UBS House view

Monthly Base March 2018

Chief Investment Office WM

This report was prepared by UBS AG.

Please see the important disclaimer at the end of the document.
This document is a snapshot view. We update the tactical asset allocation
as changes occur and resend it to subscribers. For all other forecasts and
Published information, we advise you to check the Investment Views section in your E-
Feb 22 2018 Banking or in Quotes. 1
Financial Market Outlook – short term (6 months)
We have revised up our growth Global Tactical Asset Allocation
forecasts for 2018 and 2019
Annual global real GDP growth in % (UBS
forecasts for 2017–2019) • Asset allocation
6.0 The recent market correction, triggered by concerns about rising US inflation and interest rates, and worsened by technical factors, erased some
5.0
of January's strong equity gains. We keep a constructive view on global equities as the economic backdrop remains strong. Leading indicators,
including manufacturing PMIs, suggest robust manufacturing activity ahead. We revised our annual forecast for global economic growth up to
4.0
4.1% recently. Global inflation is only picking up gradually and we expect a slow normalization of monetary policy. Solid corporate earnings growth
3.0 continues to support equities. We remain overweight in global equities against euro high yield and high grade bonds. Equity market valuations
are slightly below their long-term average and stocks should outperform credit and bonds. We are entering a phase of the business cycle, where
2.0
volatility is increasing. We therefore add some protection to our general risk-on stance through equity put options.
1.0

0.0
• Equities
2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E
Global equities are supported by solid earnings growth as can be seen from the ongoing 4Q earnings announcements. US companies, which make
Source: Bloomberg, UBS, as of February 2018 up about half of the global equity market, are benefiting from tax relief as well as the announced fiscal spending package. Global equities' price-
earnings ratio is currently slightly below its long-term average. We maintain our overweight on Eurozone against UK equities. Eurozone companies
Earnings advance supports equity are well positioned to benefit from robust global demand given their cyclical sector composition and high operational leverage, while UK earnings
markets growth is likely to lag other regions in 2018. We also hold an overweight in emerging market (EM) stocks against Australian stocks. Due to their
12m trailing earnings per share (EPS) and operational leverage, EM companies are a main beneficiary of strong global growth, while expected USD weakness in 2018 should benefit EM
equity index equities measured in USD. Investors who don't own Australia stocks should underweight UK.

• Bonds
We close our overweight in EM local currency bonds against high grade (HG) bonds, taking profits. The return outlook has weakened after strong
gains. The yield pickup against USD HG bonds is now 3%, the lowest since 2008, and does not warrant to keep exposure to volatile EM FX.
Instead, we open an overweight in EM sovereign bonds in USD against HG. We expect tighter EM sovereign spreads amid improving fundamentals,
stable commodity prices and a benign external backdrop. Also, the current yield pickup of 2.6% in USD is attractive. Euro high yield bonds remain
expensive and we keep our underweight against global equities, which have more upside potential. We furthermore open an overweight in 10-
year US Treasury bonds vs. cash as well as an underweight in 10-year Japanese gvt. bonds vs. cash.

• Foreign exchange
Source: Thomson Reuters, UBS CIO WM, as of February 2018 We are closing our long SEK vs. short NOK position as the domestic indicators in Norway are improving surprisingly fast. We keep our long CAD
vs. USD position and an overweight in a diversified EM currency basket. We are adding a long EUR vs. short USD position, a long GBP vs. short
CHF position and a long JPY vs short NZD position. Our positions should benefit from a solid global economy that convinces investors to let go of
safe-haven currencies. Also, the Eurozone runs a large trade surplus (4% of GDP) compared to sizeable trade and budget deficits in the US. Plus,
the EUR should gain against the USD as the ECB will end its QE program in September. Our long GBP vs. short CHF position should benefit from
lower uncertainty on Brexit, where we expect a 2-year transition deal in March.

For further information please contact Head CIO Global Asset Allocation Andreas J Koester, andreas.koester@ubs.com or CIO asset class specialists Philipp Schöttler, 2
philipp.schoettler@ubs.com or Carolina Corvalan, carolina.corvalan@ubs.com.
Cross-asset preferences
We like... We don't like... Model portfolios (EUR & USD)
Risk Parity Liquidity
• Global equities • UK equities 2% 5%
High grade
• Eurozone equities • Australian equities
Hedge Funds
bonds
10%
18%
• Emerging market equities US TIPS 2%
Equities • Eurozone value opportunities Inv. grade
corporate
• US smart beta bonds 8%

• Sustainable value creation in EM

Equities US
12%
EUR High yield
bonds
• Some protection via equity put options 3%
EM bonds 7%
• Corporate hybrids • Developed market high grade bonds ( ) Equities others
• US leveraged loans • "Well-worn" bonds Equities Europe Equities EM
5%
Bonds 23%
• EM sovereign bonds in USD ( ) • Euro high yield 5%

