UBS House View

UBS House View Monthly Base February 2018 Chief Investment Office WM

Published Jan 18 2018

This report was prepared by UBS AG. Please see the important disclaimer at the end of the document. This document is a snapshot view. We update the tactical asset allocation as changes occur and resend it to subscribers. For all other forecasts and information, we advise you to check the Investment Views section in your EBanking or in Quotes.

1

Financial Market Outlook – short term (6 months) Strongest global growth since 2011 Annual global real GDP growth in % (UBS forecasts for 2017–2019)

Global Tactical Asset Allocation

•

Global risk assets had a good start to the year amid signs of continuing global business cycle momentum. Leading economic indicators, including manufacturing PMIs, showed continued improvement and suggest robust manufacturing activity ahead. We expect economic growth of 3.9% this year. Solid earnings growth should continue to support equity markets. We expect the Fed to continue its gradual hiking cycle and a medium-term trend for further USD Treasury curve flattening. We remain underweight euro high yield (HY) bonds, but are modestly adding to our global equities overweight by shifting to an outright global equities exposure vs. euro HY (instead of a mix of global equities and USD HG bonds). However, after a strong run, many investors may not need to actively buy stocks. Investors that participated in the recent rally may have automatically increased the size of their overweight position in equities. We also hold an overweight on global equities against high grade (HG) bonds.

4.5 4.0 3.5 3.0 2.5 2.0 2011

2012

2013

2014

2015

2016 2017E 2018E 2019E

•

Earnings advance supports equity markets 12m trailing earnings per share (EPS) and equity index, level 600

25

450

20

300

15

150

10 2010

•

2012

2013

2014

MSCI AC World IBES trailing EPS (lhs)

2015

2016

2017

MSCI AC World index (rhs)

Source: Thomson Reuters, UBS CIO WM, as of end December 2017

Bonds Euro high yield bonds remain expensive, and we are keeping an underweight on the asset class. As for the overweight, we are shifting to an outright global equities exposure, thus moving away from the previous overweight of a mix of global equities and USD HG bonds. We hold a tactical overweight on EM local-currency bonds against HG bonds, which offer an attractive interest rate carry of around 3.5%. Given our expectation for a continued benign global environment, including limited upward pressure on US Treasury yields, a softer US dollar, and improved domestic conditions, EM currencies have further room to appreciate. Further policy rate cuts amid subdued inflation should contain upward pressure on EM local currency yields amid gradually rising yields in advanced economies.

0 2011

Equities Global equities are supported by solid earnings growth. At a price-to-earnings ratio of about 18.5x, global equities are priced broadly in line with their long-term average. We maintain our overweight on Eurozone against UK equities. Eurozone companies are well positioned to benefit from robust global demand given their cyclical sector composition and high operational leverage. Meanwhile, consensus is looking for earnings growth of about 6% for the MSCI UK in 2018, a weaker earnings outlook than for some other regions. We are adding an overweight on emerging market (EM) against Australian stocks. Due to their operational leverage EM companies are a main beneficiary of strong global growth, while expected USD weakening in 2018 should benefit EM equities measured in USD. Australian earnings growth is solid but lagging other markets. Regulatory measures to cool the housing market are likely to cap earnings growth of banks. Investors, who don't own Australia, should underweight UK.

Source: Bloomberg, UBS, as of January 2018

30

Asset allocation

•

Foreign exchange We see the current benign environment as one in which investors can afford to take more active intra-market trades. We are thus increasing our existing FX positions, including our overweight on a basket of four high-yielding emerging market currencies (BRL, INR, TRY, RUB) against a set of four pro-cyclical lower-yielding counterparts (AUD, HUF, NOK, TWD), our overweight on the Canadian dollar against the US dollar and our overweight on the Swedish krona against the Norwegian krone. The basket aims to harvest the attractive interest carry of around 7.4% p.a. of the long position, while offsetting to a certain degree some of the common risk exposures (US dollar, commodities) with the short positions.

Head CIO Global Asset Allocation Andreas J Koester, [email protected] or CIO asset class specialists Philipp Schöttler, [email protected] or Carolina Corvalan, [email protected].

2

Cross-asset preferences We like...

Equities

Bonds

Foreign exchange

Hedge Funds

Model portfolios (EUR & USD)

We don't like...

• • • • • •

Global equities ( ) Eurozone equities

• •

• • •

Corporate hybrids

• • •

SEK (

•

Navigating rising US rates with hedge funds

Risk Parity Liquidity 2% 5%

UK equities Australian equities (

)

Hedge Funds 18%

Emerging market equities ( ) Eurozone value opportunities

US TIPS 2%

US smart beta Sustainable value creation in EM (

EM local currency bonds ) )

EM FX (BRL, INR, RUB, TRY) (

)

EUR

Equities US 12%

)

US leveraged loans

CAD (

• • •

Developed market high grade bonds ( "Well-worn" bonds

• • •

NOK (

)

USD (

)

Euro high yield

DM FX (AUD, HUF, NOK, TWD) (

)

) Hedge Funds 18%

High yield bonds 3% EM bonds 5.5%

Risk Parity Liquidity 2% 5% High grade bonds 9.5% US TIPS 4%

USD Recent downgrades

Inv. grade corporate bonds 8%

Equities others 5% Equities EM 5%

Equities Europe 23%

Precious Metals & Commodities

Recent upgrades

High grade bonds 11.5%

Equities US 21%

Equities Europe 12%

Inv. grade corporate bonds 8% High yield bonds 3% EM bonds 5.5% Equities others 6% Equities EM 6%

As of 18 January 2018

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

3

Global tactical asset allocation Tactical asset allocation deviations from benchmark* neutral

underweight

Currency allocation overweight

Liquidity Equities total

neutral

underweight

overweight

USD

Global

EUR

US Eurozone

GBP

UK Switzerland

JPY

Japan

CHF

Emerging markets (EM) Australia***

SEK

Bonds total

NOK

High grade bonds Corporate bonds (IG)

CAD

High yield bonds** EM sovereign bonds (USD)

NZD

EM corporate bonds (USD)

AUD

EM local currency bonds US TIPS

EM FX basket^

Duration overlay (USD) Precious Metals & Commodities

DM FX basket^ new

old

new

old

Source: UBS, as of 18 January 2018

Source: UBS, as of 18 January 2018

*Please note that the bar charts show total portfolio preferences, which can be interpreted as the recommended deviation from the relevant portfolio benchmark for any given asset class and sub-asset class. **Position includes an underweight in EUR HY. ***Investors, who don't have exposure to Australian equities, should underweight UK equities instead.

