Macro Quarterly

For marketing purposes

For global professional /
qualified / institutional clients
and investors and US retail
clients and investors.

Macroeconomic themes and tactical asset allocation opportunities

Q2 2019 | UBS Asset Management

A symphony of trades
“...continued late
cycle volatility and
the broad array of
macrothematic
market drivers
are making for a
compelling tactical
asset allocation
opportunity set.”
Contents

3 Macro matters

4 Macro themes

6 Global growth around trend

10 Central banks to extend the cycle

14 China to find a cyclical bottom

18 Higher volatility regime to stay

22 Geopolitics and protectionism

26 Asset class attractiveness

 Macro matters
Calm after the storm—or before a new
one? After the volatility of late 2018,
2019 has proven much kinder to global
risk assets thus far. Ironically, in our view
it was precisely the severity of market
concerns about US monetary policy and
the US/China trade war in late 2018 that
has since helped to forge more benign
narratives on both key issues.
But from a multi asset perspective
Ryan Primmer perhaps the most interesting develop-
Head of Investment
ment of 2019 so far has been the surge
Solutions
in risk assets alongside the stable
performance of developed world
nominal government bonds. If
stronger growth expectations are
supporting global equities, then
shouldn’t longer-dated nominal
government bond yields be rising
and yield curves steepening?
In our view, there is not necessarily
something fundamentally contradictory
in these developments. The reversal of
fortunes in risk assets has come despite
Evan Brown generally disappointing macro data
Head of Macro Asset
Allocation Strategy,
across Europe, the US and China and, in
Investment Solutions aggregate, downgrades to forward
corporate earnings expectations
globally. In short, the rally in global
equities in 2019 has not been driven by
expectations for a better growth and
inflation backdrop for corporate profits
at all. Instead it has been driven by
investors’ clear belief that the near 30%
derating in global equity PE ratios from
end-January to end-December in 2018
was at least partly overdone, given that
a number of major fears have now been
at least partly allayed.
Whether investors’ confidence to pay
a higher price for lower earnings is
warranted or sustainable are clearly key
questions for the outlook for global
equities for the remainder of 2019. We
came into the year with a positive view
on global equities after the Q4 sell off.
We remain constructive. But the speed
and scale of the rally in 2019 to date has
tempered to a degree the conviction of
that positive view. Up 11.1% over the
course of January and February, the
MSCI World (USD) already delivered an
above-average annual return in two
short months. The likelihood of material
further upside for risk assets in the short
term is, in our view, now dependent on
the ability of ex-US demand growth to
accelerate from current weak levels and
on policymakers allowing financial
conditions to remain loose. In particular,
the effectiveness of the broad array of
measures proposed and implemented by
the Chinese authorities to cushion their
growth slowdown remains critical.
Our base case is that overall global
equity returns in the medium term
are likely to be positive but more muted
than investors have been used to for
most of the post-financial crisis period.
Nonetheless, continued late cycle
volatility and the broad array of macro-
thematic market drivers are making for
a compelling tactical asset allocation
opportunity set. In this issue of Macro
Quarterly we explore in more detail
those themes and the individual
opportunities across asset classes
globally.
Ryan Primmer, Evan Brown
3
 Macro themes
The key macroeconomic trends that are likely
to be the major drivers of global markets over
the coming year

4
Global growth Central banks to China to find a Higher volatility Geopolitics and
around trend extend the cycle cyclical bottom regime to stay protectionism

5
Global growth
around trend
After the robust and Key messages
The outlook for global growth momen-
synchronized growth tum remains a key driver of asset classes.
of 2017, the rate of After the robust and synchronized
acceleration in global growth of 2017, the rate of acceleration
in global economic growth has moderat-
economic growth has ed quite significantly over the past year.
moderated quite The major driver of the slowdown was
significantly over the lagged impact of tightening financial
conditions globally, but particularly in
the past year. China, and as trade tensions impact
business sentiment and investment.
While the US economy looks in better
shape than its major counterparts,
recent macroeconomic data have cooled
across the Eurozone, China and the US.
In aggregate, momentum across recent
macroeconomic data releases for major
economies has been clearly negative,
with little sign of durable stabilization.
Against this backdrop investor concerns
about a more protracted and meaning-
ful slowdown in demand growth
towards recession are understandable.
6
Nonetheless, we believe that the recent
concerns are overdone. Yes, the tailwind
from very accommodative Fed policy has
faded. But from here we do not see
global central banks tightening as long
as core inflationary pressures remain
muted. If anything, we see the Federal
Reserve as more likely to run the US
economy hot in a bid to rebase inflation
expectations.
Fiscal stimulus in major economies
outside of the US is also likely to
increase in importance as 2019 pro-
gresses. But in our view, the key support
to developed economies remains
consumption growth backed by solid
labor markets and continued wage
growth. In our view, stimulus from
China and a well-timed Fed pause form
the basis for a stabilization in global
growth around trend. Moreover,
resolution in trade conflicts will likely
also reduce uncertainty and support
global growth.
 Exhibit 1: A round trip in global growth
Global PMIs are now consistent with trend growth (51.7) and in expansionary territory (>50)

World Emerging markets Developed markets

58
57
56
55
Composite PMI

54
53
52
51
50
49
48
'10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Source: UBS Asset Management, Macrobond as of March 12, 2019

