UBS Economic Outlook

UBS House View
Investment Strategy Guide

February 2016
CIO Wealth Management Research

US edition
Mind the gaps

ab
In Context: What it will take

In Focus: Simmering risks unlikely to boil over
Videos: Brian Nick on tactical adjustments and
Jeremy Zirin on market risks
contents
A message from the regional CIO
1 Tactical preferences
2 Feature
Mind the gaps
by Mark Haefele
8 In context
What it will take
by Mike Ryan
10 Preferred investment views
11 At a glance
11 Month in review
12 Global economic outlook
14 Asset classes overview
Equities
Fixed income
Commodities
Foreign exchange
20 In focus
Simmering risks unlikely to boil over
by Jeremy Zirin and Brian Nick
Video feature
22 Top themes
Beyond benchmark fixed income
investing

The rising Millennials
Valuing your human capital
24 Key forecasts
25 Detailed asset allocation
32 Performance measurement
Dear reader,
The year hasnt gotten off to the kind of
start that any of us had hoped for or expected. Economic data has largely disappointed, oil prices have plunged by 25%,
and policymakers have sent mixed signals with regard to their intentions. In response, risk assets have sold off sharply,
with global equity markets off to their
worst start ever and credit spreads reaching their widest levels since 2011. Not surprisingly, the level of anxiety among investors (both institutional and individual)
has risen to the point where some now
see parallels to prior crisis periods.
35 Appendix
39 Publication details
Video feature
Click play button to watch
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.
But is this really the end of the nearly

seven-year-old bull market for financial
assets?
In this months Feature article, we identify the gaps that have arisen across
the global landscape and assess their impact. These include the gaps between
strong consumption and weak manufacturing, between current oil production
and future demand, and those related to
pegged currencies. We recommend that
investors mind the gaps that these
transitions are creating and watch for
more potentially destabilizing changes,
such as a potential Brexit from the EU,
or unexpected changes in Federal Reserve interest rates.
In our In Focus article, investment strategists Jeremy Zirin and Brian Nick explain
why they do not think simmering risks are
likely to boil over. In their words, while

voices calling this the beginning of a
worldwide recession have become louder
and more numerous, we see few truly
threatening signs that things are headed
in that direction.
In the In Context article, we focus upon
the current correction and what it will
take to stabilize markets. With the burden
of proof now on those with a more constructive view, markets are apt to remain
volatile in the near term. It is therefore
our view that we will likely need clearer
evidence that decelerating US economic
momentum during the fourth quarter was
temporary, indications that commodity
prices and the dollar have begun to stabilize, confirmation that corporate profit
growth has not peaked, and a commitment on the part of global policymakers
to remain pragmatic in order to arrest the
decline in risk assets.
While we believe that these dynamics will
begin to play out as the year progresses,
investors will need to remain patient in
the near term.
Regards,
Mike Ryan, CFA

Chief Investment Strategist, WMA
tactical preferences
We are now neutral across major asset classes but see

opportunities in Eurozone and US small-cap equities.
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EUR
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US
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Value
Asset classes
Tactical asset allocation
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US IG
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Equities
Fixed income
Foreign exchange
We have reduced our equity

weight to neutral through downgrades to non-US markets.
We are neutral on fixed income

and prefer investment grade
corporates.
We are now overweight the US

dollar against the Japanese yen.
Note: Chart includes changes made on 7 January 2016. For more information, see House View Update: Markets do not yet understand Chinese
reduce equities to neutral, 7 January 2016.
LEGEND
Overweight: Tactical recommendation to hold more of
the asset class than specified
in the moderate risk strategic
asset allocation (see page 25)
Underweight: Tactical recommendation to hold less of the

asset class than specified in
the moderate risk strategic
asset allocation (see page 25)
Neutral: Tactical recommendation to hold the asset class

in line with its weight in the
moderate risk strategic asset
allocation (see page 25)
Each bar represents a +/- 2% tactical tilt

or part thereof (i.e., one bar = 0.5% to
2%, 2 bars = 2.5% to 4%, 3 bars = over
4%). Note: Tactical time horizon
is approximately six months
February 2016 UBS house view
Feature
Mind the gaps

Market risks
Watch the gaps
Balanced position
Asset allocation
Investors have been

unsettled by fears over
Chinas transition into the
global financial system,
worries over the resilience
of US growth, and the
falling oil price.
We are monitoring a range

of dislocations in markets
and the real economy.
These include the gap
between the two Chinese
currency rates, and differing views on the path of
US interest rates.
Additional volatility justifies

greater caution and for
now we are neutral on
equities in our global
tactical asset allocation.
But the recent market falls
offer a good entry point for
investors who have been
on the sidelines.
We initiate an underweight
Japanese yen position
against the US dollar. We
are also reducing Japanese
equities to neutral, and
reducing our UK equity
underweight.
Currently, we consider the risk and reward for equities balanced. While low oil
prices have never provoked a US recession, cheaper crude has not yet provided the
expected boost to the US consumer. Fears of a China hard landing have made global
markets acutely sensitive to even minor policy changes or slight disappointments in
markets and data. The correlation between the Shanghai and US equity markets
has soared, and the recent correction can be traced to a modest 1.5% devaluation
of the Chinese yuan versus the US dollar.
Mark Haefele
Global Chief Investment Officer
Wealth Management
These new sources of volatility need to be digested by the markets to enable them
to find direction. Opportunities to overweight and underweight equity markets
remain, but overall we consider it best to be neutral on equities in our global
tactical asset allocation (TAA). Yet this is no time for investors to abandon longterm investment discipline. We should remember that market falls can represent
good opportunities to rebalance portfolios toward long-term strategic allocations.
In the remainder of the letter, I address some of the gaps we are watching
to inform our investment positioning. These include the gap between strong
consumption and weak manufacturing, which is now a global phenomenon; the
gap between oil production and demand, which has caused a jarring 75% slide
in prices since summer 2014; and the gaps that are popping up in markets related
to pegged currencies, which are indicative of the current global instability. In the
months ahead, investors will need to mind the gaps that these transitions are
creating, and watch for more potentially destabilizing changes, such as a possible
Brexit from the EU, or unexpected changes in Federal Reserve interest rates.
Some of the gaps caused by market volatility are also creating opportunities.
A variety of divergences contributes to our global TAA positioning, such as an
overweight to Eurozone equities, and underweights to emerging market (EM)
stocks, UK equities, and government bonds. We are making two changes to
our global TAA this month, closing our overweight position in Japanese equities
ubs house view February 2016
Feature
relative to UK equities, and initiating an underweight Japanese yen position relative

to the US dollar.
Service industries have been

outperforming manufacturing
by a widening margin.
Gap #1: Services vs. manufacturing

My first gap to watch exists between services and manufacturing (see Fig. 1). This
is something evident across the world, but perhaps most strikingly in the US and in
China, where manufacturing is in recession, but retail sales growth remains good.
It is clearly a positive that the services sector is holding up well. Not only does
the services sector make the greatest contribution to most developed economies
(and a growing contribution to Chinas), its growth also tends to translate, laborintensive as it is, into greater levels of employment, confidence, and consumption,
when it is humming along.
Manufacturing weakness could

undermine the services sector.
Investors will need to pay attention to how this gap closes, however. I think we
all want to see a recovery in manufacturing sentiment, and this would be a clear
and simple positive. But investors will need to watch for any indications that the
weakness in manufacturing is infecting the services side of the economy. One
potential source of contagion is through credit spreads, where borrowing costs
have been on the rise in recent months, even for companies outside of the energy
sector. We will need to remain alert for signs that higher borrowing costs are
affecting economic investment and hiring across sectors.
Gap #2: Oil supply and demand
The world had grown used to oil costing more than USD 100 per barrel.
The price of Brent crude has

fallen by three quarters since
summer 2014...
With prices now down by more than 75%, the world is trying to adjust. These
adjustments are creating uncertainty and volatility: oil majors, US drillers, and staterun energy firms in EM have made dramatic job and investment expenditure cuts.
...which has dented capital

spending by oil firms and
fuelled stock market volatility.
The extent to which many economies rely on oil investment and hiring has, like the
scale of recent oil price falls, taken many by surprise. And investment write-downs,
Fig. 1: US services strength vs. soer manufacturing sector

Index level
65
The gap between US

manufacturing and services
activity is near its highest in a
decade.
60
55
50
45
40
35
30
2005
2006
ISM manufacturing
2007
2008
2009
2010
2011
2012
2013
2014
2015
ISM non-manufacturing
Source: Bloomberg, UBS, as of 31 December 2015
Feature
deleveraging, and tighter credit conditions will continue to stoke price instability
and global growth concerns until oil finds a floor.
The imbalance between oil
supply and demand will be a
key metric for investors to
watch.
Currency pegs have come under

pressure, due to worries over
China and the falling oil price.
The Saudi currency has been
one target of speculative
selling...
Investors will need to watch oil inventories for indications that the dramatic
supply-demand imbalance is easing (see Fig. 2). In OECD nations, crude stocks are
approaching three billion barrels of oil around 300 million barrels more than the
five-year average. Until signs that this excess is clearing appear, uncertainty about
the sector and its knock-on effects is likely to hold sway. This should affect EM
most severely, and we hold an EM equity underweight in our global TAA.
Gap #3: Pegs vs. pressure
A third type of gap investors will need to watch is that popping up in the forward
and interest rate markets of pegged currencies, indicative of potential trouble to
come. These are most evident, at present, in Saudi Arabia, China, and Hong Kong.
Saudi Arabias peg to the US dollar has held firm since 1986, but has recently
come under speculative pressure, thanks to the sharp decline in oil prices. Forward
markets are pricing in a 2% fall in the riyal (or a 20% probability of a 10% drop)
against the US dollar. The government has since reportedly banned the sale of
forward options to prevent a self-fulfilling crisis.
Similarly, Chinas delinking of its currency from the US dollar, and toward a
broader basket of currencies, has driven uncertainty and speculation about further
depreciation. At one point earlier this month, the offshore yuan was trading at a
record discount to the onshore rate, before aggressive government intervention,
including wild swings in offshore yuan borrowing rates, quashed any speculation
(see Fig. 3).
...along with the Hong Kong

dollar.
Chinas moves have had a notable impact on Hong Kong, too, where USDHKD hit
an eight-year high, albeit remaining within the Hong Kong Monetary Authoritys
trading band.
Fig. 2: Oil supply has continued to outpace demand

Global oil statistics - in millions of barrels per day
The oil glut shows no

immediate signs of
disappearing.
100
3.0
95
2.0
1.0
90
0.0
85
1.0
80
2.0
75
3.0
2005
2006
2007
2008
2009
Implied stock change (right hand scale)
2010
2011
Demand (lhs)
Source: International Energy Agency, UBS, as of 19 January 2016
2012
2013
Supply (lhs)
2014
2015
2016
Feature
These gaps are important not because they present easy trading opportunities
heavy government intervention in all markets makes bets on peg breaks highly
risky propositions but insofar as they give us an indication of market stress and
the direction of capital flows. Until the global tension between market forces and
government policy is resolved, markets are likely to remain volatile.
Political gaps are also opening
in Europe.
A key measure of this will be

polls in the UK ahead of a vote
on continued EU membership.
Gap #4: European togetherness

A fourth gap to monitor will be that between European states with respect to views
on integration. The migrant crisis has placed strains on relations in recent months,
and, following events in Cologne over the New Year, is now a major political topic
in Germany. Question marks around freedom of movement of people could lead
to questions about the wider European project, creating a potential repeat of the
kind of instability we saw previously around Greece.
An important barometer of this will be the UKs vote on EU membership, which
looks increasingly likely to take place this year. Our base case remains that the proEU camp will prevail, but the latest polls give the campaign only a 5 percentage
point lead, down from about 16 points in September. This data has led us to raise
our Brexit probability to 20-30%, and this will remain a crucial gap to watch in
the months ahead.
In a Brexit scenario, UK assets would clearly be in the firing line. The pound has
already been under pressure in recent weeks due to concerns about the economy,
and more weakness is probable if anxiety about a Brexit mounts. And even if
an exit were arranged on favorable terms, it would create prolonged uncertainty,
darkening the investment outlook for one of Europes largest economies.
Futures markets are at odds

with Fed officials over the
outlook for rates...
Gap #5: The Fed dot plot vs. market expectations

