the drive you demand ASSET ALLOCATION June 2017 Global Investment Committee

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1 the drive you demand ASSET ALLOCATION June 217 Global Investment Committee

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3 GLOBAL TACTICAL ASSET ALLOCATION Rising earnings argue for remaining overweight equities Global economy / Asset allocation Sustained world growth is in place, and the developed country outlook has improved. The Eurozone offers a stronger growth outlook and lower political risks than the US, while the policy mix remains growth supportive. US growth should recover in Q2, stabilising in a 2%-2.5% range in the second half of the year. We expect the Fed to continue raising the Federal Funds rate. Portfolios remain overweight risk. Risk remains focused on non-us equity and alternatives allocations. Value remains scarce in fixed income. Fixed income We expect a return of interest rate volatility and a potential unwind of the recent risk-off trade ahead of the June Fed and ECB meetings. In anticipation, we have shifted towards non-directional bond strategies that can tactically capitalise upon such a shift in volatility. We have also shifted investment grade exposure towards alternative strategies. In Asia-biased strategy, we have shifted exposure from EM Debt to Asia IG strategies. Equities Despite elevated valuations, equities are supported by rising corporate profits. We continue to favour Japan and emerging markets which trade at an attractive discount to other regions. Following the maturity of our capital protected exposure in Europe, we seek a tactical opportunity to add to positions in Europe. Alternatives Alternatives present an attractive risk-adjusted return profile compared to expensive bonds. 217 GDP growth expected close to 2% DM 217 GDP consensus economic forecast % Earnings estimates continue to be revised up MSCI AC World: earnings revision ratio % Source(s): Bloomberg Finance L.P. -4 Number of analysts' EPS upgrades versus number of downgrades for the next 12 months Positioning has shifted in the 1-year US Treasury 4% 3% 2% 1% % -1% -2% Net positioning (lhs) Net long Source(s): Thomson Reuters -3% Net short -4% 1-year government bond yield (rhs, inverted scale) -5% % Source(s): CFTC, UBP, ETR Union Bancaire Privée, UBP SA Asset Allocation Global Investment Committee June

4 UBP ECONOMIC OUTLOOK Upgrading growth expectations in the Eurozone Key points Sustained world growth is expected despite remaining geopolitical risks. Eurozone growth is on an accelerating path, while US growth should regain higher levels from Q2. The Fed is expected to normalise monetary policy further and the ECB should adopt a less dovish stance from June 217. Strong domestic demand expected in developed countries US growth should recover to a range of 2%-2.5% in the coming quarters, thanks to positive fundamentals for consumers and the ongoing friendly environment which remains positive for corporates. The 217 growth outlook for the Eurozone has been revised up from 1.6% to 1.8%, as momentum continues to improve post-french elections. Prospects of renewed reforms and supportive economic policy favour core and peripheral countries on the continent. In Japan, growth is on a firmer trend as industry and domestic demand has rebounded. Emerging countries benefit from firmer global activity and lower fears of protectionism. In China, tighter monetary policy and tougher regulation on banks may put a cap on growth. Central banks will progressively change monetary regimes The Fed should continue to hike rates after its June meeting. Nevertheless, money markets are reluctant to price further tightening beyond June. According to our scenario, decisions to end reinvestment coupons and decrease its balance sheet should be published in Q3-17. The ECB is expected to change its forward guidance and adopt a less aggressive stance as risks are balanced and growth is stronger. Eurozone: business sentiment points towards stronger growth Eurozone: GDP & business confidence PMI services (lhs) GDP rhs PMI manufacturing (lhs) Source(s): Markit / Eurostat Labour markets in a positive trend in developed countries Unemployment rate in major developed countries as % of active population Japan Eurozone Source(s): Eurostat, US BLS, Japan Ministry of Communications Money markets underprice further Fed rate hikes US: expected fed funds rate path 3.25 % Last months ago Longer run Source(s): Fed, Bloomberg Finance L.P. US Fed's dots (median) % Union Bancaire Privée, UBP SA Asset Allocation Global Investment Committee June 217

