digital transfor-mation in the financial services industry.

Health Tech Aging populations are straining global healthcare budgets, spurring healthcare providers to explore new technologies that could improve efficiency.

Mass transit rail Rapid urbanization in Asia will strain mass transit systems, providing opportunities for infrastructure investment over the long term.

Medical devices The medical device industry has matured but opportunities exist for increased penetration in emerging markets (EMs) where affordability is on the rise.

Oncology Advances in cancer therapeutics will create new multi-billion dollar opportunities for suc-cessful drugs.

Security and safety Growing trends such as urbanization, digital data growth, and increased regulation support demand for security and safety.

Smart Mobility Global urbanization will call for structural changes in technology that will alter the way we “consume” mobility in the coming decades.

Space Growing private sector investment and lower entry barriers to the space economy are causing an inflection point in space-related long-term investments.

Resources Agricultural yield The world faces a growing food production crisis as the global population increases. Com-panies that help to boost agricultural yields stand to benefit.

Clean air and carbon reduction Rising populations and urbanization are fuel-ing the need for clean-air technologies. Solu-tion providers targeting emissions reductions stand to benefit.

Energy efficiency Stricter regulation and corporate competi-tion to improve product efficiency are driving demand for energy-efficiency solutions.

Renewables Increasing energy demand from urbanization and population growth will benefit renew-able energy as lower costs drive competitive-ness with fossil fuels.

Waste management and recycling Low waste treatment rates in EMs offer big catch-up potential that could lead to extraordi-nary growth rates.

Water scarcity Water scarcity is one of the biggest risks to mankind. If limited water resources can be bet-ter harnessed, the benefits could be enormous.

Society Education services With limits to many governments‘ education resources, there is increased opportunity for the private education market.

Emerging market healthcare An aging EM population requires stepped-up investment in healthcare. We believe global healthcare companies can benefit.

Emerging market infrastructure Growing urbanization and high economic growth rates will drive demand for infrastruc-ture investment in EMs.

Generics As healthcare costs grow, government policy and demographics will be important drivers of increased generic drug sales.

Genetic Therapies Genetic therapies use genes and cells to treat serious diseases. They could revolutionize medicine by removing the fundamental causes of inherited genetic conditions.

Obesity Urbanization and rising per-capita GDP in EMs will contribute to an ever-greater prevalence of global obesity.

Retirement homes A larger population of seniors and evolving social trends support opportunity in retirement homes investment.

Retirement planning Changing demographics are increasing demand for retirement planning, benefiting wealth and asset managers.

Silver spendingAs the global population ages, those 55 and older are expected to account for an ever-increasing proportion of consumer spending.

Fixed incomeBeyond benchmarkBy diversifying fixed-income exposure inves-tors can avoid the shortcomings of heavily government-weighted taxable fixed-income benchmarks.

MLP bonds Master limited partnership bonds offer attrac-tive coupon income relative to other invest-ment-grade sectors.

Mortgage IOsMortgage Interest only (MIOs) offer the oppor-tunity to benefit from rising interest rates along with attractive yields and high credit quality.

US senior loansSenior loans offer attractive floating-rate cou-pons with low correlation to other asset classes and lower volatility than high-yield bonds.

Yield for the short end Short-end corporate bonds offer attractive cur-rent yield without taking on excessive credit or interest-rate risk.

EquityCommodity producersCommodity producers tend to outperform in a maturing economic cycle.

Event-driven strategiesEvent-driven strategies can represent attractive ways to capitalize on companies‘ corporate actions.

Pricing power standoutsAs the business cycle progresses to later stages, companies with pricing power should be better insulated from the headwinds of slowing growth and rising input costs.

Restructuring and turnarounds Certain companies undergoing restructuring may outperform the broader market in the coming years.

Rewarding experiencesConsumers are increasingly spending more on experiences vs. goods.

Equity–ESGGender lens Evidence suggests that gender-diverse com-panies are more profitable and tend to out-perform their less-diverse peers.

Sustainable value creation in EMIncorporating environmental, social, and cor-porate governance considerations into EM equity investment decisions may provide a competitive edge.

KEY

Sustainable longer-term investment theme Longer-term investments = Multi-business cycle Shorter-term investments = Current business cycle

Themes universe For guidance on how to invest in each of the themes on this page, please contact your Financial Advisor.

18 UBS House View August 2019

Global economic outlookTrade tensions are reverberating through the global economy, hurting the manufacturing sector in particular. China is using both fiscal and monetary policy to help prevent a sharper slowdown. In the US, the labor market remains strong, helping consumer spending to rebound in 2Q19. Dovish messaging from the Fed suggests that it will cut rates at the next FOMC meeting on 31 July. We also expect the European Central Bank to start cutting rates again. Inflation remains subdued in most countries.

KEY FINANCIAL MARKET DRIVERS

Real GDP growth in % Inflation in %2018F 2019F 2020F 2018F 2019F 2020F

US 2.9 2.8 2.0 2.4 1.7 2.0

Canada 1.9 1.2 1.8 2.2 1.9 2.0

Brazil 1.1 1.0 2.2 3.7 3.8 3.7

Japan 0.8 1.3 1.3 1.0 1.0 2.0

Australia 2.8 1.9 2.4 1.9 1.5 2.0

China 6.6 6.2 6.1 2.1 2.3 1.9

India 6.8 6.7 7.1 3.4 3.6 3.9

Eurozone 1.8 1.3 1.3 1.8 1.2 1.4

Germany 1.5 1.0 1.3 1.9 1.4 1.7

France 1.6 1.3 1.4 2.1 1.3 1.4

Italy 0.7 0.3 0.8 1.2 0.7 0.5

Spain 2.6 2.2 2.0 1.7 0.9 1.5

UK 1.4 1.4 1.2 2.5 2.0 2.2

Switzerland 2.5 1.3 1.6 0.9 0.5 0.9

Russia 2.3 1.0 2.1 2.9 4.6 3.7

World 3.8 3.4 3.6 3.0 2.9 2.8

Source: Reuters EcoWin, IMF, UBS, as of 18 July 2019Note: In developing the CIO economic forecasts, CIO economists work in collaboration with economists employed by UBS Investment Research. Forecasts and esti-mates are current only as of the date of this publication and may change without notice.