Exhibit 2: Household incomes continue to grow

The consumer, primary driver of the economy, remains strong

Employment Average hourly earnings Hours worked

8%

-2

-4

-6

-8

-10
‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19

Source: UBS Asset Management, Macrobond as of March 12, 2019

7
Exhibit 3: Milestones

Theme supportive Theme challenges

Global PMIs begin to steady in coming months Global PMIs decline further towards 50, which separates expansion from
contraction
Labor markets remain solid, boosting consumer confidence and spending US Recession Tracker probabilities rise (currently at 25% chance of US recession
over next 12 months)

Fiscal policy supportive in countries/regions with low public debt Trade tensions escalate creating additional uncertainty and aggravating the
recent slowdown

Exhibit 4: Asset class implications

Asset class View Overall signal

Equities – While risk-adjusted returns are strongest when growth is accelerating, equities still post positive gains when growth is Neutral/Positive
stable at trend.
– Healing in trade tensions improves the outlook for global corporate profitability.

Fixed income – Solid and stable growth suggests central banks are not necessarily done tightening policy after the current pause. Negative
– In addition to strong cyclical growth, a pickup in either labor participation or productivity signifies stronger potential
growth. This would allow long term yields to reprice higher over time. That said, there is currently a great deal of
uncertainty on the outlook for potential growth.
– If the US business cycle turns sooner than we expect, credit is likely to underperform. We hedge our long equity exposure
with an underweight to credit.

Currencies – In a vacuum, strong global growth is consistent with outperforming high beta and EM FX. Neutral

Currencies – Should ex-US growth stabilize as we expect, the USD is likely to soften. Non-USD regions that are earlier in their respective Neutral
business cycles will attract inflows, supporting their currencies.

8
Theme case study: Long local currency emerging markets debt
With real effective exchange rates for emerging market
currencies close to all time lows, global inflation falling and
the Fed unlikely to tighten in the near term, we are construc-
tive on emerging market local currency debt.
we do not see this happening. Concerns about China’s
slowdown, the US/China trade war and about tightening
US financial conditions—so important to EM countries and
companies borrowing in USD—are, in our view, overdone.

Core to our belief in the risk-adjusted opportunity is our view
that most EM countries are structurally stronger and have
significantly better fundamentals than they had in previous EM
sell-offs, most notably in spring 2013, prior to the so-called
Taper Tantrum. While EM currency weakness can lead to
vicious circles even without an obvious fundamental catalyst,
We see the push for rate cuts across the EM complex continu-
ing, with the more dovish rhetoric of the US Federal Reserve,
near-peak in short-term US rates and balance sheet unwind all
providing significant room for EM central banks to ease policy.

With real effective exchange rates for emerging

market currencies close to all time lows, global
inflation falling and the Fed unlikely to tighten in
the near term, we are constructive on emerging
market local currency debt.

9
Central banks to extend
the cycle
While we always believed Key messages
In our view, one of the principal drivers
that the pace of policy to the sell-off in risk assets in the latter
normalization would be part of 2018 was the fear of a policy
slow, recent central bank mistake by the Federal Reserve and by
the unexpectedly hawkish rhetoric of
announcements suggest key Fed officials.
that is likely to be even
more gradual than we But with inflation well contained, major
central banks across the developed
had previously forecast. world can be patient in normalizing
monetary policy. In particular, after the
communication issues in 2018, a
strikingly more dovish and growth
supportive Fed narrative has emerged in
2019. While we always believed that the
pace of policy normalization would be
slow, recent central bank announce-
ments suggest that is likely to be even
more gradual than we had previously
forecast.
We therefore see monetary policy
extending the demand cycle still further.
We believe rate hikes from G4 central
banks are unlikely in the first half of
2019 and any rise in the second half of
2019 to be limited.
10
In the US, the failure of monetary policy
to sustainably bring core PCE inflation
back to the Fed’s 2% target is prompt-
ing some debate within the Fed about a
potential change to its framework to
create sufficient room for more stimula-
tive measures when growth slows more
meaningfully. At the very least, we
believe this increases the probability that
the Fed will let the US economy ‘run
hot’ in order to establish higher inflation
expectations.
Against this backdrop, and even in the
context of current weak momentum in
core inflation, we view yields of nominal
government bonds across major
developed markets as very low. The risks
to investors therefore appear asymmet-
ric. Overall we believe that developed
world yield curves will steepen as
growth and inflation expectations rise,
even if the pause in policy tightening is
likely to limit the upside to yields in the
near term.
Exhibit 1: Fed funds still below estimates of neutral
Fed has surpassed neutral by 150-200 bps ahead of prior recessions

United States, Laubach-Williams natural rate of interest estimates, one-sided, natural rate of interest, Federal Reserve Bank of New York estimate
Real fed funds rate
12.5%

10.0

7.5

5.0

2.5

0.0

-2.5

-5.0

-7.5
'72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Source: UBS Asset Management, Macrobond as of February 5, 2019

Exhibit 2: Fed policy is still easy given the economy

Fed funds rate has surpassed nominal GDP growth ahead of every recession since ‘70

Fed funds rate Nominal GDP growth YOY

20.0%
17.5
15.0
12.5
10.0
7.5
5.0
2.5
0.0
-2.5
-5.0
'72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Source: UBS Asset Management, Macrobond as of February 5, 2019

11
Exhibit 3: Milestones

Theme supportive Theme challenges

Core inflation momentum remains contained despite tight labor markets and wages Core inflation accelerates
moving moderately higher

Growth and inflation expectations rise, supporting steeper yield curves The yield curve bear flattens

Central banks remain on hold through H1 2019, and only resume tightening when Central banks telegraph near-term tightening in the absence of clearly stronger
growth and particularly core inflation pick up economic and inflation data

Exhibit 4: Asset class implications

Asset class View Overall signal

Equities – Patient and accommodative central banks keep discount rates low and support global growth. This is positive for corporate Positive
earnings and equity multiples.
– An accommodative Fed lowers the risk of a strong upside USD move, which is helpful for emerging market assets.