Only one month on from the Feds first rate hike in nine years, some investors are
already questioning whether the US economy could catch a cold, as China sneezes
and oil markets sputter. Futures markets seem to suggest it might, pricing in fewer
than two quarter-point Fed increases this year. Our models broadly agree.
Fig. 3: The fluctuating gap between the onshore and offshore Chinese
currency
CNY/CNH per USD
Eliminating a record currency

spread required government
intervention.
Onshore-offshore spread
0.15
6.8
6.7
0.1
6.6
0.05
6.5
6.4
6.3
0.05
6.2
0.1
6.1
0.15
6.0
2011
Spread (rhs)
2012
2013
USDCNY currency rate (lhs)
2014
2015
2016
USDCNH currency rate (lhs)
Source: Bloomberg, UBS, as of 21 January 2016
Feature
...with FOMC members

expecting a faster pace of
monetary tightening.
Charting the Feds course will be tricky, and investors will need to mind the gap
between market expectations, and the median forecast of Federal Open Market
Committee (FOMC) members that is calling for three to four quarter-point hikes.
Should the Fed reduce the pace of hikes toward market expectations, it would still
need pitch-perfect communication to avoid exacerbating fears of a US slowdown.
Equally, staying the course with four rate hikes would accord with US labor market
strength, but it could fuel the fire for further declines in EM, given how much many
of them depend on the dollar.
No matter how the gap closes, it wont be an unqualified success for monetary
policy.
We are neutral on equities in

our tactical asset allocation.
But the sell-off also creates

opportunities in selected
financial assets.
We close our relative

overweight to Japanese
equities versus UK equities. We
initiate an underweight position in the yen relative to the
US dollar.
Bottom line
Ive looked at a (non-exhaustive) list of gaps to watch as markers of what could
go wrong globally. When you factor in their recent volatility, global stock markets
appear especially sensitive to negative news, or the opening of any new gaps. In
light of this, we are maintaining a neutral stance on equities in our global TAA.
But we also have to consider the possibility that things will go right, not wrong, and
that investors could stay pessimistic too long, missing a rebound. Growth scares in
recent years have passed rapidly, especially after central banks took further policy
action. While we suggest waiting for some of the highlighted gaps to close before
taking on too much short-term risk, investors with a longer-term time horizon
may find the sell-off creating opportunities in selected financial assets. Now could
be a good time for far sighted investors to put cash to work, especially if they are
underinvested relative to their long-run equity benchmark or reference.
Tactical positioning
We are changing our positioning around the Japanese reflation trade in our
global TAA. We close our relative overweight to Japanese equities versus UK
equities. Inflation in Japan has tailed off recently, and we expect a more modest
earnings growth outlook for the market this year, after a double-digit rate of
increase last year. Conversely, UK stocks may enjoy an earnings tailwind from a
Feature
weaker pound, and from an eventual bottoming out in oil prices. That said, we still
expect to see the Bank of Japan do more to combat deflation, particularly in light
of the decline in oil prices, and so see this as a good time to initiate underweight
positions in the Japanese yen relative to the US dollar.
Overall, we hold a neutral allocation to equities, with a relative overweight in the
Eurozone against underweights in the UK and EM.
The sell-off in US high yield credit is opening up opportunities for longer-term
investors, but the latest oil slide is likely to increase default rates among the most
highly geared producers. We forecast the US high yield default rate to rise to 5.5%
this year.
Finally, within European currencies we continue to believe the Norwegian krone
will rise against the euro. The markets still appear to be expecting the Norwegian
central bank to ease further, despite core inflation at 2.9%. While Norway is
suffering from the depressed oil price, its monetary policy does not need to be
eased further, in our view. By contrast there is a greater chance that the European
Central Bank will have to cut rates, especially if inflation disappoints.
Mark Haefele
Global Chief Investment Officer
Wealth Management
For comments please contact:
ubs-cio-wm@ubs.com
In context
What it will take

It remains our view that the bull market
that began in March 2009 remains intact.
However, the steep sell-off in risk assets
that started the new year has clearly shaken
investor confidence and prompted many to
question that view. Against this unsettled
backdrop, the burden of proof has now
shifted away from those who hold a negative market view to those who have a more
constructive outlook for risk assets.
Mike Ryan, CFA

Chief Investment Strategist,
Wealth Management Americas
So what will it take for markets to begin to

stabilize and validate this more constructive view? It is our view that we will likely
need to see some combination of the following to arrest the decline in risk assets:

clearer evidence that the deceleration in

US economic momentum in the fourth
quarter was indeed temporary;
indications that commodity prices and
the US dollar have begun to stabilize;
confirmation that corporate profit
growth has not peaked and that the
collapse in energy sector earnings is not
spilling over to remaining sectors;
commitment on the part of global policymakers to remain pragmatic and responsive in their decision making.
Keep in mind, of course, that these developments are highly interdependent. So its
important to consider the dynamics as not
only fluid, but linked as well. For example,
the level of growth will influence monetary policy which will, in turn, impact the
strength of the dollar. Likewise, energy
prices and the level of the dollar will affect
corporate profitability, which heavily influences investor sentiment.
With that in mind, consider the following:
Improvement in the economic data
This most recent sell-off in risk assets
shares at least one characteristic in common with each of the prior pullbacks we
have seen since the crisis: it has been
prompted in large part by a global growth
scare. It is therefore necessary that upcoming economic data releases provide
validation that the global economic expansion remains intact and that the weakness
in the fourth quarter represents just another episodic soft patch. Of particular
interest will be evidence that consumers in
the US remain fully engaged, signs that the
normalization of credit conditions in the
Eurozone has created a more durable expansion, and validation that growth in
China is not collapsing under the weight of
both heavy debt burdens and a series of
poorly planned policy moves.
It is our view that upcoming data releases
will confirm that the economic expansion
endures uneven and substandard though
it may be. There is a whole host of data
that can be scrutinized to help gauge the
current pace of economic activity PMIs,
payrolls, industrial production, and retail
sales among them. Keep in mind, however,
that markets typically react not only to the
economic data releases themselves, but
also by how far they deviate from consensus expectations. So a helpful way for market participants to gain confirmation is
through a rise in the economic surprise indicator (see Fig. 1). Given the most recent
downgrade of growth expectations, the
bar is now set pretty low. We will therefore
look for an upswing in the economic surprise indicator as a signal that recessionary
fears are overdone.
Stabilization in commodity prices and
the dollar The ongoing slide in oil prices
and strengthening of the dollar are especially burdensome for commodity-producing emerging market economies with heavy
external debt burdens (i.e., dollar-denominated debt). But the decline in crude is also
adding to the deflationary headwinds for
developed market countries as well.
Although falling oil prices are positive for
energy importers such as Japan and the
Eurozone in the long term, for now at least
the focus is clearly centered upon financial
market stress.
Given the heavy supply overhang, crude
prices are unlikely to recover in the very
In context
near term. However, with most of these

supply shocks sustained North
American production, breakdown of discipline within OPEC, reintroduction of
Iranian supply being already well known,
further oil price declines from here should
be more limited. Meanwhile, the combination of softer growth and increased market
volatility reduces the prospects for aggressive Fed rate hikes. This, in turn, will help
take some of the edge off the dollars appreciation. The combination of more stable energy prices and a steadier dollar
should help ease the stress on emerging
markets and soften deflationary forces in
the developed world.
Continued corporate profit growth
The stronger dollar and lower oil prices
have also taken a heavy toll on US corporate profitability. Overall earnings growth
stalled in 2015, with the energy sector
posting year-over-year declines of 60%
and companies with significant currency
exposure representing another 3% drag
on profits. Keep in mind that with US
stocks trading at valuations close to historical norms and the Fed in the early stages
of policy normalization, further equity
market gains from here will depend mostly
upon the level of corporate profits.
With the fourth-quarter earnings season
now upon us, we should begin to get a bit
more clarity on the all-important profit picture. As has been the case for each of the
three previous quarters last year, analysts
have been active in cutting their earnings

forecasts in the weeks leading up to the
reporting season. As such, earnings in aggregate should handily beat currently depressed forecasts. More important, earnings outside of the energy sector are likely
to have risen between 4% and 6% during
the quarter and 7% for the full year (see
Fig. 2). This should help ease concerns over
an earnings recession and help stabilize
the market.
Pragmatic policy response The combination of Chinas move to devalue its currency in August and the decision by the
Fed to raise rates in December served to
unsettle markets accustomed to a more
benign policy backdrop. Although Chinas
move toward greater currency flexibility
was prompted more by efforts to have the
yuan added to the basket of central bank
reserve currencies than to engage in a
competitive devaluation, the impact on
emerging markets was immediate and
harsh. Meanwhile, the Feds decision to
raise rates despite a near complete absence of price pressures only added to the
overall tightening of financial conditions.
Following a second surprise devaluation in
January that contributed to the New Year
sell-off, China has gone to great lengths to
defend the yuan. This suggests that
Chinese officials will be more cautious and
deliberate in allowing for further currency
depreciation. Likewise, recent comments
by senior Fed officials indicate that
150
230
210
190
170
150
130
110
90
70
50
S&P 500 (lhs)

UBS US growth surprise index (rhs)
In the meantime, we recommend that clients refrain from actively selling out of equity positions, maintain normal levels of
risk in their portfolios, and, assuming a
sufficiently long time horizon, consider
putting large cash positions to work.
S&P 500 and S&P 500 ex-Energy trailing 12-months earnings, indexed
UBS US growth surprise index and the S&P 500
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Burden of proof
It remains our view that markets are currently oversold and that the risks of an
economic recession, policy mistake, and
earnings collapse are greatly overstated.
However, sentiment remains poor and the
burden of proof now lies with the bulls
rather than the bears. This suggests that
markets are apt to remain volatile, and any
recovery in risk assets will be limited in the
near term until we get further clarity on
the macro, policy, commodity, currency,
and profit front. We believe this will begin
to materialize as the year progresses, but
investors may need to be patient.
Fig. 2: Earnings trends ex-energy remain healthy
Fig. 1: A rise in the economic surprise indicator would

provide a signal that recessionary fears are done
2300
2100
1900
1700
1500
1300
1100
900
700
500
weakness in the economy and volatility in

financial markets could materially influence
the Feds decision-making. So in the absence of a reacceleration of growth and
stabilization of risk assets, the odds of a
Fed rate hike in March have diminished.
Chances for the European Central Bank to
boost the size of its quantitative easing in
March also seem to be rising given comments made during Mario Draghis press
conference. These more pragmatic approaches should ease concerns over a significant policy misstep.
140
130
120
110
100
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
S&P 500
S&P 500 ex-energy
Source: FactSet, UBS, as of 20 January 2016
Preferred
investment
views
Recent upgrades
Recent downgrades
Most preferred
Least preferred
Equities
US small-caps
UK
Eurozone*
Emerging markets*

North American energy independence
US technology
Cancer therapeutics
Bonds
US investment grade
Government bonds*
Beyond benchmarks
Currencies
NOK
EUR
USD
JPY
Alternative investments
As of 21 January 2016
*Change made on 7 January 2016
Note: For more information, see House View Update: Markets do not yet understand Chinese reduce equities to neutral, 7 January 2016.
10
ubs house view february 2016
At a Glance
Economy
China has once again taken center stage in early 2016 as its governments currency
management raised uncertainty about the future path and degree of renminbi depreciation among global investors. While the risk of global contagion has risen, our
base case remains for China avoiding an economic hard landing. More importantly, we expect continued growth in the US and Eurozone, balancing the general
growth weakness of emerging markets (EM). The Federal Reserve kicked off the
rate-hiking cycle on 16 December. This occurred against the backdrop of a robust
labor market, as highlighted by strong new job creation in December. Still, this hiking cycle will progress only very gradually due to low inflation and the prevalent
weakness in parts of the economy, namely manufacturing. Meanwhile, Eurozone
growth continues apace. Latest leading indicators showed a further mild improvement in the outlook. Still, at persistently low inflation levels, more ECB easing is becoming more likely.
Equities
Against a backdrop of volatile markets susceptible to otherwise manageable negative shocks as well as the uncertainty over the Chinese governments currency
management intentions, we recommend a neutral position in global equities in
our tactical asset allocation. However, we believe Eurozone companies are currently best positioned to benefit from continued global demand. Low refinancing
costs and a supportive currency effect should additionally support rising profitability. Therefore, we prefer Eurozone over UK and EM equities in a regional context. UK equities have a large exposure to the energy and the materials sectors,
where the latest rout in commodity prices weighs, while EM equities earnings
and profit margins continue to deteriorate against a backdrop of weak domestic
fundamentals.
Fixed income
We maintain an overweight in US investment grade (IG) bonds. Spreads have
widened amid the market turmoil but we do not believe there is a high probability of a US recession or a wider crisis in higher-quality corporate credit beyond
the energy sector. At an average yield to maturity of 3.6% they offer an appealing yield pickup over government bonds. From current low yield levels, US government bonds are unlikely to deliver attractive total returns over the next six
months. We are underweight the asset class while acknowledging that it continues to play a crucial role as portfolio diversifier, stabilizing portfolio returns when
risk assets sell off.
Foreign exchange
We maintain our favorable view on the Norwegian krone compared to the euro.
A stabilizing Norwegian economy should lead to monetary policy divergence and
support a rising yield differential in favor of the krone. We are adding an underweight position in the Japanese yen against the US dollar. The yen strengthened
amid the recent global risk-off sentiment, thereby making it even more difficult
for the Bank of Japan to reach its inflation target. The BoJ is hence expected to
at least maintain, if not expand, its very easy monetary policy stance. The Fed,
on the other hand, has embarked on a path of gradual policy tightening. For EURUSD, we maintain our 6- and 12-month forecasts of 1.08 and 1.10, respectively.
Month in
Review
The S&P 500, as of this writing, has
fallen 9% this month, in line with
other major developed equity markets, due to acute concerns over
global growth prospects amid tumbling commodity prices. US economic data has been mixed-to-disappointing to begin the year. The
ISM manufacturing index fell to
48.2 and vehicle sales disappointed.
On the positive side, nonfarm payrolls continued to increase at a robust pace with 292,000 jobs added
in December.
European Central Bank President
Mario Draghi hinted at further stimulus on 21 January as Eurozone inflation still remains substantially below target. Eurozone economic data
has been better than expected, and
the latest Eurozone composite PMI
report showed an increase from 54
to 54.3.
Onshore Chinese equity markets
have fallen nearly 20% so far in
January on increased concerns over
further currency depreciation and
continued slowing manufacturing
growth. To begin the year, Chinas
A-share market was shut down for
trading several times, after triggering
the 7% circuit breaker for intra-day
losses. The circuit breaker was abandoned several days into the year.
Oil prices continued their steep descent. Brent crude oil fell below the
USD 28/bbl threshold on 20 January,
representing a 26% decline since
the end of last year. Sentiment in
the oil markets has remained overwhelmingly negative, and the selling
momentum that began the year has
continued unabated with no positive
catalysts in the near term. Fears over
the health of the Chinese economy
have also created demand concerns.
11
Key financial market drivers
Global
economic
outlook
Brian Rose, PhD, US Economist
Recent US economic data has been mostly disappointing. While the labor market continues to
improve, consumer spending has been soft, and
the manufacturing sector is struggling. The Eurozone has been a relative bright spot, but Japan is
treading water. Emerging market economies have
been relatively weak. China continues to struggle,
although government support measures are helping to stabilize the economy. Inflation is subdued
and monetary policy is extremely accommodative
in most countries.
Global growth in 2016 expected to be
US
Canada
Brazil
Japan
Australia
China
India
Eurozone
UK
Switzerland
Russia
World
Real GDP growth in %