^EM FX basket contains Russian ruble, Turkish lira, Brazilian real & Indian rupee. DM FX basket contains Norwegian krone, Australian dollar, Taiwanese dollar & Hungarian forint (all equally weighted).

4

CIO themes in focus Equities

• Eurozone in style – Value opportunities

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

• US smart beta

Certain stock characteristics (momentum, quality, small capitalization, risk-weighting, value and yield) have been shown to deliver long-term investment outperformance relative to a market capitalization-weighted index. Combining these characteristics, known in the industry as smart beta, makes the investment less cyclical and creates a "passive-plus" solution. Smart beta's compelling value proposition has resulted in a phenomenal growth in assets. Smart beta ETF assets have increased to over USD 600bn and are growing at more than 30% a year.

• Sustainable value creation in emerging markets

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

Bonds

• Replacing well-worn bonds

Risk-free yields in many major developed markets are near or below zero. Even if rates remain unchanged, many short- to medium-term bonds would deliver negative total returns. We think investors can preserve wealth by taking profits on assets that will deliver negative total returns (exceeding the costs of switching out) in most likely scenarios. More attractive alternatives can be found on CIO's bond recommendation lists.

• US loans – Attractive floating yield

US senior loans are an attractive alternative to more traditional fixed income segments. Loans provide exposure to the most senior part of a company's capital structure and are often secured by the company's assets, leading to higher recovery rates than for bonds. Also, loans offer a floating coupon rate, which benefits from an increase in US short-term interest rates. The current yield of 5.0–5.5% is still attractive. Last year, the re-pricing of existing loans – allowing issuers to lock in lower coupon rates as demand for the asset class has been very strong – has held back the asset class's performance. But this headwind is likely to fade going forward. We expect the 12-month trailing default rate to remain broadly stable over the next 12 months at around 2%. We think US loans present an attractive investment opportunity for qualified investors who are comfortable holding less liquid asset classes.

UBS Chief Investment Office WM considers the highlighted themes as fitting the sustainability framework.

5

CIO themes in focus Bonds

• Attractive EM local-currency bonds

EM local-currency bonds are attractive given the benign global environment and improved domestic conditions in emerging markets. We expect limited upward pressure on yields of EM local currency bonds and a softer US dollar – both should support the outlook for the asset class in USD terms. We like a diversified index with exposure across regions.

• Yield pick-up with corporate hybrids

Corporate hybrids are a niche segment in the corporate bond market. At current spread levels, they compensate investors with a suitable reward for assuming the risks associated with them. We expect mid-single-digit percentage returns on selected instruments over 12 months.

Alternative investments

• Navigating rising US rates with hedge funds

The US Federal Reserve has started to hike interest rates. Historically, most hedge fund strategies have been resilient to rising rates, while high grade bonds have performed poorly. Investors looking for an alternative to their high grade bond exposure should consider a diversified hedge fund portfolio characterized by low directional exposure to both fixed income and equities.

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

6

CIO longer term investment themes in focus Equities

• Digital data

Due to increased urbanization, the global digital universe is expected to expand 50-fold between 2010 and 2020. Rising global internet penetration from 44% in 2015 to around 66% in 2025 and strong data growth in emerging markets are key drivers. From an investment perspective, the theme offers solid long-term growth opportunities, as significant investment will be required to manage and take advantage of the surge in data. Investors can participate by investing in either data enablers or data infrastructure companies.

• Automation and robotics

Smart automation is powering the ongoing industrial revolution, combining the innovation capabilities of industrial and IT processes to fuel global manufacturing productivity gains. Rising wages and challenging demographic developments will push up the costs of emerging market manufacturing companies, driving automation investment, in our view. Artificial intelligence employed in machines should take automation to the next level. The smart automation industry's total annual revenue now stands at around USD 156bn. We believe that over the cycle, the sector can grow by mid-to-high single digits, with industrial software, robots and new trends – 3D printing, artificial intelligence and drones – the clear outperformers.

• EM tourism

Urbanization and income growth are driving demand growth for emerging market tourism and global aviation infrastructure. Emerging market air passengers carried globally already exceed that of developed markets. Airbus forecasts that two thirds of new plane orders will come from emerging markets in the next 20 years. The growth of EM tourism is further supported by EM government policy, particularly economic diversification away from commodity exports and rising visa openness to draw visitors and attract foreign-currency receipts.

• Smart mobility

Smart mobility is a combination of smart powertrains (electrification), smart technology (autonomous driving) and smart use (car-sharing/car-hailing). Urbanization will be its main driver, with aging also a supportive factor. Sustainable investment aspects like safety, better fuel efficiency and lower emissions play nicely into our theme. Regulatory changes and technological advances support smart mobility and will reshape the way we experience and consume individual mobility. We estimate that by 2025, the annual addressable market of our theme will be around USD 400bn, or 10 times today's size.

• Energy efficiency

Energy efficiency covers wide-ranging issues with numerous characteristics and starting points, offering promising investment opportunities. Energy efficiency is gaining in importance around the world thanks to government initiatives, while rising environmental pollution has led to greater worldwide awareness. The International Energy Agency expects the demand for energy-efficient products to grow by 7–8% annually. Investment could reach USD 530bn in 20 years, up from USD 130bn in 2013.

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

UBS Chief Investment Office WM considers the highlighted themes as fitting the sustainability framework.