Fixed income – Central banks that are ‘letting the economy run hot’ support breakeven inflation. Neutral/Negative

Currencies – Currencies are a relative game, so countries tightening more aggressively will tend to have stronger currencies. Neutral
– A more accommodative Fed is a tailwind for emerging market currencies.

12
Theme case study: Long 10y US breakeven
As the difference between nominal US Treasury yields and
‘real’ or, inflation-adjusted, yields, the so-called ‘breakeven’
rate represents an effective play on inflation expectations.
After the significantly more dovish tone from the US Federal
Reserve’s rate-setting Federal Open Market Committee in
January our conviction levels have risen that market expecta-
tions for US inflation are too low.
tive ways of meeting its inflation goal and letting core PCE run
ahead of its current 2.0% target in order to establish sustain-
ably higher expectations for inflation, strongly suggest that
the balance of risks for breakeven levels is to the upside. The
Fed is now more likely, in our view, to let inflation overrun
than to tighten policy proactively without definitive proof of
sustainable momentum in core inflation.

While US breakeven rates have started to edge higher, we Meanwhile, we expect tight labor markets to continue to feed
believe that there is still potential for material further upside. through to higher wages and prices over time in the US.
In our view, the fact that the Fed is openly discussing alterna-

In our view, the fact that the Fed is openly discussing

alternative ways of meeting its inflation goal and
letting core PCE run ahead of its current 2.0% target
in order to establish sustainably higher expectations
for inflation, strongly suggest that the balance of risks
for breakeven levels is to the upside.

13
China to find a
cyclical bottom
We believe China will Key messages
Over the past year, the Chinese authori-
find a cyclical bottom in ties have used a broad range of mone-
the coming months as tary, fiscal and regulatory stimulus
previous measures begin measures to try and cushion the growth
slowdown prompted by deleveraging
to have a positive effect, initiatives and tighter financial sector
as more sizeable stimulus regulation. To date, those stimulus
measures emerge, as the initiatives have not had the desired
effect as a double whammy of sluggish
impact of US tariffs domestic demand and a weak external
diminishes and as environment for Chinese exports have
consumption growth continued to weigh on growth.
stabilizes. But we believe China will find a cyclical
bottom in the coming months as
previous measures begin to have a
positive effect, as more sizeable stimulus
measures emerge, as the impact of US
tariffs diminishes and as consumption
growth stabilizes.
Importantly in our view, recent mone-
tary and fiscal stimulus measures have
14
carefully targeted more capital efficient
private sector corporates over capital
inefficient (and already highly indebted)
property and state owned enterprise
sectors. On the monetary side, the
People’s Bank of China (PBoC) is using a
mix of tools including cheaper funding
on the lending side and credit support
on the borrowing side to help support
loan growth to the private corporate
sector. Meanwhile corporate tax cuts,
rather than major property investment,
are now the major focus of the fiscal
side.
While the rebound may not be as big as
in previous cycles due to this targeting,
we see this as a welcome differentiator
to previous reflationary stimulus
initiatives, reducing structural capital
intensity while improving the sustainabil-
ity of China’s longer-term growth
prospects.
 Exhibit 1: China total social financing
China credit impulse (12m sum)

25

20

15
USD trillions

10

-5

-10
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

Source: Bloomberg, as of Feb 15, 2019

Exhibit 2: China demand bottoming?

Aggregate demand index

2.0

1.5

1.0
Aggregate demand index

0.5

0.0

-0.5

-1.0

-1.5

-2.0

-2.5
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Source: WIND, as of Feb 15, 2019

15
Exhibit 3: Milestones

Theme supportive Theme challenges

PBoC announces further reserve requirement ratio (RRR) cuts in and lowers seven day
repo rate
Policymakers confirm continued emphasis on growth stabilization and a pause in
deleveraging
Trade tensions between the US and China continue to heal with no tariff escalation
No further monetary easing in the next three months
Fiscal measures significantly fall short of expectations and regulators stress control
on shadow credit
Trade tensions reach an impasse, resulting in a rise in tariffs

Exhibit 4: Asset class implications

Asset class View Overall signal

Equities – Confirmation of details from previously announced measures or new stimulus headlines would help credit growth gain Neutral/Positive
momentum, which improves risk sentiment and leads to potential rerating, especially for onshore equities and small and
mid-caps.

Fixed income – The PBoC is likely to keep interest rates low, including potential for benchmark rate cuts, in order to support growth Neutral/Positive
stabilization.

