Emerging market equities

Transcription

1 Wealth Management Research 29 January 2013 Emerging market equities Positioning for a cyclical recovery The latest IMF forecasts see real GDP growth in the emerging markets (EM) accelerating to 5.5% in 2013 from 5.1% in 20. The growth differential between the emerging and advanced economies is also forecast to widen in favor of EM, to +4.1% in 2013 from +3.8% in 20. Within EM, we see three main drivers for the first half of 2013: first, a cyclical recovery, supporting some of the higher-beta markets (like Russia, Brazil and South Korea), second a focus on local recovery stories (like China and Brazil), and third, some rotation away from those markets that did exceptionally well over the past year or so, towards markets that have lagged and that start the year under-owned and out of favor (like Russia and Brazil). Accordingly, our preferred equity markets remain Brazil, China and South Korea, to which we have now added Russia. Shorterterm, we see relatively less upside for the more defensive market Malaysia. In South Africa the currency is in a volatile phase. We keep both on least preferred for now. We have upgraded Indonesia from least preferred to neutral. Overview As shown in Table 1, by January 23, the MSCI EM Index was up 2.1% for the year in US dollar terms (including dividends), whereas developed markets had achieved +4.2%. Costa Vayenas, analyst, UBS AG Kelvin Tay, Regional CIO, Southern APAC, UBS AG Fig. 1: Performance of equity indices since 20 Total returns in USD, indexed from Jan Jan- Emerging markets Feb- Mar- Apr- May- Jun- Jul- Aug- Developed markets Sep- Oct- Nov- Dec- Jan- 13 Source: Datastream, UBS, as of 23 January 2013 closing. "Developed markets" refers to the MSCI World, which excludes emerging markets. This report was originally published outside the US on 25 January 2013 and has been customized for US distribution. Monetary policy in the US, the euro area, and Japan remains supportive. One implication of these low interest rate policies, we believe, will be to enhance EM equity returns in US dollars by supporting EM currencies more broadly against the US dollar over the next six months. But these broad trends can mask some big differences among individual markets. For example, last year the weakness of the Brazilian real had a negative impact on returns in USD terms, but this was reversed in the opening weeks of the year. Table 1 shows that the returns of South African equities, expressed in USD, were much worse than in local currency terms. At some point the market will conclude that the rand has become too cheap, helping to stabilize the currency, but the nearterm outlook still looks choppy and does not instill confidence. Turkish equities have had an exceptional run that continued into January. But at some point we are likely to see a bit of rotation out of Turkey into markets that have been lagging. This report has been prepared by UBS AG. Please see important disclaimers and disclosures that begin on page 8.

2 MSCI China has been one of the best performing markets over the last three months, with a strong performance continuing into January. Our positioning Focusing first on the bigger valuation picture, in Fig. 2, we compare the EM forward P/E ratio, based on -month forward consensus earnings, with the same ratio for developed markets (DM). We see that the discount currently stands at 15%, slightly less undervalued than the average since Such a discount relative to DM continues to indicate investor skepticism about the consensus earnings expectations for the emerging markets. Table 2 on the next page provides an overview of selected valuation measures for the main EM equity markets. The trailing P/E ratio is.1x, which is around 8% below the average of 13.1x recorded since The P/E ratio calculated using the -month forward consensus view, stands at 10.7x, which is around 3% below the longer-term average of 11x. In our base case, we see the P/E multiple of the MSCI EM Index staying around the current level of x trailing (i.e. realized) earnings over the next six months. Over the next months, we expect EM earnings growth of around 11% (below consensus). In a positive scenario, if global growth turns out better than our base case assumes, that would boost EM s ability to grow more strongly in 2013, resulting