CIO Weekly The UBS House View will be published on November 21. As such, the CIO Weekly will not be published. We welcome your feedback. United States CIO WM Research | 14 November 2014 Top of the Morning daily podcast Deeper dive What would OPEC do? What we are watching 02 вЂў вЂњWeek in Review/PreviewвЂњ with David Wang, Fixed Income Analyst US economic data www.ubs.com/topofthemorning The Fed and Bank of England Global leading indicators03 Dashboard 05 вЂњThe cease-fire is in name only at this pointвЂќ What you need to know вЂ“ Review General Philip Breedlove, NATO supreme allied commander Europe on the conflict in Ukraine 1 China announced that the Shanghai-Hong Kong Mutual 235,000 rise. However, the data for the prior two months was revised Market Access (MMA) program will launch on November 17. higher by net 31,000. Strong employment gains translated into a The trading link connects the bourses in Shanghai and Hong Kong drop in the unemployment rate from 5.9% to 5.8%. This level is and will provide international investors direct access to Shanghai already below the Federal ReserveвЂ™s most recent forecast for the end stocks for the first time. Meanwhile, mainland of the year. Additionally, the four-week average of investors will be able to purchase shares in Hong initial weekly jobless claims retreated to its lowest вЂњThe current US Kong-listed firms. Investors reacted positively level since April 2000. In contrast, Eurozone induswith the Shanghai Composite Index jumping trial production figures in September did not indiunemployment rate 2.3%. The Hang Seng Index added 0.8% on the cate a meaningful uptick while October inflation day. We believe the MMA will push stocks figures remained largely unchanged at low levels. is already below toward their fair values, though this does not are overweight US equities and high yield the FedвЂ™s most recent We change our fundamental view on the broad bonds as well as the US dollar relative to the euro. market. We advise investors to continue focusforecast for the end 4 Global crude oil prices resumed their ing on sectors that can deliver growth amid softof the year.вЂќ ening economic activity. For more details please downward trend as the Brent price fell below refer to our publication, вЂњMMA: Are you ready USD 80/bbl, a 50-month low. Markets continto board?вЂќ We are neutral on Chinese stocks. ued to focus on the moves of OPEC member states. Oil ministers from the UAE and Kuwait said that they were not concerned 2 RussiaвЂ™s central bank completed its transition to a fully about the current price levels, and the latter added that his counflexible exchange rate regime by removing its dual-currency try had no plans to cut output. At the same time, Iraq reduced its trading band and terminating a policy of daily regular foreign interofficial selling price for US Вcustomers while raising prices for Asia ventions. However, it retained its commitment to intervening if it and Europe, following a similar Saudi move earlier. sees threats to financial stability. It also restricted ruble liquidity temporarily in an attempt to decrease speculative bets. At the same time, the central bank said it expected the economy to stagnate in 2015 and to grow just 0.1% in 2016. In addition, the bank slashed Level 1-w chg YTD chg its medium-term inflation target to 4% from 5%. The currency ralMarket moves lied as much as 5% intra-day on Monday before it reverted to its S&P 500 2,039 0.46% 12.30% DJIA 17,653 0.64% 8.65% depreciation path on Tuesday. In other news, Russia signed an Nasdaq 4,680 0.93% 13.26% agreement to supply gas to China, settled in ruble and yuan, markNikkei 225 17,491 3.62% 7.36% ing the second such deal this year between the two nations. For Eurostoxx 50 3,057 вЂ“1.46% вЂ“1.68% more details please refer to our publication, вЂњRussia: Reaffirming our MSCI EM 993 0.14% вЂ“0.99% base case.