Currencies – China’s policymakers are likely to maintain a stable yuan (CNY) to send a message of stability. Devaluation to achieve a boost Neutral/Positive
in exports is inconsistent with rebalancing growth towards consumption. A stable CNY will help anchor emerging market
currencies.

16
Theme case study: Long China H equities vs. Taiwan equities
Chinese stocks and the RMB responded more negatively to the
threat of a protected US/China trade war than their Taiwanese
counterparts in 2018, despite Taiwan’s very obvious sensitivity
to Chinese growth in general as a major source of unfinished
goods, and the importance of the global tech cycle to Taiwan’s
heavyweight semi-conductor manufacturing sector.
Indeed, with the global computer industry having gone largely
ex growth and smartphone markets increasingly saturated, the
major drivers of the Taiwan technology sector appear to be
stuttering. New product areas, such as artificial intelligence
and electric vehicles, hold much long-term promise but are
unlikely to compensate for the slowdown in core tech sectors
or for the headwinds created by macroeconomic uncertainty.
Meanwhile, the recovery in both offshore and onshore
Chinese equity markets has been pronounced in recent
months, driven by a combination of attractive valuations and
improving investor confidence in the wake of more dovish
central bank rhetoric. We believe that there is still further to go
as prior Chinese stimulus measures had a more pronounced
effect on the data and as the Chinese authorities step up their
efforts to stabilize the growth environment.
The recently announced fourfold increase in the weighting of
onshore Chinese equities within MSCI’s widely used emerging
markets benchmarks is likely to see strong fund flows that will
likely lift offshore Chinese equities too.

Chinese stocks and the CNY responded more

negatively to the threat of a protected US/China
trade war than their Taiwanese counterparts in 2018,
despite Taiwan’s very obvious sensitivity to Chinese
growth in general as a major source of unfinished
goods, and the importance of the global tech
cycle to Taiwan’s heavyweight semi-conductor
manufacturing sector.

17
Higher volatility regime
to stay
In broad terms, we Key messages
After the significant drawdowns and
expect volatility to large price swings in risk assets of late
remain above post-crisis 2018, realized volatility has dropped
averages for the majority sharply across equity markets in 2019,
driven primarily by progress on US/China
of 2019 as the lagged trade and by the Federal Reserve’s more
impact of US rate hikes dovish rhetoric regarding both further
feeds through. interest rate rises in the US and the
reversal of its quantitative easing
program.
But despite this welcome hiatus, in
broad terms we expect volatility to
remain above post-crisis averages for the
majority of 2019 as the lagged impact
of US rate hikes feeds through. Histori-
cally, the initiation of a Fed tightening
cycle leads a rise in volatility by around
2 to 2.5 years. Geopolitical risks remain
18
elevated—with the Brexit outcome still
uncertain, upcoming elections in the
European Union, and the leadup to the
US 2020 presidential election campaign
just a few of the major political events
that are likely to impact markets.
Meanwhile, we have highlighted before
that the array of outcomes for key
macroeconomic variables is broadening
as the US cycle matures. This alone
suggests that the overall volatility
regime should be higher across assets as
investors demand a higher risk premium
for the increased uncertainty. And high
corporate debt levels across the
developed world also raise the prospect
of a more protracted spike in risk asset
volatility should global growth slow
down more than we expect.
Exhibit 1: CBOE S&P Volatility Index (LHS, 2y lag) vs. fed funds rate (RHS, %)

CBOE VIX Fed funds rate

70 10%

60 8

50
6
40
Index

4
30
2
20

10 0

0 -2
'91 '95 '99 '03 '07 '11 '15 '19

Source: Datastream as at February 28, 2019

Exhibit 2: US corporate ex-financials debt % 1970 to 2018

50%

45

40

35

30

25
'70 '76 '82 '88 '94 '00 '06 '12 '18

Source: UBS Asset Management, Refinitiv, as at Q3, 2018

19
Exhibit 3: Milestones

Theme supportive Theme challenges

Short term rate markets price in more tightening from the Fed The Fed lets the economy run hot, allowing inflation to overshoot before resuming
its tightening cycle
Macroeconomic volatility picks up, either via greater fluctuations in growth or inflation Growth and inflation remain moderate

Global growth remains imbalanced, leading to USD strength Global growth resynchronizes, placing downward pressure on USD

Exhibit 4: Asset class implications

Asset class View Overall signal

Equities – Modestly higher volatility is still consistent with positive equity returns. However, if markets enter a more prolonged regime of Neutral
higher volatility, it is likely to weigh on risk assets.
– There is a long history of energy performing as the economy moves into late cycle. Rising geopolitical risks in the Middle East
and Venezuela are hedged with energy exposure.
– Should market volatility fail to durably rise, growth equity sectors are likely to continue to outperform.

Fixed income – We are short duration as central banks gradually remove accommodation. Neutral
– If inflation rises significantly, both equities and fixed income could be challenged.
– A severe and prolonged rise in volatility due to growth concerns would likely lead to a flight into safe assets, challenging the
short duration view.

Currencies – We are short various high beta and commodity currencies to hedge against a volatility pick up. Neutral
– Safe haven currencies, such as USD, JPY, and CHF should outperform in more volatile environments.

