UBS House View
Weekly
25 June 2018
Week Ahead
► Will Trump or China blink first? Investors
have been unnerved by the increasingly rapid
exchange of threats and tariffs between the
US and China. A further escalation of tensions
has emerged as the dominant threat to global
growth and the equity rally. Trade rhetoric
has taken on an ever greater importance
for markets, vying for investor attention
with positive factors such as strong earnings
releases. Ever more intense brinkmanship risks
weakening business investment, which could
in turn slow profit growth.
► Is the Eurozone recovering from its first
quarter blues? Eurozone economic data has
been falling short of expectations. The Citi
Economic Surprise index for the region is now
running at minus 86, down from positive 50
at the start of the year. (Readings below zero
point to a below-consensus outcome.) Despite
this, the ECB announced this month that it
was expecting to end quantitative easing in
December. This week we should get a sense of
whether the region is recovering from the soft-
patch, with M3 money supply, which gauges
lending into the economy.
► Will US inflation reassure investors? The
headline US Consumer Price Index is set to
push over 3% this summer, lifted by rising
energy prices. While the Fed typically looks
through such energy effects, the data has
the potential to worry investors – raising the
prospect of faster Fed tightening. But the Fed's
preferred measure of inflation, the Personal
Consumption Expenditure index, is released
this week. The core measure, excluding energy,
has been steady at 1.8% for the past two
months, but could near the Fed's 2% target in
May.
► For more key messages on the week ahead
from Jeremy Zirin, click here.
► Read the Weekly online on our new House
View microsite.
CIO Americas, WM
Key Messages
► A period of US-centric growth forces a rethink by investors. One trend in global data over
the past month has been a return of US economic exceptionalism. The Citi Economic Surprise
Index is now running at minus 27 globally, and plus 10 for the US. As it enters its tenth year of
growth, the US appears on track for a 4% annualized growth rate in the second quarter. Job
vacancies are at a record high and now exceed the number of US unemployed. By contrast, until
a modest uptick in June to 54.8 due to largely technical factors, the Eurozone composite PMI
has pointed to slowing momentum since January. Growth data has also fallen short in leading
emerging markets; South African GDP actually contracted 2.2% in the first quarter. We don't
expect this divergence to last. Eurozone output, for example, has been held back by poor weather
and an unusually large number of bridge holidays in the first half of the year, and so can be
expected to rebound in the coming months. Still in the short term, US outperformance supports
the dollar. That is adding to stress on emerging market assets and pressuring their central banks
to enact growth-slowing rate increases. Takeaway: We have closed our overweight position in
EM equities and reduced our overweight to EM hard currency bonds. We have also closed our FX
strategy underweight to the USD versus the Canadian currency.
► Trade dispute is chilling investor spirits. Equity markets were shaken after the US
administration threatened tariffs on an additional USD 200bn of Chinese imports. China's pledge
to retaliate "forcefully," which came within hours, raised concerns that the trade dispute has
stepped up a gear in terms speed and scale. The Shanghai Composite Index fell as much as 5% on
an intra-day basis on 19 June, with a 1.5% decline in the Euro Stoxx 50. So far, both sides have
selected to tax imports that can be easily purchased elsewhere – such as the US tariff on Chinese
air conditioners and China's tax on US soybeans. That minimizes short-term economic damage.
But further rounds of retaliation could take a heavier toll on market and business sentiment. Fed
chair Jerome Powell said “changes in trade policy” called into question the positive economic
outlook, leading business leaders to postpone investment and hiring. And one top German
automaker has already said that profits could be hit by tariffs. Takeaway: We are overweight
global equities, but will remain alert for a further escalation in trade tensions. Our countercyclical
positions, such as an overweight to 10-year US Treasuries, should cushion losses if tail risks
materialize.
► Technology disruption will enable longer-term gains. Artificial intelligence passed another
milestone this week, with an IBM computer beating a human in a debating competition. Among
investors too, technology is winning the argument. While the manufacturing-heavy Dow is flat
this year, the Nasdaq has hit all-time highs, returning 13% so far in 2018. Globally, tech earnings
are on track to climb 17% for 2018 and worries over tougher government regulation that hit the
sector in March have faded. Plenty of good news has already been priced in, so we are neutral on
a tactical horizon. But the tech sector is better insulated than many other sectors from global trade
tensions. And investors can take part in the long-term growth story by investing in a diversified
way in our “Enabling technologies” theme. Five mainstream enabling technologies – artificial
intelligence (AI), augmented reality/virtual reality (AR/VR), big data, cloud computing and 5G –
are set to transform many industries over the next decade. We expect them to grow in aggregate
by an average 12.8% annually, from USD 420bn in 2017 to USD 1.1trn in 2025. Takeaway: We
are neutral on the US tech sector over the coming six months. But we believe our Long-Term
Investment Theme, Enabling Technologies, will benefit from secular progress.
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 the document.