Global growth in 2019 expected to be 3.4%

Central bank policyBrian Rose, PhD Senior Economist Americas

Ricardo Garcia-Schildknecht Strategist

House viewProbability: 60%

Fed and ECB ready to cut rates

The US Federal Reserve has signaled that it is likely to cut rates at its next policy meet-ing on 31 July. Although economic and fi-nancial conditions are strong, inflation re-mains stuck below the Fed’s 2% target and inflation expectations have moved lower. The Fed views risks as skewed to the downside. Further, the yield curve has been inverted, which in the past has often foreshadowed that a recession is coming. Fifty basis points (bps) of cuts should be enough to ensure that the yield curve moves out of inversion. That cut could come all at the next meeting or be spread out over two meetings. The ECB is set to lower its deposit rate by 0.1% each in Sep-tember and December in response to low-er US policy rates. We think that the hurdle for a new quantitative easing (QE) pro-gram remains significant and would re-quire further shocks.

Positive scenarioProbability: 30%

Further policy easing as macro backdrop worsens

Political policy errors threaten economic growth either through more aggressive trade disruption or weaker US or European growth. Central banks respond to the changing economic outlook with easing that goes beyond our base case forecasts.

Negative scenarioProbability: 10%

Inflation rises on tight labor markets and tariffs

Tighter labor markets move from squeez-ing profit margins to causing firms to raise prices more significantly. Trade taxes are passed on more comprehensively than has been the case so far.

August 2019 UBS House View 19

Key dates 26 July 2019GDP for 2Q19Consumer spending has rebounded strongly in 2Q19, which should help offset weakness in other areas of the economy. This release will also include the core personal consumption expenditure (PCE) inflation rate for 2Q, an impor-tant indicator for the Fed.

31 July 2019Employment Cost Index for 2Q19We consider the Employment Cost Index (ECI) to be a better measure of wage growth than average hourly earnings from the monthly labor report. However, the ECI provides only quarterly data, and it generally has less impact on markets.

31 July 2019FOMC rate decisionDovish messaging suggests that the Fed is highly likely to cut rates at this meeting. We have been calling for a 50 basis points (bps) cut, but the recent strength of both economic data and financial conditions sug-gest that a compromise of 25bps cut has become more likely.

1 August 2019ISM manufacturing for JulyThe ISM PMI has fallen three months in a row, reflecting global weakness in the manufacturing sector. Particularly important is the sub-index on new orders, which dropped to 50 in June, the low-est reading since December 2015.

2 August 2019Labor report for JulyNonfarm payrolls rebounded strongly in June after a weak May. In our view, job growth is slowing because most people who want to work are already employed. Noise in the data makes it difficult to discern the true underlying trend.

Growth is bottoming outJeremy Zirin, CFAHead of Equities Americas

David Lefkowitz, CFASenior Equity Strategist Americas

House viewProbability: 60%

Earnings growth should reaccelerate later this yearUS earnings growth has decelerated as the one-time boost from a lower tax rate fades and economic growth slows in the US and overseas. While a material decline in profits looks unlikely—as leading indicators such as access to capital and new claims for unemployment insurance remain support-ive—profit drivers have weakened over the last few months. Business sentiment has fallen (top chart), tariffs have risen, and overseas growth has slowed. As such, we trim our full-year S&P 500 earnings per share (EPS) estimates (bottom chart). 2019 falls from USD 168 to USD 165 (1% growth) while 2020 falls from USD 179 to USD 176 (7% growth).

Positive scenarioProbability: 20%

Central bank stimulus and trade dis-pute resolutionAggressive global central bank stimulus and a resolution to the trade dispute be-tween the US and China drives a re-accel-eration in growth.

Negative scenarioProbability: 20%

Downturn in sentiment

Trade and geopolitical tensions flare up, depressing business and consumer senti-ment. Wage pressures, without improving consumer and business demand, crimp profit margins and earnings growth rates. Declines in long-term interest rates pressure financial sector earnings.

20 UBS House View August 2019

ASSET CLASSES OVERVIEW

The sharp rebound in global equities has continued despite concerns about a renewed es-calation of US-China trade tensions. Equity market volatility has fallen back well below its long-term average after ticking up in May. Most equity markets remain close to fair value, and we would need to see more constructive newsflow on trade negotiations, an accelera-tion of macroeconomic momentum, continued monetary policy support from global central bankers, and a rise in earnings growth expectations for most markets to move meaningfully higher from here.

Equities

Eurozone Underweight

Economic activity in the region has weakened. 1Q earnings were mixed at best, with low single-digit growth year-on-year. Euro-zone equities, however, have rallied strongly since January and now appear to be priced for an overly optimistic macro scenario. At the same time, external risks remain elevated. The US-China trade conflict is on hold but not resolved and the Brexit debate is returning to the market. Other cyclical markets, such as Japan, of-fer better value and more upside, in our view. Our most preferred Eurozone sectors are energy, information technology, and utilities.

UK neutral

UK stocks are attractively valued—currently trading at 12.6x 12-month forward P/E with a dividend yield of 4.7%. However, Brexit risks combined with uncertainties about the outlook for sterling, oil, and global growth give us pause. Earnings may ex-perience low single-digit growth in 2019 but remain influenced by the outlook for oil prices. Should oil prices rise, equities will remain broadly supported. A stronger sterling remains a risk as the currency is closely linked to the Brexit outcome, where a resolu-tion still remains unclear.