2015
2016F
2017F
2.5
2.8
2.5
1.1
2.2
2.5
-3.6
-2.8
0.7
0.6
1.3
0.7
2.2
2.6
2.7
6.9
6.2
5.8
7.1
7.6
7.8
1.5
1.8
1.8
2.4
2.4
2.3
1.0
1.4
1.8
-3.7
-1.2
1.5
3.1
3.3
3.4
3.3%
Inflation in %
2015
2016F
0.1
1.5
1.5
1.9
10.6
6.4
0.9
1.0
1.5
2.2
1.5
1.5
5.0
4.6
0.0
0.7
0.1
1.1
-1.1
-0.4
15.5
8.6
3.5
3.8
2017F
2.7
2.0
4.8
1.2
2.4
1.2
4.0
1.7
1.9
0.3
5.7
3.4
Source: Reuters EcoWin, IMF, UBS, as of 19 January 2016

Note: In developing the CIO economic forecasts, CIO economists worked in collaboration with
economists employed by UBS Investment Research. Forecasts and estimates are current only as
of the date of this publication, and may change without notice.
12
Robust growth
in US
Brian Rose, PhD
US Economist
House view
Probability: 70%
We expect robust US real GDP growth over
the next 12 months. Improved US household and business fundamentals should
support private domestic demand growth,
though with a moderate drag due to a
strong USD. Against a backdrop of falling
unemployment and faster wage growth,
the Fed started to raise rates in December. We expect the pace of rate hikes to be
much more gradual than in previous tightening cycles. Housing starts should continue to increase and prices should remain
on a modest upward trend. The negative
impact of lower oil prices on energy sector
fixed investment has been a significant drag
on growth, particularly in the manufacturing sector, which remains stagnant.
Positive scenario
Probability: 15%
Strong expansion
US real GDP growth rises significantly above
3%, propelled by an expansive monetary
policy, improved business and consumer
confidence, strong housing investment, and
subsiding risks overseas. The Fed raises policy rates significantly more than markets
anticipate.
Negative scenario
Probability: 15%
Growth recession
US growth stumbles. Consumers save
rather than spend the windfall from lower
energy prices, while businesses lack the
confidence to hire workers and boost investment spending. The Fed stays on hold
in 2016.
Improving
Eurozone
growth
Ricardo Garcia-Schildknecht
Economist
House view
Resolving overcapacity
Chih-Chieh Chen; Yifan Hu
Analysts
House view
Probability: 80%
The Eurozone economy is likely to improve further in the coming quarters as

the monetary impulse reaches its peak,
with easy financing conditions supporting a capital expenditure boost. The renewed fall in oil prices means downside
risks to inflation, in particular further
weakness in the first half of 2016. The
probability of further ECB easing around
the second quarter has increased substantially, despite an accelerating Eurozone economy and the expected rate
hikes in the US.
We forecast Chinas GDP to grow by

6.2% in 2016. As China transforms, the
manufacturing PMI is likely to remain
in contraction territory, while the services PMI is expected to stay above 50.
Investment will continue to decelerate,
dragged down by traditional manufacturing and real estate; consumption is
expected to grow mildly, contributing
56% to GDP growth in 2016 from 54%
in 2015. CPI inflation will rise mildly to
2% in 2016, mainly due to rising pork
prices and a low base for comparison.
PPI inflation will rebound slightly, but
remain negative.
Positive scenario
Positive scenario
Probability: 20%
Probability: 10%
Better-than-expected growth
Oil prices and the euro decline more
than expected, with loan demand and
the economy recovering faster than envisaged. France follows a credible reform path and speeds up fiscal consolidation. Political risks fade further.
Growth acceleration
Annual growth is 6.8% year-over-year
as a result of more substantial policy
stimulus measures from the government
or a strong pickup in external demand.
Probability: 70%
Negative scenario
Probability: 10%
Deflation spiral
The Eurozone slips into a deflation spiral
due to a shock, such as Greece leaving
the Eurozone, a sharp escalation in the
Ukraine conflict, or China suffering a severe economic downturn.
Negative scenario
Probability: 10%
Sharp economic downturn
A hard landing materializes, which we
define as sub-5% real GDP growth for
more than two quarters. The economy
weakens abruptly due to a sharper
downturn in property investment and
widespread credit events.
Key dates
27 January 2016
FOMC policy decision
The Fed raised rates in December,
and, in our view, is unlikely to take
any further action at this meeting.
With no news conference scheduled, the wording of the statement
could have a big impact on markets.
29 January 2016
US 4Q15 GDP
Recent US economic data has surprised mainly on the downside, and
it appears that GDP growth slowed
significantly in 4Q15. Consumer
spending in particular was weaker
than we expected going into the
quarter.
29 January 2016
4Q15 Employment Cost Index
(ECI)
This report will be watched closely
for any signs that a shortage of labor is putting upward pressure on
wages. We consider the ECI to be
a better measure of wages than
hourly earnings from the monthly
labor report.
1 February 2016
PCE price index for December
The Personal Consumption Expenditures price index is the Feds
preferred measure of inflation and
has been running well below their
2% target. Any further slowdown
would make it difficult for the Fed
to hike rates.
1 February 2016
ISM Manufacturing for January
The ISM Manufacturing PMI
slumped to 48.2 in January, its lowest reading since 2009 and the sixth
straight monthly decline. Any sign
of stabilization in the January report
would be welcomed.
13
Asset classes overview
Equities
Jeremy Zirin, CFA; Brian Nick, CAIA; David Lefkowitz, CFA; Manish Bangard, CFA; Markus Irngartinger, PhD, CFA
Against a backdrop of volatile markets susceptible to otherwise manageable negative

shocks, we recommend a neutral position in global equities. However, we believe Eurozone
companies are currently best positioned to benefit from continued global demand. Low
refinancing costs and a supportive currency effect should support rising profitability. We
prefer Eurozone over emerging market equities, whose earnings and profit margins continue to deteriorate against a backdrop of weak domestic fundamentals.
Eurozone
Emerging markets
overweight
underweight
We are overweight Eurozone equities. Corporate earnings

growth is improving, supported by rising margins and steady
top-line growth. Ongoing monetary easing is supportive of
prospects for continued economic recovery. Leading economic indicators are showing more upside in economic activity
ahead, benefiting companies revenue generation prospects.
Our most preferred sectors are financials, energy, healthcare,
and technology.
Euro Stoxx (index points, current: 305)
House view
Positive scenario
Negative scenario
Six-month target
325
385
270
Japan
715
825
590
Six-month target
1400
1700
1200
We are underweight UK equities. Earnings dynamics remain

weaker than in other countries, especially with the renewed
sharp fall in commodity prices. In the UK, the energy sector
has a 12% weighting, and the materials sector, 5%. The recent
weakening of the pound is helpful to FTSE 100 earnings, but
has not yet created a strong currency tailwind versus last year.
Due to its defensive sector stance, the UK will likely benefit less
should the economic outlook improve.
FTSE 100 (index points, current: 5,674)
House view
Positive scenario
Negative scenario
Note: Current values as of 20 January 2016
14
Six-month target
underweight
We are neutral on Japanese equities. While Japanese companies

are seeing solid earnings growth, the tailwind of a weak yen is
fading. The recent rise in investors risk aversion is harming the
cyclical-oriented Japanese equity index. Uncertainty about the
growth outlook of the Chinese economy and more mixed data
out of Japan weigh on the market. Company share buybacks, in
adherence to Japans corporate governance code, add support.
We expect Topix trailing P/E to expand to 13.8x in the next six
months from the current level of around 13.5x.
House view
Positive scenario
Negative scenario
MSCI EM (index points, current: 693)

House view
Positive scenario
Negative scenario
UK
neutral
TOPIX (index point, current: 1,339)
We are underweight EM equities in our global portfolio. The

consensus expectation is for EM earnings to grow 8-9% over
the next 12 months. We are more cautious, however, and expect about 2-6% growth. The devaluation of the Chinese
yuan relative to the US dollar has created new uncertainties.
We forecast trailing P/E valuations will stay around current levels. We prefer China and Turkey to Mexico, Thailand, Taiwan,
and South Africa.
Six-month target
5,925
6,650
5,000
US equities
US and global equity markets have suffered sharp declines at the start of 2016. Similar to the
late August 2015 market sell-off, fears of a disorderly slowdown in China and other emerging markets appear to be the trigger. Additionally, the further slump in oil prices, continued
weak global manufacturing, and uncertainty over the Fed have further stoked domestic
recessionary fears. These concerns may linger in the near term, but we expect both the US
economy and S&P 500 profits to prove resilient.
US equities size
US equities overview
neutral
The S&P 500 barely eked out a positive total return in 2015,
rising by just 1.4%, and 2016 is off to an even more challenging start. Last year, flat market returns for US equities largely
mirrored the flat earnings growth delivered by S&P 500 companies. We have reduced our 2016 S&P 500 EPS estimate to
USD 126 from USD 130, but this still represents mid-singledigit growth over 2015 levels. Most sectors outside of energy
should still see earnings growth in 2016, and the earnings drag
from the collapse in oil prices and a strong dollar should be
less acute than in 2015. Our six-month price target is 2,025.
US sectors
Cyclical sectors appear inexpensive relative to defensive sectors, and we have a moderate pro-cyclical tilt in our US sector strategy. Technology remains our largest overweight, and
even after outperforming the S&P 500 by about 5% last year,
the sector trades at discount to the market at under 15 times
forward one-year earnings. We have a moderate overweight
in healthcare and energy. Energy continues to slump, but we
see value at current depressed valuations, particularly for patient investors. This month, we downgraded industrials to
neutral and trimmed our telecom underweight.
Small-caps have lagged this year. Mixed economic data, fears

of a global slowdown, and rising corporate credit spreads have
all contributed to weak performance. However, with valuations
relative to large-caps at five-year lows, the prospects for smallcaps to outperform appear bright if markets recover as we expect. Small-caps have weaker credit ratings; therefore, lower
high yield credit spreads will be vital in order for small-caps to
stage a comeback.
US equities style
Large-cap growth was one of the few market segments to
deliver solid returns in 2015. The Russell 1000 Growth Index
rose 5.7% last year, compared to the 3.8% decline in the Russell 1000 Value index. Many of the factors that led to growth
outperformance are still in place reasonable valuations for
growth and strong prospects for the tech sector. But a rebound
in oil prices and/or interest rates should benefit value. We recommend a balanced allocation between growth and value.
S&P 500 (index points, current: 1,859)
Six-month target
House view
Positive scenario
Negative scenario
2,025
2,250
1,700
Note: Current value as of 20 January 2016
Non-energy growth to be more visible in 2016
Small-caps should rebound as high-yield stress diminishes
Components of change in S&P 500 earnings per share (EPS), in USD
Small-cap vs. large-cap performance and high-yield spreads
130
111
125
108
120
105
115
102
110
99
105
96
100
S&P 500
2014 EPS
Non
energy
Positive contribution
Energy
S&P 500
2015 EPS
Non
energy
Base
Negative contribution
Note: 2015 and 2016 S&P 500 EPS are UBS CIO estimates.
Energy
S&P 500
2016 EPS
3
UBS 6-mth
forecast
4
5
6
7
8
93
90
2010
9
2011
2012
2013
2014
2015
2016
Small vs. large (lhs)

High yield spread (rhs, inverted)
15
Asset Classes Overview
Bonds
Leslie Falconio; Kathleen McNamara, CFA, CFP; Barry McAlinden, CFA; Philipp Schoettler; Frank Sileo
We expect the 10-year US Treasury yield to move modestly higher as the economy continues to grow, the labor market continues to improve, and the Federal Reserve responds by
continuing to gradually raise the policy rate. Some weakness persists in the manufacturing
sector, although there are no signs of significant negative spillover to the rest of the economy. Both the service sector and consumer spending are improving, while inflation remains
pressured by the strong dollar and declining commodity prices.
Government bonds
US investment grade corporate bonds
underweight
overweight
Treasury yields have declined more than 30bps in the first two
weeks of January as volatility has increased investor appetite
for the safe haven of US government securities. With global
uncertainties increasing, yields have continued to decline,
even when faced with stronger job numbers. We maintain our
12-month yield forecast at 2.50% on 10-year Treasuries, as
yields will gradually rise once short-term volatility subsides.
US 10-year yield (Current: 1.98%)
House view
Positive scenario
Negative scenario
Six-month target
2.5%
2.93.3%
1.72.1%
US high yield corporate bonds

neutral
At 827bps, high yield spreads are currently pricing in default
rates of over 8%, above our forecast of 5% in the next 12
months. We expect HY spreads to tighten from their current
levels and hold a neutral allocation to HY. At a yield over 9%,
the coupon income will be a significant source of HYs total return, even with defaults expected to reduce income by 2-3%.
Persistently low oil prices add to uncertainty, although risks to
the US energy sector are reflected in distressed pricing, in our
view. We generally favor the consumer goods and services sector over the energy and metals sectors.
USD HY SPREAD (Current: 827bps*)
House view
Positive scenario
Negative scenario
*Data based on capital BoAML High Yield indexes
16
Six-month target
590bps
450bps
1,100bps
Although investment grade (IG) corporate bond spreads

moved wider, their returns have benefited from the decline
in US Treasury yields with IG bonds up 0.6% year-to-date. IG
bonds offer an attractive risk/reward profile, with spreads at
their widest since 2012. Spreads will likely narrow if risk assets
stabilize, while IG bonds long duration would help during further market weakness. We recommend 5- to 10-year maturities. Within financials, we prefer higher-rated issuers subordinated bonds, and within non-financials, we favor select issuers
that are deleveraging.
US IG Spread (Current: 190bps*)
House view
Positive scenario
Negative scenario
Six-month target
125bps
100bps
250bps
*Data based on Barclays Corporate Aggregate Index
Emerging market bonds

neutral
We maintain a neutral allocation to emerging market sovereign and corporate bonds denominated in USD in the context
of a globally diversified portfolio. Credit spreads have further
widened on fears about China, commodities, and weak US
economic data. Concerns about an unstable China and a slowdown in the US seem overstated, in our view, and we expect
favorable technicals to support valuations. However, slower
growth in China will keep hurting EM currencies, ratings outlooks remain skewed toward downgrades, and default rates
are likely to increase.
EMBIG div / CEMBI div SPREAD
(Current: 485bps / 478bps)
House view
Positive scenario
Negative scenario
Six-month target
380bps / 400bps
300bps / 320bps
520bps / 540bps
Non-US developed fixed income
Municipal bonds
underweight
neutral
The tailwinds that were supportive of municipal bond prices in
the last few months of 2015 have now extended into the new
year. Munis have posted a positive total return of 1.0% thus
far in 2016. Muni yields have fallen, but at a slower pace than
witnessed in the US Treasury bond market. As the year progresses, refunding transactions are likely to increase based on
low interest rates and a flatter yield curve. As a result, a pickup
in supply is apt to weaken the strong technicals now in place.
Current AAA 10-year muni-to-Treasury yield ratio: 86.0% (last
month: 84.4%).
Non-US bond yields moved mostly lower over the past month,
although by slightly less than in the US. The dollar gained
modestly against most other currencies as the Feds December rate hike provided support. As a result, returns on non-US
bonds were positive, but lower than on US bonds. We expect
yields to gradually rise and the dollar to strengthen further in
the near term, producing poor returns on non-US developed
bonds for dollar-based investors. We therefore recommend an
underweight position on the asset class.
Additional US taxable fixed income (TFI) segments