вЂќ We are neutral on Russian assets and the USDRUB. Gold $ 1163/oz 1.59% вЂ“3.30% Which got us thinking вЂ¦ 3 The US labor market continued to show strength while Eurozone data was mixed. Non-farm payrolls increased by 214,000 in October, which slightly disappointed consensus expectations of a ab Brent crude oil US 10-year yield VIX $ 77.9/bbl 2.34% 13.80 вЂ“5.96% вЂ“5bps +0.1pts вЂ“29.68% вЂ“69bps +0.1pts Source: Bloomberg, as of 14 November 2014, EST 3 am This weekвЂ™s editorial ItвЂ™s the Most Wonderful Time of the Year Robert Samuels, Equity Sector Strategist, Wealth Management Americas 04 This report has been prepared by UBS Financial Services Inc. and UBS AG. Please see important disclaimer on page 8. Sections of this report were originally published outside the US and have been customized for US distribution. Deeper dive 14 November 2014 What would OPEC do? We havenвЂ™t faced such a bleak situation since the global financial crisis. In recent years, my Saudi colleague usually served as the swing producer when needed. One would think the KingdomвЂ™s USD 737bn ofВ foreign exchange reserves and nearly 10В million barrels a day (mbpd) of production would give it the latitude to sell less oil for a while to restore order in the market. Yet it hasnвЂ™t done so вЂ“ I need to analyze the situation. Dominic Schnider Analyst Tobias Hochstrasser Strategist The following is a fictitious diary entry from an OPEC oil minister Dear Diary, The atmosphere at our annual meeting in Vienna on the 27 November is likely to be unusually gloomy. The 30% plunge in global crude oil prices since the end of June has been quite a shock to all of us. WhatвЂ™s more, Brent prices of USD 80/bbl leave most of us about USD 10вЂ“50 per barrel shy of what we need to balance our budgets. Of course, such concerns are not mine alone. I believe about half of the 12 OPEC nations also require an oil price north of USD 100/bbl to avoid a big budget shortfall. How could this happen? It seems pretty simple: global production growth exceeds consumption growth. The rise of US shale output over the past two years has become a thorn in our side. As a result, oil production outside OPEC is expanding at a lofty 1.7mbpd pace this year while growth estimates for demand have recently been lowered to under 1mbpd. Further, financial speculators have jumped on the bandwagon as short positions in the futures market have built up significantly. And I recently read an interesting statistic: last year global oil imports totaled around 56mbpd, so every USDВ 10 fall in oil prices saves oil-importing nations USDВ 560m a day. Good for them. Not so good for us. Something needs to happen. What about our traditional reaction вЂ“ production cuts? What if we donвЂ™t cut oil production? If we donвЂ™t take action at the upcoming OPEC meeting, the Brent price could decline below USD 75/bbl and WTI to USD 70/bbl. That is an unappealing prospect for me, and many of my less fiscally prudent colleagues would be in even worse shape. For a start, to really hurt US shale producers we would need to allow WTI, the US benchmark price for crude oil, to slide to USD 60вЂ“65/bbl. Unfortunately, that could be more painful for some of us than for US drillers. Our club produces around 30.5mbpd. Such a price plunge would cost us more than USD 300m a day, or around USD 110bn over the course of a year. Worse still, while such a price move would curb US supply growth meaningfully at first, the moment we let the price rise again, those nimble Вforeign producers would start drilling again. We would be back to square one. Of course, itвЂ™s possible the oil price will Вself-correct. Declines like these function like tax cuts or monetary stimulus in nations like the US. The economic windfall generated could boost global growth and oil demand, which in turn would raise the price. However, that will take time. So oil demand will not ride to the rescue in the short run. I think, over the longer term, the future remains bright for us. Although many emerging markets are no longer growing as fast as they did a few years ago, they still have not approached energy consumption levels in Europe, let