• 10-year US Treasuries vs. USD cash ( ) • 10-year Japanese gvt bonds (vs. JPY cash) Risk Parity Liquidity
2%
( ) 5% High grade
Hedge Funds bonds
18% 8%
• EUR ( ) • USD ( ) US TIPS
4%
• CAD • USD
Inv. grade
Foreign exchange • EM FX (BRL, INR, RUB, TRY) • DM FX (AUD, HUF, NOK, TWD) corporate
bonds
• GBP ( ) • CHF ( )
USD 8%
High yield
• JPY ( ) • NZD ( ) bonds
3%
Equities US
21% EM bonds
Hedge Funds • Navigating rising US rates with hedge 7%
funds
Equities others
6%
Precious Metals Equities EM
Equities Europe
& Commodities 12% 6%

UBS, as of 22 February 2018

Note: Portfolio weightings are for a EUR model portfolio and a

Recent upgrades Recent downgrades USD model portfolio, with a balanced risk profile (including TAA).
We expect the EUR balanced portfolio (excluding TAA) to have
an average total return of 3.5% p.a. and a volatility of 8.0% p.a.
over the next seven years. We expect the USD balanced portfolio
(excl. TAA) to have an average total return of 5.2% p.a. and a
volatility of 7.9% p.a. over the next seven years.

3
Global tactical asset allocation
Tactical asset allocation deviations from benchmark*
Currency allocation
underweight neutral overweight
Liquidity
underweight neutral overweight
Equities total
USD
Global
US EUR
Eurozone
GBP
UK
Switzerland JPY
Japan
Emerging markets (EM)
CHF
Australia*** SEK
Bonds total
High grade bonds NOK
Corporate bonds (IG)
CAD
High yield bonds**
EM sovereign bonds (USD) NZD
EM corporate bonds (USD)
AUD
EM local currency bonds
US TIPS EM FX basket^
Duration overlay (USD)
Duration overlay (JPY) DM FX basket^

new old new old

Source: UBS, as of 22 February 2018
Source: UBS, as of 22 February 2018
^EM FX basket contains Russian ruble, Turkish lira, Brazilian real & Indian rupee. DM FX basket
*Please note that the bar charts show total portfolio preferences, which can be interpreted as the contains Norwegian krone, Australian dollar, Taiwanese dollar & Hungarian forint (all equally
recommended deviation from the relevant portfolio benchmark for any given asset class and sub-asset class. weighted).
**Position includes an underweight in EUR HY.
***Investors who don't have exposure to Australian equities should underweight UK equities instead.

4
CIO themes in focus
Equities
• Eurozone in style – Value opportunities
Solid economic growth and a moderate rise in inflation provide a suitable background for Eurozone "value" stocks to outperform the wider market, in our view. This is because value has a
modest cyclical sector bias, with an above-average weighting in energy and financials. The relative performance of value tends to move in tandem with bond yields. We expect bond yields
to move higher, driven by rising US interest rates and the prospect of the European Central Bank tapering its bond purchases early this year.

• US smart beta
Certain stock characteristics (momentum, quality, small capitalization, risk-weighting, value and yield) have been shown to deliver long-term investment outperformance relative to a market
capitalization-weighted index. Combining these characteristics, known in the industry as smart beta, makes the investment less cyclical and creates a "passive-plus" solution. Smart beta's
compelling value proposition has resulted in a phenomenal growth in assets. Smart beta ETF assets have increased to over USD 650bn and are growing by more than 30% a year.

• Sustainable value creation in emerging markets

EM equities offer investors the opportunity to add value to their portfolios by incorporating environmental, social and corporate governance (ESG) considerations into their investment decisions.
We argue that the wide disparity among individual companies on ESG performance, particularly regarding governance issues, necessitates focusing on those with a strong management to
reduce tail-risk events such as severe environmental accidents or weak corporate governance (e.g. accounting/audit issues). As corporate governance rules in emerging markets are often less
strict than those in developed countries, risks and opportunities are hard to quantify, which suggests that understanding how companies are exposed to ESG risks and opportunities and how
they manage them should factor in highly when determining corporate value.

Bonds
• Replacing well-worn bonds
Risk-free yields in some major developed markets are near or below zero. Even if rates remain unchanged, many short- to medium-term bonds would deliver negative total returns. We think
investors can preserve wealth by taking profits on assets that will deliver negative total returns (exceeding the costs of switching out) in most likely scenarios. More attractive alternatives can
be found on CIO's bond recommendation lists.
• US loans – Attractive floating yield
US senior loans are an attractive alternative to more traditional fixed income segments. Loans provide exposure to the most senior part of a company's capital structure and are often
secured by the company's assets, leading to higher recovery rates than for bonds. Also, loans offer a floating coupon rate, which benefits from an increase in US short-term interest rates.
The current yield of 5.0–5.5% is still attractive. Last year, the re-pricing of existing loans – allowing issuers to lock in lower coupon rates as demand for the asset class has been very strong
– has held back the asset class's performance. But this headwind is likely to fade going forward. We expect the 12-month trailing default rate to remain broadly stable over the next 12
months at around 2%. We think US loans present an attractive investment opportunity for qualified investors who are comfortable holding less liquid asset classes.
• Yield pick-up with corporate hybrids
Corporate hybrids are a niche segment in the corporate bond market. At current spread levels, they compensate investors with a suitable reward for assuming the risks associated with
them. We expect mid-single-digit percentage returns on selected instruments over 12 months.