Agency bonds
Mortgage-backed securities (MBS)
Agency debt valuations continue to look rich to us versus

the traditional alternatives. However, we cannot dispute that
agency debt has performed well as risk assets falter. The
BAML Agency Index has returned over 1.19%. This return is
one of the top-performing within the fixed income asset class
year-to-date. However, we maintain our view that MBS is the
better alternative. Current spread is 20bps to the 5-year Treasury (versus 15bps last month).
MBS current coupon performance has been very stable, given

the increase in volatility we have witnessed year-to-date. Currently, the spread is 104bps over the 5-year and 10-year Treasury curve. We removed our overweight in MBS last November, and went back to a neutral allocation. Given the lack of
credit exposure within MBS, we feel the asset class will perform well in 2016, but underlying uncertainty remains for the
Feds balance sheet. Current spread is 104 bps to the 5-year
and 10-year Treasury blend (versus 104 bps last month).
Preferred securities
Preferreds returned 8.5% in 2015, outperforming other major
sectors that struggled with supply issues and credit concerns.
Spread compression acted as a shock absorber to periodic
rate spikes cushioning the impact and driving returns higher.
Returns this year could be more challenged, given the likelihood of higher sustained rates and greater volatility, while current spread levels leave limited prospects for further compression. We maintain our neutral view. Current option-adjusted
spread is: 120bps (160bps last month) based on the BAML
Core Plus Fixed Rate Preferred Index.
USD 3M Libor
21 Jan-16
3 months
6 months
12 months
0.6
1.2
1.5
2.0
USD 2Y Treas.
0.8
1.4
1.5
1.8
USD 5Y Treas.
1.4
1.9
2.0
2.1
USD 10Y Treas.
2.0
2.4
2.5
2.5
USD 30Y Treas.
2.8
3.1
3.2
3.2
TIPS break-even inflation (BEI) has been falling with the decline
in oil prices. This factor, combined with low wage inflation, has
temporarily dragged down TIPS performance. However, even
with this strong adversity, TIPS BEI has not reached the levels
seen last fall with much lower oil prices. We remain holders
of 5-year TIPS and believe the outperformance will once again
resume when volatility declines. Current 10-year breakeven inflation rate of 1.37% (1.58% last month).
Credit sector spreads have widened substantially from the

June 2014 tights due to the continued decline in oil prices
CIO WMR interest rate forecasts

In %
Americas
Treasury inflation-protected securities (TIPS)
HY and IG corporate spreads (in bps) vs. WTI oil price (USD)
205
185
165
145
125
105
85
65
45
25
800
700
600
500
400
300

200
Jun-14
Sep-14
HY spread (rhs)
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
IG spread (lhs)
Oil price (lhs)

Source: BAML, UBS as of 20 January 2016
17
Commodities and other asset classes

Dominic Schnider, CFA, CAIA; Giovanni Staunovo; Thomas Veraguth; Wayne Gordon
Most commodity markets are oversupplied and in dire need of stronger demand. The
global economy should accelerate only to 3.3% in 2016, from 3.1% in 2015, leaving the
demand prospects for commodities uncertain. More importantly, most of the global
growth acceleration is likely to come from the developed world, while Asia (China),
which holds the lions share of demand for industrial metal and bulk commodities, is set
to slow further.
Commodities
neutral
Precious metals Following the December liftoff, we expect
four 25bps hikes by the US Federal Reserve in 2016, and the
fed funds rate is projected to reach 1.25-1.50% at the end
of2016. Gold prices should therefore weaken further in the
short run, followed by a recovery in six to 12 months. In the
short term, this could shift gold prices to new multi-year lows,
potentially dipping below USD 1,000/oz as we approach the
March Fed meeting; so gold is still an unattractive story.
GOLD (Current USD 1,101/oz)
House view
Positive scenario
Negative scenario
Six-month target
USD 1,050/oz
USD 1,300/oz
USD 900/oz
Crude oil Oil prices have continued sliding on renewed economic concerns related to emerging Asia. With a current oil
market surplus of 1-1.5 mbpd (world oil consumption close
to 96 mbpd), rising inventories remain a key price burden for
crude oil in the short term. The oil markets high vulnerability to even lower prices, whereby production is forced to shut
down, makes the near-term price bottom difficult to call. Only
extremes seem to discourage production and motivate the
capital market to pull out.
BRENT (Current: USD 27.9/bbl)
House view
Positive scenario
Negative scenario
Six-month target
USD 45/bbl
USD 70/bbl
USD 20/bbl
Base metals The outlook for base metal prices overall remains poor. Almost all the metal markets are in surplus, and
demand concerns remain elevated in 1H16. Moreover, we
havent seen a material supply response yet to turn price-positive in a sustainable manner. We see the most downside risks
18
in copper and lead. We expect copper prices to move to USD

4,000/mt, despite the bearish positioning in the futures market. Nickel and aluminum prices are likely to see better price
support from a production cost perspective.
Agriculture Grain prices should remain range-bound as favorable weather in Brazil should boost the prospects of adding
more production to the already high global inventories. The soybeans/corn price ratio of above 2.4 suggests that US farmers will
again favor soybean planting over corn in the upcoming spring
planting season. This supports our relative preference of corn
versus soybeans. Wheat supplies remain ample, capping the
price upside potential. That said, prospects of a La Nia event
are a longer-term bullish risk to our view. In softs, we see downside risk for sugar prices as larger inventories and a weaker Brazilian currency remain a price burden in the short term.
Other asset classes

Listed real estate Listed real estate has rebounded since its
September 2015 low, and has outperformed global equities.
Yet, it failed to surpass its peak in March 2015. Nevertheless,
stocks are currently trading at expensive levels (versus historical levels). Elevated interest rate volatility and slightly widening
credit spreads may be the reason. While property market fundamentals remain supportive, we anticipate growing uncertainties
among investors about the sustainability of the current up-cycle
that began in 2009.
FTSE EPRA/ NAREIT Developed
TR USD (Current: 3,899)
House view
Positive scenario
Negative scenario
Six-month target
USD 4,300
USD 4,500
USD 3,700
Foreign exchange
Brian Nick; Thomas Flury
The dollar has benefited from global risk aversion in January, appreciating against every
major currency save the Japanese yen. With oil prices expected to rebound, we believe this
trend may be nearing its end, although the more advanced stage of monetary policy in the
US should support USD even at these lofty levels. We now prefer USD to JPY, with the Fed
and the Bank of Japan (BoJ) headed in opposite directions and risk aversion likely to wane.
USD
JPY
overweight Despite weaker US business sentiment, the labor market has continued to recover quite strongly, paving the
way for more Fed rate hikes this year. We therefore expect the
USD to retain its strength. However, we think there is a limit
to further dollar appreciation. An even stronger USD would
negatively impact US inflation and the international competitiveness of US companies.
underweight The risks are skewed to a weaker yen against

the US dollar. The BoJ remains accommodative in order to
reach its inflation target. JPY strength may begin to affect
company earnings, according to a recent survey. Chinese
demand is weaker, which should stir the BoJ to act. Short yen
positions were unwound in recent months, and market expectations for US rate hikes are very conservative.
EUR
Other developed market currencies
underweight The ECB eased policy further in December,

but still managed to disappoint the market. Recent Eurozone
economic activity has surprised positively, while inflation
remains extremely subdued. The ECB signaled at its January
meeting that it would reevaluate its policy in March, which in
our estimation raises the probability of further easing measures and introduces more downside risk for the euro against
USD and other currencies in the near term.
overweight Commodity currencies continue to be hurt by

plummeting oil prices. Should our bullish oil forecast prove
correct, the Canadian dollar in particular has lots of room to
appreciate against USD. Within Europe, we prefer the Norwegian krone to the euro for similar reasons. The Australian
and New Zealand dollars continue to come under stress with a
slowing China demanding fewer commodity imports. Their interest rates have also fallen relative to those in the US.
GBP
neutral The Bank of England (BoE), once thought to be
right on the heels of the Fed in the race to tighten monetary
policy first, has become far more dovish in its recent meetings.
Partly as a result, GBPUSD has fallen to levels not seen since the
financial crisis. GBP is likely to struggle unless and until the BoE
adopts a more restrictive policy stance, but we expect this to
happen and to contribute to GBP strength as the year wears on.
UBS CIO FX forecasts

21 Jan 2016
3M
6M
12M
PPP*
EURUSD
1.091
1.05
1.08
1.10
1.26
USDJPY
116.6
127
127
124
77
USDCAD
1.452
1.44
1.38
1.34
1.20
AUDUSD
0.688
0.68
0.68
0.65
0.70
CHF
GBPUSD
1.417
1.48
1.55
1.58
1.63
NZDUSD
0.643
0.60
0.60
0.60
0.58
neutral EURCHF has established a 1.05-1.10 range, where

we expect it to stay. The Swiss franc has little room to weaken
versus the euro as long as the ECB continues with quantitative easing, while the Swiss National Bank will prevent it from
strengthening.
USDCHF
1.002
1.01
1.00
1.00
0.99
EURCHF
1.094
1.06
1.08
1.10
1.25
GBPCHF
1.421
1.49
1.55
1.58
1.62
EURJPY
127.2
133
137
136
97
EURGBP
0.770
0.71
0.70
0.70
0.77
EURSEK
9.364
9.40
9.40
9.00
8.94
EURNOK
9.702
9.00
8.60
8.50
9.70
Source: Thomson Reuters, UBS, as of 21 January 2016

Note: Past performance is not an indication of future returns.
*PPP = Purchasing Power Parity
19
in focus
Simmering risks
unlikely to boil over
Jeremy Zirin, CFA
Chief US Equity Strategist
Brian Nick, CAIA

Head of Tactical Asset Allocation US
We are in the midst of the worst period for global equity markets since
2011. Concerns are centered on a slowing China and a sharp decline in energy
prices to levels not seen in over a decade.
While voices calling this the beginning
of a worldwide recession have become
louder and more numerous, we see few
truly threatening signs that things are
headed in that direction.
China and energy creating ripples
While most US investors were still sleeping on the first business day of the year,
China was already making worrisome
headlines. A plummeting onshore Chinese equity market and unusually high
foreign exchange-rate volatility echo last
summers market correction. But with oil
prices and global manufacturing activity
both at fresh lows, equity markets have
now fallen through their 2015 lows.
To what do we attribute these market
fears? First, theres an impression that
a decelerating China may trigger recessions in Asia and beyond. Second, there
are worries that the fall in WTI crude oil
to under USD 27 per barrel from USD
107 in 2014 is due as much to slumping global growth as it is to oversupply.
Furthermore, the oil price collapse has
already led to a wave of energy sector
debt defaults and higher loan-loss provisions from banks, stoking fears of a
credit crunch. Pessimism about energy
has bled significantly into the broader
market. Fig. 1 shows that excluding the
global financial crisis and its aftermath,
the S&P 500 Index and the Bloomberg
Commodity Index have never been more
highly correlated than they have been
over the past year.
20
Video feature
Click play button to watch
but no tsunami
Because the last two US recessions were
associated with large buildups and rapid
contractions in single sectors (technology in 2000; financials in 2007), its logical to ask whether the collapsing energy
sector may lead to a wider contraction
in growth. But while a halt in energy-related investment has clearly impacted the
broader US economy, we believe the US
and most other large developed economies will ultimately benefit from lower
energy prices. Our colleagues on the US
Economics team in UBS Investment Research have highlighted that the savings
to consumers from lower gasoline prices
in 2015 outweighed the losses from
lower energy investment by USD 44 billion, or 0.2% of GDP (see Fig. 2). Even if
some of that windfall is saved rather than
immediately spent, stronger household
balance sheets will make consumers more
resilient down the road. We certainly
could not say the same for the damaging
residual impact of the bursting technology bubble in 2000 or the global financial
crisis in 2007-08.
In Focus
Keep in mind that the combined weights

of the technology, media and telecom
sectors reached 46% of the S&P 500 by
market cap in early 2000, a much higher
peak from which to fall. The energy sector peaked at 16% of the S&P 500 in
2008, and now accounts for only 6%.
Scaling the potential credit impact provides additional valuable insight. While
the 70% decline in oil prices will create
loan losses for several regional banks,
only 2-7% of loans are energy-related.
Compare this to 2008, when well over
half of total bank loans were tied to real
estate. Furthermore, increased capital
requirements and annual bank stress
tests mitigate the risks of another banking crisis.
What about corporate profits? S&P 500
company earnings last year failed to
grow at all, but excluding the 60% drop
in energy profits, they were up 7%. This
year, the headwinds from low oil prices
and a strong US dollar should be smaller,
and we expect companies to produce
positive mid-single-digit growth. Supporting this view is the fact that energy
now comprises less than 5% of S&P 500
earnings, down from 11% in 2014.
Similarly, China accounts for only 5% of