Emerging markets Overweight

Emerging market (EM) equities should attract global investors in 2H19 amid a backdrop of dovish global central banks, low bond yields, and more relaxed US-China trade tensions. EM equity valu-ations are above historical averages but still have about a 22% discount to developed market valuations. EM equities are primed to catch up to the rest of the world, having lagged year-to-date. Continued uncertainty around the global growth outlook will weigh on near-term sentiment, but assuming our risk case for global trade doesn’t materialize, EM equities offer an attractive potential upside.

EURO STOXX (index points, current: 379) Six-month target

House view 360

Positive scenario 380

Negative scenario 300

MSCI EM (index points, current: 1050) Six-month target

House view 1100

Positive scenario 1140

Negative scenario 910

Japan Overweight

Japanese equities have lagged other cyclical markets since the be-ginning of the year and now have significant rerating potential. We forecast FY2019 (ending March 2020) earnings growth to be at 1%, partly as a result of ongoing trade disputes. However, we believe consensus forecasts will recover from 2H19. We also ex-pect quarterly results to recover in the upcoming earnings season as demand from China should have recovered. We expect earn-ings growth of -13% year-over-year this quarter, which would be an improvement from -28% in the December quarter.

TOPIX (index points, current: 1567) Six-month target

House view 1700

Positive scenario 1780

Negative scenario 1380

Jeremy Zirin, CFA; David Lefkowitz, CFA; Edmund Tran, CFA

FTSE 100 (index points, current: 7535) Six-month target

House view 7600

Positive scenario 8100

Negative scenario 6700

Note: Current values as of 17 July 2019

August 2019 UBS House View 21

US Equities

US equities overview Overweight

Year-over–year S&P 500 earnings growth will likely be flattish in 2Q. Depressed energy sector profits and weakness in semiconductors and economically sensitive industrial segments will weigh on near-term results. However, leading indicators of profit growth—access to capital and business sentiment—remain favorable, suggesting an improvement later this year and into 2020. Specifically, we ex-pect S&P 500 earnings per share (EPS) growth of 1% in 2019 and 7% in 2020. Valuations appear fair as stocks seem to already be pricing in this modest pickup in growth. Our six-month price target is 3025 or 17x our forward 12-month earnings forecasts.

US equities – sectorsWe position our sector strategy for a healthy consumer spending outlook and a rebound in housing activity with a moderate over-weight to the consumer discretionary sector. We also favor com-munication services, which should benefit from the secular growth of advertising dollars shifting to digital platforms. Stretched valu-ations and our expectations for a pickup in interest rates support our underweight to real estate. We are also underweight industri-als as a hedge against potential escalations in trade relations and weakening earnings momentum.

US equities – sizeWe remain neutral across size segments. While valuations for small-caps and mid-caps are relatively more attractive, earnings growth is lagging. The slowdown in global economic growth is disproportionately impacting smaller companies, which tend to be more economically sensitive. Small-caps have underperformed their large-cap counterparts by more than 5% this year.

Economic growth has decelerated this year due to the lagged effect of prior Fed rate hikes, fading fiscal stimulus, and increased trade tensions. However, a recession appears very un-likely over the next 12-18 months. Consumer spending remains resilient, access to capital is healthy, and low inflation provides the Fed ample flexibility to lower interest rates to support the expansion. Despite strong year-to-date gains, valuations appear fair. We are overweight US equities relative to low yielding bonds.

US equities – styleWe continue to recommend that investors stay neutrally allocated across growth and value styles. The economic backdrop is support-ive for growth firms, which typically outperform later in the busi-ness cycle, but their valuations are higher than long-term averages relative to their value peers. Growth has materially outperformed value this year (+26% versus +18%), and will likely require strong 2H19 guidance to continue to maintain its relative strength.

S&P 500 (index points, current: 2984) Six-month target

House view 3025

Positive scenario 3325

Negative scenario 2425

Note: Current values as of 17 July 2019

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Earnings growth has decelerated but should rebound

Note: 2Q19E = CIO estimate, 3Q19E and 4Q19E = bottom-up consensus estimatesSource: FactSet, UBS, as of 17 July 2019

Figure 1

S&P 500 EPS growth; tan denotes impact of lower tax rate, in %

201620132010200720042001 2019

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Healthy and improving retail sales is favorable for consumer discretionary sector

Source: Bloomberg, UBS, as of 17 July 2019

Figure 2

Year-over-year change in retail sales, in %

22 UBS House View August 2019

ASSET CLASSES OVERVIEW

The 10-year Treasury (UST) yield remains around 2.0%, the lowest level since 2016. This is below the current Federal Reserve policy rate of 2.4%; however, market prices correspond to an expectation that the Fed will cut rates by about 1%. This is in spite of the truce in trade hostilities between the US and China agreed at the G20 Summit. In his testimony before Congress, Fed Chair Powell made clear the Fed is likely to cut rates at its July meeting. In his view, downside risks to the economy and muted inflation outweigh recent positive data on the economy. We lean toward a Fed decrease of 0.5% but see a cut of 0.25% as nearly as likely. As we think that trade tensions are unlikely to escalate dramatically and growth will slow only to around trend, we see market pricing of four rate cuts as too pessimistic.

Bonds

Emerging market bonds neutral

EM corporate and sovereign credit have delivered high single- and low-double-digit gains year-to-date, respectively on tighter spreads and lower UST yields. The asset class also benefited from the US-China trade cease fire, continued Chinese stimulus measures, and higher oil prices, among others.  Our six-month base case calls for range-bound EM sovereign spreads and somewhat wider corporate spreads. Global macro and political risks remain elevated, but dov-ish central banks and favorable commodity pricing conditions ap-pear as supporting factors. We advise investors to hold a strategic allocation to EM credit in globally diversified portfolios.