alone the US. One of my economists tells me that the average ВChinese and Indian citizen uses only around Brent oil prices dropped 30% since the end of June and now trade at 4-year lows Crude oil output from US shale drillers has been a game changer in the last six years Closing price of Brent front-month futures contract, in USD/bbl Monthly US crude oil production in million barrels per day 150 10 130 9 110 8 90 7 70 6 50 5 30 2006 2007 Brent oil price 2008 2009 2010 2011 2012 2014 4 1954 1964 1974 1984 1994 2004 200-day moving average Source: Bloomberg, UBS, as of 13 November 2014 2 2013 CIO WM Research 14 November 2014 Source: US Department of Energy, UBS, as of 13 November 2014 Please see important disclaimer and disclosures at the end of the document. The bottom line / What we are watching 1.1 liters and 0.5 liters, respectively, of oil a day. Typically, Europeans consume four to eight times as much and Americans up to 16 times more. A lot of catch-up demand exists, but now IвЂ™m straying from the problem at hand. What if we cut oil production? I must admit that OPEC members have not always collaborated harmoniously. Pushing up the oil price requires cooperation and sacrifice from all. Some of us may have been a bit too generous to our populations in recent years. Also, as a group, we will be 14 November 2014 forced to accommodate rising production from Iraq, which for years has been exempt from the collective agreements on supply. That said, taking action to restore some balance in the oil market shouldnвЂ™t require too much hardship. I donвЂ™t see any real oil glut. Days of inventory cover of oil in OECD countries are close to their five-year average, while inventories in the US are slightly above it. A cut of just 500,000вЂ“750,000 barrels per day might scare enough speculators to do the trick. And the rising pace of US production wonвЂ™t last forever. Already by next year US tight oil supply growth should moderate to 1.2mbpd. In the meantime, I believe prices could be boosted back above USDВ 90 a barrel. It will require the collective will of all OPEC member countries as Saudi Arabia may not want to shoulder the entire burden of the production cuts. The message seems to be that вЂњunited we stand and divided the oil price will fall.вЂќ Dominic Schnider and Tobias Hochstrasser The bottom line We believe that it makes economic sense for OPEC to cut production: failure to do so will lead to a steep fall in revenue. A small production cut north of 0.5mbpd should be sufficient to stabilize the market. We attach a 60% probability to such an action. In our view, maxiPreferred investment views Asset Class Most preferred Equities US small and mid caps (пѓћ) US technology US capex North American energy independence вЂў Cancer therapeutics вЂў e-Commerce (пѓћ) вЂў Benefit from reform in Mexico вЂўUK вЂў Emerging markets (пѓ ) вЂў вЂў вЂў вЂў вЂў Government bonds вЂў Emerging market corporate bonds (пѓ ) вЂў вЂў вЂў вЂў Fixed income Least preferred US high yield Mortgage IOs (пѓћ) US senior loans Commercial mortgage-backed securities Foreign exchange вЂўUSD вЂўGBP Alternative investments вЂў Credit alternatives to diversify bond portfolios вЂўEUR вЂўCHF mizing OPECвЂ™s revenues remains the path to a potential new equilibrium and not the equilibrium state itself. Assuming OPEC cuts, we feel comfortable with our 2015 average price guidance at USD 94/bbl for Brent and USD 88/bbl for WTI. What we are watching вЂ“ Preview 1 US economic data: US retail sales will be released on 14 November while industrial production will follow on 17 November. Both economic figures have shown robust annual growth rates of above 4 % in recent months. We expect this trend to continue and remain overweight US risk assets and the US dollar relative to the euro. 2 The Federal Reserve and Bank of England: Both central banks will release their minutes on 19 November, providing insights into the likelihood of rising rates. Strong US labor market data has put pressure on the Fed to hike rates. We are overweight the US dollar and British pound. 