in higher earnings growth of around 15%, leading also to a better P/ E multiple of 14x trailing earnings. Negative scenario: A significant escalation of the Eurozone debt crisis, a sharp fiscal contraction in the US, and a big deceleration in Chinese growth could each hit EM's economic prospects. In such a scenario, we would expect a 20% decline in earnings over months. More defensive Malaysia would do better, while more cyclical South Korea and Russia would underperform. We assume, however, that the market would also be expecting some recovery in earnings for 2014, helping the P/E multiple to recover to 10x trailing earnings. Selected country views As a highly cyclical equity market with a beta over the MSCI World of 1.25, we expect Russia to benefit from the recent improvement in investor sentiment. Latest developments in the Eurozone, which seem to have lowered the near-term risk of an escalation of the debt crisis, coupled with the growth improvement in emerging markets support foreign investor sentiment toward gaining a bit more exposure to Russian equities, which still trades at a 49% discount to the MSCI Emerging Markets on a -month forward looking price-to-earnings basis. Table 1: Equity performance since the beginning of 2013 Total returns in USD and local currency (LC) Rank Equity Index USD LC 1 Turkey 11.3% 10.5% 2 Chile 6.5% 4.9% 3 Mexico 6.5% 3.8% 4 Hungary 6.3% 6.9% 5 Philippines 5.5% 4.3% 6 Russia 5.2% 4.2% 7 China 4.7% 4.8% 8 India 4.4% 2.3% 9 Developed markets 4.2% 4.5% 10 Peru 4.0% 4.0% 11 Latin America 4.0% 3.0% Thailand 3.5% 0.8% 13 Brazil 2.9% 2.5% 14 Indonesia 2.7% 2.6% 15 Emerging markets 2.1% 2.0% 16 Asia 2.0% 1.4% 17 Colombia 1.0% 1.7% 18 Egypt 0.8% 4.8% 19 Taiwan 0.6% 0.4% 20 EMEA* 0.1% 2.5% 21 Korea -1.0% -1.4% 22 Poland -2.0% -0.5% 23 Morocco -2.3% -2.9% 24 Malaysia -2.5% -3.0% 25 Czech Republic -4.3% -3.1% 26 South Africa -6.3% -0.2% Source: Datastream, UBS, as of 23 January 2013 closing. *EMEA = Emerging Europe, Middle East, and Africa; LC = local currency; "Developed markets" refers to the MSCI World, which excludes emerging markets. Emerging market country preferences Current most preferred markets Brazil China Russia South Korea Source: UBS Current least preferred markets Malaysia South Africa In South Africa, strikes and related violence have led to the permanent closure of some mines and seem likely to lead to lower foreign direct investment. Additionally, deteriorating government finances and social unrest led Moody's to lower South Africa's credit rating in September 20, and this was followed by Fitch in January PMI data suggest that economic momentum is weak. Inflation is trending higher. The weaker currency hurt returns in USD terms. At some point the market will conclude that the rand has become too cheap, helping to stabilize the currency, but the near-term outlook still looks choppy and does not instil confidence. Wealth Management Research 29 January

3 The European Central Bank's announcement that it stands ready to buy the bonds of compliant euro area governments, has lessened the euro-related tail risks for the smaller European emerging equity markets (Hungary, Poland), but their equity markets remain susceptible to setbacks linked to the euro area. Turkish equities have had an exceptional run that continued into January. But at some point we are likely to see a bit of rotation out of Turkey into markets that have been lagging. With financials accounting for nearly 60% of the index, the earnings outlook for that sector needs to be closely monitored. For now, we thus keep the market rated neutral. After no earnings growth for two years, and underperformance in 20, Brazil is now under-owned and a contrarian play. Our call is for economic growth to accelerate, which should support a recovery in earnings. We expect the domestic recovery to be driven by investment and by record low interest rates, supporting loan growth. Some of the government s policy announcements in 20 did damage to certain equity sectors (utilities), but will help stimulate the economy (e.g. lower electricity prices and lower interest rate margins). The banks' margins are under pressure, but we believe that this news is already priced in. The currency is more competitive than a year ago. Growth in China helps Brazil a bit on the margin, but we do not see as the main