UBS Chief Investment Office WM considers the highlighted themes as fitting the sustainability framework. 5
CIO themes in focus
Alternative investments
• Navigating rising US rates with hedge funds
The US Federal Reserve has started to hike interest rates. Historically, most hedge fund strategies have been resilient to rising rates, while high grade bonds have performed poorly. Investors
looking for an alternative to their high grade bond exposure should consider a diversified hedge fund portfolio characterized by low directional exposure to both fixed income and equities.

This selection of themes is a subset of a larger theme universe. It represents the highest conviction themes of the UBS Chief Investment Office WM, taking into account the current market environment and risk-return
characteristics.

6
CIO longer term investment themes in focus
Equities
• Digital data
Due to increased urbanization, the global digital universe is expected to expand 50-fold between 2010 and 2020. Rising global internet penetration (likely about 66% in 2025 vs. 44% in
2015) and strong data growth in emerging markets are key drivers. From an investment perspective, the theme offers solid long-term growth opportunities, as significant investment will be
required to manage and take advantage of the surge in data. Investors can participate by investing in either data enablers or data infrastructure companies.
• Automation and robotics
Smart automation is powering the ongoing industrial revolution, combining the innovation capabilities of industrial and IT processes to fuel global manufacturing productivity gains. Rising
wages and challenging demographic changes will pressure costs of manufacturing firms, driving automation investments. Also, the increasing digitalization of automation equipment is
a key driver of higher efficiency and therefore more automation investments. Artificial intelligence employed in machines should take automation to the next level. The smart automation
industry's total annual revenue now stands at around USD 177.5bn. We believe that over the cycle, the sector can grow by mid-to-high single-digits, with industrial software, robots and
new trends – 3D printing, artificial intelligence and drones – the clear outperformers.
• EM tourism
Urbanization and income growth are driving demand growth for emerging market tourism and global aviation infrastructure. Emerging market air passengers carried globally already exceed
that of developed markets. Airbus forecasts that two thirds of new plane orders will come from emerging markets in the next 20 years. The growth of EM tourism is further supported by
EM government policy, particularly economic diversification away from commodity exports and rising visa openness to draw visitors and attract foreign-currency receipts.
• Smart mobility
Smart mobility is a combination of smart powertrains (electrification), smart technology (autonomous driving) and smart use (car-sharing/car-hailing). Urbanization will be its main driver,
with aging also a supportive factor. Sustainable investment aspects like safety, better fuel efficiency and lower emissions play nicely into our theme. Regulatory changes and technological
advances support smart mobility and will reshape the way we experience and consume individual mobility. We estimate that by 2025, the annual addressable market of our theme will be
around USD 400bn, or 10 times today's size.
• Energy efficiency
Energy efficiency covers wide-ranging issues with numerous characteristics and starting points, offering promising investment opportunities. Energy efficiency is gaining in importance
around the world thanks to government initiatives, while rising environmental pollution has led to greater worldwide awareness. The International Energy Agency expects the demand for
energy-efficient products to grow by 7–8% annually. Investment could reach USD 530bn in 20 years, up from USD 130bn in 2013.

This selection of themes is a subset of a larger theme universe. It represents the highest conviction themes of the UBS Chief Investment Office WM, taking into account the current market environment and risk-return
characteristics. The Longer Term Investment (LTI) theme series focuses on inevitable global trends, such as population growth, aging and urbanization, that create a variety of opportunities, with certain companies and
sub-sectors experiencing a higher-than-GDP rate of revenue growth. Here, we include a subset of a larger universe of LTI themes expected to offer good entry points for theme-oriented investors in the coming months,
and highlight our preference for a diversified approach to themes.

UBS Chief Investment Office WM considers the highlighted themes as fitting the sustainability framework. 7
Key financial market driver 1 - Central bank policy
Corporate pricing power improved, then steadied
Key points
Core producer price inflation rose throughout 2017
• The US Federal Reserve has accelerated the process of tightening quantitative policy, and we expect it to do so again over the course
of 2018. In effect, the US is destroying dollar money supply. Further rate hikes are likely in 2018. Powell's appointment as Fed Chair
suggests policy continuity.
• The European Central Bank is now buying EUR 30bn worth of assets a month. Market attention will focus on whether this program
is extended beyond September. Public comments on this reveal divisions within the governing council. The Bank of England has
reversed the 2016 "emergency" rate cut and a further interest rate increase may be considered in the second quarter.
• Within the G7, the Bank of Japan remains the sole voice of policy accommodation although some are calling this into question.