3 Global leading indicators: Preliminary purchasing manager indices around the world will be published on 20 November. Our focus is on whether the recent stimulus measures in China have supported growth momentum and on Eurozone indicators, which we expect to remain sluggish. пѓћ Recent upgrades пѓ Recent downgrades 4 There will be an abundance of housing data being released next week. The November National Association of Home Builders Housing Market Index will be announced on Tuesday. On Wednesday, October housing starts and building permits will be revealed and on Thursday, October existing home sales will be announced. For more information, please see the most recent UBS House View: Investment Strategy Guide. Source: UBS CIO WMR, as of 23 October 2014 5 On 18 November, the Federal Reserve will be releasing minutes from its 28-29 October meeting. Cash Sections of this report were originally published outside the US on 13 November 2014 and have been customized for US distribution. 6 On Tuesday, the October Producer Price Index will be announced. On Thursday, the October Consumer Price Index (CPI) will be revealed. According to Bloomberg surveys, economists are expecting a -0.1% m/m decline in CPI for October, due in part to low fuel costs. Recent issues of вЂњDeeper diveвЂќ вЂў What does the Bank of Japan's latest QE mean? (7 November 2014) вЂў Mission accomplished? (31 October 2014) 3 CIO WM Research 14 November 2014 вЂў How is this sell-off shaping up? (17 October 2014) вЂў Are emerging markets ready for reform? (10 October 2014) Please see important disclaimer and disclosures at the end of the document. Editorial 14 November 2014 ItвЂ™s the Most Wonderful Time of the Year Robert Samuels Equity Sector Strategist, Wealth Management Americas 2014 was going to be the year of the U.S. consumer. After moderate real consumption growth of 2.2%, on average, during the recovery, all key household fundamentals had improved at the dawn of the year. Real disposable income accelerated after U.S. households had absorbed personal income tax hikes in early 2013. Financial asset and house prices continued to climb and net worth to disposable income was rapidly approaching its pre-crisis peak. The personal savings rate had risen to a comfortable level of around 4%. After a contentious fight and a government shutdown, Democrats and Republicans finally agreed to a two-year budget plan, tentatively shelving political brinkmanship. Finally, consumer credit growth had accelerated, a sign that U.S. consumers were willing to borrow more freely to finance their consumption. Fast forward to November and year-to-date real consumption has been disappointing at 1.9%. While harsh winter effects depressed consumer durable consumption in 1Q14, the expected snapback in 2Q14 was uninspiring at an annualized 2.5% rate and 3Q14 showed a lack of follow-through with annualized growth of 1.9%. What went wrong? U.S. households seem to have grown more cautious, as witnessed by an increase in the savings rate to almost 6%. This is very odd behavior considering that the net worth to disposable income ratio is consistent with a savings rate of 2%. That difference is hard to reconcile unless one is willing to accept a pervasive change in U.S. consumer attitudes. Another explanation could be that median to low income families have not yet enjoyed a strong labor market recovery and therefore they have increased their savings rate, pushing up the average savings rate. So here we sit on the eve of Black Friday and the all-important holiday shopping season and there is a sense of optimism in the air. In fact, the National Retail Federation (NRF) expects holiday sales to rise 4.1% this year to USD 616 billion, which would mark the first time since 2011 that holiday sales grew by more than 4%. There are some signs that retailers may be beginning to see a tailwind from the 4 CIO WM Research 14 November 2014 economy, led by healthier labor markets, higher