*EMBIG div / CEMBI div SPREAD(current: 288bps / 307bps)) Six-month target

House view 280-300bps /310-330bps

Positive scenario  260bps / 270bps

Negative scenario 450bps / 520bps

US investment grade corporate bonds neutral

We remain neutral on IG. While the asset class’ high duration makes it sensitive to changes in rates, the supply/demand picture is tilted in IG’s favor. Demand should be supported by the large stock of negative yields abroad. The gross amount of new IG sup-ply has not overwhelmed this year (down 10% year-over-year) and net issuance is historically low due to high bond redemptions. We favor financials (US banks) over non-financials due to their strong credit profiles. In addition, IG corporates with short maturities (1-3 years) provide attractive yield relative to their low duration.

US IG SPREAD (current: 118bps*) Six-month target

House view 110–130bps

Positive scenario 90bps

Negative scenario 275bps*Data based on ICE BAML IG corporate index

Leslie Falconio; Kathleen McNamara, CFA, CFP; Barry McAlinden, CFA; Philipp Schoettler; Frank Sileo, CFA

Government bonds underweight

The US 10-year Treasury yield reached its year-to-date low of 1.93% on 5 July. This was short lived however, as non-farm pay-roll, retail sales, and the recent inflation indicators the consumer price index (CPI) and the producer price index (PPI) all came in above expectation. We continue to believe the bulk of the yield decline in treasuries is behind us. The incremental total return from owning treasuries remains limited given the yield declines in 2019.

US 10-YEAR YIELD (current: 2.0%) Six-month target

House view 2.3%

Positive scenario 2.0%

Negative scenario 2.8%

US high yield corporate bonds neutral

Credit spreads on HY bonds moved modestly tighter over the past month following a cooling of US and China trade tensions and dovish signaling by the Fed. In addition to spread contraction, HY total returns of 10% this year have also been supported by lower Treasury yields. With downside macro risks having diminished slightly and the default outlook benign, we reduce our HY spread forecast range to 380 basis points (bps) to 410bps. Current spread levels sit in the middle to this range. We believe the Fed’s more cautious stance and investor appetite for yield should be support-ive for spreads in the short term.

USD HY SPREAD (current: 401bps*) Six-month target

House view 380–420bps

Positive scenario 300bps

Negative scenario 800bps

*Data based on ICE BAML High Yield indices *EMBIG diversified ex-VenezuelaNote: Current values as of 17 July 2019

August 2019 UBS House View 23

Preferred securitiesWe expect returns to moderate in the months ahead and we could see a near-term pull back if rates rebound. However, with the Fed’s latest messaging these risks have abated somewhat. Price apprecia-tion has been tempered, and against a backdrop of falling Treasury yields we have seen some widening in yield spreads. This may buffer near-term volatility. We favor fixed-rate preferreds with above-aver-age coupons and fixed-to-floatings (F2Fs) with at least four years of call protection, high reset spreads, and strong prospectus language regarding floating-rate coupon calculation in the absence of Libor.

Municipal bonds neutral

Munis are off to a good start for the second half of 2019. Month-to-date, munis are up 0.4%, boosting their year-to-date return to now sit at 5.8%. Municipal bond mutual funds have now at-tracted net new cash for 27 straight weeks. The high season for municipal bond maturities and reinvestment capital from bond calls has another month to go, representing an important tailwind for munis. Credit quality spreads remain narrow, suggesting that there is an opportunity to upgrade muni portfolios.

Current AAA 10-year muni-to-Treasury yield ratio: 74.4% (last month: 80.7%)

Non-US developed fixed income neutral

Over the past month, bond yields have generally moved lower in non-US developed markets on speculation that more central banks will cut rates. On foreign exchange markets, the dollar strengthened modestly against most other major currencies, hurting returns when measured in dollars. Overall, returns were still in positive territory for the month. With yields falling to new lows, including negative yields on many bonds, non-US developed fixed income is unattractive. We do not recommend a strategic asset allocation position on the asset class.

Additional US taxable fixed income (TFI) segments

Mortgage-backed securities (MBS) MBS spreads have widened over the past month but have stabi-lized after 10-year Treasury yields bounced off their year-to-date low of 1.93%. Although MBS are cheap relative to their IG corpo-rate counterparts, given the Fed’s intention of extending the cur-rent credit cycle via market easing we continue to prefer corporate credit versus agency MBS. Our range for MBS remains 70-95bps to the US Treasury. CIO believes the underperformance of MBS to corporates will reverse in the latter part of 2019 and we look to upgrade from our neutral allocation

Current spread is +86bps to the 5-year and 10-year Treasury blend (versus +80bps last publication).

Agency bondsCIO remains underweight agency debt. We do not see a lot of rel-ative value within the asset class, and we believe the rush to safe havens is behind us given the markets dovish view. With such low rates, call probabilities have risen and spreads for non-callable are simply too tight at +8bps, given what investors may earn in other asset classes such as mortgage-backed securities (MBS). Year-to-date the agency index has returned 3.9%, well below other com-parable AAA asset classes. We believe fund outflows will increase and remain underweight the sector.

Current spread is +8bps to the 5-year (versus +8bps last month). Treasury inflation-protected securities (TIPS)After inflation expectations moved to their pre-presidential election low in June, we allocated to 5-year TIPS versus treasuries and are now overweight the sector. With the Fed more dovish, inflation expecta-tions should rise on the heels of a lower dollar, stable oil prices, in-crease in consumer spending, the impact from tariffs and a continued extension of the current expansion. Inflation expectations became too cheap given as a result of the multiple Fed tightening during 2018. We believe this will reverse over the next year, benefitting TIPS.

Current 5-year breakeven inflation rate of 1.61% (1.53% last month).

