UBS Equity Compass

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Chief Investment Office WM — December 2017

The year ahead – cautious optimism

Global equities Eurozone UK

Stay overweight Stay overweight Stay underweight

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Editorial UBS Equity Compass The year ahead – cautious optimism...... 3

This report has been prepared by Region Strategy UBS AG, UBS Securities Japan Co., Ltd., Stay overweight equities...... 4 and UBS Switzerland AG. Please see the important disclaimer at the end of the Sector Strategy document. A pro-cyclical tilt...... 5

Regions Editor-in-Chief Switzerland...... 6 Bert Jansen, Equity Strategist Eurozone...... 7 United Kingdom...... 8 Editors United States...... 9 CLS Communication AG, Basel Japan...... 10 Asia ex Japan...... 11 Editorial deadline Global Emerging Markets...... 12 15 December 2017 Sectors Project Management European Automobiles...... 13 Virender Negi* European Consumer Discretionary...... 14 European Consumer Staples...... 15 Desktop Publishing European Energy...... 16 CIO Digital & Print Publishing European Financials...... 17 European Healthcare...... 19 Translation European Industrials...... 20 CLS Communication AG, Basel Information Technology...... 21 European Materials...... 22 Cover picture Real Estate...... 23 iStock European Telecoms...... 24 European Utilities...... 25 Languages Published in English and German Sustainable investing...... 26

Contact Equity Radar...... 27 ubs [email protected] UBS homepage: www.ubs.com Investment themes Diversified dividends in the UK...... 28 EM(U) winners...... 28 Eurozone dividend growth...... 28 Eurozone in style: Value opportunities ...... 28 Finding value in EM ...... 29 Gender diversity matters...... 29 Riding the wave of Internet of Things (IoT)...... 29 Sustainable value creation in emerging markets...... 29 Swiss high-quality dividends...... 30 US energy stocks: Time to refuel...... 30 US Smart Beta...... 30 US technology: Secular growth, on sale...... 30

*We would like to thank Virender Negi, an employee of Cognizant Group, for his assistance in preparing this report. Subscribe Cognizant staff provide support services As a UBS client, you can subscribe to the UBS Equity Compass via the e-banking to UBS. platform, via Quotes or by asking your client advisor.

UBS CIO WM December 2017 2 Editorial The year ahead – cautious optimism

I have over 20 years of experience as • We expect another year of positive equity returns, driven mainly by an equity strategist. After two long rising corporate profits, rather than higher valuations. stays in London and Paris, and a short • The prospect of monetary tightening – central banks’ net asset stint in Singapore in between, I joined

purchases will turn negative by the end of the year for the first UBS in Zurich in 2014 as European E ditori a l time in nearly a decade – leaves limited scope for P/E expansion, in equity strategist. I have a Master’s our view. degree in economics from the Univer- sity of Amsterdam, and an MBA from • While we are cautiously optimistic about the year ahead, potential the University of Washington. surprises could ambush the market. Bert Jansen, strategist

The world economy should grow by a solid 3.8% next year, similar to this year. With inflation likely to remain stable, a goldilocks scenario for Reg i on St r ategy equities looks probable.

Nevertheless, the year will not be an easy one for investors. Instead of dwelling on our base scenario for the year ahead, best summarized as From the editor’s desk: “cautious optimism” (please refer to “Year Ahead 2018,” published on • The next issue of UBS Equity Compass will be pub- 29 November), I’ll highlight three potential surprises that may upset the lished on 22 January 2018. applecart (none of which constitutes the CIO WM House View).

European sovereign bond yields, instead of rising as is widely expected, Secto r St ategy could fall. Such a scenario is conceivable because inflation expectations will stay low due to structurally deflationary pressures from an aging society, disruptive technologies and high debt. It would hurt financials and support long-duration sectors like consumer staples, healthcare and Reg i on s information technology.

A second surprise would be another year of earnings-per-share (EPS) upgrades. The positive impact from better-than-expected economic growth would likely offset any effect from adverse currency movements. Secto rs In Europe, earnings have surprised positively in two consecutive years only twice in the past 30 years.

Finally, equities might fall markedly early in the year, triggered by the US Federal Reserve tightening policy more aggressively than anticipated and confounding the conventional view that market gains will be front- loaded. Equity markets would then struggle to regain the lost ground because no proverbial wall of worry would be left to climb: all the economic, political, regulatory and fiscal lights would be flashing green. A market priced for perfection amid rising US interest rates implies no i nable nve s t ng Su s ta upside.

In our global tactical asset allocation, we are overweight equities against high grade bonds and euro high yield credit. We are also overweight the Eurozone versus an underweight in UK equities. At a global sector level, we are overweight energy, financials and information technology. Eq uit y Ra d a r Happy holidays and best of luck in the year ahead.