consumer confidence and, most recently, a significant decline in gas prices. In addition to an improving macro outlook, there are other factors that lead us to be more upbeat on holiday spending, which can represent almost one-third of a retailerвЂ™s annual sales and 40-50% of annual profits. Last yearвЂ™s weather was incredibly disruptive with harsh winter storms that negatively impacted mall traffic at inopportune times. This yearвЂ™s forecast (fingers crossed) calls for milder temperatures and less precipitation. Also, retail inventories are in better position this year heading into the holidays, and while we expect the environment to remain highly competitive вЂ”with stores opening even earlier this year on Thanksgiving вЂ” there should be a little bit less pressure on margins. With regards to holiday shopping trends, we expect online sales to exhibit strong growth, with the NRF calling for a 9-11% rise in 2014 to USD 105 billion of e-Commerce sales. Also, mobile commerce continues to grow exponentially as it is now very easy to buy anything from apparel to footwear to furniture from your mobile phone. And what will people be looking to buy? Consumer electronics and athletic-inspired apparel will likely be high on most peopleвЂ™s wish lists. Finally, while free shipping around the holiday is now part of the price of doing business, вЂњBuy Online, Pickup In-StoreвЂќ is becoming much more commonplace and is a viable option for those looking to make a lastminute holiday purchase. So at the end of the day, we are not very worried about the lackluster consumer performance this year and expect to see a pickup in the next several quarters. Historically, consumer spending eventually catches up with household fundamentals. After all, if all drivers of consumer spending are improving, why shouldnвЂ™t households increase their spending rates? Therefore, we continue to expect real consumption growth acceleration to around 3% in the coming quarters, which in turn will help fuel the recent pickup in business fixed investment growth. And if the consumer finally decides to open his/her wallet this holiday season, it definitely will be the most wonderful time of the year. Kind Regards, Robert Samuels Thomas Berner Please see important disclaimer and disclosures at the end of the document. Dashboard 14 November 2014 Strategy and performance Cross asset and equities Tactical Asset Allocation Market Returns Asset Classes MTD YTD 2013 0.3% 4.7% 22.8% Fixed Income вЂ“0.7% 0.9% Commodities вЂ“1.5% вЂ“7.8% вЂ“9.5% Equity вЂ“вЂ“вЂ“ вЂ“вЂ“ underweight вЂ“ n neutral + ++ +++ overweight вЂ“2.6% Total return indices in USD Note: Indexes used to calculate returns are MSCI All Country World (for Equity), Barclays Capital Global Aggregate Index (for Fixed Income), Dow Jones-UBS Commodity Index Total Return Source: UBS Chief Investment Office/CIO WMR, as of 13 November 2014 Tactical Asset Allocation Market Returns Equities MTD YTD 11.6% 32.5% Large-Cap Growth 1.2% 12.1% 33.5% Mid-Cap 0.9% 11.2% 34.8% Small-Cap 0.2% 2.1% вЂ“0.2% вЂ“3.0% 22.8% вЂ“2.3% 1.3% ++ +++ overweight 1.3% 1.3% 4.4% 43.1% Cons. Staples 1.0% 2.9% 14.3% 26.1% вЂ“1.7% вЂ“2.4% вЂ“2.1% 25.1% Energy Financials 0.0% 1.3% 12.0% 35.6% Healthcare 0.2% 0.7% 23.8% 41.5% Industrials 0.4% 1.9% 8.7% 40.7% Technology 1.2% 2.0% 18.4% 28.4% Materials 1.5% 1.5% 7.7% 25.6% 1.8% 10.4% 11.5% 2.4% 1.0% + Cons. Discr. вЂ“1.4% вЂ“0.8% 22.1% 13.2% Large-Cap Value n neutral 38.8% вЂ“2.6% Total return indices in USD вЂ“вЂ“вЂ“ вЂ“вЂ“ вЂ“ underweight n neutral + ++ +++ Total return indices in USD overweight Note: S&P 500 Sector Indexes used to calculate returns. Source: UBS CIO WMR, as of 13 November 2014 Tactical Asset Allocation Market Returns International Developed Equities MTD EMU UK Note: Indexes used to calculate returns are Russell 3000 (for US), Russell 1000 Value, Russell 1000 Growth, Russell Mid Cap, Russell 2000 (for Small-Cap), MSCI EAFE (for IntвЂ™l Developed), MSCI EMF (for Emerging Markets). Source: UBS Chief Investment Office/CIO WMR, as