UBS interest rate forecasts

US 18-Jul-19 UBS 3m UBS 6m UBS 12m

USD 3m LIBOR 2.2 2.1 2.1 2.1

USD 2Y Treas. 1.8 1.8 1.9 2.0

USD 5Y Treas. 1.8 1.8 2.0 2.1

USD 10Y Treas. 2.1 2.1 2.3 2.4

USD 30Y Treas 2.6 2.5 2.7 2.7

Curve: 2y/10y spread (bp) 0.3 0.3 0.4 0.4

Source: Bloomberg, UBS, as of 18 July 2019

1989 1994 1999 2004 2009 2014 2019

2250

2500

1250

1000

750

500

250

0

1500

2000

1750

22

18

14

10

6

2

HY/IG yields and spreads are not at attractive levels given where we are in the cycle

Source: Morningstar; Ice Baml, UBS, as of 5 July 2019

High Yield Spreads (bps)

IG Corp spreads

IG Yield

HY Yield

lhs: spreads, in bps; rhs: yield, in %

24 UBS House View August 2019

ASSET CLASSES OVERVIEW

Commodity indexes rose by 2.5%–3% in June, supported by precious metals and energy. The asset class is up 5.5%-7.5% this year. We remain positive on commodity indexes, tar-geting a mid-single-digit spot appreciation over the next six months. We also like select commodities that are benefiting from their safe-haven status (gold) or supply-side stories (oil) or that should be undersupplied (nickel, aluminum and copper).

Commodities and other asset classesDominic Schnider, CFA, CAIA; Giovanni Staunovo; Thomas Veraguth; Wayne Gordon

Commodities neutral

Precious metals We believe that global trade tensions, soaring fi-nancial market uncertainty, and the prospect of Federal Reserve rate cuts are likely to spur inflows into non-commercial positions in gold futures/options and exchange-traded funds. As such, we forecast the gold price at USD 1,450/oz in six to 12 months. We reiterate our view that the yellow metal remains a valuable insurance asset, as adding it can help to reduce the overall volatility of a portfolio.

GOLD (current: USD 1427/oz) Six-month target

House view USD 1450/oz

Positive scenario USD 1600/oz

Negative scenario USD 1300/oz

Crude oil OPEC and its allies (OPEC+) agreed to extend the pro-duction cut deal reached last year in December (which expired 30 June) by another nine months, until the end of March. We expect ongoing high compliance to the production deal and further dis-ruption in Iran and Venezuela to trigger further oil inventory draws in the coming weeks. As such, we still expect Brent prices to move above USD 70/bbl over the next three to six months.

BRENT (current: USD 64/bbl) Six-month target

House view USD 70/bbl

Positive scenario USD 90/bbl

Negative scenario USD 50/bbl

Other asset classes

Listed real estate We forecast earnings growth of 4.9% for 2019-20 (excl. emerging markets) driven by internal growth and some positive rental reversion. Companies are focusing on repositioning or extensions. A few need to deleverage, while the majority can still optimize financing costs and the balance sheet. A growing number of companies’ risk-spreads will expand in a cyclical decel-eration. Stock picking is key and the universe won’t be supported by central banks’ rate cuts, in our view.

RUGL Index (current: USD 5562) Six-month target

House view USD 5200

Positive scenario USD 5600

Negative scenario USD 4800

Note: Current values as of 17 July 2019

Agriculture Weather premiums returned to agricultural markets in 2Q19, driven by unprecedented delays in US planting, particu-larly for corn. The Bloomberg agriculture index has risen overall by 1% year-to-date, grains by 2.0% and soft commodities by 1.6%. Non-commercial traders remain net short agriculture overall, yet short-covering in wheat, corn and cocoa has been dramatic. In soft commodities, coffee and cocoa have rebounded sharply as weather concerns surfaced. In livestock, the USDA’s quarterly hog and pig report beat industry expectations; the number of animals rose 3.9% year-over-year (and pigs per litter were up 3.5% year over year).

Base metals Base metal prices have suffered greatly from the latest escalation in US-China trade tensions. Tensions aside, prices began to weaken in mid-April on softer global manufacturing data. Stabiliza-tion and a selective uptick in exchange inventories quarter-to-date have added to selling pressure, with investors reacting across the sector regardless of the variances in inventory dynamics (some metal inventories have still fallen). Our positive view on the sector largely hinges on greater monetary and fiscal stimulus across all regions (particularly the US and China) and trade tensions stabilizing.

August 2019 UBS House View 25

Foreign exchangeThomas Flury, Strategist

We adjust our FX strategy following a mid-year forecast review. We close our underweight positions in the Swiss franc (CHF) against the euro (EUR) and the Norwegian krone (NOK). We shift our long British pound (GBP) versus short Australian dollar (AUD) position into a long GBP versus US dollar (USD) position. In light of the favorable environment for carry positions, we increase our allocation to a basket of emerging market currencies.

USD underweight

Investors have been spoiled with high US interest rates, which, combined with low currency volatility, made them invest heavily in US dollars. With the Fed now likely to cut rates, we expect the USD to give up some of its overvaluation and weaken against most major currencies over the next 12 months.

EUR underweight

The European Central Bank (ECB) is likely to follow the Fed with monetary easing. In our new forecasts it will take longer for the euro to recover against the dollar. We expect more of a sideways path for the next six months when both central banks ease their policies.

GBP overweight

Market concerns about a no-deal Brexit by October are overdone, in our view. A reversal of this and fading dollar attractiveness should lead to a rebound of GBPUSD. With the Bank of England on hold, and with Fed cuts already priced in the market, the focus remains mostly on politics. Lingering Brexit uncertainty will likely curb sterling’s upside potential in the high 1.30s.