Bert Jansen, Equity Strategist UBS Chief Investment Office WM Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 3 Region Strategy

Stay overweight equities

I have more than 12 years of experi- • We are positive on global equity markets as we enter 2018, amid ence as an equity strategist, and robust economic growth and limited evidence of an impending joined UBS in 2008. I hold a PhD in recession. Much like in 2017, solid earnings growth should con- economics from the University of

tinue to support equity markets. Global equities are valued in line Bonn, and am also a CFA charter- E ditori a l with their 30-year averages. holder. • We maintain our overweight position on Eurozone equities. Lead- Markus Irngartinger, ing domestic economic indicators remain at high levels and are CFA, strategist supporting domestically generated earnings growth. Eurozone companies are disproportionately geared toward the robust global manufacturing cycle. • We remain underweight UK stocks. We expect earnings growth to

decelerate in 2018. Political uncertainty is likely to weigh on invest- Reg i on St r ategy ment activity.

Equity markets – preferences and performance Global equities have pursued an almost uninterrupted upward path with Market returns in % relatively low variation in 2017. The resurgence in economic growth worldwide fueled a broad-based earnings recovery, which underpinned Regions/Countries Positioning 1-month YTD the healthy advance of roughly 20% in the MSCI All Country World Australia è 1 10 Index. CIO remains overweight global equities entering the new year and

Canada è 1 8 Secto r St ategy expects them to outperform high grade and euro high yield bonds. Robust economic growth worldwide supports continued revenue Emerging markets è 1 33 growth. Companies are likely to defend their margins amid muted wage Eurozone ì 1 14 pressure and achieve solid earnings growth. Earnings are poised to drive Japan è 2 18 equity prices higher. Reg i on s Switzerland è 3 19

Overweight EMU equities United Kingdom î 2 9 We are overweight Eurozone equities over UK ones. Domestic demand United States è 4 22 in the monetary union is robust, and leading indicators have inched up steadily, pointing to continued domestic expansion. Moreover, due to Arrow indicates our preference relative to global equity markets over Secto rs the cyclical sector exposure, company earnings should also be supported a 3- to 12-month horizon. Source: Thomson Reuters, UBS, as of 15 December 2017 by the solid global economic backdrop. Earning growth of about 10% should drive Eurozone stocks higher in 2018.

Underweight UK equities UK equities lagged global and Eurozone ones in 2017 in part due to Earnings recovery supports global equities weakness in healthcare and utilities. Moreover, the UK’s more defensive Year-over-year growth of earnings per share (EPS), in % sector make-up leaves it less geared toward the global growth recovery than the Eurozone equity market is. The increase in inflation is eroding 50 real wage growth. Political uncertainty about the future relationship with 40 i nable nve s t ng Su s ta the EU might harm investment activity in 2018. We expect earnings 30 growth to decelerate in 2018 after a more than 20% advance in 2017. 20 10 We are neutral Swiss equities in our global portfolio. Organic sales 0 growth has re-accelerated in 2017, and we expect it to be sustained at –10 close to 4%. This should lead to positive earnings growth at a mid-to- –20 high single-digit rate next year. –30 Eq uit y Ra d a r –40 2006 2009 2012 2015

MSCI AC World 12m trailing EPS growth, yoy

Source: Thomson Reuters, UBS, as of December 2017

Past performance is no indication of future performance. The market Inv estme n t h emes prices provided are closing prices on the respective principal exchange.

Back to Contents page UBS CIO WM December 2017 4 Sector Strategy

A pro-cyclical tilt

I have over 20 years of experience as • We have a pro-cyclical tilt in our global sector allocation. Most eco- an equity strategist. After two long nomic indicators continue to point to solid economic growth, stays in London and Paris, and a short combined with modestly rising inflation. stint in Singapore in between, I joined

• At a global sector level, we are overweight financials and energy as UBS in Zurich in 2014 as European E ditori a l our favorite reflation plays. We are also overweight information equity strategist. I have a Master’s technology. The sector has been strong this year, but valuations are degree in economics from the Univer- sity of Amsterdam, and an MBA from reasonable and earnings growth should remain strong. the University of Washington. • We are underweight consumer staples, healthcare and utilities. They have limited operating leverage compared to other, more Bert Jansen, strategist cyclical sectors, while high valuations in staples leave no room for P/E expansion amid rising US interest rates. Reg i on St r ategy

Energy (ì) Regional sector preferences The sector should be supported by another year of solid EPS and cash Sectors Global US EMU flow growth, helped by cost cutting and lowered capex. Free cash flows at major energy firms should be sufficient again to cover capex and divi- Consumer Discretionary è è è dend payments and even allow share buybacks for some. The above- Consumer Staples î î î average dividend yield looks attractive and safe, unless there is a signifi- Energy ì ì ì cant decline in oil prices. Financials ì ì è (ì) Secto r St ategy

Financials (ì) Healthcare î (è) î (è) î (è)

Solid GDP growth and lower bad debt provisioning should provide sup- Industrials è è ì (è) port. But European banks’ interest margins should remain under pressure because of persistently low interest rates and bond yields. Credit Information Technology ì ì ì (è) Reg i on s growth in the Eurozone is picking up, albeit from a low base. The sector Materials è è è is trading, at a discount to non-financials. Real Estate è è î