driver. A new risk has materialized, though, that needs monitoring. A drought has depleted dams, threatening to cut electricity production from hydroelectric plants. There are fears that this could be a repeat of 2001, when blackouts weakened growth. But we take the view that it is still too early to start cutting GDP forecasts. The Mexican equity market has performed well. The possibility of structural reforms being approved has helped the market reach new highs. We think reforms could be approved, but the timeframe is still uncertain. Mexico should benefit from the US recovery, and the peso is cheap. Momentum is good and we could still see outperformance for a while. The main arguments against are relatively rich valuations and the more defensive nature of the equity market, i.e., there should be less upside in a cycle recovery relative to higher beta markets. Fig. 2: EM at a discount to developed markets P/E ratio of the MSCI Emerging Markets relative to the MSCI World, including average (since 1990) 130% 0% 110% 100% 90% 80% 70% 60% 50% 40% relative P/E ratio Average Source: IBES monthly data as of end-dec. 20, UBS Jan 23, Fig. 3: Earnings growth outlook Consensus expected earnings growth (-month forward) China 10% India 14% Indonesia 14% Korea 19% Malaysia 9% Philippines 11% Taiwan 22% Thailand 17% Asia 15% Brazil Chile Colombia Mexico Peru Latin America Czech Republic Egypt Hungary Morocco Poland Russia South Africa Turkey EMEA* -10% -2% 2% 5% 6% 8% 11% 10% 11% % 13% 18% 16% 20% 20% Emerging markets Developed markets 11% 13% -15% -5% 5% 15% 25% Source: IBES, UBS, as of 23 January *EMEA = Emerging Europe, Middle East, and Africa; "Developed markets" refers to the MSCI World, which excludes emerging markets. Wealth Management Research 29 January

4 Fig. 4: EMEA still lagging Consensus expected earnings growth (-month forward) 25% Asia Latin America EMEA* 20% 15% 10% 5% Table 2: Emerging market valuation overview: Current valuations and averages since 1998 Equity market P/E 1, trailing P/E 1, m forward P/B 2 DY 3 0% Dec-10 Jun-11 Dec-11 Jun- Dec- Source: IBES, UBS; 23 Jan. 2013, with monthly data as of end-december 20. *EMEA = Emerging Europe, Middle East, and Africa. RoE 4 EPS 5 growth, m forward Index current (average) current (average) current (average) current (average) current (average) current (3m change, ppt) weight companies China 11.3x (13.1x) 10.3x (11.5x) 1.7x (1.6x) 2.9% (2.5%) 15.1% (.8%) 10.5% (+2.5) 18.3% 135 India 16.5x (15.7x) 14.4x (13.2x) 2.7x (2.9x) 1.3% (1.5%) 16.7% (18.2%) 14.0% (+1.8) 6.6% 73 Indonesia 15.8x (11.0x) 13.9x (9.3x) 3.7x (2.4x) 2.4% (2.8%) 22.8% (16.2%) 13.6% (+1.6) 2.6% 26 Korea 10.1x (11.3x) 8.5x (9.2x) 1.2x (1.3x) 1.1% (1.7%) 11.1% (10.4%) 19.0% (-0.9) 15.3% 104 Malaysia 15.8x (16.7x) 14.4x (14.2x) 2.2x (1.8x) 2.9% (2.4%) 14.7% (10.0%) 9.2% (-1.0) 3.5% 42 Philippines 19.5x (16.8x) 17.6x (14.0x) 2.9x (1.7x) 1.9% (2.1%) 14.5% (10.2%) 11.2% (-1.2) 0.9% 18 Taiwan 17.6x (17.5x) 14.3x (14.5x) 1.8x (2.0x) 3.5% (2.8%) 8.5% (10.0%) 22.3% (+2.3) 10.6% 114 Thailand 13.9x (.3x) 11.9x (11.7x) 2.5x (1.8x) 2.8% (3.0%) 16.0% (7.4%) 16.7% (-1.8) 2.5% 25 Asia.7x (14.6x) 11.0x (11.9x) 1.7x (1.8x) 2.3% (2.2%).8% (11.2%) 15.1% (+1.1) 60.4% Brazil.9x (8.7x) 10.8x (7.6x) 1.5x (1.4x) 4.0% (4.0%) 10.2% (14.0%) 19.9% (+8.0).6% 81 Chile 19.8x (18.0x) 16.5x (14.9x) 2.3x (1.7x) 2.1% (2.4%) 9.7% (8.9%) 19.7% (+7.4) 1.8% 21 Colombia 17.5x (11.9x) 15.8x (8.9x) 2.2x (1.1x) 2.9% (4.3%) 11.1% (8.6%) 11.0% (-3.2) 1.3% 14 Mexico 20.1x (14.2x) 17.7x (.1x) 3.2x (2.4x) 1.4% (1.8%) 14.8% (15.5%) 13.4% (-5.7) 5.2% 26 Peru 14.2x (11.9x).9x (10.0x) 3.6x (2.4x) 3.9% (3.1%) 24.6% (20.1%) 9.8% (+1.4) 0.6% 3 Latin America 14.7x (11.8x).5x (10.0x) 1.8x (1.7x) 3.2% (3.0%) 11.1% (13.6%) 17.8% (+4.9) 21.4% Czech Republic 9.8x (13.7x) 10.1x (.1x) 1.6x (1.3x) 6.9% (3.9%) 17.2% (11.0%) -2.4% (-1.4) 0.3% 3 Egypt 7.6x (10.3x) 7.3x (8.7x) 1.4x (2.2x) 3.5% (4.4%) 10.2% (20.7%) 4.8% (-7.2) 0.3% 8 Hungary 9.0x (10.4x) 8.0x (9.5x) 0.9x (1.8x) 3.5% (1.9%) 6.5% (17.1%) 11.3% (-2.7) 0.2% 3 Morocco n.a. (14.3x) 11.8x (.1x) 2.8x (2.9x) 4.7% (3.7%) 22.5% (19.8%) 8.1% (+0.0) 0.1% 3 Poland 10.6x (13.2x) 11.8x (11.7x) 1.4x (1.7x) 5.6% (2.7%) 15.9% (.4%) -10.3% (-5.1) 1.5% 20 Russia 5.2x (7.0x) 5.2x (6.8x) 0.8x (1.1x) 3.6% (1.6%) 14.7% (13.6%) 1.5% (+4.7) 6.0% 27 South Africa 14.1x (.2x).1x (10.0x) 2.6x (2.2x) 3.2% (3.1%) 16.4% (16.4%) 16.2% (-0.7) 7.7% 50 Turkey.5x (10.7x) 11.2x (8.2x) 1.9x (2.1x) 2.2% (2.4%) 15.8% (18.3%) 11.6% (-0.3) 2.0% 25 EMEA* 8.8x (10.9x) 8.3x (9.4x) 1.4x (1.8x) 3.5% (2.6%) 15.1% (15.8%) 5.6% (+1.8) 18.1% Emerging markets.1x (13.1x) 10.7x (11.0x) 1.6x (1.8x) 2.7% (2.5%).9% (.7%) 13.3% (+1.9) 100.0% 821 Developed markets 14.2x (17.7x).8x (15.3x) 1.8x (2.3x) 2.8% (2.2%).0% (.2%) 11.1% (-0.5) Price-to-earnings ratio / 2 Price-to-book value / 3 Dividend yield / 4 Return on equity / 5 Earnings per share; averages are based on monthly data since 1998 Source: IBES, UBS; as of 23 January 2013, where daily data was available and end-december 20 where only monthly data was available. *EMEA = Emerging Europe, Middle East, and Africa; "Developed markets" refers to the MSCI World, which excludes emerging markets. Asia ex-japan Asia ex-japan equities have thus far seen a relatively benign start to 2013, with the MSCI Asia ex-japan equity index (AxJ) gaining some 2.6% as at 18 Jan 2013, on the back of a sterling 22.3% return in 20. Wealth Management Research 29 January

5 Rewind to the start of 20 and the situation could not have been more different, with investment sentiment poor and risk appetite almost non-existent. As we had pointed out in our report "Happy ending after a shaky beginning" (dated 30 Nov 20), encouraging signs are emerging that the Asia ex-japan economies have stabilized and are gaining momentum from modest economic recoveries in China and the US. China and South Korea remain Preferred China and South Korea remain our most preferred markets. With 4Q GDP and December data showing a clear recovery in the Chinese economy, we expect stronger GDP growth and better corporate earnings in We like South Korea for its strong export growth momentum, with the solid performance attributed to its increasing competitiveness in industries like technology and automobiles, resilient demand at Samsung Electronics and its high exposure to China, mainly for end consumption. Malaysia is our least preferred market as its defensiveness will likely not contribute to performance in a cyclical recovery. The Malaysian market also experiences an overhang due to political uncertainty ahead of the general elections. China outlook China's recently released fourth quarter GDP numbers and December data showed that the economy is clearly recovering and has "landed softly". Its 7.9% GDP growth in Q4 last year reiterates what we have stated before; that the economy has entered a phase of normalized growth, with weak external demand, demographic changes and rising labour proving to be the structural hurdles for the economy. The bigger challenge for China lies not in slowing external demand, but rather in whether it can steer the economy away from being driven by fixed-asset investment to being more balanced, with domestic consumption as the other notable engine of growth. The December data also revealed that consumption accounted for 4% of the growth, overtaking investment (3.9%) as the largest contributor to GDP. With a new politburo in place from March onwards, we think the new leaders will strive for policy continuity, be more tolerant of more modest growth rates, and pursue structural reforms for growth sustainability. Nonetheless, we expect stronger growth and better corporate earnings in 2013, especially in the next couple of quarters as corporate earnings catch up to the economic recovery, on the back of improved aggregate demand and moderate restocking, while policy should be overall supportive without major shifts. Furthermore, we expect structural reforms to gain traction with a focus on income redistribution and urbanization. MSCI China has been one of the best performing markets over the last 3 months, with returns of close to % compared to the 7.6% returns of AxJ. In terms of valuations, China is now trading at 10x - months forward P/E (M FWD P/E), well below its own and AxJ's 10- year historical average of x. Wealth Management Research 29 January