20
Theme case study: Long Japanese yen vs. US dollar
Our long position in the Japanese yen against the US dollar is
a play on a number of key themes impacting markets. In our
view, the valuation case for the trade is compelling. Our
proprietary estimates of fair value indicate the JPY is some
20% undervalued against the USD.
Key to our belief that the USD will weaken generally is the
expectation that relative growth momentum between the
US and the rest of the world is likely to peak in the coming
months. On the US side we see growth moderating as prior
US rate hikes begin to take their toll and the impact of
President Trump’s fiscal stimulus package wanes. Outside of
the US we see Chinese growth stabilizing (see “China to find a
cyclical bottom”) and the end of a number of one-off factors
that have hit manufacturing in Europe and Japan rolling off.
The Japanese yen is seen by investors as a ‘risk off’
currency, traditionally strengthening when investor
risk aversion is high. We believe that short USD vs.
JPY therefore should provide a degree of protection
from any sharp change in overall investor risk appetite
and is likely to perform strongly should volatility spike.
This is exactly the sort of environment in which the dollar has
weakened historically.
In Japan, while core inflation remains relatively muted, there
are clear signs that it has bottomed. And with an increasingly
tight labor market and a closing output gap, we see risks more
to the upside than the downside in 2019.
From a multi asset perspective the trade also has important
portfolio characteristics. The Japanese yen is seen by investors
as a ‘risk off’ currency, traditionally strengthening when
investor risk aversion is high. We believe that short USD vs. JPY
therefore should provide a degree of protection from any
sharp change in overall investor risk appetite and is likely to
perform strongly should volatility spike.
21
Geopolitics and
protectionism
Does apparent progress Key messages
Does apparent progress on the trade
on the trade talks talks between the US and China negate
between the US and the likely influence of geopolitical risk
China negate the likely across markets over the medium term?
Not in our view. While recent rhetoric
influence of geopolitical between the two giants of the global
risk across markets over economy has been notably more
the medium term? constructive in the wake of the investor
concerns in late 2018, behind the
short-term rapprochement lie deep-
seated issues regarding geopolitical
influence, national security and technol-
ogy intellectual property. In our view,
these are very unlikely to be completely
resolved in the short term, even if US
tariffs on Chinese goods are lifted.
If recent polls across Europe ahead of
May’s European Union elections are
accurate, accurate, the forces of
protectionism and populism are not
likely to abate any time soon. We
therefore see heightened geopolitical
risks as a trend that is likely to impact
multiple asset classes for the foreseeable
future. The EU elections, Brexit, and US
elections in 2020 all have the potential
to impact markets.
22
In our view, political risk premium in
European assets is likely to remain
elevated ahead of the EU elections
and with considerable uncertainty still
surrounding the precise nature of the
UK’s exit from the EU. But the forces
of populism are not all negative for
growth. We see higher fiscal spending
playing an important role in helping to
prolong the demand cycle. We also see
higher fiscal spending as a direct
consequence of the shift in the political
narrative across developed countries.
Elsewhere our focus is on trade protec-
tionism. The current trade war between
the US and China has already signifi-
cantly dented business confidence and
weighed on growth. While the likeli-
hood of at least a short-term agreement
is largely priced in to risk assets, the
current US administration is nothing if
not unpredictable. We do see risk that
President Trump follows through with
tariffs on European auto exports as a
result of its Section 232 investigation.
Exhibit 1: Trade policy remains a wild card
...from China to Europe?

Implemented Proposed
Additional
1000 China 301: Remaining imports*
China 301*

800
China 301 Sec. 232
Billions of dollars

Tariffs Autos China: +USD 200bn

600 Announced took effect
($50bn) Additional Sept. 24.
400 China 301*
Steel
Washing Machines Steel & Aluminum China: +USD 16bn
200 & Solar Panels & Aluminum China: +USD 34bn

0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Source: USTR, Goldman Sachs as of Sept. 2018

*In April, the White House proposed tariffs on additional $100bn in imports in response to China’s retaliation.This supplemental proposal was increased to
$400bn on June 18 and to all remaining imports on July 20.

Exhibit 2: US economic policy uncertainty index­—news-based

300

250

200
Index

150

100

50

0
'09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Source: Datastream as at February 28, 2019

23
Exhibit 3: Milestones

Theme supportive Theme challenges

Further escalation of tensions between the US and its allies vs. China. Broadening of US-China trade truce
anti-trade measures beyond goods towards investment and IT restrictions
Trump administration places tariffs on auto imports Trump administration backs away from auto tariffs; broader trade agreements
achieved with US allies
Populists gain enough share of seats in European Parliament election to influence Pro-EU politicians maintain sufficient power to maintain existing policies and
fiscal/immigration policy continue with EU reform
No deal Brexit UK passes Prime Minister May's plan or something similar

Exhibit 4: Asset class implications

Asset class View Overall signal

Equities – Both trade and immigration restrictions tend to reduce growth and profits via increased costs. Negative
– However, exporters will be hurt more than companies with mostly domestic revenues.
– Cyclicals would underperform defensives and some regions may be more susceptible to rising trade tensions than is currently
priced in.

Fixed income – Tariffs increase costs on businesses and consumers. Upward pressure on inflation suggests an underweight to duration. Negative
– Downward pressure on growth is negative for credit spreads.

Currencies – EM currencies are high-beta to both global growth and trade. Neutral
– Safe haven currencies, such as USD, JPY, and CHF should outperform regardless of the nature of a geopolitical shock.
– A successful passage of USMCA (NAFTA 2.0) would be supportive of MXN.