Telecoms è è è ì Information technology (ì) ( )

The sector has had a strong year, but its premium rating to the wider Utilities î î è (î) Secto rs market is not out of line historically and is justified by above-average Arrow indicates our preference relative to the respective regional profitability. IT continues to look attractive because of strong structural benchmark indices over a 3- to 12-month horizon. earnings growth and above-average cash flow generation. Note: Arrow in brackets indicates last UBS Equity Compass positioning. Consumer staples (î) The sector’s high and stable cash generation is attractive, supported by solid growth prospects in emerging markets. However, high valuations Performance of global equity sectors limit the scope for a rerating amid rising US interest rates. The stronger In % euro is an additional challenge for Eurozone-based companies, given the Cons Discretionary sector’s high sales exposure outside the currency union. i nable nve s t ng Su s ta Cons Staples Utilities (î) Energy The sector should underperform amid solid, synchronized global growth Financials and rising US interest rates. In the Eurozone, we do not see any near- Healthcare term positive catalysts following the sector’s strong gains this year. Gen- Industrials eration overcapacity will not disappear any time soon, while electricity IT demand is likely to remain muted. Materials Eq uit y Ra d a r Telecom Utilities

–5 0 5 10 15 20 25 30 35 40

YTD1m

Source: Thomson Reuters, UBS, as of 15 December 2017

Past performance is no indication of future performance. The market Inv estme n t h emes prices provided are closing prices on the respective principal exchange.

Back to Contents page UBS CIO WM December 2017 5 Region

Preference Switzerland Neutral

I earned a Master of Science in Strategy business administration from the We are neutral Swiss equities. Organic sales growth has re-acceler- University of Berne, and have ated in 2017, and we expect it to be sustained at close to 4% in worked as an equity analyst for UBS

2018. Earnings growth is likely to continue to improve in 2018. Still, for over 25 years. After two long E ditori a l the defensive Swiss market – healthcare and consumer staples stays in Asia, I am now based in account for 60% of the market capitalization – will benefit less from Zurich and cover Swiss equities. robust global growth than more cyclical ones. Stefan R. Meyer, analyst

Our positioning within the region We recommend selective investing, with a preference for quality dividend payers as well as stocks with withholding-tax-free distributions.

Overall, the dividend yield of Swiss stocks is attractive, even though Reg i on St r ategy their valuation is high.

Most Preferred Least Preferred Revenue growth recovered in 2017. This was supported by a turnaround Credit Suisse Group CHF Adecco CHF in domestic deflation and the softening Swiss franc from mid-year. As a DKSH Holding AG CHF Autoneum Holding AG CHF result, corporate profits are likely to end up higher this year, after two Flughafen Zuerich CHF Barry Callebaut CHF consecutive years of negative growth. This was welcome news to inves- Galenica Santé CHF Ems-Chemie CHF tors, and the Swiss equity market is likely to end the year with a double- Geberit CHF Gurit CHF Secto r St ategy digit percentage total return. Georg Fischer CHF Panalpina World Transport CHF Julius Baer Group CHF Schindler CHF Favorable global economic trends are likely to extend into the next year Landis+Gyr Gr N CHF Swisscom CHF despite a number of potential global risks. For 2018, we therefore expect organic sales growth for the Swiss equity market to settle at close to the Novartis CHF Vifor Pharma CHF Reg i on s 4% mark. Roche CHF SGS CHF A weaker franc will support the domestic economy, and business earn- Sulzer CHF ings generated internationally will be worth more in francs. While the Sunrise Communications CHF currency gains have only had a marginally positive effect on this year’s Vontobel CHF Secto rs corporate profits, we expect the currency exchange rate factor to Zurich Insurance Group CHF increase profits in the coming year by a low-single-digit rate. Overall, we Source: UBS, as of 18 December 2017 expect mid-single-digit percentage profit growth this year and a high- single-digit rate in the coming two years. As our selections may change over time, please always consult the underlying Equity Preference List (EPL) for our up-to-date equity preferences. The respective EPL (which also lists the analyst(s) responsible for the selections and the thematic The average dividend yield at 3.1% is attractive in a historical compari- benchmark) can be found on the UBS CIO portal, which can be accessed via the son and relative to CHF bond yields. However, the price-to-earnings (P/E) e-banking platform or via Quotes. ratio of the Swiss Performance Index (SPI) based on estimated corporate earnings for the next 12 months is rather expensive at close to 18x versus the 20-year average of 15.6x. i nable nve s t ng Su s ta

Swiss high-quality dividend-paying equities are attractive because the yield advantage over CHF interest rates and bonds is high. However, the growth factor is important too, as pure high-yield equities can no longer benefit from falling interest rates, while the global economic upswing again allows more sales and earnings growth. Distributions are even more attractive if they are withholding-tax-free. Eq uit y Ra d a r Investing in Switzerland

A monthly guide to investing in Swiss financial markets Investing in Switzerland Investing in Switzerland is a monthly Chief Investment Office WM — December 2017 / January 2018 cross-asset investment guide for those interested in investing in the Swiss financial markets, covering equities, bonds, real estate, currencies and more. For further reading: A look ahead to the new year Available in: English, German, French, Equities Bonds Economy

Using dividend strategies Negative total EU brings tailwind • Swiss equities: Swiss withholding-tax-free distributions, published on to participate in growth returns loom Italian a b Subscribe: here or via client advisor 9 November 2017. Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 6 Region

Preference Eurozone Overweight

Strategy We are overweight Eurozone equities. Domestic demand is robust and leading indicators point to continued solid domestic activity in

early 2018. Moreover, companies are well positioned to benefit from E ditori a l robust global demand given their cyclical sector composition. While the ECB will start reducing its asset purchasing program in 2018, the monetary backdrop will remain favorable for stocks.