CHF neutral

The Swiss National Bank (SNB) remains on hold, but we expect it to be challenged. The Fed is likely to cut rates by end of July and the ECB is likely to follow. With both major central banks in eas-ing mode, the SNB may be drawn to intervention and rate cuts, and still has to allow some CHF appreciation. We expect USDCHF to trade around parity in the next six months, then closer to 0.97 in six months.

UBS CIO FX forecasts

3M 6M 12M PPP*

EURUSD 1.12 1.15 1.17 1.28

USDJPY 106 105 103 75

USDCAD 1.33 1.32 1.30 1.22

AUDUSD 0.69 0.70 0.71 0.68

GBPUSD 1.29 1.32 1.35 1.57

NZDUSD 0.65 0.65 0.67 0.60

USDCHF 1.00 0.97 0.96 0.93

EURCHF 1.12 1.12 1.12 1.19

GBPCHF 1.29 1.29 1.29 1.46

EURJPY 119 121 121 96

EURGBP 0.87 0.87 0.87 0.82

EURSEK 10.80 10.60 10.60 9.79

EURNOK 9.50 9.40 9.40 10.43

Source: Thomson Reuters, UBS, as of 17 July 2019 Note: Past performance is not an indication of future returns.*PPP = Purchasing Power Parity

JPY neutral

The yen remains our preferred safe-haven currency. USDJPY has drifted lower since April, driven by rising expectations for Fed rate cuts, which further compressed US-Japan yield dif-ferentials. The risk for USDJPY remains skewed to the down-side in the near term. A further deterioration in risk appe-tite is likely to trigger more short-covering of speculative JPY positioning. We expect USDJPY to fall to 105 in six months.

Other developed market currencies neutral

We are still convinced of Norway’s unique situation with ongoing rate hikes, and thus keep our NOK overweight position against the Canadian dollar (CAD), while shifting the other position from CHFNOK to EURNOK. In light of the favorable environment for carry positions, we increase our allocation to a basket of emerging market currencies. This aims to earn the interest rate advantage without being too strongly exposed to US–China trade tensions and other global risk-on vs. risk-off considerations. On the long side we have the currencies of India, Indonesia and South Africa. These are financed with short positions in Australia, New Zealand and Taiwan dollars.

ASSET CLASSES OVERVIEW

26 UBS House View August 2019

Overweight

Neutral

Underweight

Key forecasts Six-month forecast

Asset class

TAA (6–12

months)

Change this

month Benchmark Value

m/m perf.

in %1

House View

Positive scenario

Negative scenario

EQUITIES

US – S&P 500 2984 1.0% 3025 3325 2425

Eurozone – Euro Stoxx 379 0.9% 360 380 300

UK* – FTSE 100 7535 1.5% 7600 8100 6700

Japan – Topix 1567 0.5% 1700 1780 1380

Switzerland SMI 9942 -0.4% 9780 10440 8810

Emerging Markets – MSCI EM 1050 0.1% 1100 1140 910

BONDS

US Government bonds² 10yr Treasury yield 2.0% -0.3% 2.3% 2.0% 2.8%

US Corporate bonds – BAML IG spread 118 bps 0.3% 110-130 bps 90 bps 275 bps

US High-yield bonds – BAML US HY spread 401 bps 0.2% 380-420 bps 300 bps 800 bps

EM Sovereign EMBI Diversified spread³ 288 bps 0.5% 280-300 bps 260 bps 450 bps

EM Corporate – CEMBI Diversified spread 307 bps 0.9% 310-330 bps 270 bps 520 bps

OTHER ASSET CLASSES

Gold – Spot price 1427 /oz. 2.7% 1450 1600 1300

Brent crude oil – Spot price 63.66 /bbl. -1.2% 70 90 50

Listed real estate – RUGL Index 5562 -0.5% 5200 5600 4800

CURRENCIES Currency pair

USD USD NA NA NA NA NA

EUR EURUSD 1.12 -0.6% 1.15 NA NA

GBP GBPUSD 1.24 -2.1% 1.32 NA NA

JPY** – USDJPY 108 0.6% 105 NA NA

CHF – USDCHF 0.99 0.6% 0.97 NA NA

Source: Bloomberg, UBS * For 1–4 year horizon, we would underweight UK equities.** For a 1–4 year horizon, we would also hold a preference for the JPY. 1 Month over month. 2 We increased our underweight to US government bonds this month but added an offsetting overweight to Treasury Inflation-Protected Securities within this category. 3 EMBIG Diversified ex-VenezuelaNote: Current values as of 17 July 2019. Currency values as of 18 July 2019.Past performance is no indication of future performance. Forecasts are not a reliable indicator of future performance.

August 2019 UBS House View 27

US equity sector allocationin %

S&P 500 CIO GWM tactical deviation2 CurrentBenchmark Numeric Symbol allocation3

allocation1 Previous Current Previous Current

Communication Services 10.5 +1.0 +1.0 + + 11.5

Consumer Discretionary 10.4 +1.0 +1.0 + + 11.4

Consumer Staples 7.4 +0.0 +0.0 n n 7.4

Energy 4.9 +0.0 +0.0 n n 4.9

Financials 13.1 +0.0 +0.0 n n 13.1

Health Care 13.8 +0.0 +0.0 n n 13.8

Industrials 9.3 –1.0 –1.0 – – 8.3

Information Technology 21.6 +0.0 +0.0 n n 21.6

Materials 2.7 +0.0 +0.0 n n 2.7

Real Estate 3.1 –1.0 –1.0 – – 2.1

Utilities 3.3 +0.0 +0.0 n n 3.3

Source: UBS, as of 18 July 2019.