CIO view (Probability: 75%*) Policies tighten gradually

• The Fed has accelerated the process of shrinking its balance sheet, in accordance with the pre-announced policy path. Fed Chair
Powell's term suggests policy continuity and the likelihood of further (modest) interest rate increases in 2018. Other vacancies
on the FOMC create uncertainty about the nuances of policy. The confirmation of Goodfriend as Fed governor faces political
obstacles. Additional fiscal stimulus at a time of full employment may raise some concerns at the Fed.
• The ECB has reduced its bond-buying from EUR 60bn a month to EUR 30bn a month. This program lasts until September, and Source: Haver, UBS, as of 14 February 2018
there is clearly a division among ECB council members as to whether the bond-buying program should simply end at that point.
The strength of the euro area economy makes justifying the continuation of the policy increasingly difficult.
• The Bank of England has reversed the 2016 emergency rate cut. A further rate hike remains likely if economic activity proves
resilient. Other central banks have been more inclined to discuss policy with a bias toward tightening rather than easing; this Some liquidity tightening underway
The tightness of liquidity is about supply and demand.
coincidence of views more likely reflects the general improvement in global growth data rather than any overt coordination.
A falling central bank balance sheet to GDP ratio is one
• The tightening of central bank policy has shifted from past cycles. There is no desire to reduce economic growth or inflation. indication that liquidity supply may be less than liquidity
The aim is to maintain growth and inflation around current levels. This contrasts with some historical tightening episodes, which demand
have deliberately sought to reduce company pricing power.

Positive scenario (Probability: 10%*) Worsening macro backdrop

• The Fed falls further behind the curve as US inflation surprises higher, with real interest rates slipping more rapidly. The ECB
launches additional policy easing, reversing the language of recent public announcements and signaling a stronger emphasis on
the potential to ease policy further. The BoJ comes under pressure to engineer currency depreciation.

Negative scenario (Probability: 15%*) Macro risks fade, central banks seek to reduce pricing power
• The inflationary effect of a tighter US labor market and fiscal stimulus leads to a stronger Fed response and a combination of tight
monetary policy and loose fiscal policy over the course of 2018. Increased labor market costs and commodity price pressures lead
to higher European inflation, generating early signs of a more rapid tapering of ECB quantitative easing.
*Scenario probabilities are based on qualitative assessment

Key dates
Mar 7 US Federal Reserve Beige Book Source: UBS, as of 14 February 2018

Mar 8 European Central Bank policy meeting

Mar 12 Minutes of Bank of Japan policy meeting
Mar 21 US Federal Reserve policy meeting

For further information please contact US economist Brian Rose, brian.rose@ubs.com, European economist Ricardo Garcia, ricardo-za.garcia@ubs.com or UBS WM Global Chief Economist 8
Paul Donovan, paul.donovan@ubs.com
Key financial market driver 2 - Political risks
Politics continue, markets continue not to care
Key points
MSCI AC world equity index, with key political events
• Markets remain relatively immune to political risks, and investors appear unwilling to price in probabilities of extreme tail events.
The next phase of the UK-EU divorce, confirmation of the German grand coalition, the Italian election and, in the longer term, the
outlook for US politics are also considerations. Global trade issues may become a concern if the US administration becomes more
vocal on this topic.
• Events in the Middle East are potentially significant, this is less about oil prices (which we expect to moderate as the year progresses)
and more about potential shifts in capital flows as policy adjusts to fresh domestic political demands.
• Domestic investors tend to understand local politics better than foreign investors. Market reaction to political risk will therefore
depend on the domestic-foreign mix of investors. The higher the foreign ownership, the greater the risk of overreaction to political
noise. The US dollar's reaction to US political risk is an example of this.

CIO view (Probability: 70%*)

• Political uncertainty still gets a lot of media coverage, but it has a relatively limited impact on financial markets. Source: Bloomberg, UBS Year Ahead 2018, as of December 2017
• US concerns focus on the run-up to the mid-term elections in November. Turnover of White House staff may have some market
relevance if it distracts from attempts to produce additional fiscal stimulus or a solution to the immigration debate. Bond market
reaction to fiscal stimulus and political uncertainty will be of broader interest, particularly if Treasury auction results are weak.
Senior staff turnover in US administrations
• The German coalition negotiations now move to approval by the SPD party membership. The proposed policy program is unlikely Turnover of senior staff in first-term administrations of
to trouble investors. The trade negotiations of the EU and the UK are likely to be complex and lengthy – investors will not pay recent US presidents. Staff turnover may raise investor
much attention to the details, but may react to the headlines. concerns about policy continuity
• Saudi Arabian fiscal developments and asset seizures have potential capital flow implications. North Korean concerns seem to
have abated during the winter Olympic Games in South Korea, with some hints at the possibility of the US engaging in talks.