7

Key financial market driver 1 - Central bank policy Key points • The US Federal Reserve has accelerated the process of tightening quantitative policy, and we expect it to do so again over the course of 2018. In effect, the US is destroying dollar money supply. Further rate hikes are likely over the course of 2018. Jerome Powell's nomination as Fed chair, if successful, suggests policy continuity, although there are other vacancies to be filled on the FOMC. • The European Central Bank has scaled back its bond-buying program further, and is now buying EUR 30bn worth of assets per month. Market attention will focus on whether this program concludes or is extended beyond September. The Bank of England has reversed the 2016 "emergency" rate cut. Although public statements are moderate, a further increase in UK rates during 2018 cannot be ruled out. • Within the G7, the Bank of Japan remains the sole voice of policy accommodation, although some are calling this into question. Policies tighten gradually CIO view (Probability: 75%*) • The Fed has accelerated the process of shrinking its balance sheet, in accordance with the preannounced policy path. The nomination of Powell as Fed chair, if confirmed, suggests policy continuity and the likelihood of further (modest) interest rate increases in 2018. Other vacancies on the FOMC create some uncertainty about the nuances of policy this year. The Fed's forecasts suggest that the recent tax cuts are unlikely to impact central bank policy in a meaningful way. • The ECB reduced its bond-buying from EUR 60bn a month to EUR 30bn a month. This program lasts until September, and there is clearly a division among ECB council members as to whether or not the bond-buying program should simply end at that point. The strength of the euro area economy makes justifying the continuation of the policy increasingly difficult. • The Bank of England has reversed the 2016 emergency rate cut. A further rate increase remains a risk if economic activity proves more resilient. Other central banks have been more inclined to discuss policy with a bias toward tightening rather than easing; this coincidence of views more likely reflects the general improvement in global growth data rather than any overt coordination. • The tightening of central bank policy has shifted from past cycles. There is no desire to reduce economic growth or inflation. The aim is to maintain growth and inflation around current levels. This contrasts with some historical tightening episodes, which have deliberately sought to reduce company pricing power.

Central bank real rates – still negative even with recent tightening Policy rate less headline consumer price inflation

Source: Haver, UBS, as of 14 January 2018

US cash in circulation continues to grow Although the Fed's balance sheet is falling, the amount of physical dollar cash has doubled since the global financial crisis and continues to grow

Worsening macro backdrop Positive scenario (Probability: 10%*) • The Fed falls further behind the curve as US inflation surprises higher, with real interest rates slipping more rapidly. The ECB launches additional policy easing, reversing the language of recent public announcements and signaling a stronger emphasis on the potential to ease policy further. The BoJ comes under pressure to engineer currency depreciation. Macro risks fade, central banks seek to reduce pricing power Negative scenario (Probability: 15%*) • The inflationary effect of a tighter US labor market leads to a stronger Fed response and a combination of tight monetary policy and loose fiscal policy over the course of 2018. Increased labor market costs and commodity price pressures lead to higher European inflation, generating early signs of a more rapid tapering of ECB quantitative easing. *Scenario probabilities are based on qualitative assessment

Key dates Feb 8 Feb 14 Feb 21

Bank of England policy meeting Swedish Riksbank policy meeting Minutes of the January meeting of the US Federal Reserve

Source: UBS, as of 14 January 2018

US economist Brian Rose, [email protected], European economist Ricardo Garcia, [email protected] or UBS WM Global Chief Economist Paul Donovan, [email protected] 8

Key financial market driver 2 - Political risks Key points • Markets remain relatively immune to political risks, and investors appear unwilling to price in probabilities of extreme tail events. The next phase of the UK-EU divorce, the Italian election and, in the longer term, the outlook for US politics are also considerations. Global trade issues may be an issue if the US administration becomes more vocal on this topic. • Events in the Middle East are potentially significant. This is less about oil prices (which we expect to moderate as the year progresses) and more about potential shifts in capital flows as policy adjusts to fresh domestic political demands. • Domestic investors tend to understand local politics better than foreign investors. Market reaction to political risk will therefore depend on the domestic-foreign mix of investors. The higher the foreign ownership, the greater the risk of overreaction to political noise. The US dollar's reaction to US political risk is an example of this. CIO view (Probability: 70%*) • Political uncertainty still gets a lot of media coverage, but it has a relatively limited impact on financial markets. • US concerns focus on the run up to the mid-term elections in November. The passage of tax cuts has reduced the immediate political focus of financial markets. However the US State of the Union address, negotiations over trade (NAFTA) and issues in currency markets (China) all have the potential to influence markets before November. • The German coalition negotiations now move to approval by the SPD party membership. Markets are unlikely to be too concerned by this, and the proposed policy program is unlikely to trouble investors. The trade negotiations of the EU and the UK are likely to be complex and lengthy – investors will not pay much attention to the details, but may react to the headlines. The Catalonian situation seems to have achieved a stalemate that has allowed markets to disregard it. • Iran's nuclear program is assuming more prominence, although attention on recent protests in the country has diminished. Saudi Arabian political developments are also coming into focus; recent fiscal developments and asset seizures have potential capital flow implications. The North Korean concerns seem to have abated ahead of the winter Olympic Games in South Korea. Positive scenario (Probability: 10%*) • The sharp improvement in labor market conditions for low-skilled workers leads to wage increases that either are accompanied by better credit access or compensate for the loss of credit access since 2008; this eases income and consumption inequality. Governments and economists successfully communicate the net economic benefits of global trade and diversity. Negative scenario (Probability: 20%*) • Nationalist tendencies appear encouraged by single-issue politics and social media. Traditional party structures fail to address the demands of large sections of the electorate, encouraging populism. Political outcomes are increasingly unpredictable as opinion polls offer even less guidance. Established parties adopt populist policies, raising uncertainty about mainstream policy programs. Lower income groups' standards of living are hurt by populist policies and rising food and energy prices, fueling further demands for radical and unpredictable change.

Politics continue, markets continue not to care MSCI AC world equity index, with key political events

Source: Bloomberg, UBS Year Ahead 2018, as of December 2017

Saudi foreign exchange reserves have been falling Change in Saudi reserve assets, USD million

Source: Haver, as of 14 January 2018

*Scenario probabilities are based on qualitative assessment.

Key dates Feb 11 Mar 4

Finnish presidential election (second round) Italian general election

Global Chief Economist, UBS WM Paul Donovan, [email protected] 9

Key financial market driver 3 - Healthy US profit growth

CIO view (Probability: 60%*)

Earnings growth on solid footing. Tax reform is icing on the cake.