5 UBP ECONOMIC OUTLOOK World growth expected on a 3.5% trend World growth is expected to stay on a sustained 3.5% trend in 217 and growth in developed countries is expected to be close to 2%, driven by the US and Germany. The 217 outlook on the Eurozone has been revised up from 1.6% to 1.8%, slightly above the consensus. Germany and Spain offer a solid growth trend, while cyclical improvement is underway in 217 in France and in Italy. Growth in emerging countries should stabilise on a sustained trend. The outlook on India is positive and growth is expected to stay sustained. Growth in China should settle around 6.5%, after strong growth in H1-17. Recovery in Brazil and Russia continues, but at a slow pace. Weakening economic surprises in the US favored lower US 1y TY Surprise index - daily 1 Daily publications vs Bloomberg expectations % Economic surprise index US 1-year yield Source(s): Citigroup Global Markets, Bloomberg Finance L.P. Outlook on Eurozone has improved Eurozone GDP by country % Eurozone Germany France Spain Italy GDP y/y % Consensus 217 UBP 218 Consensus WORLD - MER on PPP basis* USA Japan Eurozone United Kingdom Switzerland Brazil Russia India China Developed countries Emerging countries Source(s): Eurostat, UBP ETR Sources: UBP - Economic & Thematic Research, Bloomberg consensus * MER: market exchange rates; PPP: purchasing power parity Union Bancaire Privée, UBP SA Asset Allocation Global Investment Committee June

6 GLOBAL EQUITIES Corporate earnings upgrades continue to rise Equity markets have been resilient in May despite mixed economic data and the prospect of impeachment of the US president in light of alleged scandals involving Russian officials. Equities remain underpinned by strongly positive earnings revisions in most regions. Earnings upgrades continued to support equities 2 % % 15 1 US Our equity positions have performed well in April-May with Emerging Market (overweight) and Japan (overweight) equities outperforming US equities (underweight). The strong performance of US technology, one of our favourite sectors (together with healthcare), has led the US market to new all-time highs. Elevated valuations, especially in the US, remain a concern but they must be put in the context of rising earnings power and a price-to-book ratio which appears about fair relative to corporate profitability (see middle chart). We remain neutral on European equities but seek a better tactical opportunity to add to positions as investor positioning is currently somewhat overweight. Within Europe, we continue to be overweight eurozone banks - the most sensitive sector to a rise in bond yields and a recovering EU economy. We are overweight Japan. Our scenario on US rates should weigh on the yen, which will allow the improving fundamentals (macro and micro) to continue to be re-priced into the domestic equity market the cheapest among major DMs. We are overweight emerging markets. EM are a key beneficiary of the recovery in world trade growth and appear cheap relative to developed markets despite offering a better earnings profile Europe -25 Number of analysts' EPS upgrades versus -25 number of downgrades for the next 12 months Source(s): Thomson Reuters On a global basis, valuations are not out of line with current corporate profitability (RoE) MSCI AC World: ROE and price-to-book ratio % Price-to-book ratio (rhs) ROE Source(s): Thomson Reuters, MSCI, UBP EM continue to trade at a significant discount relative to DM Emerging vs developed markets: adjusted 12-month forward PER Sector-adjusted EM PER* DM PER Unadjusted EM PER 6 Spread between DM PER and EM 3 sector-adjusted PER, rhs *EM PER is recomposed using DM sector Source(s): Thomson Reuters, UBP Union Bancaire Privée, UBP SA Asset Allocation Global Investment Committee June 217

7 GLOBAL BONDS EUR high yield spreads tightened towards post-crisis lows Despite the recent decline in yields, we have retained our a short duration and overweight risk/carry given the approach to monetary policy normalisation by major central banks looking ahead. In the government bond space, we remain underweight. The prospect of ECB tapering, a further US interest rate hike and a gradual process of Fed s balance sheet normalisation should push yields substantially higher. We believe government bond markets continue to misprice the change in the policy landscape in the coming months. With investment grade spreads nearing cyclical lows, we maintain a neutral investment grade position. As a result, we continue to tilt in favour of non-directional bond strategies which can capitalise upon the expected pickup in interest rate volatility. European credit markets have been in a decidedly happy mood following the French elections. As a result, key segments appear to be increasingly expensive. With Euro HY spreads tightened towards post-crisis lows, we see better value in USD vs. EUR high yield. As a result, we remain overweight on US High yield due to the relatively attractive yield of over 5.9% and improving corporate fundamentals. We remain overweight convertible bonds. With the equity optionality embedded in their structure, convertibles tend to be less sensitive to interest rates compared to regular bonds. Consequently, they may offer better protection in a rising rates environment. A rebound of US economic surprise should push US 1y yield higher US surprise index - daily Daily publications vs Bloomberg expectations % Economic surprise index US 1-year yield Source(s): Citigroup Global Markets, Bloomberg Finance L.P. Markets mispricing Fed hikes % % Fed's dots (median) months ago Last months ago Source(s): Fed, CBT EUR HY spreads tightened towards post crisis lows Basis points Emerging market bonds, with spreads still near historical averages, present one of the few, relatively attractive return profiles compared to the broader fixed income universe, both in USD and EUR Source(s): BofAML, UBP Union Bancaire Privée, UBP SA Asset Allocation Global Investment Committee June