S&P 500 profits, far less than Europe or
the rest of the emerging markets. To be
sure, a rapid slowdown in China would
present serious risks to global growth
and corporate profitability. But we believe this scenario has been given too
much weight in market pricing. Chinas
manufacturing sector continues to struggle, but retail sales growth remains robust and the services sector sits firmly in
expansion territory. We see only a 10%
chance of sub-5% GDP growth in China
this year. Our base case is a continuation of Chinas growth transition and
moderation. While this may create difficulties for companies supplying industrial equipment to Chinas old growth
model, it should not materially threaten
global growth.
excellent windows to deploy new

money or replenish diminished equity allocations. While return expectations for
risk assets in 2016 are not lofty, they are
a good deal better than those available
on cash and short-term fixed income.
When the tide comes back in

In his In Context piece earlier in this
publication, UBS WMA Chief Investment
Strategist Mike Ryan lists some of the
factors he will be watching as we look
for an end to the current market tumult.
Investment opportunities lie at the end
of that list. Past growth scares, most
notably in 2011, have often provided
Fig. 2: Positive net effect of oil prices on US economy
Fig 1: Equity-commodity correlation unusually high

12-month rolling correlation of daily returns, S&P 500 and Bloomberg
Commodity Index
Consumer savings vs. investment decline due to 2015 energy price

collapse, in USD
150
1.00
100
0.75
50
0.50
0.25
0.00
50
0.25
100
$115B
$71B
Consumer savings on
gasoline spending
0.50
1992
1995
1998
2001
2004
2007
2010
2013
Investment in
energy extraction
2016
Source: UBS Investment Research, as 31 December 2015
21
Top themes
Highlights from our monthly selection of highest conviction investment themes across the asset class spectrum
Beyond benchmark fixed income investing
Barry McAlinden, CFA; Leslie Falconio; Stephen Freedman, CFA;

David Wang
Sally Dessloch
Portfolio context
Portfolio context
US and non-US
fixed income
u
Equity
growth and
income
Decade theme
integration
Diversify away from highquality bond portfolios toward greater exposure to

credit spread sectors and
actively managed fixed
income strategies.
u
Full
report
Beyond benchmark fixed

income investing
We recommend diversifying bond portfolios away from traditional taxable

fixed income benchmarks that are heavily government-weighted (i.e., Barclays
Aggregate Index), and incorporating
other types of beyond-benchmark
assets. In our view, the flexibility provided by extending beyond a traditional
benchmark should add value more often than not over longer market cycles.
We favor credit spread sectors and investment approaches that are flexible
and that utilize active management.
u
Growth
opportunities
Decade theme
u
Portfolio
integration
As a satellite holding
within a US equity portfolio, through our recommended basket of single
securities within the consumer and technology
sectors.
u
Full
report
Given the large size and earnings potential of Millennials, we believe that
companies with positive exposure to
this rising generation will experience
a growth tailwind in the years to
come. The types of companies that
stand to benefit from this generation
include certain innovative technology
companies, wellness-focused brands,
and service-oriented industries.
This is a generation of digital natives. Its passion for and fluency
with technology is fueling growth in
e-Commerce, social media services,
and mobile applications. Additionally,
easy access to information is leading to more informed consumption
decisions that favor cost-competitive
online retailers and wellness-focused
brands. Finally, this commitment-free
generation is renting in large numbers and supporting the growth in
sharing economy services.
Millennials are using social media at higher rates than older

generations
Yields at higher starting point helps future returns

In %
Daily users of each service by age group, in %
9
8
7
6
5
4
3
2
1
0
Facebook
Instagram
Twitter
SnapChat
Pinterest
Year end yield 2015
Source: BAML, UBS, as of 31 December 2015
Senior loans
Preferreds
HY corps
IG corps
Securitized
MBS
Agencies
TIPS
Treasuries
WhatsApp
Year end yield 2014
22
US equity
u
ulti-year:
M
u
ulti-year:
M
u
Portfolio
The path to a normalized growth and

interest rate environment will produce
headwinds for fixed income investors
over a medium- to longer-term period.
Higher rates will exert pressure on principal values, and low starting yields will
lead to greater bond price sensitivity.
Accordingly, future fixed income returns
are likely to be more modest, with starting yield levels being a strong indicator
of future performance.
LinkedIn
0
Age 1317
Age 1834
10
20
30
40
50
60
Age 3554
Age 55+
Source: UBS Evidence Lab, UBS Investment Bank, Examining Consumer Usage of
Social Media, as of 8 December 2014
70
Top themes
Highlights from our monthly selection of highest conviction investment themes across the asset class spectrum
Michael Crook, CAIA
Portfolio context
u
Equity
growth and
income

Medium-term:
6 to 12 months
u
Portfolio
integration
Implications for strategic

asset allocation and for
insurance strategies.
u
Full
report
Valuing your human

capital
Human capital is the value of an individuals future labor income, and represents an important intangible asset
class that should be considered alongside stocks and bonds. It tends to be
the largest early in ones professional
career, and runs down as retirement
nears. Human capital has characteristics that are more bond-like than
equity-like. Therefore, considering an
individuals entire net worth (including
human capital) suggests holding allocations to stocks, with the allocations declining over time along a certain glide
path. The specific path depends on
the individuals type of work. Another
implication is that a permanent loss of
human capital can have devastating
consequences for a household. Therefore, it is critical to protect the value of
human capital through life insurance
and disability insurance strategies.
Top themes
Thematic investment ideas from CIO Wealth Management Research
February 2016
Financials returning
capital
ab
The investment themes highlighted in

this section are among our highest conviction
thematic recommendations. The full list of
most preferred themes (see below) is
discussed in our monthly publication
entitled Top themes.
Preferred themes
US technology: Secular growth, on sale
Eurozone comeback
Major advances in cancer therapeutics
N
orth American energy independence:
Reenergized
Beyond benchmark fixed income investing
Human capital as a percentage of assets declines over time
Illustrative total wealth balance sheet, % of total wealth
Ask your Financial Advisor for a copy

of this publication.
100
80
60
40
20
0
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
Age
Financial assets
Human capital
Source: UBS, as of 31 December 2015
23
Key forecasts
Overweight
Neutral
Underweight
As of 20 January 2016
Asset class
Equities
TAA1
Change
6-month forecast
Positive
Negative
House View
scenario
scenario
Benchmark
Value
m/m perf.
in %2
S&P 500
1859
-7.3%
2025
2250
1700
USA
Euro Stoxx
305
-11.2%
325
385
270
UK
FTSE 100
5674
-6.3%
5925
6650
5000
Japan
Topix
1339
-12.9%
1400
1700
1200
SMI
7966
-7.5%
8375
9400
7150
MSCI EM
693
-12.3%
715
825
590
2.0%
1.4%
2.5%
2.93.3%
1.72.1%
Eurozone
Switzerland
Emerging Markets
Bonds
US Government bonds
10yr yield
US Corporate bonds
Spread
190 bps
0.0%
125 bps
100 bps
250 bps
US High yield bonds
Spread
827 bps
-3.2%
590 bps
450 bps
1100 bps
EM Sovereign
Spread
485 bps
-1.4%
380 bps
300 bps
520 bps
EM Corporate
Spread
478 bps
-3.1%
400 bps
320 bps
540 bps
Gold
Spot price
1101 /oz.
3.3%
1050
1300
900
Brent crude oil
Spot price
27.88 /bbl.
-24.4%
45
70
20
Listed real estate
EPRA/NAREIT DTR
3899
-7.3%
4300
4500
3700
NA
NA
NA
NA
NA
Other asset
classes
Currencies
Currency pair
USD
EUR
EURUSD
1.09
0.2%
1.08
<1.00
>1.15
GBP
GBPUSD
1.42
-4.7%
1.55
NA
NA
JPY
USDJPY
117
-3.5%
127
>128
<115
CHF
USDCHF
1.00
1.2%
1.00
NA
NA
Source: Bloomberg, UBS

1
TAA = Tactical asset allocation, 2 Month over month
*Change made on 7 January 2016.
Past performance is no indication of future performance. Forecasts are not a reliable indicator of future performance.
24
24
ubs house
house view
view February
February2016
2016
ubs
detailed asset allocation
Detailed asset allocation

taxable with non-traditional assets
0.0
Current allocation1
0.0 +0.0
Change this month
Strategic asset allocation
0.0
CIO tactical deviation
Current allocation1
0.0 +0.0
Aggressive
Change this month
0.0
Current allocation1
0.0 +0.0
Moderately
aggressive
Change this month
0.0
Current allocation1
0.0 +0.0
Moderate
Change this month
0.0
Change this month
0.0 +0.0
Moderately
conservative
Current allocation1
Cash
Change this month
All figures in %
Conservative
Investor
risk profile
Fixed Income
69.0 +0.0
69.0 57.0 +0.0
57.0 46.5 +0.0
46.5 41.0 +0.0
41.0 33.0 +0.0
33.0
US Fixed Income
62.0 +2.0
64.0 51.0 +2.0
53.0 40.5 +2.0
42.5 34.0 +2.0
36.0 26.0 +2.0
28.0
US Govt
-0.5
6.5
-0.5
5.0
50.0 +0.0
50.0
39.0 +0.0
US IG total market
4.0 +1.5
5.5
US IG 15 years
0.0 +1.0
US HY Corp
US Municipal
Intl Fixed Income

Intl Developed Markets
Emerging Markets
7.0
-1.0
3.0
39.0
30.0 +0.0
3.5 +1.5
5.0
1.0
0.0 +1.0
1.0 +0.0
1.0
7.0
-2.0
6.0
-2.0
4.0
3.5
-1.0
2.5
30.0
24.0 +0.0
3.0 +2.0
5.0
1.0
0.0 +1.0
3.0 +0.0
3.0
5.0
6.0
-2.0
4.0
4.0
-2.0
1.0
2.0 +0.0
2.0
-1.0
1.0
24.0
17.0 +0.0
17.0
2.5 +2.0
4.5
2.0 +2.0
4.0
1.0
0.0 +1.0
1.0
0.0 +1.0
1.0
3.5 +0.0
3.5
4.0 +0.0
4.0
5.0 +0.0
5.0
4.0
6.0
-2.0
4.0
7.0
-2.0
5.0
7.0
-2.0
5.0
2.0
3.0
-2.0
1.0
3.0
-2.0
1.0
2.0
-2.0
0.0
2.0
3.0 +0.0
3.0
4.0 +0.0
4.0
5.0 +0.0
5.0
16.0 +0.0
16.0 27.0 +0.0
27.0 34.5 +0.0
34.5 45.0 +0.0
45.0 55.0 +0.0
55.0
9.0 +0.5
9.5 15.0 +0.0
15.0 20.0 +0.5
20.5 26.0 +0.5
26.5 31.0 +0.5
31.5
US Large cap Growth
2.5
-0.5
2.0
4.5
-1.0
3.5
6.0
-1.0
5.0
8.0
-1.0
7.0
9.5
-1.0
8.5
US Large cap Value
2.5
-0.5
2.0
4.5
-1.0
3.5
6.0
-1.0
5.0
8.0
-1.0
7.0
9.5
-1.0
8.5
US Mid cap
3.0 +0.0
3.0
4.0 +0.0
4.0
5.0 +0.0
5.0
7.0 +0.0
7.0
8.0 +0.0
8.0
US Small cap
1.0 +1.5
2.5
2.0 +2.0
4.0
3.0 +2.5
5.5
3.0 +2.5
5.5
4.0 +2.5
6.5
7.0
6.5 12.0 +0.0
Equity
US Equity
International Equity
1.0 +0.0
5.5
-0.5
12.0 14.5
-0.5
14.0 19.0
-0.5
-0.5
23.5
15.0
4.5
7.0 +1.0
8.0
8.5 +1.0
9.5
Emerging Markets
3.0
-1.0
2.0
5.0
-1.0
4.0
6.0
-1.5
4.5
8.0
-1.5
6.5
10.0
-1.5
8.5
4.0 +0.0
4.0
4.0 +0.0
4.0
4.0 +0.0
4.0
5.0 +0.0
5.0
5.0 +0.0
5.0
Non-traditional
12.0
14.0 +1.0
4.0 +0.5
Commodities
11.0 +1.0
18.5 24.0
11.0 +0.0
11.0 12.0 +0.0
12.0 15.0 +0.0
15.0
9.0 +0.0
9.0
7.0 +0.0
7.0
Hedge Funds
11.0 +0.0
11.0
12.0 +0.0
12.0
10.0 +0.0
10.0
3.0 +0.0
3.0
0.0 +0.0
0.0
Private Equity
0.0 +0.0
0.0
0.0 +0.0
0.0
5.0 +0.0
5.0
6.0 +0.0
6.0
7.0 +0.0
7.0
Private Real Estate
0.0 +0.0
0.0
0.0 +0.0
0.0
0.0 +0.0
0.0
0.0 +0.0
0.0
0.0 +0.0
0.0
WMR tactical deviation legend: OverweightUnderweightNeutral Change legend: pUpgradeq Downgrade *Refers to moderate-risk profile.
1
The current allocation column is the sum of the strategic asset allocation and the tactical deviation column.
Source: UBS and WMA AAC, 21 January 2016. See appendix for information regarding sources of strategic asset allocations and their suitability, investor risk profiles, and the interpretation of the suggested tactical deviations from the strategic asset allocations.
25

taxable without non-traditional assets
0.0
Current allocation1
0.0 +0.0
Change this month
0.0
Current allocation1
0.0 +0.0
Aggressive
Change this month
Benchmark allocation
0.0
Current allocation1
0.0 +0.0
Moderately
aggressive
Change this month
0.0
Current allocation1
0.0 +0.0
Moderate
Change this month
0.0
Change this month
0.0 +0.0
Moderately
conservative
Current allocation1
Cash
Change this month
All figures in %
Conservative
Investor
risk profile
Fixed Income
80.0 +0.0
80.0 66.0 +0.0
66.0 54.5 +0.0
54.5 44.0 +0.0
44.0 33.0 +0.0
33.0
US Fixed Income
72.0 +2.0
74.0 58.0 +2.5
60.5 47.0 +2.0
49.0 36.0 +2.0
38.0 26.0 +2.0
28.0
US Govt
8.0
-0.5
7.5
58.0
+0.0
US IG total market
4.0
US IG 15 years
US HY Corp
US Municipal
Intl Fixed Income