Our positioning within the sectors Another year of synchronized global growth should be supportive of Rudolf Leemann, analyst Fabio Trussardi, analyst Eurozone equities. Highly valued non-cyclicals should underperform

amid rising US interest rates. We are overweight energy, industrials Reg i on St r ategy and information technology, and underweight consumer staples, healthcare and real estate. Most Preferred Least Preferred Andritz EUR Air Liquide EUR Our country positioning within the region BNP Paribas EUR Deutsche Bank EUR We are overweight Germany, whose above-average cyclicality should Continental AG EUR Kone EUR benefit from solid global growth. We are underweight Belgium and CRH EUR Philips Lighting N.V. EUR the Netherlands because of both markets’ defensive sector bias. We Danone EUR have a neutral stance on France, Italy and Spain. Enel EUR Secto r St ategy Erste Bank EUR Market and sectors Ferrari NV USD The MSCI EMU total return index should end the year with a gain of Galp Energia EUR more than 10%, largely led by the outperformance of cyclicals, financials

Grifols SA (B Share) EUR Reg i on s and utilities. The gain is broadly in line with this year’s expected earn- KPN Telecom EUR ings-per-share (EPS) growth. Linde EUR Moncler EUR For next year, we expect corporate earnings to grow by 9–11%, aided by NN GROUP EUR another year of synchronized global GDP growth. The combination of Secto rs OSRAM LICHT EUR solid revenue growth and rising profit margins, thanks to operating lev- SAP AG EUR erage (historically, net profits grow around 2.8x as much as revenues, on Schneider Electric EUR average), should more than offset the negative currency effects we TOTAL EUR expect from a rising euro (a 5% rise in the trade-weighted euro is equiv- UniCredit EUR alent to a 2–3% drag on MSCI EMU’s EPS). Vinci EUR Source: UBS, as of 18 December 2017 The potential for P/E expansion is limited, in our view, because of rising

US interest rates and the prospect of a winding down of the ECB’s asset- As our selections may change over time, please always consult the underlying purchase program (“tapering”). The 12-month forward market P/E of Equity Preference List (EPL) for our up-to-date equity preferences. The respective EPL (which also lists the analyst(s) responsible for the selections and the thematic 14.5x stands at a modest premium to its long-term historical average of i nable nve s t ng Su s ta benchmark) can be found on the UBS CIO portal, which can be accessed via the 14.0x (since the inception of the euro in 1999). e-banking platform or via Quotes.

At a sector level, we are overweight energy (attractive dividend yield, improving cash flows), industrials (play on accelerating capex) and information technology (solid EPS growth, above average profitability). We are underweight consumer staples, healthcare and real estate. Eq uit y Ra d a r The main risk of a market de-rating would be aggressive Fed policy tightening or an earnings recession. ECB tapering and political uncertainty For further reading: are unlikely to have a meaningful impact on Eurozone equities. • Eurozone sectors and countries – looking forward to Bert Jansen, Equity strategist 2018, published on 13 November 2017. • European economy – ECB’s QE: Decision day, published on 18 October 2017. • Investment theme “Eurozone in style: Value opportunities” (latest thematic one-pager as of 11 Decem-

ber 2017). Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 7 Region

Preference United Kingdom Underweight

An equity strategist specializing in Strategy UK equities, I’m based in London. I We are underweight UK equities. They no longer benefit from a have a background as a UK con- weaker currency as in early 2017. Earnings of domestically focused sumer analyst, and was a fund ana-

companies show lackluster development. We expect earnings growth lyst before joining UBS in 2004. E ditori a l to decelerate in 2018, while political uncertainty is likely to weigh on A University of Oxford graduate, I investment activity. Weak real wage growth should put pressure on hold the CFA charter, the Financial Planning Certificate, and the Invest- domestically generated revenues. ment Management Certificate. Our positioning within the region Caroline Simmons, CFA, strategist Investing in diversified dividends is our preferred way of gaining exposure to the UK market. We believe this type of strategy will outper-