Deeper Dive
US-biased global
growth: EM pain as
dollar gains
Global economic growth dynamics appear to have shifted.
Last year, for the first time since 2007, all 45 countries tracked
by the OECD grew. And in January at the World Economic
Forum in Davos, the International Monetary Fund trumpeted the
"broadest synchronized global growth upsurge since 2010." But
since then, synchronization has given way to more US-biased
global growth.
After 2.2% annualized growth in the first quarter, US GDP is
tracking at close to a 4% annualized rate in the second quarter.
In contrast, Eurozone data has consistently disappointed, and
after growth slowed to a 1.7% year-on-year rate in 1Q from
2.7% in 4Q 2018, ECB President Mario Draghi cautioned in
June that the soft patch could last for longer. GDP expansion
in China, after holding up in the first quarter, is showing signs
of moderating, with growth in infrastructure investment, in
particular, slowing as the government focuses on deleveraging.
Looking ahead, US growth should be around 3% over our six-
month investment horizon. The stimulus from fiscal policy is still
getting stronger and should peak around the end of the year.
Eurozone growth should improve moderately by the second
half of the year as one-off factors unwind. These include strikes,
an unusually high number of bridge holidays in the first half, a
larger-than-usual flu epidemic, and the formation of the new
German government that held back government consumption.
Our base case for China is that some slowing of growth is
inevitable, but will be controlled. We expect cuts to the reserve
requirement ratio (RRR) if necessary, and the government has
the scope for fiscal stimulus if the economy decelerates more
abruptly than expected. Overall, we forecast 6.6% growth this
year¨.
Bottom line
Synchronized global growth appears to have given way to a more US-biased global expansion. For the rest of the year, the divergence
should moderate as the Eurozone recovers and China’s slowdown is controlled. But the shift in favor of the US economy is helping
support the dollar. As a result, we reduce our FX strategy underweight to the US dollar and our tactical overweight to emerging
market (EM) assets, which tend to be negatively impacted by a rising dollar.
2
UBS House View Weekly - 25 June 2018
Mark
Haefele
Even though over time the growth divergence should narrow,
the shift in favor of the US economy is helping support the
US dollar, with the dollar index gaining 7% since a February
low. USD strength may persist in the near term; so in our
tactical asset allocation, we want to avoid being underweight
US dollars, and avoid large overweight positions in emerging
market (EM) assets, which tend to be negatively impacted by
a rising dollar. Against this backdrop, we recently made three
changes to our positioning:
► We closed our overweight in EM equities versus US
government bonds. The greenback's rise has weighed on
the MSCI EM Index and pressured central banks in emerging
markets to tighten monetary policy, presenting a headwind
to the region’s economic growth. Although the growth
outlook remains positive overall, first-quarter growth figures
were disappointing, notably in South Africa and Brazil,
and business sentiment, as measured by the purchasing
managers’ index, is falling.
► We have halved our overweight in USD-denominated
EM sovereign bonds. The asset class offers an attractive
yield of 6.5%, or 3.5 percentage points over equivalent
duration US Treasuries; but weaker relative economic
momentum and heightened political risk in Mexico, Turkey,
and Brazil present a risk, as do trade tensions between the
US, Mexico, and China.
► We have closed our FX strategy overweight in the
Canadian dollar (CAD) versus the USD. The Bank of
Canada has been slower than we expected to signal tighter
monetary policy and the CAD is also likely to be held back in
the near term by uncertainty over the outlook for NAFTA.