of 13 November 2014 S&P 500 forecast CIO WMR 6-month rolling price target 2050 2013 earnings per share actual USD 110 2014 earnings per share estimate USD 120 2015 earnings per share estimate USD 129 Source: UBS CIO WMR, as of 13 November 2014 Tactical deviations from benchmark: Scale for charts вЂ“ Symbol Description/Definition + ++ +++ moderate overweight vs. benchmark overweight vs. benchmark strong overweight vs. benchmark вЂ“ вЂ“вЂ“ вЂ“вЂ“вЂ“ moderate underweight vs. benchmark n Neutral, i.e. on benchmark underweight vs. benchmark strong underweight vs. benchmark Notes This represents the tactical asset allocation for a moderate, taxable investor without alternative investments. See the latest UBS House View: Investment Strategy Guide for an interpretation of the tactical deviations and an explanation of the corresponding benchmark allocation. Tactical time horizon is approximately six months. Total return market performance is from Bloomberg as of close of business on source date, using representative indices, and is provided for information only. Past performance is no indication of future performance. 5 CIO WM Research 14 November 2014 YTD 2013 Utilities 11.0% 33.6% вЂ“ вЂ“вЂ“вЂ“ вЂ“вЂ“ underweight Weekly MTD Telecom 1.0% Emerging Markets Market Returns US Equity Sectors 2013 US IntвЂ™l Developed Tactical Asset Allocation YTD 2013 вЂ“1.6% вЂ“8.3% 30.0% 0.0% вЂ“3.5% 20.7% 1.3% вЂ“1.3% 27.3% Australia вЂ“1.7% 3.9% 4.3% Canada 0.6% 4.8% 6.4% Switzerland 1.2% 3.4% 27.6% NA NA NA Japan Other вЂ“вЂ“вЂ“ вЂ“вЂ“ underweight вЂ“ n neutral + ++ +++ overweight Total return indices in USD Note: MSCI Region or Country Indexes used to calculate returns. Source: UBS Chief Investment Office/WMR, as of 13 November 2014 The overweight and underweight recommendations represent tactical deviations that can be applied to any appropriate benchmark portfolio allocation. They reflect CIO WMRвЂ™s assessment of market opportunities and risks in the respective asset classes and market segments. The benchmark allocation is not specified here. Please see the most recent UBS House View: Investment Strategy Guide for definitions/explanations of benchmark allocation. They should be chosen in line with the risk profile of the investor. Note that the Regional Equity and Bond Strategy is provided on an unhedged basis (i.e., it is assumed that investors carry the underlying currency risk of such investments). Thus, the deviations from the benchmark reflect our views of the underlying equity and bond markets in combination with our assessment of the associated currencies. + вЂ“ Indicates +/вЂ“ change Terms and Abbreviations EMU = European Monetary Union and is comprised of European countries that have adopted the Euro as their currency, IntвЂ™l = international, MTD = month-to-date, USD = US dollar, YTD = year-to-date. Please see important disclaimer and disclosures at the end of the document. Dashboard 14 November 2014 Strategy and performance Fixed income and currencies Tactical Asset Allocation Market Returns Fixed income Tactical Asset Allocation USD Taxable Fixed Income MTD YTD 2013 US 0.0% 5.1% вЂ“2.0% Treasuries Government 0.0% 4.0% вЂ“2.6% TIPS Municipal вЂ“0.2% 8.1% вЂ“2.6% Agencies IG Corporates* вЂ“0.2% 6.6% вЂ“2.0% Agency MBS HY Corporates вЂ“0.2% 4.5% 7.4% IntвЂ™l Developed вЂ“1.2% вЂ“2.0% вЂ“3.1% Emerging Markets вЂ“0.9% 6.3% вЂ“ вЂ“вЂ“вЂ“ вЂ“вЂ“ underweight n neutral + вЂ“4.1% Market Returns MTD YTD 2013 вЂ“3.3% 0.0% 4.8% вЂ“0.1% 5.1% вЂ“9.4% 0.0% 3.5% вЂ“1.8% 0.1% 5.3% вЂ“1.4% IG Corporate* вЂ“0.2% 6.8% вЂ“1.5% HY Corporates вЂ“0.2% 4.6% 7.4% 0.6% 14.9% вЂ“3.7% Preferred Securities ++ +++ overweight Total return indices in USD вЂ“вЂ“вЂ“ вЂ“вЂ“ вЂ“ underweight n neutral + ++ +++ overweight Total return indices in USD Note: Indexes used to calculate returns are Barclays Capital (BarCap) US Aggregate, BarCap US Aggregate Government, BarCap Municipal Bond, BarCap US Aggregate Credit (for IG), BarCap US Aggregate Corp HY, BarCap Global Aggregate ex-USD (for IntвЂ™l Developed), BarCap