form in a continued search for yield. Reg i on St r ategy

In the past month, the UK equity market is broadly flat, meaning that it Most Preferred Least Preferred has returned 8% this year (including dividends). The UK is one of the AstraZeneca GBP Ashtead Group GBP worst-performing equity regions in 2017. Aviva GBP Debenhams GBP BAT UK GBP National Grid GBP Telco was the best-performing sector in the past month, as Vodafone‘s BP GBP investment in their networks shows signs of paying off. This was fol- Compass Group GBP Secto r St ategy lowed by financials, where UK banks eventually benefited from the pos- Diageo GBP itive outcome of the Bank of England stress test. Healthcare was the HSBC GBP worst-performing sector due to generally uninspiring 3Q results and ris- Prudential GBP ing bond yields Royal Dutch Shell GBP Reg i on s The Bank of England (BoE) has raised rates for the first time since 2007, Vodafone Group GBP and we see the path remaining data-dependent and gradual. Historically, Source: UBS, as of 18 December 2017 equities tend to perform well during interest rate hiking cycles (returning As our selections may change over time, please always consult the underlying 11% on average following the first rate rise during the last six hiking Equity Preference List (EPL) for our up-to-date equity preferences. The respective cycles), but there could be some sector rotation, so we advise positioning EPL (which also lists the analyst(s) responsible for the selections and the thematic Secto rs across a broad range of sectors. While there is some risk to the domestic benchmark) can be found on the UBS CIO portal, which can be accessed via the e-banking platform or via Quotes. economy and some weakness in the UK consumer market, domestic companies are already trading on average at a 25% P/E discount to the rest of the UK market.

Politics will have an impact too, whether in the form of domestic political party concerns or Brexit negotiations. The currency has been the main conduit for Brexit risk, with a weaker pound offsetting concerns about the future of the financial services industry. As deadlines approach, volatility could increase in these areas, but, ultimately, global growth is likely i nable nve s t ng Su s ta to fuel the overall UK equity market, since 70% of its revenues are generated outside the UK.

The UK’s forward P/E of 14.4x is in line with its long-run average, meaning equity performance will need to be fueled by earnings growth, which is likely to be uninspiring next year. After exceeding 20% this year, earnings growth is likely to fall, with consensus currently calling for 5%. Two Eq uit y Ra d a r big tailwinds, the recovery in commodity prices and a weak currency, will no longer be present. For further reading: Our preferred investment strategy in the UK is to focus on diversified • UK economy: Forecast update, published on dividends – benefiting from the UK’s attractive 4% dividend yield while 8 November 2017. maintaining a broad spread across sectors. • UK economy: Brexit brief: deal or no deal, published on 20 October 2017. • UK economy – Brexit brief: Kickstart, published on

3 October 2017. Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 8 Region

Preference United States Neutral

I am a CFA charterholder, with a Strategy Master’s degree in finance from a US We are neutral US equities. Looking ahead to 2018, economic university. I have been with UBS since momentum is solid and corporate profits are on a sustainable growth 1999, and have worked in both

path. Tax reform looks likely to pass, which will boost the growth out- credit and equities. Nowadays, I E ditori a l look further. Low inflation allows the Fed to raise interest rates very focus as an equity analyst on the gradually. At a trailing P/E of around 20.5x, US equities are more auto sector. expensive than many other regions. Rolf Ganter, CFA, analyst

Our positioning within the region We expect US equities to continue to rise, driven by solid earnings growth and an ongoing equity friendly backdrop. We retain our pref-

erence for cyclical versus defensive sectors and for value over growth Reg i on St r ategy stocks. Our preferred sectors are technology, financials and energy.

In 2017, US equities were underpinned by solid S&P 500 EPS growth of Our US stock selections in the following sector 10%. Market gains were amplified by higher valuations, driven by Equity Preferences lists strengthening and synchronized global growth and inflation generally US sector Link* undershooting market expectations. preference

For 2018, the solid economic backdrop bodes well for corporate profit USA –– Secto r St ategy growth. We forecast 2018 S&P 500 EPS to rise another 8% to USD 141 US Consumer Discretionary è if tax reform is not passed. With expected tax reform benefits, profits could get an additional 6–10% boost. Businesses and consumers con- US Consumer Staples î tinue to enjoy low-cost and relatively easy access to capital – the oxygen US Energy ì Reg i on s that propels economic growth, which in turn also spurs ongoing corporate earnings growth and supports above-average market valuations. US Financials ì

US Healthcare î (è) We continue to favor “cyclical” sectors or those sectors more levered to improving economic growth. After growing 18% in 2017, technology US Industrials è Secto rs (the S&P 500’s largest sector) should see another year of double-digit US REITs è earnings growth, although somewhat slower compared to 2017. Earn- ings for financials should also be solid. Higher short-term interest rates, US Telecoms è continued healthy economic growth, and a potential boost to capital US Utilities î market activity should drive earnings to accelerate into mid-teens growth rates. Energy sector profits continue to recover from rather depressed Information Technology ì levels, as spot oil prices have improved. More defensive sectors such as consumer staples, healthcare, and utilities should see relatively consist- Real Estate è ent, albeit lower, profit growth – we believe they will underperform. Arrow indicates our preference relative to US equity market over a