6 A strong USDJPY is hurting Korean market sentiment MSCI Korea's year-to-date performance has been poor, with sentiment negatively affected by the recent weakness of the JPY. Since June 20, the KRW has appreciated by an estimated 20% against the JPY, with the strength largely exacerbated by the recent weakness of the JPY against the USD. A weaker JPY is likely to be detrimental to Korean exporters, but the JPY has to be much weaker from its current levels for us to turn negative on the Korean exporters, namely the automakers and steel makers, which together comprise about 13% of the index. With the global economy posting a rather modest recovery at best and, therefore, little potential for growth to kick in, any market share gains in exports is likely to come at the expense of other exporters. If Japanese exporters were to gain market share due to a weaker JPY, the likely loser in this zero sum game are the Korean exporters, as they now compete almost directly with the Japanese in terms of product lines and quality. We would be concerned with our Most Preferred rating on MSCI Korea if the JPY continues to weaken much further from its current levels of 88 to 89. Our Japanese economist Daiju Aoki believes that the JPY will stabilise at the current levels and perhaps weaken towards 90 over the next months, which is not a significant move and one that is unlikely to disadvantage the Korean exporters by a large degree. In terms of valuations, Korea is not expensive, with the market trading at a 10% and 26% discount, respectively, to its 10-year historical and regional averages for on a -month forward P/E. Indonesia upgraded to neutral Indonesia has been underperforming for the past 18 months and valuations on a 3- and 5-year historical basis are no longer as demanding as before. What the market is looking out for are signs of stability where the currency is concerned and the moves by the Central Bank of Indonesia (BI) late last week will have addressed some of these concerns. The Minister of State-owned enterprises Dahlas Iskan and BI Governor Nasution instructed the state oil company Pertamina and the state-owned utility company PLN to settle their dollar purchases directly with BI. We think the initial impact of the measures will be positive for the currency, as it should improve the supply and demand balance for USD in the spot market. However, the medium-term impact is less clear. Without foreign portfolio inflows, we think the measures could lead to a gradual decline in the central bank s reserves. In that sense, Indonesia may not outperform the market but its underperformance might come to a halt with the currency stabilising. We upgrade Indonesia to Neutral on the back of more compelling valuations and a stabilisation of the IDR. Wealth Management Research 29 January

7 Philippines expected to trade broadly in line with EM Favourable government policies, renewed political stability and optimism among both investors and consumers is likely to sustain the current momentum in the Philippines stock market. The decline in interest rates, coupled with increased investment spending by both the government and the private sector, has fuelled a sharp re-acceleration in economic growth since In addition, the expected upgrade in the country s credit rating will likely sustain both foreign portfolio and direct investment inflows. Appendix End notes 1 WMR determined the benchmark allocation by country of Emerging Market Equity in proportion to each country s market capitalization. 2 See "Deviations from benchmark allocations" regarding the interpretation of the suggested tactical deviations from benchmark. The current column refers to the tactical deviation that applies as of the date of this publication. The previous column refers to the tactical deviation that was in place at the date of the previous edition of report. 3 The current allocation row is the sum of the benchmark allocation and the WMR tactical deviation rows. Deviations from benchmark allocation The recommended tactical deviations from the benchmark are provided by WMR. They reflect our short- to medium-term assessment of market opportunities and risks in the market segments. Positive / zero / negative tactical deviations correspond to an overweight / neutral / underweight stance for each market segment relative to their benchmark allocation. Note that the country allocations on International Equities are provided on an unhedged basis (i.e., it is assumed that investors carry the underlying currency risk of such investments). Thus, the deviations from the benchmark reflect our views of the underlying equity market in combination with our assessment of the associated currencies. Emerging Market Equity Module, in % Benchmark WMR Tactical Current allocation 1 deviation 2 allocation 3 Previous Current Brazil China India Korea Russia South Africa Taiwan Mexico Other Source: UBS WMR, as of 28 January Note: See End notes. Wealth Management Research 29 January

