UBS Global Asset Management forum highlights continental divide

  UBS Global Asset Management forum highlights continental divide

US and European investors have strikingly different views on the world
economy, judging by a recent sampling of views at UBS Global Asset Management.

Business Wire

CHICAGO -- March 28, 2013

THE UBS GLOBAL ASSET MANAGEMENT Cyclical Market Forum, held quarterly to
discuss three plausible economic scenarios and their potential implications
for investments over the next 12 months, found its 1Q13 Forum cautiously
optimistic about risk assets, although participants warned that the situation
in Europe could remain volatile. Three market scenarios are proposed at each
Cyclical Market Forum and debated by UBS Global Asset Management investment
teams with combined assets under management of more than USD 634 billion
worldwide.

The participants generally believed that a “risk-on” atmosphere would prevail
over the next six to 12 months. However, they believed that tail risks in
Europe, such as the recent banking crisis in Cyprus, remained concerns. While
the previous two Forums had been dominated by discussions of the US “fiscal
cliff” and the potential drag on US GDP growth precipitated by severe spending
cuts, the focus of the 1Q13 Forum shifted back to the role of fundamentals in
driving market returns. In general, participants foresee a reasonable global
growth outlook, with Europe a notable exception. One finding was that the
geographic location of participants strongly influenced their levels of
optimism, even more so than the asset classes they manage.

UBS Cyclical Market Forum 1Q13 Economic Scenarios Under Consideration

  *Scenario 1, “Risk perpetuation”: A “muddle through” situation in which
    political uncertainty in the US and Europe weighs on the growth outlook,
    despite some encouraging economic developments in the US and China. In
    this scenario, European markets remain volatile, Japanese markets perform
    strongly based on more accommodative monetary policy and China continues
    to grow at a relatively strong pace.
  *Scenario 2, “Risk habituation”: The most “risk-on” scenario, in which the
    US Congress agrees to a fiscal compromise with a minimal effect on growth,
    triggering gains in GDP due to a pent-up demand for spending by both
    corporations and consumers. In this scenario, problems in Europe diminish,
    and the eurozone returns to GDP growth in 2013. The Japanese economy
    improves due to aggressive monetary policy and rising demand, while
    China’s growth continues to accelerate.
  *Scenario 3, “Risk annihilation”: The most bearish scenario, in which
    political gridlock in the US and instability in Europe lead to significant
    deceleration in the US and the eurozone. In this scenario, the US barely
    escapes recession, and European growth remains negative. In Japan,
    aggressive monetary policy is not enough to offset weakening demand, and
    the Chinese economy decelerates significantly.

Each scenario was intensely scrutinized. Nearly half of the Cyclical Market
Forum participants voted Scenario 1 as the most likely, approximately
one-third voted for the more bullish Scenario 2, and 20% voted for the bearish
Scenario 3. There was a decided geographic split in terms of sentiment, with
US-based investors significantly more bullish than participants based in the
UK and Europe.

Key Takeaways from the Forum:

Curt Custard, Head of Global Investment Solutions, Chair of the Cyclical
Market Forum (Chicago)

“It’s remarkable how US-based investors are so much more bullish than their
European counterparts. The regional split seems to matter even more than the
traditional different viewpoints between stock and bond investors. Even fixed
income investors—not always the most bullish group—based in the US are far
more optimistic about the world as a whole than equity investors based in
London and other parts of Europe.”

Joshua McCallum, Senior Fixed Income Economist (London)

“Even with the uncertainty in Cyprus, markets did not react too negatively.
This outcome may signal that investors are undergoing risk habituation and are
focusing on fundamentals, such as earnings, rather than larger macro events.
These developments could mean a return to markets that appear more normalized,
but the danger is that risk habituation in markets takes the pressure off the
politicians, which could create troubles in the future.”

Comments on Specific Asset Classes:

Bruno Bertocci, Global Equity Strategist (Chicago)

“We see positive support for equity markets. We’re quite bullish on the US
economy, especially as the housing market continues to recover, which could
create jobs and further lift consumer sentiment. We’re less positive on the
European economy, but there could be significant value in export-driven
companies there— especially those that export primarily to the much-stronger
US and China markets.”

Uta Fehm, Senior Portfolio Manager, Emerging Markets Debt (Frankfurt, Germany)

“None of the scenarios would be highly beneficial for USD-denominated emerging
markets debt. In the ‘muddle-through’ Scenario 1, there could be high
volatility for the asset class, with returns much lower than in 2012, but
still positive around the coupon level; the ‘risk-on’ Scenario 2 would likely
be supportive for emerging markets debt from a spread point of view, but
higher US Treasury yields could at least partly jeopardize spread returns; and
the ‘risk-off’ Scenario 3 would likely lead to significant losses for the
asset class due to spread widening.”

Mike Lammers, Strategist, US Core/Value Equities (Chicago)

“We feel Corporate America is pretty strong, and we see a positive outlook for
US equities in 2013. This belief is supported by pent-up demand for capital
spending by corporations, and an increasingly robust housing market. As a
result, we could see both earnings growth and multiple expansion—a combination
that would act as a strong tailwind for equity markets.”

UBS Global Asset Management is a large-scale asset manager with
well-diversified businesses across regions, capabilities and distribution
channels. It offers investment capabilities and investment styles across all
major traditional and alternative asset classes. These include equity, fixed
income, currency, hedge fund, real estate, infrastructure and private equity
investment capabilities that can also be combined into multi-asset strategies.
The Fund Services unit provides professional services including legal fund
set-up, accounting and reporting for traditional investment funds and
alternative funds.

Invested assets worldwide totalled some CHF 581 billion (EUR 481 billion, GBP
391 billion, USD 634 billion) at 31 December 2012. The firm is a leading fund
house in Europe, the largest mutual fund manager in Switzerland and one of the
largest fund of hedge funds and real estate investment managers in the world.

With around 3,800 employees, located in 24 countries, we are a truly global
firm. Our principal offices are in London, Chicago, Frankfurt, Hartford, Hong
Kong, New York, Paris, Singapore, Sydney, Tokyo and Zurich.

The information and opinions contained herein are a reflection of UBS Global
Asset Management’s best judgment based on current market assumptions and are
considered forward-looking statements. Any obligation to update or alter
forward-looking statement as a result of new information, future events, or
otherwise is disclaimed. There is no assurance that these projections will
ultimately be realized. Actual future results may prove to be different from
expectations.

About the Cyclical Market Forum

Assessing the economic and market environment is a key part of UBS Global
Asset Management’s investment strategy-setting process across all investment
areas. Our Cyclical Market Forum, open to representatives of all investment
teams, regularly debates important economic and market themes and their
potential impact on our investment strategies. The Forum’s purpose is to
examine the main economic and market drivers – typically through scenario
analysis over a 12- to 18-month time horizon – and to foster debate between
the teams managing different asset classes. The three economic scenarios
discussed should not be considered forecasts.

The way in which the output from the Forum is used varies across UBS Global
Asset Management’s investment teams and it is just one of a number of inputs
into each team’s investment process. One of the key benefits of the Cyclical
Market Forum is the opportunity to exchange research and viewpoints from the
various investment specialists and to examine the intersection between
top-down and bottom-up drivers. As such, it broadens the input into our
strategy-setting process in a structured format.

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megan.stinson@ubs.com
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