Positive scenario (Probability: 10%*)

• The sharp improvement in labor market conditions for low-skilled workers leads to wage hikes that either are accompanied
by better credit access or compensate for the loss of credit access since 2008; this eases income and consumption inequality.
Governments and economists successfully communicate the net economic benefits of global trade and diversity.

Negative scenario (Probability: 20%*)

• Nationalist tendencies appear encouraged by single-issue politics and social media. Traditional party structures fail to address the
demands of large sections of the electorate, encouraging populism. Political outcomes are increasingly unpredictable as opinion
polls offer even less guidance. Established parties adopt populist policies, raising uncertainty about mainstream policy programs.
Lower income groups' standards of living are hurt by populist policies and rising food and energy prices, fueling further demands
for radical and unpredictable change. Source: Brookings Institute, as of 14 February 2018
*Scenario probabilities are based on qualitative assessment.

Key dates
Mar 4 Germany's SPD membership vote on grand coalition agreement
Mar 4 Italian general election
Mar 5 China's National People's Congress
Mar 22 European heads of government meeting

For further information please contact Global Chief Economist, UBS WM Paul Donovan, paul.donovan@ubs.com 9
Key financial market driver 3 - Healthy US profit growth
Forward EPS estimates have risen nearly 10% since
Key points
tax reform was enacted
• Solid economy and tax reform driving strong earnings growth.
S&P 500 consensus forward EPS estimate, in USD
• We look for 16% growth in 2018 after 12% growth in 2017.
• Earnings growth will likely slow to trend levels in 2019. We forecast growth of 5%. 170
160 Tax reform
CIO view (Probability: 60%*) Earnings growth on solid footing. Tax reform is icing on the
enacted
cake. 150
• The earnings growth outlook remains healthy, driven by solid US consumer spending, secular growth drivers in tech, improving 140
US manufacturing activity (as energy investment spending and emerging market demand improve), and a more favorable
130
environment for financials. Leading indicators of profit growth, such as bank lending standards and capital spending intentions,
remain supportive. 120
• The tax reform package should drive a further 8% rise in corporate profits, comprising of a lower tax rate and the redeployment 110
of overseas cash into higher-returning assets. Faster economic growth as a result of the tax cuts could offer additional upside. 2014 2015 2016 2017 2018
• Adding it all up, we estimate S&P 500 EPS of USD 157 (16% growth) in 2018, up from 12% growth in 2017. Earnings growth Source: FactSet, UBS, as of 15 February 2018
should slow to trend rate in 2019 as the one-time boost from a lower tax rate goes away. We forecast USD 162 (5% growth) in
2019.
• Fears that high profit margins will decline in the near term appear overblown. Excluding the tech sector, margins are not 4Q profit growth was strong, even before tax
excessive, in our view. The tech sector's high margins are supported by companies that have dominant market shares in their reform impact
end-markets. Other structural factors, such as industry consolidation, support higher-than-average profit margins. S&P 500 EPS, year-on-year growth
• Also, margins typically only decline when the economy enters a recession. Finally, the prospect of higher wages is unlikely to 15%
crimp profitability. Labor cost inflation has virtually no correlation with profit margins. In addition, higher consumer income is 10%
usually recycled into faster consumer spending, suggesting that earnings growth (which is more important that profit margins)
5%
should be well supported.
0%

Positive scenario (Probability: 20%*) Fiscal policy boosts earnings more than expected -5%
• Corporate tax reform and the increased government spending generate even faster-than-expected profit growth. Higher interest -10%

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17E
rates and deregulation further boost financial sector earnings. Investment spending picks up.

Negative scenario (Probability: 20%*) Downturn in sentiment S&P 500 S&P 500 ex energy
• Trade and geopolitical tensions flare up as a result of the Trump administration's policy priorities, depressing business and Source: FactSet, UBS, as of 15 February 2018
consumer sentiment. Wage pressures, without improving consumer and business demand, hurt profit margins and earnings
growth rates. Persistently low short-term interest rates and renewed declines in long-term interest rates pressure financial sector
earnings.
*Scenario probabilities are based on qualitative assessment.

Key dates
Mar 12 First quarter results from "early reporters" begin

For further information please contact CIO strategists Jeremy Zirin, jeremy.zirin@ubs.com, David Lefkowitz, david.lefkowitz@ubs.com or Edmund Tran, edmund.tran@ubs.com. 10
Global economic outlook - Summary
Key points
• The world economy remains in mid-cycle. Global growth is operating around trend. Improving labor markets support domestic Trend-like growth, normal inflation
demand. The normal triggers of recession – policy error or economic overheating – are still absent.
• Inflation data has normalized and is fluctuating around long-term trends. In a lower-inflation world, statistical quirks will be more
important in creating noise around consumer price inflation trends. Corporate pricing power seems firm.
• The Fed has accelerated the reduction of its balance sheet, following its pre-determined tightening plan. Further interest rate
increases are expected this year. The ECB has slowed its pace of asset-buying and may cease entirely after September.