24
Theme case study: Short AUD vs. USD
The Australian Dollar is widely viewed by investors as a global
demand bellwether. Yet with its close ties to Chinese domestic
demand, the AUD remains caught in the crossfire of the US/
China standoff on trade. With recent headlines reporting that
China is considering banning Australian thermal coal imports
in response to the exclusion of Chinese telecoms
giant Huawei from Australia’s mobile telecoms infrastructure,
geopolitical tensions are now directly impacting Australian
growth prospects.
Our base case is that the Chinese economy will bottom in the
second half of 2019 as stimulus measures kick in and improved
trade relations allow for a recovery in business confidence. But
our negative stance on the AUD represents, in our view, an
effective hedge against any escalation of trade tensions or the
failure of China policy to support ex-US growth in the way
that we expect.
The Australian Dollar is widely viewed by investors as
a global demand bellwether. Yet with its close ties to
Chinese domestic demand, the AUD remains caught
in the crossfire of the US/China standoff on trade.
Importantly, there are also compelling reasons to be short the
AUD based on domestic fundamentals alone. We remain
particularly wary of the Australian housing market and the
scope for material further cooling from very stretched levels.
Rate expectations in Australia have already moved sharply
lower over the past six months as growth expectations have
fallen and as the realities of a leveraged household sector have
limited the Reserve Bank of Australia’s previous bias for
tightening. But we view the risks as still to the downside for
Australian rates. In short, there is likely to be downward
pressure on the AUD even if global growth outside of
Australia improves and we believe further housing weakness
more than offsets the boost to the AUD from rising iron ore
prices.
25
 FPO -- Photo to be added

Asset class
attractiveness
26
The chart below shows the views of our Asset Allocation team on overall asset class attractiveness, as well as the relative attrac-
tiveness within equities, fixed income and currencies, as of February 28, 2019.

Overall signal =
Positive Negative

Overall
Unattractive Neutral Attractive
signal

US
Eurozone
Japan
Equities Switzerland
UK China
Australia
EM Ex-China

US
Eurozone (core) Eurozone (non)
Switzerland UK Australia China
Fixed Income
Japan EMD USD EMD LC
US Inv Grade
High Yield

EUR
USD GBP JPY
AUD CHF
Currencies
CNY Emerging

CAD

Source: UBS Asset Management Investment Solutions Asset Allocation team as of February 28, 2019. Views are provided on the basis of a 3-12 month
investment horizon, are not necessarily reflective of actual portfolio positioning and are subject to change. For illustrative purposes only.

27
 Overall signal =
Positive Negative

Asset class Overall signal UBS Asset Management’s viewpoint

Global Equities – We see a China-led stabilization of ex-US growth and the pause in US monetary policy tightening
as key to prolonging the business cycle, just as they were in early 2016. In particular we view
the probability of a recession in the coming year as low given the strength of labor markets and
consumption across the developed world. We believe that the global economic growth is slowing
to around trend rate, not collapsing.

Global Duration – After inconsistent Fed rhetoric prompted fears of a US monetary policy mistake in late 2018, a
clearer and unequivocally more accommodative Fed narrative is now emerging. While at least
one more hike in US policy rates is possible in our view, we believe that the Fed is close to the
peak in rates in this cycle. In our view, the Fed is now likely to let the US economy ‘run hot’ in
order to rebase inflation expectations. With scant evidence of significant momentum in US core
inflation, the Fed has considerable breathing room.
– The ability of China to cushion its slowdown is also likely to be key to the global economy and
markets in the remainder of 2019. The Chinese authorities have a broad range of policy tools at
their disposal and they appear willing to use the full breadth in achieving a difficult balancing act
between derisking a highly leveraged and capital inefficient Chinese economy and softening the
slowdown prompted by those deleveraging initiatives.
– In our view, risk assets discounted material concerns about factors including the potential impact
of a protracted US/China trade war at the start of the year. The speed and scale of the rally in the
face of disappointing macro data globally and downgrades to forward corporate earnings ex-
pectations suggest strongly that expectations for good news on US/China trade talks have now
been largely priced in. We remain constructive on global equities, but the speed and scale of the
rally in 2019 has tempered to a degree the conviction of that positive view. Up around 11% YTD
in local currency terms, global equities have already delivered an above-average annual return in
two short months. The likelihood of further material upside for risk assets in the short term is, in
our view, now dependent on central banks allowing financial conditions to remain loose and on
the ability of ex-US demand growth to accelerate from current weak levels. In particular, the ef-
fectiveness of the broad array of measures proposed and implemented by the Chinese authorities
to cushion their growth slowdown remains critical.
– We retain a negative view overall on developed world duration over the medium term. While
wage growth has yet to materially impact core inflation measures, developed world labor
markets continue to tighten. We see nominal yields moving gradually higher as explicit monetary
policy support fades, output gaps close, wage growth accelerates and as tariffs hit consumer
prices. However, upside to nominal yields is likely limited by structural factors including fast aging
populations in the developed world.

US Equities – US equities remain supported by solid corporate earnings growth and increasing capital returns
to shareholders. But the most recent earnings season exposed vulnerabilities in some momentum
sectors and illustrates how difficult a return towards more normal growth expectations can be—
especially after a period of exceptionally supportive fiscal and monetary policy. We do not expect
current headwinds on the IT sector to abate quickly given the present political and regulatory
environment. While the recent derating leaves US equity multiples below recent averages, we
continue to believe that the case for equities outside of the US is stronger.