8 Appendix 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. WMR generally recommends only those securities it believes have been registered under Federal U.S. registration rules (Section of the Securities Exchange Act of 1934) and individual State registration rules (commonly known as "Blue Sky" laws). Prospective investors should be aware that to the extent permitted under US law, WMR may from time to time recommend bonds that are not registered under US or State securities laws. These bonds may be issued in jurisdictions where the level of required disclosures to be made by issuers is not as frequent or complete as that required by US laws. For more background on emerging markets generally, see the WMR Education Notes, "Emerging Market Bonds: Understanding Emerging Market Bonds," August 2009 and "Emerging Markets Bonds: Understanding Sovereign Risk," 17 December 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. Terms and Abbreviations Term / Abbreviation Description / Definition Term / Abbreviation Description / Definition 1Q, 2Q, etc. or 1Q11, First quarter, second quarter, etc. or first quarter A actual i.e. 2010A 2Q11, etc. 2011, second quarter 2011, etc. E expected i.e. 2011E GDP Gross domestic product NV Neutral View: The stock is expected to neither p.a. Per annum (per year) outperform nor underperform the relevant benchmark nor significantly appreciate or depreciate in absolute terms. Shares o/s Shares outstanding UP Underperform: The stock is expected to underperform the sector benchmark WMR UBS Wealth Management Research CIO UBS WM Chief Investment Office Wealth Management Research 29 January

9 Appendix Global Disclaimer Wealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affiliate thereof. Wealth Management & Swiss Bank brands its publications as Chief Investment Office, Wealth Management Research outside the US. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Different assumptions could result in materially different results. We recommend that you obtain financial and/or tax advice as to the implications (including tax) of investing in the manner described or in any of the products mentioned herein. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/ or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and its affiliates). All information and opinions as well as any prices indicated are currently only as of the date of this report, and are subject to change without notice. Opinions expressed herein may differ or be contrary to those expressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria. At any time UBS AG and other companies in the UBS group (or employees thereof) may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to the issuer of relevant securities or to a company connected with an issuer. 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 considered risky. Past performance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or income of an investment. This document may not be reproduced or copies circulated without prior authority of UBS or a subsidiary of UBS. UBS expressly prohibits the distribution and transfer of this document to third parties for any reason. UBS will not be liable for any claims or lawsuits from any third parties arising from the use or distribution of this document. This report is for distribution only under such circumstances as may be permitted by applicable law. In developing the WMR economic forecasts, WMR 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. Distributed to US persons by UBS Financial Services Inc., a subsidiary of UBS AG. UBS Securities LLC is a subsidiary of UBS AG and an affiliate of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-us affiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-us affiliate. The contents of this report have not been and will not be approved by any securities or investment authority in the United States or elsewhere. Version as per October The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. Wealth Management Research 29 January