8 GLOBAL PORTFOLIO POSITIONING Prefer non-us equities and Alternatives Key Convictions Overweight Global Equities EQUITIES Favour Japanese equites and Emerging Markets Neutral Europe Overweight Technology and Healthcare Underweight Global Bonds BONDS Favour Non-Directional strategies Underweight duration ALTERNATIVES FOREIGN EXCHANGE Risk Premia strategies Market Neutral Event Driven EUR weakening trend since mid-214 is nearing its end Global Equities Global Bonds Underweight Neutral Overweight Underweight Neutral Overweight Equities total Bonds total USA Europe Government Corporate IG Corporate HY Japan EM debt (USD) EM Non-Directional June May Convertibles June May 8 12 Union Bancaire Privée, UBP SA Asset Allocation Global Investment Committee June 217

9 RECENT PORTFOLIO CHANGES Trimming Investment Grade exposure and reducing gold We continue to expect increasing interest rate volatility going forward. The prospect of ECB tapering, a further US interest rate hike and a gradual process of the Fed s balance sheet normalisation should push yields substantially higher. Investment grade spreads are at their historic lows, approaching the levels of 23-27, before the global financial crisis. This leaves a limited prospect for further spreads compression. USD Investment grade spread nearing cyclical low USD investment-grade corporate debt spread Basis points While spreads may stay low given strong corporate fundamentals, we believe that the risk-reward profile of the asset class is becoming less attractive going forward in light of the shifting interest rate policy backdrop ahead. Since September 216, we began a shift from fixed income and interest rate sensitivity in anticipation of a normalisation of the interest rate environment ahead. We have continued this move by reducing our investment grade exposure in favour of Fixed Income Relative Value strategies in the Alternatives space. We also reduced positions in gold in the month in anticipation of a potential unwind driven by a resumption of the Fed hiking cycle, a more hawkish ECB as we move towards the summer and the decreasing risk of EU fragmentation Source(s): BofAML, UBP Flows of gold turned to negative territory Gold and weekly flows 1'5 USD/ounce Million ounces 6 1'4 5 Gold price (LHS) 4 1'3 3 1'2 2 1'1 1 1' 9-1 ETF holdings of gold Source(s): Bloomberg Finance L.P., UBP Union Bancaire Privée, UBP SA Asset Allocation Global Investment Committee June

10 Disclaimer This document constitutes marketing material and is not the result of a financial analysis or research and therefore not subject to legal requirements regarding the independence of investment research. It is furnished for general information purposes only and does not constitute an offer or recommendation to enter into any type of financial transaction or to conclude any type of mandate with Union Bancaire Privée, UBP SA, or any entity of the Group (hereinafter «UBP»). This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or is located or incorporated in, any jurisdiction where such distribution, publication, availability or use would be contrary to applicable laws or regulations, or which would subject UBP and/or its subsidiaries or affiliates to any registration or licensing requirement within such jurisdiction. This document may not be distributed, reproduced or referred to (in whole or in part) without the express written consent of UBP. This document reflects the opinion of UBP as of the date of issue. The information, opinions and analysis contained herein have been based on sources believed to be reliable. However, UBP does not guarantee their timeliness, accuracy, or completeness. All information, analysis and opinions are subject to change without notice at any time and with no obligation to update. This document is not intended to provide a sufficient basis on which to make an investment decision and is not a personal recommendation or investment advice. It is intended only to provide observations and views, regardless of the date on which the reader may receive or access it. Each person is urged to determine whether any investments suit their particular circumstances and to independently assess, with professional advisors, the specific risks incurred, including without limitation at the financial, regulatory, legal, accounting and tax levels. Past performance and/or financial market scenarios are no guarantee of current or future returns. Where these materials contain statements about future performance, such statements are forward looking and subject to a number of risks and uncertainties. The opinions, analysis and information herein do not take into account circumstances, objectives, or needs of any specific person. Investments may be subject to risks that are difficult to quantify and to integrate into their valuation and significant fluctuations in their value or return may occur. Products with a high degree of risk, such as derivatives, structured products, or alternative/non-traditional investments (hedge funds, private equity, real estate funds, etc.) are suitable only for sophisticated investors who are capable of understanding and assuming the risks involved. Investments in foreign securities or currencies involve additional risk as the foreign security or currency might lose value against an investor s reference currency. This document is without express or implied warranties or representations of any kind and UBP will not accept any liability whatsoever for any loss or damage resulting from the use of, or reliance on, the information, analysis or opinions contained herein. Copyright UBP. All rights reserved. Union Bancaire Privée, UBP SA Head Office Rue du Rhône P.O. Box Geneva 1, Switzerland ubp@ubp.com