• The earnings growth outlook remains healthy, driven by solid US consumer spending, secular growth drivers in tech, improving

•

•

•

•

US manufacturing activity (as energy investment spending and emerging market demand improve), and a more favorable environment for financials. Leading indicators of profit growth, such as bank lending standards and capital spending intentions, remain supportive. The tax reform package should drive a further 6–10% rise in corporate profits, comprised of a lower tax rate and the redeployment of overseas cash into higher-returning assets. Faster economic growth as a result of the tax cuts could offer additional upside. We estimate S&P 500 EPS of USD 133 (up 11% y/y) for 2017. Including benefits from the tax legislation, we look for earnings growth to accelerate in 2018. Our estimate is USD 154 (up 16% y/y). After the one-time tax-related bump, earnings growth should slow to trend rates in 2019. We forecast USD 162 (up 5% y/y) in 2019. Fears that high profit margins will decline in the near term appear overblown. Excluding the tech sector, margins are not excessive, in our view. The tech sector's high margins are supported by companies that have dominant market shares in their end-markets. Other structural factors, such as industry consolidation, support higher-than-average profit margins. Also, margins typically only decline when the economy enters a recession. Finally, the prospect of higher wages is unlikely to crimp profitability. Labor cost inflation has virtually no correlation with profit margins. In addition, higher consumer income is usually recycled into faster consumer spending.

Earnings growth should continue to accelerate in 2018, normalize in 2019 S&P 500 EPS, year-over-year growth 40% 30% 20% 10% 0% -10% -20% -30%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

Key points • S&P 500 earnings growth continues to accelerate. We estimate EPS of USD 133 (up 11% y/y) for 2017, and USD 154 (up 16% y/y) for 2018 including tax reform benefits. • Earnings growth will likely slow to trend levels in 2019. We forecast EPS of USD 162 (up 5% y/y). • High profit margins will likely be sustained.

Source: FactSet, UBS, as of 11 January 2018

S&P 500 profit cycle ended 2017 on a high note S&P 500 EPS, year-over-year growth 15% 10% 5% 0% -5%

S&P 500

3Q17

4Q17E

2Q17

1Q17

4Q16

3Q16

2Q16

1Q16

4Q15

3Q15

2Q15

1Q15

4Q14

-10%

3Q14

Trump's policies boost earnings more than expected Positive scenario (Probability: 20%*) • The Trump administration's policies, especially corporate tax reform, generate faster-than-expected profit growth. Higher interest rates and deregulation further boost financial sector earnings. Investment spending picks up. Downturn in sentiment Negative scenario (Probability: 20%*) • Trade and geopolitical tensions flare up as a result of the Trump administration's policy priorities, depressing business and consumer sentiment. Wage pressures, without improving consumer and business demand, may hurt profit margins and earnings growth rates. Persistently low short-term interest rates and renewed declines in long-term interest rates may pressure financial sector earnings.

S&P 500 ex energy

Source: FactSet, UBS, as of 11 January 2018

*Scenario probabilities are based on qualitative assessment.

Key dates Jan 29

Peak of fourth quarter earnings season

CIO strategists Jeremy Zirin, [email protected], David Lefkowitz, [email protected] or Edmund Tran, [email protected].

10

Global economic outlook - Summary Key points • The world economy remains in mid-cycle. Global growth is operating around trend. Improving labor markets support domestic demand. The normal triggers of recession – policy error or economic overheating – are still absent. • Inflation data has normalized, and is fluctuating around long-term trends. In a lower-inflation world, statistical quirks will be more important in creating noise around consumer price inflation trends. Corporate pricing power seems firm. • The Fed has accelerated the reduction of its balance sheet, following its pre-determined tightening plan. Further interest rate increases are expected this year. The ECB has slowed its pace of asset-buying and may cease entirely after September. Global growth firm, around trend CIO view (Probability: 75%*) • The global economic cycle remains strong. On an aggregate basis, the world should match 2017 levels of growth in 2018. There will be some variation in the drivers of growth. Labor markets remain strong in most major economies. Consumer income growth is supporting domestic demand. Stronger European and US domestic demand has translated into stronger export data from the Asian region. Part of the US fiscal stimulus is likely to be spent on imports, providing stimulus to the global rather than the US economy. • Inflation rates are still being influenced by short-term technical factors, which create noise around long-term trend levels. There is some anecdotal evidence of rising corporate pricing power, and producer price inflation is generally higher than in the recent past. • Real US interest rates, adjusted for consumer price inflation, are still negative. The Fed's balance sheet (a money supply proxy) continues to decline as a share of GDP (a money demand proxy). The ECB has reduced its bond-buying to EUR 30bn a month, and may decide to cease bond buying entirely after September.

Positive scenario (Probability: 15%*)

Trend-like growth, normal inflation

Source: UBS, as of 15 January 2018

Forecasts and estimates are current only as of the date of this publication, and may change without notice.

Pricing power recovery? Producer price inflation, excluding energy. Change %yoy

Growth exceeds expectations

• European growth surprises positively, with better labor markets and a more stable banking system that is more willing to lend. Initial US economic growth data continues to be revised higher, and labor market shortages increase household incomes and consumer demand at a faster pace than expected. Fiscal stimulus adds to the pace of economic activity. • Emerging markets see stable domestic demand, and higher commodity prices, coupled with consumer demand in developed economies, support export sectors. Pro-business forces guide the US policy agenda and produce growth-supportive regulatory and legislative changes. Political damage to growth

Negative scenario (Probability: 10%*)

• US consumers suffer lower real disposable incomes as domestic inflation pressures increase. Political uncertainty in the US ahead of the midterm elections damages economic sentiment. Eurozone growth weakens as bank lending reverses.

• Credit growth suffers as capital flows are disrupted and uncertainty undermines normal bank lending.

Source: OECD, Haver, UBS, as of 14 January 2018

*Scenario probabilities are based on qualitative assessment.

Key dates Feb 2 Feb 8 Feb 14 Feb 21

US employment report (January) UK Bank of England rate decision US consumer price inflation (January) US minutes of the January Federal Reserve FOMC meeting

UBS WM Global Chief Economist Paul Donovan, [email protected] 11

US economy - Moderate growth in the US Key points • We expect the US economy to grow at a moderate pace over the next 12 months. • Inflation should gradually trend higher as the recovery continues. • The Fed has begun to shrink its balance sheet and interest rate hikes will likely continue at a gradual pace.