3- to 12-month horizon. i nable nve s t ng Su s ta In terms of styles, we continue to believe value looks attractive relative to *Document links are UBS-internal only. Note: Arrow in brackets indicates last UBS Equity Compass growth. With tax reform passage likely, overall earnings growth will positioning. likely accelerate to well above-average levels – typically a supportive environment for value stocks. In terms of size, we currently have no preference between small, mid, and large caps. Eq uit y Ra d a r

For further reading: • US equities: 2018 outlook: Keep calm and ride the

bull, published on 12 December 2017. Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 9 Region

Preference Japan Neutral

Based in Tokyo, I’m responsible for Strategy interpreting Japan’s economy, corpo- We are neutral Japanese equities. Corporate sentiment is buoyant. rate earnings, political changes, and The economy is advancing and monetary stimulus remains intact. providing investment insights. I was

Earnings reports in 2017 showed that the Japanese equity market, senior investment manager at another E ditori a l with its strong tilt to cyclical sectors, is a main beneficiary of robust asset management firm before joining global economic growth. Still, we expect earnings growth to slow UBS in 2006. I have an MBA from the Goizueta Business School at Emory due to base effects in 2018. University in Atlanta, Georgia, and am a chartered member of the Securities Our positioning within the region Analysts’ Association of Japan. After the national election in October, Japanese equities- outper Toru Ibayashi, analyst formed their peer markets. In addition, corporate earnings in the Sep-

tember quarter were better than expected, at 17% year-on-year in Reg i on St r ategy net profit. However, we believe earnings momentum should slow in 2018 due to slower margin expansion. We prefer stocks that benefit Most Preferred Least Preferred structurally from the tightening of Japan’s labor market. Dena JPY JSR JPY East Japan Railway JPY Screen Holdings JPY In the lower house election on 22 October, Prime Minister Shinzo Abe’s Fanuc JPY SUMCO JPY Liberal Democratic Party (LDP) retained its two-thirds majority. However, Fujitsu JPY unlike the previous lower house election in December 2014, the reelec- HINO MOTORS JPY Secto r St ategy tion of the Abe administration this time will not guarantee further eco- Japan Airlines JPY nomic stimulus measures. Although we do not think Abenomics will end Japan Post JPY any time soon, the Bank of Japan may change its quantitative easing Kubota JPY sometime next year. Mabuchi Motor JPY Reg i on s The key question for investors is, why are Japanese corporate earnings Mitsubishi Estate JPY so strong? In our view, much of positives in the September quarter came Mitsubishi UFJ Financial JPY from very strong Chinese capital expenditure. Chinese companies built Group Nidec JPY multiple large-scale semiconductor factories and invested in electric ORIX JPY vehicle technologies, which helped Japanese companies’ sales despite Secto rs JPY gaining against USD this year. In short, we think Japanese companies Resorttrust JPY are benefiting from the mid-to-late cycle of the global economy as well Seven & I holdings JPY as the capital investment expansion cycle. We should watch if these pos- Shinsei Bank JPY itive trends can continue throughout 2018. Sumitomo Mitsui Financial JPY Group In 2018, we expect three things in Japan: 1) higher inflation/interest TDK JPY rates; 2) an even more severe labor shortage; and 3) slower corporate Toshiba JPY earnings in 1H 2018 due to the higher base in 2017. To take advantage Yahoo Japan JPY of these trends, we recommend buying Japanese ecommerce operators, Source: UBS, as of 18 December 2017 which are enjoying a higher penetration rate in Japan and meeting i nable nve s t ng Su s ta demand for more time-saving solutions. Furthermore, we think Japanese As our selections may change over time, please always consult the underlying Equity Preference List (EPL) for our up-to-date equity preferences. The respective banks are also well positioned to benefit from higher wages, inflation EPL (which also lists the analyst(s) responsible for the selections and the thematic and eventually interest rates in 2018. As investors’ focus changes drasti- benchmark) can be found on the UBS CIO portal, which can be accessed via the cally when earnings momentum turns slower, we need to pay attention e-banking platform or via Quotes. to outperformers of Japanese equities in 2017, such as machinery and semiconductor equipment manufacturers. Eq uit y Ra d a r

For further reading: • Japanese equities: Japan embraces sustainable investing, published on 22 November 2017. • Japanese equities: Why we expect Japan’s corporate earnings to slow, published on 16 November 2017. • Japanese equities: Tightening labor markets could benefit Japan – update?, published on 7 November

2017. Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 10 Region

Preference Asia ex Japan ––

I began my career as an IT sector • We expect another year of double-digit earnings growth for Asia analyst in early 2006, and expanded ex Japan in 2018 with an EPS growth estimate of 11%. coverage to include the Taiwan mar- • Valuations of the region still remain attractive, as we see broaden- ket and other thematic ideas. I am a

ing earnings growth as an additional catalyst. CFA and a CAIA charterholder, and E ditori a l • From a thematic perspective, we still like Asian companies offering studied commerce at university. growth at a reasonable price, selective financials, and cash flow Sundeep Gantori, CFA, analyst leaders.