Emerging Markets
7.0
-0.5
6.5
58.0
45.0 +0.0
+1.5
5.5
0.0
+1.0
2.0
5.0
-1.0
4.0
45.0
35.0 +0.0
3.0 +2.0
5.0
1.0
0.0 +1.0
+0.0
2.0
8.0
-2.0
6.0
-2.0
2.0
+0.0
3.0
-1.0
2.0
35.0
26.0 +0.0
3.0 +2.0
5.0
1.0
0.0 +1.0
3.0 +0.0
3.0
6.0
8.0
-2.5
4.0
5.0
-2.5
2.0
3.0 +0.0
2.0
-1.0
1.0
26.0
16.0 +0.0
16.0
2.0 +2.0
4.0
1.0 +2.0
3.0
1.0
0.0 +1.0
1.0
0.0 +1.0
1.0
4.0 +0.0
4.0
5.0 +0.0
5.0
7.0 +0.0
7.0
5.5
7.5
-2.0
5.5
8.0
-2.0
6.0
7.0
-2.0
5.0
2.5
4.0
-2.0
2.0
3.0
-2.0
1.0
2.0
-2.0
0.0
3.0
3.5 +0.0
3.5
5.0 +0.0
5.0
5.0 +0.0
5.0
16.0 +0.0
16.0 30.0 +0.0
30.0 40.5 +0.0
40.5 51.0 +0.0
51.0 62.0 +0.0
62.0
9.0 +0.5
9.5 18.0 +0.0
18.0 23.0 +0.5
23.5 29.0 +0.5
29.5 36.0 +0.5
36.5
US Large cap Growth
3.0
-0.5
2.5
5.0
-1.0
4.0
7.0
-1.0
6.0
9.0
-1.0
8.0
11.0
-1.0
10.0
US Large cap Value
3.0
-0.5
2.5
5.0
-1.0
4.0
7.0
-1.0
6.0
9.0
-1.0
8.0
11.0
-1.0
10.0
US Mid cap
2.0
+0.0
2.0
5.0 +0.0
5.0
6.0 +0.0
6.0
7.0 +0.0
7.0
9.0 +0.0
9.0
US Small cap
1.0
+1.5
2.5
3.0 +2.0
5.0
3.0 +2.5
5.5
4.0 +2.5
6.5
5.0 +2.5
7.5
7.0
-0.5
6.5 12.0 +0.0
4.0
+0.5
4.5
7.0 +1.0
8.0
Emerging Markets
3.0
-1.0
2.0
5.0
-1.0
4.0
7.5
-1.5
6.0
9.5
-1.5
8.0
11.0
-1.5
9.5
4.0 +0.0
4.0
4.0 +0.0
4.0
5.0 +0.0
5.0
5.0 +0.0
5.0
5.0 +0.0
5.0
Equity
US Equity
Commodities
12.0 17.5
-0.5
10.0 +1.0
17.0 22.0
11.0
-0.5
12.5 +1.0
21.5 26.0
13.5
-0.5
25.5
15.0 +1.0
16.0
1
26

non-taxable with non-traditional assets
0.0
Current allocation1
0.0 +0.0
Change this month
0.0
Current allocation1
0.0 +0.0
Aggressive
Change this month
0.0
Current allocation1
0.0 +0.0
Moderately
aggressive
Change this month
0.0
Current allocation1
0.0 +0.0
Moderate
Change this month
0.0
Change this month
0.0 +0.0
Moderately
conservative
Current allocation1
Cash
Change this month
All figures in %
Conservative
Investor
risk profile
Fixed Income
68.0 +0.0
68.0 56.0 +0.0
56.0 46.5 +0.0
46.5 39.0 +0.0
39.0 33.0 +0.0
33.0
US Fixed Income
60.0 +2.0
62.0 49.0 +2.0
51.0 40.0 +2.0
42.0 32.5 +2.0
34.5 26.0 +2.0
28.0
47.0
-1.0
46.0
-1.5
34.5
-2.0
26.0
-2.0
17.5
-2.0
11.0
US Municipal
0.0 +0.0
0.0
0.0 +0.0
0.0
0.0 +0.0
0.0
0.0 +0.0
0.0
0.0 +0.0
0.0
US IG total market
9.0 +2.0
11.0
7.0 +2.5
9.5
5.0 +3.0
8.0
4.0 +3.0
7.0
2.0 +3.0
5.0
US IG 15 years
0.0 +1.0
1.0
0.0 +1.0
1.0
0.0 +1.0
1.0
0.0 +1.0
1.0
0.0 +1.0
1.0
US HY Corp
4.0 +0.0
4.0
6.0 +0.0
6.0
7.0 +0.0
7.0
9.0 +0.0
9.0
11.0 +0.0
11.0
8.0
-2.0
6.0
7.0
-2.0
5.0
6.5
-2.0
4.5
6.5
-2.0
4.5
7.0
-2.0
5.0
6.0
-2.0
4.0
4.0
-2.0
2.0
3.5
-2.0
1.5
2.5
-2.0
0.5
2.0
-2.0
0.0
2.0
3.0 +0.0
3.0
3.0 +0.0
3.0
4.0 +0.0
4.0
US Govt
Intl Fixed Income

Emerging Markets
2.0 +0.0
36.0
28.0
19.5
13.0
5.0 +0.0
5.0
Equity
17.0 +0.0
17.0 28.0 +0.0
28.0 34.5 +0.0
34.5 42.0 +0.0
42.0 53.0 +0.0
53.0
US Equity
10.0 +0.5
10.5 16.0 +0.0
16.0 20.5 +0.5
21.0 24.0 +0.5
24.5 31.0 +0.5
31.5
US Large cap Growth
3.0
-0.5
2.5
5.0
-1.0
4.0
6.0
-1.0
5.0
7.5
-1.0
6.5
9.5
-1.0
8.5
US Large cap Value
3.0
-0.5
2.5
5.0
-1.0
4.0
6.0
-1.0
5.0
7.5
-1.0
6.5
9.5
-1.0
8.5
US Mid cap
2.5 +0.0
2.5
4.0 +0.0
4.0
5.5 +0.0
5.5
6.0 +0.0
6.0
8.0 +0.0
8.0
US Small cap
1.5 +1.5
3.0
2.0 +2.0
4.0
3.0 +2.5
5.5
3.0 +2.5
5.5
4.0 +2.5
6.5
7.0
6.5 12.0 +0.0
-0.5
12.0 14.0
-0.5
13.5 18.0
-0.5
21.5
13.0 +1.0
14.0
4.0 +0.5
4.5
7.0 +1.0
8.0
8.0 +1.0
9.0
Emerging Markets
3.0
-1.0
2.0
5.0
-1.0
4.0
6.0
-1.5
4.5
8.0
-1.5
6.5
9.0
-1.5
7.5
4.0 +0.0
4.0
4.0 +0.0
4.0
4.0 +0.0
4.0
5.0 +0.0
5.0
5.0 +0.0
5.0
14.0
9.0 +0.0
9.0
Non-traditional
11.0
-0.5
Commodities
10.0 +1.0
17.5 22.0
11.0 +0.0
11.0 12.0 +0.0
12.0 15.0 +0.0
15.0 14.0 +0.0
Hedge Funds
11.0 +0.0
11.0
12.0 +0.0
12.0
10.0 +0.0
10.0
8.0 +0.0
8.0
3.0 +0.0
3.0
Private Equity
0.0 +0.0
0.0
0.0 +0.0
0.0
5.0 +0.0
5.0
6.0 +0.0
6.0
6.0 +0.0
6.0
Private Real Estate
0.0 +0.0
0.0
0.0 +0.0
0.0
0.0 +0.0
0.0
0.0 +0.0
0.0
0.0 +0.0
0.0
1
27
non-taxable without non-traditional assets
0.0
Fixed Income
78.0 +0.0
78.0 65.0 +0.0
65.0 55.0 +0.0
55.0 46.0 +0.0
46.0 36.0 +0.0
36.0
US Fixed Income
69.0 +2.0
71.0 57.0 +2.0
59.0 47.0 +2.0
49.0 38.0 +2.0
40.0 29.0 +2.0
31.0
55.0
-1.0
54.0
-2.0
40.0
-2.0
30.0
-2.0
21.0
-2.0
11.0
0.0
+0.0
0.0
0.0 +0.0
0.0
0.0 +0.0
0.0
0.0 +0.0
0.0
0.0 +0.0
0.0
10.0
+2.0
12.0
8.0 +3.0
11.0
6.0 +3.0
9.0
4.0 +3.0
7.0
3.0 +3.0
6.0
US IG 15 years
0.0
+1.0
1.0
0.0 +1.0
1.0
0.0 +1.0
1.0
0.0 +1.0
1.0
0.0 +1.0
1.0
US HY Corp
4.0
+0.0
4.0
7.0 +0.0
7.0
9.0 +0.0
9.0
11.0 +0.0
11.0
13.0 +0.0
13.0
9.0
-2.0
7.0
8.0
-2.0
6.0
8.0
-2.0
6.0
8.0
-2.0
6.0
7.0
-2.0
5.0
7.0
-2.0
5.0
5.0
-2.0
3.0
4.0
-2.0
2.0
3.0
-2.0
1.0
2.0
-2.0
0.0
2.0
+0.0
2.0
3.0 +0.0
3.0
4.0 +0.0
4.0
5.0 +0.0
5.0
US Govt
US Municipal
US IG total market
Intl Fixed Income

Emerging Markets
42.0
32.0
23.0
13.0
5.0 +0.0
5.0
Equity
18.0 +0.0
18.0 31.0 +0.0
31.0 41.0 +0.0
41.0 50.0 +0.0
50.0 59.0 +0.0
59.0
US Equity
10.0 +0.5
10.5 18.0 +0.0
18.0 23.0 +0.5
23.5 28.0 +0.5
28.5 33.0 +0.5
33.5
US Large cap Growth
3.0
-0.5
2.5
5.5
-1.0
4.5
7.0
-1.0
6.0
8.5
-1.0
7.5
10.0
-1.0
9.0
US Large cap Value
3.0
-0.5
2.5
5.5
-1.0
4.5
7.0
-1.0
6.0
8.5
-1.0
7.5
10.0
-1.0
9.0
US Mid cap
3.0
+0.0
3.0
5.0 +0.0
5.0
6.0 +0.0
6.0
7.0 +0.0
7.0
9.0 +0.0
9.0
US Small cap
1.0
+1.5
2.5
2.0 +2.0
4.0
3.0 +2.5
5.5
4.0 +2.5
6.5
4.0 +2.5
6.5
8.0
-0.5
7.5 13.0 +0.0
4.0
+0.5
4.5
8.0 +1.0
9.0
Emerging Markets
4.0
-1.0
3.0
5.0
-1.0
4.0
8.0
-1.5
6.5
10.0
-1.5
4.0 +0.0
4.0
4.0 +0.0
4.0
4.0 +0.0
4.0
4.0 +0.0
Commodities
13.0 18.0
-0.5
10.0 +1.0
17.5 22.0
11.0
-0.5
12.0 +1.0
21.5 26.0
-0.5
25.5
14.0 +1.0
15.0
8.5
12.0
-1.5
10.5
4.0
5.0 +0.0
5.0
13.0
1
Source: UBS and WMA AAC, 21 January 2016. See appendix for information regarding sources of strategic asset allocations and their suitability, investor risk profiles, and the interpretation
of the suggested tactical deviations from the strategic asset allocations.
28
Current allocation1
0.0 +0.0
Change this month
0.0
Current allocation1
0.0 +0.0
Aggressive
Change this month
Benchmark allocation
0.0
Current allocation1
0.0 +0.0
Moderately
aggressive
Change this month
0.0
Current allocation1
0.0 +0.0
Moderate
Change this month
0.0
Change this month
0.0 +0.0
Moderately
conservative
Current allocation1
Cash
Change this month
All figures in %
Conservative
Investor
risk profile

all equity and all fixed income models
-1.0
4.5
96.0 95.0 +0.5
4.0
5.0
-0.5
95.5
US Fixed Income
0.0 +0.0
0.0 82.0 +4.5
86.5 81.0 +4.0
85.0
16.0 +2.5
Current allocation1
5.0
0.0 95.0 +1.0
Change this month
Current allocation1
5.0
0.0 +0.0
Change this month
5.0 +0.0
Fixed Income
Change this month
Cash
All fixed income,

non-taxable
All fixed income,

taxable
Current allocation1
All figures in %
All equity
US Govt total market
0.0 +0.0
0.0
9.0
-2.0
7.0
US Govt 1~3 years
0.0 +0.0
0.0
0.0 +0.0
0.0
6.0
-1.5
18.5
4.5
US Govt 3~7 years
0.0 +0.0
0.0
0.0 +0.0
0.0
14.0
-2.5
11.5
US Govt 7~10 years
0.0 +0.0
0.0
0.0 +0.0
0.0
10.0
-1.5
8.5
US MBS
0.0 +0.0
0.0
0.0 +0.0
0.0
9.0 +0.0
9.0
US Munis total market
0.0 +0.0
0.0
28.0 +0.0
28.0
0.0 +0.0
0.0
US Munis short duration
0.0 +0.0
0.0
11.0 +0.0
11.0
0.0 +0.0
0.0
US Munis long duration
0.0 +0.0
0.0
22.0 +1.0
23.0
0.0 +0.0
0.0
US IG total market
0.0 +0.0
0.0
5.0 +3.5
8.5
10.5 +5.0
15.5
US IG 1~5 years
0.0 +0.0
0.0
0.0 +2.0
2.0
0.0 +2.0
2.0
US High Yield
0.0 +0.0
0.0
7.0 +0.0
7.0
15.5 +0.0
15.5
0.0 +0.0
0.0 13.0
-3.5
9.5 14.0
-3.5
10.5
0.0 +0.0
0.0
-3.5
3.5
-3.5
3.5
Intl Fixed Income