Regional view - United States
Tradecraft
Michael Ryan
CFA, Chief Investment Officer Americas
The immediate impact of these trade
disputes is limited, in our view, and
therefore won’t imperil either the global
expansion or long-running bull market.
We estimate that the announced tariffs
on China would reduce growth by about
0.2% and increase inflation by less than
0.1%. The effect on corporate profits
could be more significant, especially
for those companies facing potential
disruptions to their supply chain, but
would only modestly dampen the strong
profit environment.
The bigger risks of course come over
the longer term. A deepening trade
dispute could undermine consumer,
business, and investor confidence.
Capital spending could suffer as
companies become less confident in the
commitment to globalization. Likewise,
US-based companies could encounter a
more challenging operating environment
within China amid more restrictive
licensing requirements.
This suggests that while a full-blown
trade war remains unlikely, the longer-
term implications of such a conflict –
on both the real economy and financial
markets – would be significant. We
therefore need to better understand the
dynamics behind the current dispute and
where they may lead us long term. To
provide some context for what I believe
are America's strategic interests with
3
With the recent back-and-forth between the US
and China, the trade dispute has moved beyond
the media's glare and caught the attention of
even the most sober-minded market participants.
International stocks fell 3.5% in the past two
weeks as the two countries have moved closer to
a series of escalating tariffs and trade restrictions.
regard to trade, it's helpful to look at
how those interests have evolved over
the past 70 years and then ask how this
evolution could impact future policy.
Post-World War II: At the end of WWII,
the US finally stepped decisively onto the
world stage, seeking military alliances
and economic integration in order to
confront an emerging threat – the global
communist movement. Global trade was
one way to prevent vulnerable nations
from falling into the Soviet sphere of
influence, and the US often entered
into trade relationships where the terms
were not always in America's favor in
order to serve a strategic goal: to tie the
economic fortunes of the West together.
Post-Berlin Wall: The fall of the Berlin
Wall marked a key pivot point in world
history and left the US as the world’s
only superpower. The US found itself
with a unique opportunity to expand
its influence by extending the reach of
free market practices and democratic
values. The US foresaw global trade
playing a key role in the opening up of
new markets in Eastern Europe, Latin
America, Africa, and Asia. This time
around, it was less about tying Western
interests together, and more about
promoting those common values in
order to expand growth globally. Bilateral
terms of trade once again took a back
UBS House View Weekly - 25 June 2018
seat to integrating emerging markets
into a truly global economy.
Post-financial crisis: But the global
financial crisis shook the financial
system to its core and prompted
many to question the primacy of free
market capitalism. The emergence
of both China and the Eurozone as
global economic powerhouses – and
potential trade adversaries to the United
States – resulted in yet another policy
inflection point. With the Soviet Union
vanquished and the global economy fully
integrated, it’s not surprising to see the
US reassessing its strategic interests.
The focus now is upon protecting
the intellectual property of US-based
companies, insuring a level playing field
for business practices, and addressing
perceived inequities in bilateral trade
relationships. It could be that that this
agenda is largely being driven by the
current Administration as some believe,
and the policy pivot may only therefore
last as long as President Trump’s tenure.
But if this is indeed how the US now
defines its strategic interests, then these
sorts of trade disputes will only become
more common in the future and markets
will need to learn to adjust.
Tradecraft may well replace statecraft
as the biggest source of geopolitical
uncertainty.
 UBS House View Weekly - 25 June 2018

Strategy and performance

TAA and market returns
Tactical Total return in % Annualized total return in %
Deviation
Asset class in %* 1-week 1-month YTD 1-Year 5-Year 10-Year** Benchmark
Barclays Capital US Treasury –
Cash –2.0 0.04 0.18 0.76 1.33 0.47 0.48
Bills [1–3 M]

Fixed Income 0.0

US Gov't –3.5 0.15 1.06 –1.40 –1.58 1.46 2.97 BarCap US Agg Government

Bloomberg Barclays US Treasury

US Gov't 10 year +2.0 0.26 1.64 –3.15 –4.34 1.43 3.73
Bellwethers 10 Year

US Municipal 0.0 0.11 0.76 –0.38 0.87 3.58 4.30 BarCap Municipal Bond

US IG Corp 0.0 –0.31 0.35 –3.32 –1.49 3.36 5.14 BarCap US Agg Credit

US HY Corp 0.0 –0.04 0.82 0.69 3.50 5.60 7.84 BarCap US Agg Corp HY

Int'l Developed Markets 0.0 0.20 –0.12 –1.33 2.95 0.67 1.85 BarCap Global Agg xUS

50% BarCap EM Gov and 50%

Emerging Markets 0.0 0.18 –1.11 –4.40 –0.60 2.71 N/A
BarCap Global EM (USD)

Emerging Markets Local Currency 0.0 0.05 –2.16 –5.12 –0.13 0.90 N/A BarCap EM Gov