Global (Ex-US) Equities – In Europe, growth has decelerated considerably, due to external and domestic factors. Externally,
China’s slowdown and trade uncertainty negatively affected European exports. Domestically,
political upheaval in Italy and France along with disruptive auto emissions regulations weighed on
the economy. However, our longer-term base case remains positive, supported by solid domestic
demand dynamics, attractive valuations and by a likely stabilization of global economic condi-
tions towards the second half of 2019.
– We remain constructive on Japanese equities despite the near-term headwinds from weakening
global growth. Diminished political uncertainties and ongoing structural reforms are supportive
of higher price multiples while a solid underlying domestic economy suggests the outlook for
profits is stronger than markets are discounting.

Emerging Markets – Emerging market equities have recently performed well despite a continued deterioration in EM
Equities inc China corporate earnings. The surge in Chinese social financing bodes well for EM growth over coming
months.
– We remain broadly positive on China in the expectation of further measures to cushion the
domestic growth slowdown. Any broadening of the current trade standoff with the US is likely to
hamper Chinese growth, but a gradual economic slowdown is already priced in and the Chinese
authorities have already shown themselves willing to provide monetary, fiscal and regulatory sup-
port to help smooth the ongoing economic transition. Chinese equities still trade at a PE discount
to other markets and further market liberalization could prompt a rerating as international capital
starts to flow into Chinese assets following the inclusion of onshore Chinese equities in MSCI’s
widely followed EM equity indices.

Source: UBS Asset Management. As of February 28, 2019.

28
 Overall signal =
Positive Negative

Asset class Overall signal UBS Asset Management’s viewpoint

Currency – As signs of stimulus from China begin to take hold, we expect ex-US growth to stabilize. Over
time, we anticipate capital will flow from the US into earlier-cycle economies and that the USD
will weaken, especially as the USD remains somewhat expensive on a real trade-weighted basis.
Elsewhere, we continue to see strong valuation support for the JPY and see short AUD as an
effective hedge against ongoing China weakness in an economy where domestic household
leverage is likely to constrain growth.

US Bonds – After the recent downward repricing of US rate expectations, 10yr nominal US Treasury yields are
close to the low end of the range of our estimate of fair value. Nonetheless, US nominal yields
look attractive relative to most other developed government bond markets on an unhedged
basis. In the absence of a material pickup in inflation or term premium, yields are likely to remain
range bound. Our overall assessment is neutral.

Global (Ex-US) Bonds – In aggregate, we see global sovereign bonds outside of the US as unattractive. The ECB has
committed to low rates for some time, limiting attractiveness of core Euro area bonds. We find
Italian BTPs attractive on diminishing political risks. Brexit is probably negative for UK gilts in the
case of both a hard and soft Brexit. In a hard Brexit scenario, gilt yields are likely to fall first on
lower growth expectations before rising on higher inflation risks and a higher credit risk premi-
um. Should the current deal pass through parliament, we would expect UK 10yr yields to rise
immediately due to improved growth prospects.
– Swiss bonds continue to look very overvalued and in our view they have an increasingly asym-
metric risk profile. The Swiss economy is relatively strong and we see Swiss bonds as vulnerable
to attempts to normalise monetary policy by a Swiss National Bank increasingly concerned by the
strength of the housing market.
– Elsewhere we are more positive on Australian duration on a relative basis. We see the Reserve
Bank of Australia taking a cautious approach to policy given elevated household leverage and
slow inflation.

US Investment Grade – Although we do not believe that a sharp demand slowdown is imminent, we believe IG spreads
Corporate Debt troughed for the cycle in early 2018. Moreover, we are concerned about increased supply,
reduced demand, and potentially large number of “fallen angels” when the economic growth
slows down significantly and downgrades begin.

US High Yield Bonds – Current default rates in high yield are very low by historical standards. Given the still relatively
positive economic backdrop, we do not expect a material pick-up in US defaults in the near term.
However, after the significant recent rally, spreads have now tightened to a point where we see
the balance of risks skewed towards more widening.

Emerging Markets Debt – Spreads on EM debt relative to US Treasuries widened substantially in 2018 in the face of higher
US dollar geopolitical risks, a strengthening USD and higher USD funding rates. However, EM local curren-
cy bond yields have rallied both in absolute terms and relative to US yields since September while
Local currency EM hard currency bonds yields began a rally in late November. This reflects investor expectations
for a less hawkish Fed, less aggressive US trade policy, and/or more China stimulus. We like EM
local currency bonds given their attractive valuations.

Chinese Bonds – Chinese bonds have the highest nominal yields among the 10 largest fixed income markets
globally and have delivered the highest risk-adjusted returns of this group over the last 5 and 10
years. Slowing economic growth and inclusion in the Bloomberg Barclays Global Aggregate index
next year should continue to push yields down during the next 3–12 months.

Source: UBS Asset Management. As of February 28, 2019.

29
For marketing and information purposes by UBS. For global professional /qualified / institutional clients and investors and US retail
clients and investors.

This document does not replace portfolio and fund-specific materials. Commentary is at a macro or strategy level and is not with reference to any
registered or other mutual fund.