Manufacturing PMI showing strength Purchasing managers' indices (PMIs) 70 60

Moderate expansion CIO view (Probability: 60%*) • We expect the US economy to grow at a moderate pace over the next 12 months. The improving labor market should support robust consumer spending. • Housing starts and home prices should remain on an upward trend, contributing modestly to overall economic growth. • Business investment should continue to grow at a moderate pace, encouraged in part by labor shortages. • Conditions in the manufacturing sector have improved and output should continue to rise at a moderate pace. • Inflation appears to have bottomed out, and we expect a gradual upward trend in the quarters ahead. A tight labor market and rising producer prices should eventually feed through into consumer price inflation. • Tax reform should provide a modest stimulus to growth. Government spending may be increased as well ahead of the November 2018 midterm elections. Deregulation should provide some benefit over time. We do not expect the Trump administration to cause any severe disruptions to trade. • We expect the Fed to hike rates two or three times in 2018. The Fed is shrinking its balance sheet by USD 20bn a month and the pace will be ratcheted up to USD 50bn a month by end-2018. Strong expansion Positive scenario (Probability: 25%*) • US real GDP grows above 2.7%, propelled by an accommodative monetary policy, a looser fiscal policy, strong household spending, and subsiding risks overseas. Inflation hits the Fed's 2% target earlier than expected, leading the central bank to raise rates at a faster pace. Growth recession Negative scenario (Probability: 15%*) • US growth stumbles. Political uncertainty and tighter financial conditions weigh on business investment and consumer spending. The Fed stays on hold. *Scenario probabilities are based on qualitative assessment.

Key dates Jan 26 Jan 31 Feb 1 Feb 2

4Q17 GDP advance estimate FOMC rate decision ISM manufacturing for January Labor report for January

50 40 30 2007

2009 Manufacturing PMI

2011

2013

2015

2017

Non-manufacturing PMI

Source: Bloomberg, UBS, as of 10 January 2018

Inflation is bottoming out US headline and core PCE price index, year-on-year in % 5 4 3 2 1 0 (1) (2) 2007

2009 2011 PCE price index y/y

2013 2015 2017 Core PCE price index y/y

Source: Bloomberg, UBS, as of 10 January 2018

PCE = personal consumption expenditures

US economist Brian Rose, [email protected] 12

Eurozone economy - Strong start into 2018 Key points • We expect economic growth to remain strong, while losing some momentum later in 2018. • Inflation should start to move firmly up again, starting in the spring. • We expect the ECB to end its QE program in September 2018 and to start raising rates in July 2019.

Eurozone growth expected to top out in 2018 Business and consumer surveys

Short-term tailwinds to abate CIO view (Probability: 60%*) • The economy should continue to perform strongly, even if somewhat less so in the second half of 2018. Inflation is set to move firmly higher, starting in March, on the back of energy base effects. We expect the European Central Bank (ECB) to end its quantitative easing (QE) program in September 2018 and to start raising interest rates in July 2019. • In Germany, fundamentals such as consumer confidence, construction and capital-expenditure plans remain robust. A grand coalition is expected to emerge from the government-formation process. In France, a stronger construction sector and more corporate investment, given a business-friendly government, should ensure continued robust economic growth. • Italian economic growth should consolidate, supported by a stabilizing construction sector. We expect a centrist coalition following the general election. Spain is still growing strongly, but the momentum is likely to moderate. We expect Catalonia to remain a part of Spain. Source: Haver Analytics, UBS, as of December 2017

Better-than-expected growth

Positive scenario (Probability: 20%*) • The global economy reaccelerates and the euro weakens. Eurozone loan demand and the economy recover faster than envisaged. Political risks fade. Disinflationary setback Negative scenario (Probability: 20%*) • The Eurozone suffers a disinflationary setback as Greece leaves the Eurozone, Brexit talks fail, Catalonia leaves the EU, markets fear a Five Star Movement-led government in Italy, the Ukraine conflict escalates or the Chinese economy suffers a severe downturn.

ECB balance sheet boosted by QE Total assets in national currency (index: 2007=100)

*Scenario probabilities are based on qualitative assessment.

Key dates Jan 24 Jan 25 Jan 30 Jan 31 Jan 31

PMI flash for January ECB press conference GDP estimate for the fourth quarter (2017) Unemployment rate for December Inflation estimate for January

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

CIO European economist Ricardo Garcia, [email protected] 13

Chinese economy - A balance between deleveraging and stability Slowing credit growth tightening (in % y/y)

Key points • GDP growth in 2018 likely to moderate but be of better quality. • Monetary policy likely to stay prudent, with further regulatory tightening. • Political, economic and currency stability likely to keep investors confident about China.

on

regulatory

25

On track for moderation CIO view (Probability: 80%*) • China's economic growth will likely continue to decelerate in an orderly manner in 2018 due to a cooling property market, slowing infrastructure investment and continuing deleveraging efforts; but a sharp slowdown is unlikely, due to a supportive fiscal policy and the priority of risk containment. • 2018 CPI inflation is likely to rise to 2.5% from about 1.5% in 2017, while PPI inflation may pull back to low single-digit growth from 6%+ in 2017 due to economic moderation and high base effects. • 2018 investment is likely to slow further to around 7% from 7.3% y/y in the first ten months of 2017, while consumption may remain resilient, growing about 10% y/y, similar to the trend in the past two years. 2018 export growth is expected to stay in the low single digits. • Monetary policy will likely stay prudent, with continued deleveraging efforts. The State Council's Financial Stability and Development Committee was set up for regulatory coordination, as well as more regulatory measures were introduced on asset management products and internet financing. Open market operation rates were hiked slightly to reflect rising funding costs. In contrast, a temporary reserve ratio requirement (RRR) cut for large banks was announced to meet high liquidity needs during Chinese New Year. Targeted RRR cuts announced last September are effective from this month on. As a whole, we expect the government to keep a balance between deleveraging and stability. • The annual Central Economic Work Conference has laid out major policies and tasks for 2018. Three main priorities were highlighted: risk prevention, environment protection and poverty reduction, echoing the tone set at the 19th Party Congress in pursuing quality over quantity growth.

20

15

10 12

13

14

15

Outstanding TSF growth (% y/y)

16

17

Outstanding bank loan growth (% y/y)

Source: CEIC, UBS, as of November 17

PBoC took action to prevent a potential liquidity shock (in CNY bn) 2000 1500

Growth acceleration Positive scenario (Probability: 10%*) • Chinese GDP growth exceeds 7% this year thanks to a government stimulus package or a major pick-up in external demand. Marked growth downturn Negative scenario (Probability: 10%*) • China experiences a marked growth downturn, defined as sub-6% real GDP growth for more than two quarters, due to plunging investments and widespread credit defaults. * Scenario probabilities are based on qualitative assessments.