Contrary to general perception, AxJ P/E expanded by only mid-single digits in 2017 thanks to earnings growth and currency tailwinds. We believe earnings will be a key driver in 2018, as we expect them to rise by 11%. Reg i on St r ategy During the past 15 years, there have been only two instances when earnings grew by double digits over two consecutive years (2003–04 and 2009–10), driven by broader economic recovery. Investors rewarded Asia ex Japan Focus 20 EPL the markets well, driving P/E multiples up by an average of 8% during Most Preferred both years. We expect AxJ markets to rerate moderately in 2018 as the China: Overweight region’s sustainable innovation-driven growth becomes more apparent. Alibaba USD The region now trades on a forward P/E of about 13.2x, slightly above Baidu, Inc. USD the 15-year average of 12.5x. China Construction Bank HKD Secto r St ategy China Mobile Ltd HKD While Asia posted a strong return in 2017, it was concentrated in the top Ping An Insurance (Group) HKD 15 stocks, which drove over half of the performance. The good news is Tencent Holdings HKD that growth will likely broaden, with speeds converging between mar- Hong Kong: Neutral kets like North Asia and ASEAN plus India, as well as between cyclical AIA Group HKD Reg i on s and defensive sectors. The coming year will likely be the first in almost a Samsonite International S.A. HKD decade that every sector will post earnings growth, so the gap should India: Neutral narrow. We believe a broad-based earnings recovery will support the HDFC Bank* INR region’s valuations and drive 13–14% returns in 2018. ICICI Bank* INR

Indonesia: Overweight Secto rs With earnings growth broadening in 2018, we expect markets to start Bank Mandiri IDR paying attention to laggards. Any rotation should happen gradually, Semen Indonesia IDR however, as we still see steady growth for 2017’s best performers – Malaysia: Underweight North Asia and IT. We do see select opportunities in ASEAN (Indonesia, Philippines: Underweight Thailand) and in the financial and consumer sectors. While most of the Singapore: Neutral structural trends in technology are intact, the sector benefited from cycli- DBS Group Holdings SGD cal tailwinds in 2017 like memory pricing and margin recovery that may South Korea: Neutral fade in 2018. We therefore expect the cyclical part of technology like KB Financial Group* KRW hardware or semiconductors to partly roll over in 2018, while structural POSCO* KRW stories like internet should continue to grow. Samsung Electronics* KRW i nable nve s t ng Su s ta Taiwan: Underweight MediaTek Inc.* TWD Taiwan Semiconductor Manufacturing* TWD Thailand: Overweight Bangkok Bank* THB CP All Plc* THB

*Potential trading restrictions Eq uit y Ra d a r Source: UBS, as of 18 December 2017

As our selections may change over time, please always consult the underlying Equity Preference List (EPL) for our up-to-date equity preferences. The respective EPL (which also lists the analyst(s) responsible for the selections and the thematic benchmark) can be found on the UBS CIO portal, which can be accessed via the e-banking platform or via Quotes. For further reading: • Investing in Asia Pacific, published on 20 October 2017. • Asia Pacific economy: The Belt and Road Initiative, published on

13 October 2017. Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 11 Region Global Preference Emerging Markets Neutral

I began my career as an economist Strategy at the Swiss National Bank in 2002, We are neutral emerging market (EM) stocks in our global portfolio. and following a stint at Banco de While economic and corporate fundamentals look promising, EM España, I joined UBS in 2009, where

equities have had a very strong rally in 2017. EM earnings have I am currently responsible for the E ditori a l rebounded strongly in 2017 thanks to revived economic activity. We emerging market asset allocation. expect this trend to continue. EM equities are trading at a discount to I hold a Master’s in economics from the University of St. Gallen, and their developed market counterparts. received my PhD from the University of Basel. Our positioning within the region Michael Bolliger, Our Most Preferred markets are China, Indonesia, Thailand (strong Head of EM Asset Allocation earnings recovery), Russia, Brazil (economic recovery and strong earn-

ings growth), and Turkey (attractive valuations and strong earnings Reg i on St r ategy growth); Least Preferred are Taiwan (tech sector headwind), Malaysia, and the Philippines (macro challenges).

With just a few weeks to go before the year ends, EM equities are on Country preferences in EM equities track to deliver the best yearly performance since 2009. Earnings recov- (relative to MSCI EM Index) ery has been the biggest driver, contributing more than two-thirds of the 30% gain in USD terms this year. underweight neutral overweight Secto r St ategy China For 2018, growth will likely remain the key factor behind our construc- India tive view on EM equities. We expect around 8–12% earnings growth in Indonesia 2018, resulting in a total return for the asset class in the mid-teens South Korea range. Valuations are slightly expensive with a trailing 12-month P/E of Reg i on s 14.1x, one standard deviation above the historical average but at a 24% Asia Malaysia discount to developed market peers (versus the historical average of an Philippines 18% discount). Taiwan Thailand

Our Most Preferred markets are Brazil, China, Indonesia, Thailand, Tur- Brazil Secto rs key, and Russia. We trimmed our overweight in Russia and Turkey, as we Chile are adding more exposure to EM equities in a diversified manner. In Bra- Colombia zil, valuations are attractive and we expect the macroeconomic outlook LatA m Mexico to improve even further, supporting earnings growth. We like Turkey for Peru its earnings growth. In Russia, we believe greater GDP growth and sta- Czech Republic ble-to-higher commodity prices will support earnings and the market as Hungary a whole. In Asia, we like China for its attractive valuations, and Thailand Poland and Indonesia for their earnings momentum and profitability.