Americas
The views expressed are a general guide to the views of UBS Asset Management as of March 2019. The information contained herein should not be
considered a recommendation to purchase or sell securities or any particular strategy or fund. Commentary is at a macro level and is not with reference
to any investment strategy, product or fund offered by UBS Asset Management. The information contained herein does not constitute investment
research, has not been prepared in line with the requirements of any jurisdiction designed to promote the independence of investment research and is
not subject to any prohibition on dealing ahead of the dissemination of investment research. The information and opinions contained in this document
have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. All such information and
opinions are subject to change without notice. Care has been taken to ensure its accuracy but no responsibility is accepted for any errors or omissions
herein. A number of the comments in this document are based on current expectations and are considered “forward-looking statements.” Actual future
results, however, may prove to be different from expectations. The opinions expressed are a reflection of UBS Asset Management’s best judgment at the
time this document was compiled, and any obligation to update or alter forward-looking statements as a result of new information, future events or
otherwise is disclaimed. Furthermore, these views are not intended to predict or guarantee the future performance of any individual security, asset class
or market generally, nor are they intended to predict the future performance of any UBS Asset Management account, portfolio or fund.

EMEA
The information and opinions contained in this document have been compiled or arrived at based upon information obtained from sources believed to
be reliable and in good faith, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or develop-
ments referred to in the document. UBS AG and / or other members of the UBS Group may have a position in and may make a purchase and / or sale of
any of the securities or other financial instruments mentioned in this document.

Before investing in a product please read the latest prospectus carefully and thoroughly. Units of UBS funds mentioned herein may not be eligible for
sale in all jurisdictions or to certain categories of investors and may not be offered, sold or delivered in the United States. The information mentioned
herein is not intended to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not a
reliable indicator of future results. The performance shown does not take account of any commissions and costs charged when subscribing to and
redeeming units. Commissions and costs have a negative impact on performance. If the currency of a financial product or financial service is different
from your reference currency, the return can increase or decrease as a result of currency fluctuations. This information pays no regard to the specific or
future investment objectives, financial or tax situation or particular needs of any specific recipient.

The details and opinions contained in this document are provided by UBS without any guarantee or warranty and are for the recipient’s personal use and
information purposes only. This document may not be reproduced, redistributed or republished for any purpose without the written permission of UBS
AG.

This document contains statements that constitute “forward-looking statements”, including, but not limited to, statements relating to our future
business development. While these forward-looking statements represent our judgments and future expectations concerning the development of our
business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from our
expectations.

UK
Issued in the UK by UBS Asset Management (UK) Ltd. Authorised and regulated by the Financial Conduct Authority.

APAC
This document and its contents have not been reviewed by, delivered to or registered with any regulatory or other relevant authority in APAC. This
document is for informational purposes and should not be construed as an offer or invitation to the public, direct or indirect, to buy or sell securities.
This document is intended for limited distribution and only to the extent permitted under applicable laws in your jurisdiction. No representations are
made with respect to the eligibility of any recipients of this document to acquire interests in securities under the laws of your jurisdiction.

30
Using, copying, redistributing or republishing any part of this document without prior written permission from UBS Asset Management is prohibited.
Any statements made regarding investment performance objectives, risk and/or return targets shall not constitute a representation or warranty that such
objectives or expectations will be achieved or risks are fully disclosed. The information and opinions contained in this document is based upon
information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any misrepresentation, errors or
omissions. All such information and opinions are subject to change without notice. A number of comments in this document are based on current
expectations and are considered “forward-looking statements”. Actual future results may prove to be different from expectations and any unforeseen
risk or event may arise in the future. The opinions expressed are a reflection of UBS Asset Management’s judgment at the time this document is
compiled and any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise is disclaimed.

You are advised to exercise caution in relation to this document. The information in this document does not constitute advice and does not take into
consideration your investment objectives, legal, financial or tax situation or particular needs in any other respect. Investors should be aware that past
performance of investment is not necessarily indicative of future performance. Potential for profit is accompanied by possibility of loss. If you are in any
doubt about any of the contents of this document, you should obtain independent professional advice.

Australia
This document is provided by UBS Asset Management (Australia) Ltd, ABN 31 003 146 290 and AFS License No. 222605.

China
The securities may not be offered or sold directly or indirectly in the People’s Republic of China (the “PRC”). Neither this document or information
contained or incorporated by reference herein relating to the securities, which have not been and will not be submitted to or approved/verified by or
registered with the China Securities Regulatory Commission (“CSRC”) or other relevant governmental authorities in the PRC pursuant to relevant laws
and regulations, may be supplied to the public in the PRC or used in connection with any offer for the subscription or sale of the Securities in the PRC.
The securities may only be offered or sold to the PRC investors that are authorized to engage in the purchase of Securities of the type being offered or
sold. PRC investors are responsible for obtaining all relevant government regulatory approvals/licenses, verification and/or registrations themselves,
including, but not limited to, any which may be required from the CSRC, the State Administration of Foreign Exchange and/or the China Banking
Regulatory Commission, and complying with all relevant PRC regulations, including, but not limited to, all relevant foreign exchange regulations and/or
foreign investment regulations.

The key symbol and UBS are among the registered and unregistered trademarks of UBS.

31
© UBS 2019. All rights reserved.
AMMA-1433 3/19
www.ubs.com/am