For US equity sub-sector recommendations please see the “Equity Preference List” for each sector. These reports are published on a monthly basis and can be found on the Online Services website in the Research > Equities section.The benchmark allocation, as well as the tactical deviations, are intended to be applicable to the US equity portion of a portfolio across investor risk profiles.1 The benchmark allocation is based on S&P 500 weights.2 See "Deviations from strategic asset allocation " in the Appendix of UBS House View for an explanation regarding the interpretation of the suggested tactical devia-

tions from benchmark. The “current” column refers to the tactical deviation that applies as of the date of this publication. The “previous” column refers to the tacti-cal deviation that was in place at the date of the previous edition of the UBS House View or the last UBS House View Update.

3 The current allocation column is the sum of the S&P 500 benchmark allocation and CIO GWM tactical deviation columns.

Note: For additional information on indices, portfolio analytics, and performance, please see our standalone asset allocation report.

Underlying indices for Strategic Asset Allocations

US Cash (Barclays Capital US Treasury – Bills [1–3 M])

US Large-Cap Growth (Russell 1000 Growth)

US Large-Cap Value (Russell 1000 Value)

US Mid-Cap (Russell Mid Cap)

US Small-Cap (Russell 2000)

International Dev. Equities (MSCI EAFE)

Emerging Markets Equities (MSCI EMF)

US Government Fixed Income (Bloomberg Barclays US Agg Government)

US Municipal Fixed Income (Bloomberg Barclays Municipal Bond)

US Investment-Grade Fixed Income (Bloomberg Barclays US Agg Credit)

US Corporate High-Yield Fixed Income (Bloomberg Barclays US Agg Corp HY)

International Dev. Fixed Income (Bloomberg Barclays Global Agg xUS)

Emerging Markets Fixed Income (50% Bloomberg Barclays EM Gov and 50% BarCap Global EM (USD))

Commodities (Dow Jones-UBS Commodity Index)

Index information

Full detailed asset allocation tablesView our full set of asset allocation tables for guidance on positioning across different investor types, portfolio strategies, and risk tolerances.

28 UBS House View August 2019

APPENDIX

Cautionary statement regarding forward-looking statementsThis report contains statements that constitute “forward-looking state-ments,” including but not limited to statements relating to the current and expected state of the securities market and capital market assump tions. While these forward-looking statements represent our judg ments and future expectations concerning the matters discussed in this document, a number of risks, uncertainties, changes in the market, and other important factors could cause actual developments and results to differ materially from our expecta-tions. These factors include, but are not limited to (1) the extent and nature

of future developments in the US market and in other market segments; (2) other market and macro-economic developments, including movements in local and international securities markets, credit spreads, currency exchange rates and interest rates, whether or not arising directly or indirectly from the current mar ket crisis; (3) the impact of these developments on other markets and asset classes. UBS is not under any obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements wheth-er as a result of new information, future events, or otherwise.

PublisherUBS Financial Services Inc. CIO Global Wealth Management 1285 Avenue of the Americas 20th Floor New York, NY 10019

This report was published on 19 July 2019.

Lead authors Mark Haefele Mike Ryan

EditorKate Hazelwood

Project Management Paul Leeming John Collura Matt Siegel

Desktop PublishingJohn Choi Cheryl Seligman

Cognizant GroupSrinivas Addugula Sunil Vedangi

Cover ImageGetty Images

Jason DrahoLeslie FalconioThomas FluryRicardo Garcia- SchildknechtWayne GordonMarkus IrngartingerLaura KaneDavid LefkowitzBarry McAlinden

Kathleen McNamaraBrian RoseDominic SchniderPhilipp SchoettlerFrank SileoGiovanni Staunovo Thomas VeraguthJustin WaringJeremy Zirin

Authors (in alphabetical order)

Investment committeeGlobal Investment Process and Committee descriptionThe UBS investment process is designed to achieve replicable, high-quality results through applying intellectual rigor, strong process governance, clear responsibility, and a culture of challenge.

Based on the analyses and assessments conducted and vetted through-out the investment process, the Chief Investment Officer (CIO) formulates the UBS Wealth Management Investment House View (e.g., overweight, neutral, underweight stances for asset classes and market segments rela-tive to their benchmark allocation) at the Global Investment Committee (GIC). Senior investment professionals from across UBS, complemented by selected external experts, debate and rigorously challenge the investment strategy to ensure consistency and risk control.

Global Investment Committee compositionThe GIC comprises top market and investment expertise from across all divisions of UBS:

• Mark Haefele (Chair)• Paul Donovan• Jorge Mariscal• Mike Ryan• Simon Smiles• Tan Min Lan• Themis Themistocleous• Bruno Marxer (*)• Andreas Koester

WMA Asset Allocation Committee descriptionWe recognize that a globally derived house view is most effective when complemented by local perspective and application. As such, UBS has formed a Wealth Management Americas Asset Allocation Committee (WMA AAC). WMA AAC is responsible for the development and monitor-ing of UBS WMA‘s strategic asset allocation models and capital market assumptions. The WMA AAC sets parameters for the CIO Americas, WM Investment Strategy Group to follow during the translation process of the GIC‘s House Views and the incorporation of US-specific asset class views into the US-specific tactical asset allocation models.

WMA Asset Allocation Committee compositionThe WMA Asset Allocation Committee comprises nine members:

• Mike Ryan• Michael Crook• Brian Rose• Jeremy Zirin• Jason Draho• Tom McLoughlin• Leslie Falconio• Laura Kane• David Lefkowitz

(*) Business area distinct from Chief Investment Office Americas, Wealth Management

August 2019 UBS House View 29

APPENDIX

Explanations about asset classes

Statement of risk

Sources of strategic asset allocations and investor risk profilesStrategic asset allocations represent the longer-term allocation of assets that is deemed suitable for a particular investor. The strategic asset alloca-tion models discussed in this publication, and the capital market assump-tions 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 tol-erance, return objectives and time horizon. Therefore, the strategic asset allocations in this publication may not be suitable for all investors or investment goals and should not be used as the sole basis of any invest-ment 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 “Strategic Asset Allocation (SAA) Methodology and Portfolios.” Your Financial Advisor can provide you with a copy.