CIO view (Probability: 75%*) Global growth firm, around trend

• The global economic cycle remains strong. On an aggregate basis, the world should match 2017 levels of growth in 2018.
There will be some variation in the drivers of growth. Labor markets remain strong in most major economies. Consumer income
growth is supporting domestic demand. Stronger European and US domestic demand has translated into stronger export data
from the Asian region. Part of the US fiscal stimulus is likely to be spent on imports, providing stimulus to the global rather than
the US economy. Source: UBS, as of 14 February 2018

• Inflation rates are still being influenced by short-term technical factors, which create noise around long-term trend levels. There Forecasts and estimates are current only as of the date of this
is some anecdotal evidence of rising corporate pricing power, and producer price inflation is generally higher than in the recent publication, and may change without notice.
past. US wage growth has slowed from its 2017 highs, but technical factors could add to consumer price inflation.
• Real policy interest rates, adjusted for consumer price inflation, are still negative in the major economies. US consumer price inflation – how are most prices
doing?
Positive scenario (Probability: 15%*) Growth exceeds expectations Median and Trimmed Mean CPI measures reduce the
• European growth surprises positively, with better labor markets and a more stable banking system that is more willing to lend. Initial impact of outlier price changes, and give a sense of how
US economic growth data continues to be revised higher, and labor market shortages increase household incomes and consumer most prices are doing
demand at a faster pace than expected. Fiscal stimulus adds to the pace of economic activity.
• Emerging markets see stable domestic demand, and higher commodity prices, coupled with consumer demand in developed
economies, support export sectors. Pro-business forces guide the US policy agenda and produce growth-supportive regulatory
and legislative changes.

Negative scenario (Probability: 10%*) Political damage to growth

• US consumers suffer lower real disposable incomes as domestic inflation pressures increase. Additional fiscal stimulus at a time
of full employment produces economic overheating, which in turn provokes an economic recession in 2019.
• Credit growth suffers as capital flows are disrupted and uncertainty undermines normal bank lending.
*Scenario probabilities are based on qualitative assessment.

Key dates

Mar 1 US personal income, spending and PCE deflator (January) Source: Cleveland Federal Reserve, as of 14 February 2018

Mar 1 Japanese unemployment and household spending (January)

Mar 9 US employment report (February)
Mar 14 German consumer price inflation (February)

For further information please contact UBS WM Global Chief Economist Paul Donovan, paul.donovan@ubs.com 11
US economy - Moderate growth in the US
Key points Inflation is bottoming out, but remains below
• We expect the US economy to grow at a moderate pace over the next 12 months. target
• Inflation should gradually trend higher as the recovery continues. Core CPI and Core PCE y/y, in %
• The Fed has begun to shrink its balance sheet and interest rate hikes will likely continue at a gradual pace. 3

2.5
CIO view (Probability: 60%*) Moderate expansion
2.2
• We expect the US economy to grow at a moderate pace over the next 12 months. The improving labor market should support 2
robust consumer spending. 1.5
• Housing starts and home prices should remain on an upward trend, contributing modestly to overall economic growth.
1
• Business investment should continue to grow at a moderate pace, encouraged in part by labor shortages.
0.5
• Conditions in the manufacturing sector have improved and output should continue to rise at a moderate pace. 1998 2002 2006 2010 2014 2018
• Inflation appears to have bottomed out, and we expect a gradual upward trend in the quarters ahead. A tight labor market and Core CPI y/y Core PCE y/y

rising producer prices should eventually feed through into consumer price inflation. Source: Bloomberg, UBS, as of 16 February 2018

• Tax reform and increased government spending should provide a modest stimulus to growth. Deregulation should provide some PCE = personal consumption expenditures
benefit over time. We do not expect the Trump administration to cause any severe disruptions to trade.
• We expect the Fed to hike rates four times in 2018 and three times in 2019. The Fed is shrinking its balance sheet by USD 20bn
a month and the pace will be ratcheted up to USD 50bn a month by the end of 2018. Manufacturing PMI showing strength
Purchasing managers' indices (PMIs)
Strong expansion 60
Positive scenario (Probability: 25%*)
• US real GDP grows above 3%, propelled by an accommodative monetary policy, a looser fiscal policy, strong household spending,
and subsiding risks overseas. Inflation hits the Fed's 2% target earlier than expected, leading the central bank to raise rates at a 50

faster pace.
Negative scenario (Probability: 15%*) Growth recession 40

• US growth stumbles. Political uncertainty and tighter financial conditions weigh on business investment and consumer spending.
The Fed stays on hold. 30
2000 2003 2006 2009 2012 2015 2018
*Scenario probabilities are based on qualitative assessment. ISM Manufacturing index ISM Non-Mfg index
Source: Bloomberg, UBS, as of 16 February 2018
Key dates