Key dates Jan 31

1000 500 0 -500 -1000

January manufacturing and non-manufacturing PMI

-1500 -2000 2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

OMO (CNY bn)

Re-financing tools (CNY bn)

Liquidity from RRR cut (CNY bn)

Chg in PBoC FX assets (CNY bn)

4Q17

Source: CEIC, UBS, as of December 2017

CIO China economist Yifan Hu, [email protected] or CIO analyst Kathy Li, [email protected] 14

Swiss economy - Weaker Swiss franc supports GDP growth Key points • Economic growth in Switzerland picked up in 3Q17 on the back of strong net exports. We expect the robust growth to continue this year. Swiss activity is supported by solid growth in the Eurozone and by a depreciation of the Swiss franc. • Major risks for the Swiss economy stem from Donald Trump's economic policies, tensions on the Korean Peninsula, the Italian general election in March and uncertainties regarding Catalonia's future. • After the ECB gave clear indications to terminate its bond purchases in 2018, pressure on the Swiss franc eased sharply and the SNB was able to stop FX market interventions. A rate hike is not in the cards until late 2018. Robust recovery CIO view (Probability: 60%*) • Swiss GDP growth in 3Q17 accelerated to 0.6% quarter-on-quarter. Economic growth in previous quarters was revised up slightly, bringing the year-on-year growth rate to 1.2% in the third quarter. • We expect Swiss GDP to have grown by 1.0% in 2017. GDP growth is likely to pick up in 2018 to 1.8%. In 2019, we forecast a continuation of the recovery, GDP growth is likely to stay at 1.8%. • The Swiss PMI manufacturing remained above the 65-mark in December pointing to a healthy pick-up in economic activity. • Employment growth improved slightly to 0.5% in 3Q17. Also, the downtrend in unemployment continued. As the recovery gains momentum, the seasonally adjusted jobless rate will likely drop below the 3.0% mark soon. • CPI inflation rose 0.8% y/y in December, bringing the average inflation rate in 2017 to 0.5% - the highest inflation print since 2010. We expect inflation to average 0.6% this year – underpinned by a weaker Swiss franc. • Thanks to a significant depreciation of the Swiss franc against the euro in the last few months, the SNB was able to stop FX market interventions. However, a rate hike is not in the cards until late 2018. The SNB will not raise rates before the ECB has slowed down its QE program markedly or terminated the program completely.

Swiss PMI climbing in sync with the Eurozone PMI Purchasing manager index for the manufacturing industry 70

65

60

55

50

45 Feb-15

Aug-15

Feb-16

Aug-16

Switzerland

Feb-17

Aug-17

Eurozone

Source: Macrobond, UBS, as of 11 January 2018

Stronger Swiss growth and inflation ahead GDP growth and CPI inflation with UBS forecasts 3.0%

Eurozone boosts Swiss growth Positive scenario (Probability: 25%*) • A further drop in Eurozone unemployment fuels positive sentiment in the union, in turn supporting Swiss exports. Compared with strong European growth, Switzerland has some catch-up potential. Swiss economic downturn Negative scenario (Probability: 15%*) • Protectionist measures by the Trump administration could lead to a slowing of global trade, which would hurt Swiss exports. Also, political risks still exist in Italy and Catalonia, as well as in the Korean Peninsula. * Scenario probabilities are based on qualitative assessment.

Key dates Jan 30 Jan 31 Feb 1 Feb 12

2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5%

Trade balance (December) UBS Consumption Indicator (December) PMI (January) CPI (January)

-1.0% -1.5% 14

15

16 17E 18E 19E GDP growth

14

15

16 17 Inflation

18E 19E

Source: SNB, UBS, as of 11 January 2018

CIO Swiss economists Alessandro Bee, [email protected] or Sibille Duss, [email protected].

15

Contact List Global Chief Investment Officer WM Mark Haefele [email protected]

UBS CIO WM Global Investment Office Global Asset Allocation Andreas Koester [email protected]

UHNW & Alternatives IO Simon Smiles [email protected]

Investment Themes Philippe G. Müller [email protected]

UBS CIO WM Regional Chief Investment Offices US Mike Ryan [email protected]

APAC Min Lan Tan [email protected]

Europe Switzerland Themis Themistocleous Daniel Kalt [email protected] [email protected]

Emerging Markets Jorge Mariscal [email protected]