Emerging Markets Hard Currency +1.5 0.32 –0.05 –3.68 –1.07 4.52 6.47 BarCap Global EM (USD)

Equity +2.0

Global Equity +2.0 –1.05 –0.97 0.79 11.91 9.95 4.95 MSCI ACWI

US Large cap Growth –1.0 –1.07 3.11 9.13 23.16 16.96 10.88 Russell 1000 Growth

US Large cap Value +1.0 –0.56 –0.31 –0.68 8.39 10.82 7.37 Russell 1000 Value

US Mid cap 0.0 –0.62 1.73 4.00 14.35 13.00 9.23 Russell Mid Cap

US Small cap 0.0 0.11 3.83 10.38 21.54 13.35 9.63 Russell 2000

Int'l Developed Markets 0.0 –0.96 –3.36 –1.73 7.87 6.84 2.09 MSCI EAFE

EM Equity 0.0 –2.27 –4.45 –5.27 10.23 6.25 1.62 MSCI EMF

Commodities 0.0 –0.40 –4.32 –0.14 11.60 –6.84 N/A Blooomberg Commodity Index

Yield Assets 0.0

S&P/LSTA U.S. Leveraged Loan

Senior Loans 0.0 –0.01 0.29 2.31 4.60 3.99 5.20
100 Index
BofA Merrill Lynch Fixed Rate
Preferreds 0.0 –0.10 1.47 –0.04 1.92 6.43 4.15
Preferred Securities Index

MLPs 0.0 1.68 –1.00 0.75 3.03 –2.93 6.09 Alerian MLP Total Return

US Real Estate 0.0 2.49 6.74 0.30 2.02 9.03 6.24 FTSE NAREIT Equity REIT Index

*The tactical deviation is for a moderate, non-taxable investor without alternative investments. See the latest UBS House View: Investment Strategy Guide for an interpretation of the
tactical deviations and an explanation of the corresponding benchmark allocation.
**As of last month end
Source: UBS, as of 22 June 2018

S&P 500 forecast CIO GWM

6-month rolling price target USD 2900

2017 earnings per share estimate USD 133.0
2018 earnings per share estimate USD 158.0
2019 earnings per share estimate USD 167.0

Source: UBS, as of 22 June 2018

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 UBS House View Weekly - 25 June 2018

Strategy and performance

TAA and market returns: US equity sectors
Tactical Total return in % Annualized total return in %
Deviation
Asset class in %* 1–week 1–month YTD 1–Year 5–Year 10–Year** Benchmark

S&P 500 –0.87 1.29 4.00 15.38 13.90 9.12 SPX Index

Consumer Discretionary 0.0 –0.70 6.40 13.62 25.94 16.95 14.49 S5COND Index

Consumer Staples –1.0 0.16 4.83 –8.34 –4.67 8.33 8.72 S5CONS Index

Energy +1.0 1.52 –2.69 5.72 21.44 2.06 1.11 S5ENRS Index

Financials +1.0 –1.41 –4.00 –2.22 14.89 13.88 5.07 S5FINL Index

Health Care –1.0 –0.66 2.60 3.67 7.27 14.31 12.00 S5HLTH Index

Industrials 0.0 –3.37 –3.50 –3.41 7.17 13.09 8.62 S5INDU Index

Information Technology 0.0 –1.29 2.74 13.35 31.24 22.38 13.57 S5INFT Index

Materials +1.0 –2.07 –1.42 –2.36 11.04 10.72 5.06 S5MATR Index

Real Estate 0.0 2.55 5.40 –0.41 3.24 7.22 3.05 S5RLST Index

Telecom 0.0 –0.51 –0.37 –9.42 –1.08 3.96 4.61 S5TELS Index

Utilities –1.0 2.50 3.59 –1.95 –1.60 10.73 6.27 S5UTIL Index

Note: Tactical deviations are intended to be applicable to the US equity portion of a portfolio across investor risk profiles.
**As of last month end
Source: UBS, as of 22 June 2018

Market moves
Level 1–w chg YTD chg
S&P 500 2,755 –0.87% 4.00%
DJIA 24,581 –2.03% 0.54%
Nasdaq 7,693 –0.68% 12.02%
Nikkei 225 22,517 –1.47% –0.23%
Eurostoxx 50 3,442 –1.81% 0.88%
MSCI EM* 1,088 –2.26% –5.22%
MSCI World* 2,115 –0.88% 1.93%
MSCI EAFE* 1,980 –0.95% –1.38%
DXY 95 –0.28% 2.60%
Gold $ 1271/oz –0.66% –2.47%
Brent crude oil $ 75.6/bbl 2.87% 12.98%
US 10–year yield 2.89% –3 bps +49 bps
VIX 13.77 +1.8 pts +2.7 pts
Source: Bloomberg, as of 22 June 2018
Note: All returns are in local currency
* As of intraday 21 June 2018

Tactical time horizon is approximately six months.