Feb 27 Durable goods orders

Feb 28 4Q17 GDP second estimate
Mar 1 ISM manufacturing for February
Mar 1 PCE Index for January

For further information please contact US economist Brian Rose, brian.rose@ubs.com 12

Eurozone economy - Strong start into 2018
Key points Eurozone growth expected to top out in 2018
• We expect economic growth to start strong in 2018, while losing some momentum during the year. Business and consumer surveys
• Inflation should start to rise firmly again, starting in spring.
• We expect the ECB to end its QE program in September and to start raising rates in July 2019.

CIO view (Probability: 60%*) Short-term tailwinds to abate

• We expect the Eurozone economy to continue to grow strongly in 2018, even if somewhat less so in the second half of the year.
Inflation should rise firmly starting in March on the back of energy base effects. We expect the European Central Bank (ECB) to
end its quantitative easing (QE) program in September 2018 and to start raising interest rates in July 2019.
• In Germany, fundamentals such as consumer confidence, construction and capital-expenditure plans remain robust. A grand
coalition is expected to emerge from the government-formation process before Easter. In France, a stronger construction sector
and more corporate investment, given a business-friendly government, should ensure continued robust economic expansion.
• Italian economic growth should consolidate, supported by a stabilizing construction sector. We expect a centrist coalition following
the general election. Spain is still growing strongly, but the momentum is likely to moderate. We expect Catalonia to remain a
part of Spain.
Source: Haver Analytics, UBS, as of January 2018
Positive scenario (Probability: 20%*) Better-than-expected growth
• The global economy accelerates further and the euro weakens. Eurozone loan demand and the economy recover faster than
envisaged. Political risks fade.
Disinflationary setback ECB balance sheet boosted by QE
Negative scenario (Probability: 20%*)
Total assets in national currency (index: 2007=100)
• The Eurozone suffers a disinflationary setback as Greece leaves the Eurozone, Brexit talks fail, Catalonia leaves the EU, markets fear
a Five Star Movement-led government in Italy, the Ukraine conflict escalates, or the Chinese economy suffers a severe downturn.
*Scenario probabilities are based on qualitative assessment.

Key dates

Feb 28 Inflation for February

Mar 1 Unemployment rate for January
Mar 8 ECB press conference
Mar 22 Flash PMI for March

Source: Haver Analytics, UBS, as of January 2018 (SNB data as of December 2017)

For further information please contact CIO European economist Ricardo Garcia, ricardo-za.garcia@ubs.com 13
Chinese economy - Quality over quantity growth
Key points 2017 GDP growth driven by net exports and
• We expect GDP growth to moderate but be of better quality in 2018. consumption
• Monetary policy should stay prudent with further regulatory tightening.
• Political, economic and currency stability should keep investors confident on China.

CIO view (Probability: 80%*) On track for moderation

• Chinese GDP grew 6.9% in 2017 from 6.7% in 2016, but should moderate in 2018 due to a cooling property market, slowing
infrastructure investment and continuous deleveraging efforts.
• We forecast 2018 CPI inflation to rise to 2.7% from 1.6% in 2017 due to food prices and rising service costs. We see PPI
inflation pulling back to the low single-digits from 6.3% in 2017 due to economic moderation and the high base effect.
• We expect investment growth to continue to decelerate to below 7% in 2018 from 7.2% in 2017, and consumption growth to
remain resilient around 10%. Export growth should be in the low single-digits following 7.9% in 2017.
• We expect the government to use a prudent monetary policy and macro-prudential assessment in its effort to reduce leverage
and prevent financial risks. More regulatory measures are expected from the Financial Stability and Development Committee.
Liquidity should remain relatively tight in 2018, leading to higher interest rates and slowing credit growth. Fiscal policy remains
supportive, but with stricter controls on local government debts. Source: CEIC, UBS, as of 2017

• The annual Central Economic Work Conference last December laid out major policies and tasks for 2018 – risk prevention,
environmental protection and poverty reduction – echoing the tone set at the 19th Party Congress last October in pursuing
quality over quantity growth. PBoC took action to prevent a potential liquidity
shock
Positive scenario (Probability: 10%*) Growth acceleration
• China GDP growth rises above 7% a year, pushed by strong government policy stimulus packages and/or a strong pickup in
external demand.
Negative scenario (Probability: 10%*) Marked growth downturn
• A credit crunch is a tail risk that may encompass bond defaults, soaring interest rates, tight liquidity and a fall in bank lending,
which could lead to market sell-offs and a slowdown in China's economic growth, with global spillover effects. A credit crunch is a
higher risk for regions with low GDP growth, and for sectors with overcapacity issues.
* Scenario probabilities are based on qualitative assessments.