Emerging Markets
0.0 +0.0
7.0
7.0
0.0
6.0 +0.0
6.0
7.0 +0.0
7.0
Equity
95.0
-0.0
95.0
0.0 +0.0
0.0
0.0 +0.0
0.0
US Equity
54.0 +0.5
54.5
0.0 +0.0
0.0
0.0 +0.0
0.0
US Large-cap Growth
7.0
-1.0
6.0
0.0 +0.0
0.0
0.0 +0.0
0.0
US Large-cap Value
7.0
-1.0
6.0
0.0 +0.0
0.0
0.0 +0.0
0.0
19.0
US Large-cap Total Market

IT sector
US Mid-cap Equity
US Small-cap Equity
-3.0
16.0
0.0 +0.0
0.0
0.0 +0.0
0.0
0.0 +3.0
3.0
0.0 +0.0
0.0
0.0 +0.0
0.0
14.0 +0.0
14.0
0.0 +0.0
0.0
0.0 +0.0
0.0
7.0 +2.5
9.5
0.0 +0.0
0.0
0.0 +0.0
0.0
40.5
0.0 +0.0
0.0
0.0 +0.0
0.0
21.5
0.0 +0.0
0.0
0.0 +0.0
0.0
3.0
0.0 +0.0
0.0
0.0 +0.0
0.0
0.0
0.0 +0.0
0.0
0.0 +0.0
0.0
-4.5
13.0
0.0 +0.0
0.0
0.0 +0.0
0.0
0.0 +3.0
3.0
0.0 +0.0
0.0
0.0 +0.0
0.0
41.0
-0.5
23.5
-2.0
Eurozone currency hedged
0.0 +3.0
Japan
0.0 +0.0
Global EM Equity
China
17.5
p
q
Publication note
The All Equity and All Fixed Income
portfolios complement our balanced
portfolios and offer more granular
implementation of our House View.
While we generally do not recommend
that investors hold portfolios consisting of only stocks or only bonds, the All
Equity and All Fixed Income portfolios
can be used by investors who want to
complement their existing holdings. It is
also possible to combine the All Equity
portfolio with one of the All Fixed Income portfolios to generate a balanced
portfolio. The tactical tilts in the portfolios are based on the corresponding
tilts in our balanced portfolios (moderate risk profile, without alternative
investments).
A special feature of the All Equity portfolio is that it includes carve-outs:
3% allocations to our preferred sectors within US large-caps as well as our
preferred countries within both international developed markets and the
emerging markets. A maximum of two
sectors/countries of each type may be
selected for carve-outs. The amount
of cash in the All Equity portfolio will
vary one-for-one with the overall overweight/underweight on equities in the
balanced portfolio, subject to a 3%
maximum. This allows us to express a
tactical preference between stocks and
bonds.
The All Fixed Income portfolios include
both taxable and non-taxable versions.
These are based on the fixed income
portion of the balanced portfolios, with
the non-taxable version incorporating
an additional allocation to MortgageBacked Securities. In addition, the All
Fixed Income portfolios include allocations to government bonds (Munis in
the taxable version, Treasuries in the
non-taxable version) of different maturities, allowing views on duration to
be expressed. Cash is set at 5% of the
portfolios, with small deviations possible due to rounding.
Source: UBS and WMA AAC, 21 January 2016. See appendix for information regarding sources of strategic asset allocations and their suitability, investor risk profiles and the interpretation of the suggested tactical deviations from the strategic asset allocations.
WMR tactical deviation legend: Overweight Underweight Neutral

1
29
Portfolio analytics
The portfolio analytics shown for each risk profiles benchmark allocations are based on estimated forward-looking
return and standard deviation assumptions (capital market assumptions), which are based on UBS proprietary research. The
development process includes a review of a variety of factors,
including the return, risk, correlations and historical performance of various asset classes, inflation and risk premium.
These capital market assumptions do not assume any particular investment time horizon. The process assumes a situation
where the supply and demand for investments is in balance,
and in which expected returns of all asset classes are a reflection of their expected risk and correlations regardless of time
frame. Please note that these assumptions are not guarantees and are subject to change. UBS has changed its risk and
return assumptions in the past and may do so in the future.
Neither UBS nor your Financial Advisor is required to provide
you with an updated analysis based upon changes to these or
other underlying assumptions.
Risk
Profile ==>>
In order to create the analysis shown, the rates of return for

each asset class are combined in the same proportion as the
asset allocations illustrated (e.g., if the asset allocation indicates 40% equities, then 40% of the results shown for the allocation will be based upon the estimated hypothetical return
and standard deviation assumptions shown below).
You should understand that the analysis shown and assumptions used are hypothetical estimates provided for your general information. The results are not guarantees and pertain
to the asset allocation and/or asset class in general, not the
performance of specific securities or investments. Your actual
results may vary significantly from the results shown in this
report, as can the performance of any individual security or
investment.
Moderately
Moderately
Conservative conservative Moderate aggressive Aggressive
Taxable with
non-traditional assets
Estimated Return
4.4%
5.1%
5.9%
6.4%
7.0%
Estimated Risk
5.6%
7.4%
9.6%
11.5%
13.5%
Taxable without
Estimated Return
4.0%
4.8%
5.5%
6.1%
6.8%
Estimated Risk
5.4%
7.5%
9.5%
11.5%
13.5%
Non-taxable with
Estimated Return
4.3%
5.0%
5.8%
6.4%
7.0%
Estimated Risk
5.5%
7.4%
9.5%
11.4%
13.4%
Non-taxable without
Asset Class
4.0%
4.8%
5.5%
6.1%
6.8%
Estimated Risk
5.4%
7.5%
9.5%
11.4%
13.5%
2.5%
0.5%
US Government Fixed Income
2.2%
4.3%
US Municipal Fixed Income
2.9%
4.7%
US Corporate Investment Grade Fixed Income
3.5%
5.9%
US Corporate High Yield Fixed Income
5.6%
11.7%
International Developed Markets Fixed Income
4.0%
9.0%
Emerging Markets Fixed Income
4.9%
9.1%
US Large-cap Equity
7.5%
16.8%
US Mid-cap Equity
8.4%
19.6%
US Small-cap Equity
8.6%
21.8%
International Developed Markets Equity
8.5%
19.7%
10.0%
25.5%
Commodities
6.4%
18.9%
Hedge Funds
6.2%
6.7%
Private Equity
11.8%
24.4%
8.5%
11.8%
Private Real Estate
30
Annual risk
US Cash
Emerging Markets Equity
Estimated Return
Capital Market Assumptions

Annual total return
Additional asset allocation models

US equity sector allocation, in %
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.
S&P 500
Benchmark
allocation1
CIO WMR Tactical deviation2

Numeric
Symbol
Previous
Current
Previous
Current
Current
allocation3
Consumer Discretionary
12.9
+0.0
+0.0
12.9
Consumer Staples
10.5
-1.0
-1.0
9.5
Energy
6.2
+1.0
+1.0
7.2
16.0
+0.0
+0.0
16.0
Healthcare
15.5
+1.0
+1.0
16.5
Industrials
10.0
+1.0
+0.0
10.0
Information Technology
20.5
+2.0
+2.0
++
++
22.5
Materials
2.6
+0.0
+0.0
2.6
Telecom
2.6
-2.0
-1.0
1.6
Utilities
3.3
-2.0
-2.0
1.3
Financials
Source: S&P, UBS, as of 21 January 2016

Note: 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.
International developed markets (non-US) equity module, in %
EMU / Eurozone
Benchmark
allocation1
28.0
CIO WMR tactical deviation2

Previous
Current
+30.0
+20.0
UK
20.0
-20.0
Japan
Current allocation3
48.0
-10.0
10.0
17.0
19.0
+10.0
-2.0
Australia
7.0
-2.5
-2.0
5.0
Canada
9.0
-2.5
-2.0
7.0
Switzerland
8.0
-2.5
-2.0
6.0
Other
9.0
-2.5
-2.0
7.0
Source: UBS, as of 21 January 2016

Note: Table includes changes made on 7 January 2016. For more information, see House View Update: Markets do not yet understand Chinese reduce equities to
neutral, 7 January 2016.
International developed markets (non-US) fixed income module, in %

The US Taxable Fixed Income Allocation table appears in Fixed Income Strategist, which is published on a monthly basis and can be found in the Fixed
Income section of the Online Services Research website.
EMU / Eurozone
UK
Benchmark
allocation1
42.0
9.0
WMR tactical deviation2

Previous
Current
-5.0
+0.0
+0.0
+5.0
Current allocation3
42.0
14.0
Japan
32.0
+0.0
-10.0
22.0
Other
17.0
+5.0
+5.0
22.0

Footnotes
1
For the first table on this page, the benchmark allocation is based on S&P 500 weights. For the second and third tables on this page, the benchmark allocation refers to a moderate risk profile
and represents the relative market capitalization weights of each country or region.
2
See Deviations from strategic asset allocation or benchmark allocation in the appendix for an explanation regarding the interpretation of the suggested tactical deviations 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 tactical deviation that was in place at the date of the previous
edition of UBS House View or the last UBS House View Update.
3
The current allocation column is the sum of the CIO WMR tactical deviation columns and (the S&P 500 benchmark allocation for the first table on this page) (the benchmark allocation for the
second and third tables on this page).
31
performance measurement

The performance calculations shown in Table A commence
on 25 January 2013, the first date upon which the Investment
Strategy Guide was published following the release of the
new UBS WMA strategic asset allocation (SAA) models. The
performance is based on the SAA without non-traditional assets for a moderate risk profile investor, and the SAA with the
tactical shift (see detailed asset allocation tables where the
SAA with the tactical shift is referred to as current allocation). Performance is calculated utilizing the returns of the
indices identified in Table B as applied to the respective allocations in the SAA and the SAA with the tactical shift. For example, if US Mid Cap Equity is allocated 10% in the SAA and
12% in the SAA with the tactical shift, the US Mid Cap Equity
index respectively contributed to 10% and 12% of the results
shown. Prior to 25 January 2013, CIO WMR published tactical
asset allocation recommendations in the Investment Strategy
Guide using a different set of asset classes and sectors. The
performance of these tactical recommendations is reflected
in Table C.
The performance attributable to the CIO WMR tactical deviations is reflected in the column in Tables A and C labeled Excess return, which shows the difference between the performance of the SAA and the performance of the SAA with
the tactical shift. The Information ratio is a risk-adjusted
performance measure, which adjusts the excess returns for

the tracking error risk of the tactical deviations. Specifically
the information ratio is calculated as the ratio of the annualized excess return over a given time period and the annualized standard deviation of daily excess returns over the same
period. Additional background information regarding the
computation of the information ratio figures provided below
are available upon request.
The calculations assume that the portfolios are rebalanced
whenever changes are made to tactical deviations, typically upon publication of the Investment Strategy Guide on
a monthly basis. Occasionally, changes in the tactical deviations are made intra-month when warranted by market conditions and communicated through an Investment Strategy
Guide Update. The computations assume portfolio rebalancing upon such intra-month changes as well. Performance
shown is based on total returns, but does not include transaction costs, such as commissions, fees, margin interest, and
interest charges. Actual total returns adjusted for such transaction costs will be reduced. A complete record of all the recommendations upon which this performance report is based
is available from UBS Financial Services Inc. upon written request. Past performance is not an indication of future results.
Table A: Moderate risk profile performance measurement (25 January 2013 to present)
SAA
SAA with
tactical shift
Excess
return
Information
ratio
(annualized)
Russell 3000
stock index
(total return)
Barclays Capital
US Aggregate bond
index (total return)
25 January 2013 to 31 March 2013
0.79%
0.83%
0.04%
+0.9
5.59%
0.11%
2Q 2013
-2.18%
-2.14%
0.04%
+0.3
2.69%
-2.33%
3Q 2013
3.60%
3.86%
0.26%
+2.4
6.35%
0.57%
4Q 2013
3.05%
3.23%
0.18%
+2.9
10.10%
-0.14%
1Q 2014
2.56%
2.53%
-0.03%
-0.2
1.97%
1.84%
2Q 2014
3.44%
3.49%
0.05%
+0.3
4.87%
2.04%
3Q 2014
-1.54%
-1.71%
-0.16%
-1.2
0.01%
0.17%
4Q 2014
0.47%
0.73%
0.26%
+1.3
5.24%
1.79%
1Q 2015
1.38%
1.69%
0.31%
+2.1
1.80%
1.61%
2Q 2015
-0.18%
-0.19%
-0.01%
-0.1
0.14%
-1.68%
3Q 2015
-4.67%
-5.08%
-0.41%
-2.4
-7.25%
1.23%
4Q 2015
1.61%
1.67%
0.06%
+0.5
6.27%
-0.57%
1Q 2016 to date
-4.57%
-4.81%
-0.24%
-8.4
-9.51%
1.07%
Since inception (25 January 2013)
3.32%
3.63%
0.31%
+0.2
29.93%
5.75%
32

Table B: SAA for moderate risk profile investor, and underlying indices (all figures in %)
25 Jan 2013 to present
US Large Cap Growth (Russell 1000 Growth)
7.0
US Large Cap Value (Russell 1000 Value)
7.0
US Mid Cap (Russell Mid Cap)
6.0
US Small Cap (Russell 2000)
3.0
International Dev. Eq. (MSCI EAFE)
10.0
Emerging Markets Eq. (MSCI EMF)
7.5
US Government Fixed Income (BarCap US Agg Government)

US Municipal Fixed Income (BarCap Municipal Bond)
5.0
35.0
US Investment Grade Fixed Income (BarCap US Agg Credit)
3.0
US Corporate High Yield Fixed Income (BarCap US Agg Corp HY)
4.0
International Dev. Fixed Income (BarCap Global Agg xUS)
4.0
Emerging Markets Fixed Income (50% BarCap EM Gov and 50% BarCap Global EM (USD))
3.5
Commodities (Dow Jones-UBS Commodity Index)
5.0
Source: UBS
The performance calculations shown in Table C, which start

on 25 August 2008 and end on 24 January 2013, have been
provided for historical information purposes only. They are
based on prior SAAs (referred to as benchmark allocations)
with non-traditional assets for a moderate risk profile investor, and on prior SAAs with tactical shifts as published in the
Investment Strategy Guide during the same time period. Performance is calculated utilizing the returns of the indices identified in Table D as applied to the respective allocations in the
SAA and the SAA with the tactical shift. See the discussion in
connection with Table A, previous page, regarding the meanings of the Excess return and Information ratio columns
and how the Information ratio column is calculated.
From 25 August 2008 through 27 May 2009, the Investment