16

Disclaimer Generic financial research – Risk information: UBS Chief Investment Office WM's investment views are prepared and published by Wealth Management and Personal & Corporate Banking or Wealth Management Americas, Business Divisions of UBS AG (regulated by FINMA in Switzerland), its subsidiary or affiliate ("UBS"). In certain countries UBS AG is referred to as UBS SA. This material 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. 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 material 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). All information and opinions as well as any prices indicated are current as of the date of this report, and are subject to change without notice. The market prices provided in performance charts and tables are closing prices on the respective principal stock exchange. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. 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. UBS and any of its directors or employees may be entitled at any time to hold long or short positions in investment instruments referred to herein, carry out transactions involving relevant investment instruments in the capacity of principal or agent, or provide any other services or have officers, who serve as directors, either to/for the issuer, the investment instrument itself or to/for any company commercially or financially affiliated to such issuers. At any time, investment decisions (including whether to buy, sell or hold securities) made by UBS and its employees may differ from or be contrary to the opinions expressed in UBS research publications. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to control 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 not suitable for every investor as there is a substantial risk of loss, and losses in excess of an initial investment may occur. Past performance of an investment is no guarantee for its future performance. Additional information will be made available upon request. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in foreign exchange rates may have an adverse effect on the price, value or income of an investment. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information. Tax treatment depends on the individual circumstances and may be subject to change in the future. UBS does not provide legal or tax advice and makes no representations as to the tax treatment of assets or the investment returns thereon both in general or with reference to specific client's circumstances and needs. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of our individual clients and we would recommend that you take financial and/or tax advice as to the implications (including tax) of investing in any of the products mentioned herein. This material may not be reproduced or copies circulated without prior authority of UBS. UBS expressly prohibits the distribution and transfer of this material to third parties for any reason. UBS accepts no liability whatsoever for any claims or lawsuits from any third parties arising from the use or distribution of this material. This report is for distribution only under such circumstances as may be permitted by applicable law. In developing the Chief Investment Office (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. For information on the ways in which UBS CIO WM manages conflicts and maintains independence of its investment views and publication offering, and research and rating methodologies, please visit www.ubs.com/research. Additional information on the relevant authors of this publication and other CIO publication(s) referenced in this report; and copies of any past reports on this topic; are available upon request from your client advisor. External Asset Managers / External Financial Consultants: In case this research or publication is provided to an External Asset Manager or an External Financial Consultant, UBS expressly prohibits that it is redistributed by the External Asset Manager or the External Financial Consultant and is made available to their clients and/or third parties. Australia: This notice is issued by UBS AG ABN 47 088 129 613 (Holder of Australian Financial Services Licence No 231087): This Document is issued and distributed by UBS AG. This is the case despite anything to the contrary in the Document. The Document is intended for use only by “Wholesale Clients” as defined in section 761G (“Wholesale Clients”) of the Corporations Act 2001 (Cth) (“Corporations Act”). In no circumstances may the Document be made available by UBS AG to a “Retail Client” as defined in section 761G of the Corporations Act. UBS AG’s research services are only available to Wholesale Clients. The Document is general information only and does not take into account any person’s investment objectives, financial and taxation situation or particular needs. Austria: This publication is not intended to constitute a public offer under Austrian law, but might be made available for information purposes to clients of UBS Europe SE, Niederlassung Österreich, with place of business at Wächtergasse 1, A-1010 Wien. UBS Europe SE, Niederlassung Österreich is a branch of UBS Europe SE, a credit institution constituted under German Law in the form of a Societas Europaea, duly authorized by the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin), and is subject to the joint supervision of BaFin, the central bank of Germany (Deutsche Bundesbank), as well as of the Austrian supervisory authority (Finanzmarktaufsicht, FMA), to which this publication has not been submitted for approval. Bahamas: This publication is distributed to private clients of UBS (Bahamas) Ltd and is not intended for distribution to persons designated as a Bahamian citizen or resident under the Bahamas Exchange Control Regulations. Bahrain: UBS is a Swiss bank not licensed, supervised or regulated in Bahrain by the Central Bank of Bahrain and does not undertake banking or investment business activities in Bahrain. Therefore, Clients have no protection under local banking and investment services laws and regulations. Brazil: Prepared by UBS Brasil Administradora de Valores Mobiliários Ltda, entity regulated by Comissão de Valores Mobiliários ("CVM"). Canada: In Canada, this publication is distributed to clients of UBS Wealth Management Canada by UBS Investment Management Canada Inc.. Czech Republic: UBS is not a licensed bank in Czech Republic and thus is not allowed to provide regulated banking or investment services in Czech Republic. This material is distributed for marketing purposes. Denmark: This publication is not intended to constitute a public offer under Danish law, but might be distributed by UBS Europe SE, Denmark Branch, filial af UBS Europe SE, with place of business at Sankt Annae Plads 13, 1250 Copenhagen, Denmark, registered with the Danish Commerce and Companies Agency, under the No. 38 17 24 33. UBS Europe SE, Denmark Branch, filial af UBS Europe SE is a branch of UBS Europe SE, a credit institution constituted under German Law in the form of a Societas Europaea, duly authorized by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). UBS Europe SE, Denmark Branch, filial af UBS Europe SE is subject to the joint supervision of the BaFin, the central bank of Germany (Deutsche Bundesbank) and the Danish Financial Supervisory Authority (DFSA) (Finanstilsynet), to which this document has not been submitted for approval. France: This publication is distributed by UBS (France) S.A., French "société anonyme" with share capital of € 125.726.944, 69, boulevard Haussmann F-75008 Paris, R.C.S. Paris B 421 255 670, to its clients and prospects. UBS (France) S.A. is a provider of investment services duly authorized according to the terms of the "Code Monétaire et Financier", regulated by French banking and financial authorities as the "Autorité de Contrôle Prudentiel et de Résolution". Germany: The issuer under German Law is UBS Europe SE, Bockenheimer Landstrasse 2-4, 60306 Frankfurt am Main. UBS Europe SE is authorized and regulated by the "Bundesanstalt für Finanzdienstleistungsaufsicht". Hong Kong: This publication is distributed to clients of UBS AG Hong Kong Branch by UBS AG Hong Kong Branch, a licensed bank under the Hong Kong Banking Ordinance and a registered institution under the Securities and Futures Ordinance. India: Distributed by UBS Securities India Private Ltd. 2/F, 2 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra (East), Mumbai (India) 400051. Phone: +912261556000. SEBI Registration Numbers: NSE (Capital Market Segment): INB230951431, NSE (F&O Segment) INF230951431, BSE (Capital Market Segment) INB010951437. Israel: UBS Switzerland AG is registered as a Foreign Dealer in cooperation with UBS Wealth Management Israel Ltd, a wholly owned UBS subsidiary. UBS Wealth Management Israel Ltd is a licensed Portfolio Manager which engages also in Investment Marketing and is regulated by the Israel Securities Authority. This publication shall not replace any investment advice and/or investment marketing provided by a relevant licensee which is adjusted to your personal needs. Italy: This publication is distributed to the clients of UBS Europe SE, Succursale Italia, Via del Vecchio Politecnico, 3 - 20121 Milano, the branch of a German bank duly authorized by the “Bundesanstalt für Finanzdienstleistungsaufsicht” to the provision of financial services and supervised by "Consob". Jersey: UBS AG, Jersey Branch, is regulated and authorized by the Jersey Financial Services Commission for the conduct of banking, funds and investment business. Where services are provided from outside Jersey, they will not be covered by the Jersey regulatory regime. UBS AG, Jersey Branch is a branch of UBS AG a public company limited by shares, incorporated in Switzerland whose registered offices are at Aeschenvorstadt 1, CH-4051 Basel and Bahnhofstrasse 45, CH 8001 Zurich. UBS AG, Jersey Branch's principal place business is 1, IFC Jersey, St Helier, Jersey, JE2 3BX. Luxembourg: This publication is not intended to constitute a public offer under Luxembourg law, but might be made available for information purposes to clients of UBS Europe SE, Luxembourg Branch, with place of business at 33A, Avenue J. F. Kennedy, L-1855 Luxembourg. UBS Europe SE, Luxembourg Branch is a branch of UBS Europe SE, a credit institution constituted under German Law in the form of a Societas Europaea, duly authorized by the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin), and is subject to the joint supervision of BaFin, the central bank of Germany (Deutsche Bundesbank), as well as of the Luxembourg supervisory authority, the Commission de Surveillance du Secteur Financier (the "CSSF"), to which this publication has not been submitted for approval. Mexico: This document has been distributed by UBS Asesores México, S.A. de C.V., a company which is not part of UBS Grupo Financiero, S.A. de C.V. or of any other Mexican financial group and whose obligations are not guaranteed by any third party. UBS Asesores México, S.A. de C.V. does not guarantee any yield whatsoever. Netherlands: This publication is not intended to constitute a public offering or a comparable solicitation under Dutch law, but might be made available for information purposes to clients of UBS Europe SE, Netherlands branch, a branch of a German bank duly authorized by the “Bundesanstalt für Finanzdienstleistungsaufsicht” for the provision of financial services and supervised by "Autoriteit Financiële Markten” (AFM) in the Netherlands , to which this publication has not been submitted for approval. New Zealand: This notice is distributed to clients of UBS Wealth Management Australia Limited ABN 50 005 311 937 (Holder of Australian Financial Services Licence No. 231127), Chifley Tower, 2 Chifley Square, Sydney, New South Wales, NSW 2000, by UBS Wealth Management Australia Ltd. You are being provided with this UBS publication or material because you have indicated to UBS that you are a client certified as a wholesale investor and/or an eligible investor ("Certified Client") located in New Zealand. This publication or material is not intended for clients who are not Certified Clients ("Non-Certified Clients"), and if you are a Non-Certified Client you must not rely on this publication or material. If despite this warning you nevertheless rely on this publication or material, you hereby (i) acknowledge that you may not rely on the content of this publication or material and that any recommendations or opinions in this publication or material are not made or provided to you, and (ii) to the maximum extent permitted by law (a) indemnify UBS and its associates or related entities (and their respective directors, officers, agents and advisers (each a "Relevant Person") for any loss, damage, liability or claim any of them may incur or suffer as a result of, or in connection with, your unauthorised reliance on this publication or material and (b) waive any rights or remedies you may have against any Relevant Person for (or in respect of) any loss, damage, liability or claim you may incur or suffer as a result of, or in connection with, your unauthorised reliance on this publication or material. Saudi Arabia: This publication has been approved by UBS Saudi Arabia (a subsidiary of UBS AG), a Saudi Arabian closed joint stock company incorporated in the Kingdom of Saudi Arabia under commercial register number 1010257812 having its registered office at Tatweer Towers, P.O. Box 75724, Riyadh 11588, Kingdom of Saudi Arabia. UBS Saudi Arabia is authorized and regulated by the Capital Market Authority of Saudi Arabia. Singapore: Please contact UBS AG Singapore branch, an exempt financial adviser under the Singapore Financial Advisers Act (Cap. 110) and a wholesale bank licensed under the Singapore Banking Act (Cap. 19) regulated by the Monetary Authority of Singapore, in respect of any matters arising from, or in connection with, the analysis or report. Spain: This publication is distributed to its clients by UBS Europe SE, Sucursal en España, with registered office at Calle María de Molina 4, C.P. 28006, Madrid, entity supervised by Banco de España and the Bundesanstalt für Finanzdienstleistungsaufsicht. UBS Europe SE, Sucursal en España is a branch of UBS Europe SE, a credit institution constituted in the form of a Societas Europaea authorized and regulated by the Bundesanstalt für Finanzdienstleistungsaufsich. Sweden: This publication is not intended to constitute a public offer under Swedish law, but might be distributed by UBS Europe SE, Sweden Bankfilial with place of business at Regeringsgatan 38, 11153 Stockholm, Sweden, registered with the Swedish Companies Registration Office under the Reg. No 516406-1011. UBS Europe SE, Sweden Bankfilial is a branch of UBS Europe SE, a credit institution constituted under German Law in the form of a Societas Europaea, duly authorized by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). UBS Europe SE, Sweden Bankfilial is subject to the joint supervision of the BaFin, the central bank of Germany (Deutsche Bundesbank) and the Swedish financial supervisory authority (Finansinspektionen), to which this document has not been submitted for approval. Taiwan: This material is provided by UBS AG, Taipei Branch in accordance with laws of Taiwan, in agreement with or at the request of clients/prospects. Thailand: This material was provided to you as a result of a request received by UBS from you and/or persons entitled to make the request on your behalf. Should you have received the material erroneously, UBS asks that you kindly delete the e-mail and inform UBS immediately. The material may not have been reviewed, approved, disapproved or endorsed by any financial or regulatory authority in your jurisdiction. The relevant