Key dates

Feb 28 Manufacturing and non-manufacturing PMI for February

Mar 9 CPI and PPI inflation for February
Mar 14 January-February fixed asset investment, industrial production and retail sales

Source: CEIC, UBS, as of January 2018

For further information please contact CIO China economist Yifan Hu, yifan.hu@ubs.com or CIO analyst Kathy Li, kathy.li@ubs.com 14
Swiss economy - Weaker Swiss franc supports GDP growth
Key points
• Economic growth in Switzerland picked up in 3Q17 on the back of strong net exports. We expect the robust growth to continue
this year. Swiss activity is supported by solid growth in the Eurozone and by a depreciation of the Swiss franc.
• Major risks for the Swiss economy stem from Donald Trump's economic policies, tensions on the Korean Peninsula and the risk of a
premature tightening by major central banks.
• After the ECB gave clear indications to terminate its bond purchases in 2018, pressure on the Swiss franc eased sharply and the SNB
was able to halt FX market interventions. A rate hike is not expected until late 2018, in our view.
Swiss PMI bodes well for 2018 Swiss GDP growth
Purchasing managers' index for the manufacturing
sector, and Swiss GDP growth in %
5 70
4 65
3 60
2 55

1 50
CIO view (Probability: 60%*) Robust recovery
0 45
• Swiss 3Q17 GDP growth accelerated to 0.6% quarter-on-quarter. Economic growth estimates for previous quarters were raised
-1 40
slightly, bringing the year-on-year growth rate to 1.2% in the third quarter.
-2 35
• We expect Swiss GDP to have grown 1% in 2017, and to grow by 1.8% in 2018. In 2019, we forecast a continuation of the
-3 30
recovery, with GDP growth to stay at 1.8%.
-4 25
• The Swiss manufacturing PMI remained above the 65 mark in January, pointing to a healthy pick-up in economic activity. 06 07 08 09 10 11 12 13 14 15 16 17
GDP growth (y/y in %, left hand scale)
• Employment growth improved slightly to 0.5% in 3Q17. Also, the downtrend in unemployment continued. As the recovery
Purchasing Manager Index (right hand scale)
gains momentum, the seasonally-adjusted jobless rate will likely drop below the 3% mark soon.
Source: Macrobond, UBS, as of 15 February 2018
• CPI inflation rose to 0.7% year-on-year in January. We expect inflation to average 0.6% this year, underpinned by a weaker
Swiss franc.
• Thanks to the significant depreciation of the franc against the euro in the last few months, the Swiss National Bank (SNB) was
Stronger Swiss growth and inflation ahead
able to stop interventions in the foreign-exchange (FX) market. However, a rate hike is unlikely until late 2018, in our view. We
GDP growth and CPI inflation with UBS forecasts
believe the SNB will not raise rates before the ECB has slowed its QE program markedly or terminated it completely.
3.0%

2.5%
Positive scenario (Probability: 25%*) Eurozone boosts Swiss growth
• A further drop in Eurozone unemployment fuels positive sentiment in the union, in turn supporting Swiss exports. Compared with 2.0%

strong European growth, Switzerland has some catch-up potential. 1.5%

Negative scenario (Probability: 15%*) Swiss economic downturn 1.0%

• Protectionist measures by the Trump administration could lead to a slowing of global trade, which would hurt Swiss exports. Also, 0.5%
political risks still exist in Italy and Catalonia, as well as on the Korean Peninsula.
0.0%
* Scenario probabilities are based on qualitative assessment.
-0.5%
Key dates -1.0%

-1.5%
Mar 1 4Q17 GDP 14 15 16 17E 18E 19E 14 15 16 17 18E 19E
PMI for February GDP growth Inflation
Mar 1
Source: Macrobond, UBS, as of 15 February 2018
Mar 6 CPI for February
Mar 15 SNB policy meeting

For further information please contact CIO Swiss economists Alessandro Bee, alessandro.bee@ubs.com or Sibille Duss, sibille.duss@ubs.com. 15
Contact List
Global Chief Investment Officer WM

Mark Haefele
mark.haefele@ubs.com

UBS CIO WM Global Investment Office

Global Asset Allocation UHNW & Alternatives IO Investment Themes

Andreas Koester Simon Smiles Philippe G. Müller
andreas.koester@ubs.com simon.smiles@ubs.com philippe-g.mueller@ubs.com

UBS CIO WM Regional Chief Investment Offices

US APAC Europe Switzerland Emerging Markets

Mike Ryan Min Lan Tan Themis Themistocleous Daniel Kalt Jorge Mariscal
mike.ryan@ubs.com min-lan.tan@ubs.com themis.themistocleous@ubs.com daniel.kalt@ubs.com jorge.mariscal@ubs.com

16
Disclaimer
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