Strategy Guide had at times published a more detailed set
of tactical deviations, whereby the categories Non-US Developed Equities and Non-US Fixed Income were further
subdivided into regional blocks. Only the cumulative recommendations at the level of Non-US Developed Equities and
Non-US Fixed Income were taken into account in calculating the performance shown in Table C opposite. Prior to 25
August 2008, WMR published tactical asset allocation recommendations in the US Asset Allocation Strategist using
a less comprehensive set of asset classes and sectors, which
makes a comparison with the subsequent models difficult.
33

Table C: Moderate risk profile performance measurement (25 August 2008 to 24 January 2013)
Benchmark
Allocations (SAA)
Benchmark
Allocation (SAA)
with tactical shift
Excess
return
25 Aug 08 to 31 Dec 08
Information ratio
(annualized)
Russell 3000
stock index
(total return)
Barclays Capital
US Aggregate bond
index (total return)
-16.59%
-15.64%
0.96%
+2.0
-29.00%
3.33%
2009 Q1
-5.52%
-5.45%
0.07%
+0.3
-10.80%
0.12%
2009 Q2
11.18%
11.37%
0.18%
+1.0
16.82%
1.78%
2009 Q3
10.44%
11.07%
0.63%
+2.1
16.31%
3.74%
2009 Q4
2.99%
3.30%
0.31%
+1.1
5.90%
0.20%
2010 Q1
2.74%
2.56%
-0.18%
-0.9
5.94%
1.78%
2010 Q2
-4.56%
-4.87%
-0.31%
-1.4
-11.32%
3.49%
2010 Q3
8.34%
7.99%
-0.35%
-2.1
11.53%
2.48%
2010 Q4
5.18%
5.17%
-0.01%
-0.1
11.59%
-1.30%
2011 Q1
3.23%
3.15%
-0.08%
-0.4
6.38%
0.42%
2011 Q2
0.62%
0.47%
-0.16%
-0.9
-0.03%
2.29%
2011 Q3
-7.65%
-8.56%
-0.90%
-2.5
-15.28%
3.82%
2011 Q4
4.66%
4.39%
-0.27%
-0.8
12.12%
1.12%
2012 Q1
5.89%
5.41%
-0.48%
-2.3
12.87%
0.30%
2012 Q2
-1.59%
-1.57%
0.02%
+0.2
-3.15%
2.06%
2012 Q3
4.18%
4.08%
-0.10%
-1.1
6.23%
1.59%
2012 Q4
0.69%
0.65%
-0.04%
-0.7
0.25%
0.21%
01 Jan 13 to 24 Jan 13
2.17%
2.20%
0.03%
+2.5
5.19%
-0.23%
24.86%
24.10%
-0.76%
-0.1
31.81%
30.76%
Since inception
Source: UBS
Table D: SAAs for moderate risk profile investor, and underlying indices (all figures in %)
25 Aug 2008 to 23 Feb 2009
24 Feb 2009 to 24 Jan 2013
12.5
11.0
12.5
11.0
US Small Cap Value (Russell 2000 Value)
2.0
US Mid Cap (Russell Midcap)
5.0
US Small Cap Growth (Russell 2000 Growth)
2.0
US Small Cap (Russell 2000)
3.0
US REITs (FTSE NAREIT All REITs)
1.5
US REITs (FTSE NAREIT All REITs)
Non-US Dev. Eq. (MSCI Gross World ex-US)

Emerging Markets Eq. (MSCI Gross EM USD)
US Fixed Income (BarCap US Aggregate)
10.5
Developed Markets (MSCI Gross World ex-US)
2.0
10.0
2.0
Emerging Markets (MSCI Gross EM USD)
2.0
30.0
US Fixed Income (BarCap US Aggregate)
29.0
Non-US Fixed Income (BarCap Global Aggregate ex-USD)
8.0
Non-US Fixed Income (BarCap Global Aggregate ex-USD)
Cash (JP Morgan Cash Index USD 1 month)
2.0
Cash (JP Morgan Cash Index USD 1 month)
2.0
Commodities (DJ UBS total return index)
5.0
Commodities (DJ UBS total return index)
5.0
Alternative Investments (HFRX Equal Weighted Strategies)

Source: UBS
34
12.0
Alternative Investments (HFRX Equal Weighted Strategies)
8.0
12.0
appendix
Investment committee
Global Investment Process and Committee description
The 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
throughout the investment process, the Chief Investment Officer (CIO) formulates the UBS Wealth Management Investment
House View (e.g., overweight, neutral, underweight stance for
asset classes and market segments relative 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 composition
The GIC is comprised of 12 members, representing top market
and investment expertise from across all divisions of UBS:
WMA Asset Allocation Committee description

We 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 monitoring of UBS
WMAs strategic asset allocation models and capital market
assumptions. The WMA AAC sets parameters for the CIO
WMR Americas Investment Strategy Group to follow during
the translation process of the GICs House Views and the incorporation of US-specific asset class views into the US-specific tactical asset allocation models.
WMA Asset Allocation Committee composition
The WMA Asset Allocation Committee is comprised of five
members:

Mark Haefele (Chair)

Mark Andersen
Jorge Mariscal
Mads Pedersen
Mike Ryan
Simon Smiles
Tan Min Lan
Themis Themistocleous
Paul Donovan (*)
Dawn Fitzpatrick (*)
Bruno Marxer (*)
Andreas Koester (*)
Mike Ryan
Michael Crook
Richard Hollmann (*)
Brian Nick
Jeremy Zirin
Stephen Freedman
(*) Business areas distinct from Chief Investment Office/

Wealth Management Research
(*) Business areas distinct from Chief Investment Office/Wealth

Management Research
35
appendix
Explanations about asset classes

Sources of strategic asset allocations and investor risk profiles
Strategic asset allocations represent the longer-term allocation of assets
that is deemed suitable for a particular investor. The strategic asset allocation models discussed in this publication, and the capital market assumptions used for the strategic asset allocations, were developed and approved by the WMA AAC.
The strategic asset allocations are provided for illustrative purposes only
and were designed by the WMA AAC for hypothetical US investors with a
total return objective under five different Investor Risk Profiles ranging
from conservative to aggressive. In general, strategic asset allocations will
differ among investors according to their individual circumstances, risk
tolerance, return objectives and time horizon. Therefore, the strategic asset allocations in this publication may not be suitable for all investors or
investment goals and should not be used as the sole basis of any investment decision. Minimum net worth requirements may apply to allocations
to non-traditional assets. As always, please consult your UBS Financial
Advisor to see how these weightings should be applied or modified according to your individual profile and investment goals.
The process by which the strategic asset allocations were derived is described in detail in the publication entitled UBS WMAs Capital Markets
Model: Explained, Part II: Methodology, published on 22 January 2013.
Your Financial Advisor can provide you with a copy.
Deviations from strategic asset allocation or benchmark allocation

The recommended tactical deviations from the strategic asset allocation or
benchmark allocation are provided by the Global Investment Committee and
the Investment Strategy Group within CIO Wealth Management Research
Americas. They reflect the short- to medium-term assessment of market opportunities and risks in the respective asset classes and market segments.
Positive/zero/negative tactical deviations correspond to an overweight/neutral/underweight stance for each respective asset class and market segment
relative to their strategic allocation. The current allocation is the sum of the
strategic asset allocation and the tactical deviation.
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 combination with
the assessment of the associated currencies. Thus, the deviations from the
strategic asset allocation reflect the views of the underlying equity and bond
markets in combination 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.
Scale for tactical deviation charts

Symbol
Description/Definition
Symbol
Symbol
moderate overweight vs. benchmark
moderate underweight vs. benchmark
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
36
appendix
Appendix
Emerging Market Investments
Investors 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 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
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 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.
are subject to high fees, including management fees and other fees
and expenses, all of which will reduce profits.
For more background on emerging markets generally, see the WMR

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.
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 strategies at all times, and managed futures strategies may have material directional elements.
Real Estate: There are risks specifically associated with investing
in real estate products and real estate investment trusts. They
involve risks associated with debt, adverse changes in general
economic or local market conditions, changes in governmental,
tax, real estate and zoning laws or regulations, risks associated
with capital calls and, for some real estate products, the risks
associated with the ability to qualify for favorable treatment under the federal tax laws.
Private Equity: There are risks specifically associated with investing in private equity. Capital calls can be made on short notice, and the failure to meet capital calls can result in significant
adverse consequences including, but not limited to, a total loss
of investment.
Foreign Exchange/Currency Risk: Investors in securities of issuers located outside of the United States should be aware that
even for securities denominated in US dollars, changes in the
exchange rate between the US dollar and the issuers 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.
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. Subinvestment-grade bonds are recommended only for clients with a higher risk tolerance and who seek to
hold higher-yielding bonds for shorter periods only.
Nontraditional Assets
Nontraditional asset classes are alternative investments that
include hedge funds, private equity, real estate, and managed futures (collectively, alternative investments). Interests
of alternative investment funds are sold only to qualified investors,
and only by means of offering documents that include information
about the risks, performance and expenses of 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
investments (1) are not mutual funds and are not subject to the
same regulatory requirements as mutual funds; (2) may have performance that is volatile, and investors may lose all or a substantial
amount of their investment; (3) may engage in leverage and other
speculative investment practices that may increase the risk of investment loss; (4) are long-term, illiquid investments; there is generally no secondary market for the interests of a fund, and none is
expected to develop; (5) interests of alternative investment funds
typically will be illiquid and 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)
Interests in alternative investment funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured
depository institution, and are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any
other governmental agency. Prospective investors should understand
these risks and have the financial ability and willingness to accept
them for an extended period of time before making an investment
in an alternative investment fund, and should consider an alternative
investment fund as a supplement to an overall investment program.
In addition to the risks that apply to alternative investments generally, the following are additional risks related to an investment in
these strategies:
37
appendix
Disclaimer
Chief Investment Office (CIO) Wealth Management (WM) Research
is published by UBS Wealth Management and UBS Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affiliate
thereof. CIO WM Research reports published outside the US are
branded as Chief Investment Office WM. In certain countries UBS
AG is referred to as UBS SA. This publication is for your information
only and is not intended as an offer, or a solicitation of an offer, to
buy or sell any investment or other specific product. The analysis
contained herein does not constitute a personal 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. We recommend that you
obtain financial and/or tax advice as to the implications (including
tax) of investing in the manner described or in any of the products
mentioned herein. 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 and its affiliates). All information and opinions as well as any prices indicated are
current only as of the date of this report, and are subject to change
without notice. Opinions expressed herein may differ or be contrary
to those expressed by other business areas or divisions of UBS as
a result of using different assumptions and/or criteria. At any time,
investment decisions (including whether to buy, sell or hold securities) made by UBS AG, its affiliates, subsidiaries and employees may
differ from or be contrary to the opinions expressed in UBS research
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the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be
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the flow of information contained in one or more areas within UBS,
into other areas, units, divisions or affiliates of UBS. Futures and options trading is considered risky. Past performance of an investment
is no guarantee for its future performance. Some investments may
be subject to sudden and large falls in value and on realization you
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38
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This report was published
on 22 January 2016.
Lead authors
Mark Haefele
Mike Ryan
Authors (in alphabetical order)
Manish Bangard
Chih-Chieh Chen
Michael Crook
Sally Dessloch
Leslie Falconio
Thomas Flury
Stephen Freedman
Ricardo Garcia-Schildknecht
Wayne Gordon
Yifan Hu
Markus Irngartinger
David Lefkowitz
Barry McAlinden
Kathleen McNamara
Brian Nick
Brian Rose
Dominic Schnider
Philipp Schoettler
Frank Sileo
Giovanni Staunovo
Thomas Veraguth
David Wang
Jeremy Zirin
Editors
Abraham De Ramos
Barbara Rounds-Smith
Roslyn Myers
Project Management
Paul Leeming
John Collura
Matt Siegel
Desktop Publishing
George Stilabower
Cognizant Group Basavaraj Gudihal,
Srinivas Addugula, Pavan Mekala
and Virender Negi
39
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Mind the gaps

In Context: What it will take

A message from the regional CIO

The rising Millennials

Valuing your human capital

This report has been prepared by UBS AG, UBS

But is this really the end of the nearly

likely to boil over. In their words, while

Mike Ryan, CFA

We are now neutral across major asset classes but see

We have reduced our equity

We are neutral on fixed income

We are now overweight the US

Underweight: Tactical recommendation to hold less of the

Neutral: Tactical recommendation to hold the asset class

Each bar represents a +/- 2% tactical tilt

February 2016 UBS house view

Mind the gaps

Watch the gaps

Investors have been

We are monitoring a range

Additional volatility justifies

ubs house view February 2016

relative to UK equities, and initiating an underweight Japanese yen position relative

Service industries have been

Gap #1: Services vs. manufacturing

Manufacturing weakness could

The price of Brent crude has

...which has dented capital

Fig. 1: US services strength vs. soer manufacturing sector

The gap between US

Source: Bloomberg, UBS, as of 31 December 2015

February 2016 UBS house view

Currency pegs have come under

...along with the Hong Kong

Fig. 2: Oil supply has continued to outpace demand

The oil glut shows no

Implied stock change (right hand scale)

Source: International Energy Agency, UBS, as of 19 January 2016

ubs house view February 2016

A key measure of this will be

Gap #4: European togetherness

Futures markets are at odds

Gap #5: The Fed dot plot vs. market expectations

Eliminating a record currency

USDCNY currency rate (lhs)

USDCNH currency rate (lhs)

Source: Bloomberg, UBS, as of 21 January 2016

February 2016 UBS house view

...with FOMC members

We are neutral on equities in

But the sell-off also creates

We close our relative

ubs house view February 2016

February 2016 UBS house view

What it will take

Mike Ryan, CFA

So what will it take for markets to begin to

clearer evidence that the deceleration in

ubs house view February 2016

near term. However, with most of these