Emerging Markets Government and BarCap Global Emerging Markets USD (50% of each for Emerging Markets). *Investment grade corporates are overweight in non-taxable portfolios but underweight in most taxable portfolios. Source: UBS Chief Investment Office/CIO WMR, as of 13 November 2014 Note: Indexes used to calculate returns are Bank of America Merrill Lynch (BoA ML) US Treasury, BoA ML US Inflation-Linked Treasury, BoA ML US Composite Agency, BoA ML US Mortgage Backed Securities, BoA ML US Corporate, BoA ML US High Yield Constrained, BoA ML Fixed Rate Preferred Securities. *Investment grade corporates are overweight in non-taxable portfolios but underweight in most taxable portfolios. Source: UBS CIO WMR, as of 13 November 2014 Tactical Asset Allocation Tactical Asset Allocation Market Returns Foreign exchange MTD YTD 2013 USD NA NA NA EUR вЂ“0.4% вЂ“9.2% 4.2% GBP вЂ“1.8% вЂ“5.1% 1.9% JPY 3.1% 9.9% 21.4% CHF 0.1% 7.9% вЂ“2.5% Other NA вЂ“вЂ“вЂ“ вЂ“вЂ“ underweight вЂ“ n neutral + NA NA ++ +++ overweight Change against USD Source: UBS Chief Investment Office/CIO WMR, as of 13 November 2014 Tactical deviations from benchmark: Scale for charts вЂ“ Symbol Description/Definition + ++ +++ moderate overweight vs. benchmark overweight vs. benchmark strong overweight vs. benchmark вЂ“ вЂ“вЂ“ вЂ“вЂ“вЂ“ moderate underweight vs. benchmark n Neutral, i.e. on benchmark underweight vs. benchmark strong underweight vs. benchmark Notes This represents the tactical asset allocation for a moderate, taxable investor without alternative investments. See the latest UBS House View: Investment Strategy Guide for an interpretation of the tactical deviations and an explanation of the corresponding benchmark allocation. Tactical time horizon is approximately six months. Emerging markets comprises corporate and sovereign bonds. In Foreign exchange, other refers to other developed currencies. Total return market performance is from Bloomberg as of close of business on source date, using representative indices, and is provided for information only. Past performance is no indication of future performance. 6 CIO WM Research 14 November 2014 Market Returns International Developed Fixed Income MTD EMU UK Japan YTD 2013 вЂ“0.2% вЂ“1.0% 6.8% вЂ“0.9% 4.1% вЂ“0.8% вЂ“3.2% вЂ“6.9% вЂ“16.1% Other NA вЂ“вЂ“ вЂ“вЂ“вЂ“ underweight вЂ“ n neutral + NA NA ++ +++ Total return indices in USD overweight Note: BarCap Region or Country Indexes used to calculate returns. Source: UBS Chief Investment Office/CIO WMR, as of 13 November 2014 The overweight and underweight recommendations represent tactical deviations that can be applied to any appropriate benchmark portfolio allocation. They reflect CIO WMRвЂ™s assessment of market opportunities and risks in the respective asset classes and market segments. The benchmark allocation is not specified here. Please see the most recent UBS House View: Investment Strategy Guide for definitions/explanations of benchmark allocation. They should be chosen in line with the risk profile of the investor. Note that the Regional Equity and Bond Strategy is provided on an unhedged basis (i.e., it is assumed that investors carry the underlying currency risk of such investments). Thus, the deviations from the benchmark reflect our views of the underlying equity and bond markets in combination with our assessment of the associated currencies. The scale above does not pertain to the USD taxable fixed income table. The symbols in that table describe varying degrees of preference in a USD taxable fixed income portfolio. + вЂ“ Indicates +/вЂ“ change Terms and Abbreviations EMU = European Monetary Union and is comprised of European countries that have adopted the Euro as their currency, HY = high yield, IntвЂ™l = international IG = investment grade, MBS = mortgage-backed securities, MTD = month-to-date, USD = US dollar, YTD = year-to-date. Please see important disclaimer and disclosures at the end of the document. Dashboard 14 November 2014 Earnings calendar The Earnings Calendar