17

Disclaimer investments will be subject to restrictions and obligations on transfer as set forth in the material, and by receiving the material you undertake to comply fully with such restrictions and obligations. You should carefully study and ensure that you understand and exercise due care and discretion in considering your investment objective, risk appetite and personal circumstances against the risk of the investment. You are advised to seek independent professional advice in case of doubt. UAE: This research report is not intended to constitute an offer, sale or delivery of shares or other securities under the laws of the United Arab Emirates (UAE). The contents of this report have not been and will not be approved by any authority in the United Arab Emirates including the UAE Central Bank or Dubai Financial Authorities, the Emirates Securities and Commodities Authority, the Dubai Financial Market, the Abu Dhabi Securities market or any other UAE exchange. This material is intended for professional clients only. UBS AG Dubai Branch is regulated by the DFSA in the DIFC. UBS AG/UBS Switzerland AG is not licensed to provide banking services in the UAE by the Central Bank of the UAE nor is it licensed by the UAE Securities and Commodities Authority. The UBS AG Representative Office in Abu Dhabi is licensed by the Central Bank of the UAE to operate a representative office. UK: Approved by UBS AG, authorised and regulated by the Financial Market Supervisory Authority in Switzerland. In the United Kingdom, UBS AG is authorised by the Prudential Regulation Authority and subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. A member of the London Stock Exchange. This publication is distributed to private clients of UBS London in the UK. Where products or services are provided from outside the UK, they will not be covered by the UK regulatory regime or the Financial Services Compensation Scheme. USA: This document is not intended for distribution into the US, to US persons, or by US-based UBS personnel. UBS Securities LLC is a subsidiary of UBS AG and an affiliate of UBS Financial Services Inc., UBS Financial Services Inc. is a subsidiary of UBS AG. Version 07/2017. ©UBS 2018.The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

18