Deviations from strategic asset allocation or benchmark allocationThe recommended tactical deviations from the strategic asset allocation or benchmark allocation are provided by the Global Investment Commit-tee and the Investment Strategy Group within CIO Americas, Wealth Management. They reflect the short- to medium-term assessment of mar-ket opportunities and risks in the respective asset classes and market seg-ments. Positive/zero/negative tactical deviations correspond to an over-weight/neutral/underweight stance for each respective asset class and market segment relative to their strategic allocation. The current alloca-tion is the sum of the strategic asset allocation and the tactical deviation.

Note that the regional allocations on the Equities and Bonds pages in UBS House View are provided on an unhedged basis (i.e., it is assumed that investors carry the underlying currency risk of such investments) unless otherwise stated. Thus, the deviations from the strategic asset allocation reflect the views of the underlying equity and bond markets in combina-tion with the assessment of the associated currencies. The detailed asset allocation tables integrate the country preferences within each asset class with the asset class preferences in UBS House View.

Asset allocation does not assure profits or prevent against losses from an investment portfolio or accounts in a declining market.

Equities - Stock market returns are difficult to forecast because of fluctua-tions in the economy, investor psychology, geopolitical conditions and other important variables.

Fixed income - Bond market returns are difficult to forecast because of fluctuations in the economy, investor psychology, geopolitical conditions and other important variables. Corporate bonds are subject to a number of risks, including credit risk, interest rate risk, liquidity risk, and event risk. Though historical default rates are low on investment grade corporate bonds, perceived adverse changes in the credit quality of an issuer may negatively affect the market value of securities. As interest rates rise, the value of a fixed coupon security will likely decline. Bonds are subject to market value fluctuations, given changes in the level of risk-free interest rates. Not all bonds can be sold quickly or easily on the open market. Prospective investors should consult their tax advisors concerning the fed-eral, state, local, and non-U.S. tax consequences of owning any securities referenced in this report.

Preferred securities - Prospective investors should consult their tax advisors concerning the federal, state, local, and non-U.S. tax consequences of owning preferred stocks. Preferred stocks are subject to market value fluc-

tuations, given changes in the level of interest rates. For example, if inter-est rates rise, the value of these securities could decline. If preferred stocks are sold prior to maturity, price and yield may vary. Adverse changes in the credit quality of the issuer may negatively affect the market value of the securities. Most preferred securities may be redeemed at par after five years. If this occurs, holders of the securities may be faced with a reinvest-ment decision at lower future rates. Preferred stocks are also subject to other risks, including illiquidity and certain special redemption provisions.

Municipal bonds - Although historical default rates are very low, all munic-ipal bonds carry credit risk, with the degree of risk largely following the particular bond‘s sector. Additionally, all municipal bonds feature valua-tion, return, and liquidity risk. Valuation tends to follow internal and external factors, including the level of interest rates, bond ratings, supply factors, and media reporting. These can be difficult or impossible to proj-ect accurately. Also, most municipal bonds are callable and/or subject to earlier than expected redemption, which can reduce an investor‘s total return. Because of the large number of municipal issuers and credit struc-tures, not all bonds can be easily or quickly sold on the open market.

Scale for tactical deviation charts

Symbol Description/Definition Symbol Description/Definition Symbol Description/Definition

+ moderate overweight vs. benchmark – moderate underweight vs. benchmark n neutral, i.e., on benchmark

++ overweight vs. benchmark – – underweight vs. benchmark n/a not applicable

+++ strong overweight vs. benchmark – – – strong underweight vs. benchmark

Source: UBS

30 UBS House View August 2019

APPENDIX

AppendixEmerging Market InvestmentsInvestors should be aware that Emerging Market assets are subject to, among others, potential risks linked to currency volatility, abrupt changes in the cost of capital and the economic growth outlook, as well as regulatory and socio-political risk, interest rate risk and higher credit risk. Assets can sometimes be very illiquid and liquidity conditions can abruptly worsen. CIO Americas, WM generally recommends only those securities it believes have been registered under Federal US 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 permit-ted under US law, CIO Americas, WM 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 CIO Americas, WM Education Notes “Investing in Emerging Markets (Part 1): Equities,” 27 August 2007, “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 invest-ment-grade band). Such an approach should decrease the risk that an investor could end up holding bonds on which the sovereign has defaulted. Subinvest-ment-grade bonds are recommended only for clients with a higher risk toler-ance and who seek to hold higher-yielding bonds for shorter periods only.

Nontraditional AssetsNontraditional asset classes are alternative investments that include hedge funds, private equity, real estate, and managed futures (col-lectively, alternative investments). Interests of alternative investment funds are sold only to qualified investors, and only by means of offering docu-ments that include information about the risks, performance and expenses of alternative investment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund is speculative and involves significant risks. Specifically, these invest-ments (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 subject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation information to investors; (7) generally

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 will-ingness to accept them for an extended period of time before making an investment in an alternative investment fund, and should consider an alterna-tive investment fund as a supplement to an overall investment program.

In addition to the risks that apply to alternative investments generally, the fol-lowing 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-US 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 strate-gies at all times, and managed futures strategies may have material direc-tional 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 denom-inated in US dollars, changes in the exchange rate between the US 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 US investor.

APPENDIX

DisclaimerUBS Chief Investment Office‘s (“CIO”) investment views are prepared and published by the Global Wealth Management business of UBS Switzerland AG (regulated by FINMA in Switzerland) or its affiliates (“UBS”).

The investment views have been prepared in accordance with legal requirements designed to promote  the independence of investment research.

Generic investment research – Risk information:

This publication is  for your  information only  and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Different assumptions could result in materially different results. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be 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 forecasts, estimates and market prices indicated are current 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.

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