Total return market performance is from Bloomberg as of close of business on source date, using representative indices, and is provided for information only.
Past performance is no indication of future performance.

+ – Indicates +/– change

Terms and abbreviations

YTD = year-to-date.
TAA = tactical asset allocation.

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 UBS House View Weekly - 25 June 2018

Earnings calendar
The Earnings Calendar provides publicly announced reporting dates and times of companies covered by Chief Investment Office GWM.
Reporting dates and times are subject to change by the reporting companies.

Date Company Ticker Company Ticker Company Ticker

26-Jun-2018 Lennar Corp. LEN
27-Jun-2018 General Mills, Inc. GIS
28-Jun-2018 Walgreens Boots Alliance, Inc. WBA NIKE, Inc. NKE
29-Jun-2018 Constellation Brands, Inc. STZ
Source: FactSet, UBS, as of 22 June 2018

Key economic indicators

Date Indicator Period Time (ET) Unit Consensus Previous
25-Jun-18 New Home Sales May 10:00 AM m/m 0.5% –1.5%
25-Jun-18 Dallas Fed Mfg Survey Jun 10:30 AM level 24.0 26.8
26-Jun-18 Consumer Confidence Jun 10:00 AM level 127.5 128.0
27-Jun-18 Durable Goods Orders May 08:30 AM m/m –1.0% –1.6%
27-Jun-18 Advance Goods Trade Balance May 08:30 AM level –$68.9b –$68.2b
27-Jun-18 Durables less transportation May 08:30 AM m/m 0.5% 0.9%
27-Jun-18 Pending Home Sales Index May 10:00 AM m/m 1.0% –1.3%
28-Jun-18 Real Gross Domestic Product (annualized) Q1 08:30 AM q/q 2.2% 2.2%
29-Jun-18 Personal Income May 08:30 AM m/m 0.4% 0.3%
29-Jun-18 Consumer Spending May 08:30 AM m/m 0.4% 0.6%
29-Jun-18 Uni. of Mich. Consumer Sentiment Jun 10:00 AM level 99.2 99.3

Source: Bloomberg, UBS, as of 22 June 2018

UBS forecast estimates are published on Friday evenings in Economic Perspectives by economists employed by UBS Investment Research, a part of UBS Investment Bank.
m/m = month–over–month. q/q = quarter–over–quarter. y/y = year–over–year. k = thousand. mn = million. bn = billion.

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 UBS House View Weekly - 25 June 2018

Emerging Market Investments

Investors should be aware that Emerging Market assets are subject to, amongst others, potential risks linked to currency volatility, abrupt changes
in the cost of capital and the economic growth outlook, as well as regulatory and socio-political risk, interest rate risk and higher credit risk. Assets
can sometimes be very illiquid and liquidity conditions can abruptly worsen. CIO GWM generally recommends only those securities it believes have
been registered under Federal U.S. registration rules (Section 12 of the Securities Exchange Act of 1934) and individual State registration rules
(commonly known as "Blue Sky" laws). Prospective investors should be aware that to the extent permitted under US law, CIO GWM may from
time to time recommend bonds that are not registered under US or State securities laws. These bonds may be issued in jurisdictions where the
level of required disclosures to be made by issuers is not as frequent or complete as that required by US laws.
For more background on emerging markets generally, see the CIO GWM Education Notes, Emerging Market Bonds: Understanding Emerging
Market Bonds, 12 August 2009 and Emerging Markets Bonds: Understanding Sovereign Risk, 17 December 2009.
Investors interested in holding bonds for a longer period are advised to select the bonds of those sovereigns with the highest credit ratings (in
the investment grade band). Such an approach should decrease the risk that an investor could end up holding bonds on which the sovereign has
defaulted. Sub-investment grade bonds are recommended only for clients with a higher risk tolerance and who seek to hold higher yielding bonds
for shorter periods only.

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