provides publicly announced reporting dates and times of companies covered by Wealth Management Research Americas. Reporting dates and times are subject to change by the reporting companies. Date Company Ticker 17-Nov-2014 Urban Outfitters, Inc. URBN 18-Nov-2014 Dick's Sporting Goods, Inc. DKS 19-Nov-2014 Lowe's Cos., Inc. LOW 20-Nov-2014 Williams-Sonoma, Inc. WSM Company Ticker Company Ticker The Home Depot, Inc. HD Medtronic, Inc. MDT Gap, Inc. GPS Source: Bloomberg, UBS, as of 13 October 2014 Key economic indicators Date Indicator Period Time (ET) Unit Consensus Previous 17-Nov-14 Empire State Manufacturing Survey November 8:30 AM level 10.0 6.2 17-Nov-14 Indutrial Production October 9:15 AM m/m 0.2% 1.0% 17-Nov-14 Capacity Utilization October 9:15 AM level 79.3% 79.3% 18-Nov-14 Final Demand Producer Price Index (PPI) October 8:30 AM m/m вЂ“0.1% вЂ“0.1% 18-Nov-14 PPI less Food and Energy October 8:30 AM m/m 0.1% 0.0% 18-Nov-14 Housing Market Index November 10:00 AM index 55 54 19-Nov-14 Housing Starts October 8:30 AM level 1025k 1017k 19-Nov-14 Housing Permits October 8:30 AM level 1040k 1031k 20-Nov-14 Jobless Claims For Week, 15 November 8:30 AM level 280k 290k 20-Nov-14 Consumer Price Index (CPI) October 8:30 AM m/m вЂ“0.1% 0.1% 20-Nov-14 CPI less Food and Energy October 8:30 AM m/m 0.2% 0.1% 20-Nov-14 Purchasing Managers Index Manufacturing Index Flash November 9:45 AM level 56.5 55.9 20-Nov-14 Existing Home Sales October 10:00 AM level 5.15mn 5.17mn 20-Nov-14 Leading Economic Indicators October 10:00 AM m/m 0.5% 0.8% 20-Nov-14 Philadelphia Fed Survey November 10:00 AM level 18.3 20.7 Source: Bloomberg, UBS, as of 13 October 2014 UBS forecast estimates are published on Friday evenings in Economic Perspectives by economists employed by UBS Investment Research, a part of UBS Investment Bank. m/m = month-over-month, q/q = quarter-over-quarter, k = thousand, bn = billion, y/y = year-over-year, mn = million 7 CIO WM Research 14 November 2014 Please see important disclaimer and disclosures at the end of the document. Appendix 14 November 2014 Investing in Emerging Markets Investors should be aware that Emerging Market assets are subject to, amongst others, potential risks linked to currency volatility, abrupt changes in the cost of capital and the economic growth outlook, as well as regulatory and sociopolitical risk, interest rate risk and higher credit risk. Assets can sometimes be very illiquid and liquidity conditions can abruptly worsen. WMR generally recommends only those securities it believes have been registered under Federal U.S. registration rules (Section 12 of the Securities Exchange Act of 1934) and individual State registration rules (commonly known as вЂњBlue SkyвЂќ laws). Prospective investors should be aware that to the extent permitted under US law, WMR may from time to time recommend bonds that are not registered under US or State securities laws. These bonds may be issued in jurisdictions where the level of required disclosures to be made by issuers is not as frequent or complete as that required by US laws. For more background on emerging markets generally, see the WMR Education Notes, вЂњEmerging Market Bonds: Understanding Emerging Market Bonds,вЂќ 12 August 2009 and вЂњEmerging Markets Bonds: Understanding Sovereign Risk,вЂќ 17 December 2009. Investors interested in holding bonds for a longer period are advised to select the bonds of those sovereigns with the highest credit ratings (in the investment grade band). Such an approach should decrease the risk that an investor could end up holding bonds on which the sovereign has defaulted. Sub-investment grade bonds are recommended only for clients with a higher risk tolerance and who seek to hold higher yielding bonds for shorter periods only. 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Version as per May 2014. В© UBS 2014. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. 8 CIO WM Research 14 November 2014 Please see important disclaimer and disclosures at the end of the document.