EMEA Russia South Africa Our Least Preferred markets are Taiwan, Malaysia and the Philippines. i nable nve s t ng Su s ta We expect headwinds from the tech sector in Taiwan. In Malaysia and Turkey the Philippines, macro challenges may weigh on performance. new old

Note: All positions are relative to the MSCI EM Index. The EM regional asset allocation shown is not part of the Global Tactical Asset Allocation (TAA). Source: UBS, as of 14 December 2017 Eq uit y Ra d a r Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 12 Sector

European

Eurozone preference Automobiles ––

I am a CFA charterholder, with a Strategy Master’s degree in finance from a US The sector faces several structural challenges, including the rise of car university. I have been with UBS since sharing and the shift away from traditional combustion engines (die- 1999, and have worked in both

sel & gasoline) to electric vehicles. As a consequence, capex is likely to credit and equities. Nowadays, I E ditori a l rise while after-sales maintenance is likely to fall. In the near term, focus as an equity analyst on the however, buoyant consumer confidence is supporting US and Euro- auto sector. pean car sales, providing sector support. All in all, the scope for a sec- Rolf Ganter, CFA, analyst tor rerating is limited, in our view, despite low valuations.

Our positioning within the European sector For 2018, we remain confident in a diversified selection of European

car and tire manufacturers and suppliers with a strong commitment Reg i on St r ategy to R&D-driven technology. Corporate restructuring, the future of diesel and the positioning in a disruptive automotive world will drive the Most Preferred Least Preferred sector and the individual stocks. Continental AG EUR Autoneum Holding AG CHF Ferrari NV USD This year, we recommended a diversified selection across European auto Fiat Chrysler EUR stocks, as we expected them to benefit from growth in Europe and Michelin EUR China. It turned out to be true, with global car growth within our 2–3% Renault SA EUR Secto r St ategy expectations. We were correct in not anticipating any major rerating. Valeo EUR The sector performance was roughly in line with the broad-based Euro- Volkswagen Preference EUR pean markets, but with pronounced differences in individual stocks. Volvo B SEK In 2018, we expect Europe’s strong volume growth to slow, as the UK Source: UBS, as of 18 December 2017 Reg i on s will further cool off and Germany will remain stable at best. The US will As our selections may change over time, please always consult the underlying remain challenging, as European sedans are less in demand than large Equity Preference List (EPL) for our up-to-date equity preferences. The respective US SUV and pick-up trucks. We are confident that Brazil and Russia will EPL (which also lists the analyst(s) responsible for the selections and the thematic benchmark) can be found on the UBS CIO portal, which can be accessed via the continue to recover. As always, China, the largest auto market globally, e-banking platform or via Quotes. is the wild card. We expect global car volume to grow around 2%. Secto rs

The strong euro will be a burden, ongoing high research and development costs will cap operating profit margins, and capital expenditures will remain high. New technologies will shape the future of the auto industry, as highlighted in our Longer Term Investment (LTI) theme called Smart Mobility. This is based on a combination of smart powertrains (electrification), smart technology (autonomous driving), and smart use (car-sharing/car-hailing).

Upside surprises for the sector are unlikely to come from earnings, which i nable nve s t ng Su s ta should grow by 5–8%, but instead from corporate restructuring in the form of disposals and spin-offs or from the market finally realizing that auto companies will also succeed in a Smart Mobility world. Both could lead to a rerating, as investors might feel attracted by the sector’s low valuation, trading 45% below market multiples. Risks include news on the diesel-related discussions, a stronger euro, economic weakness leading to falling consumer confidence globally, and stock market volatility. Eq uit y Ra d a r

For further reading: • Longer Term Investments: Smart mobility, published

on 18 October 2017. Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 13 Sector

European

Eurozone preference Consumer Discretionary Neutral

With around 15 years of experience Strategy covering the insurance sector at vari- Strong confidence indicators, helped by rising wages and falling ous global brokerage houses and unemployment in the major economies, are supporting the sector. banks in London and Zurich, I

Luxury goods and general retail should show double-digit EPS growth rejoined UBS in 2014 and am respon- E ditori a l this year, helped by solid growth in Europe and China. Solid organic sible for the global insurance and growth in luxury goods should more than offset the negative impact luxury industries. I graduated from the London School of Economics of the strong euro. But a lot of good news is priced in following the with a degree in Philosophy and Eco- sector’s strong performance. nomics and am a CFA charterholder. Michael Klien, CFA, analyst Our positioning within the European sector Overall, the macroeconomic backdrop for consumers is favorable,

and financial conditions are also supportive of consumer spending. Reg i on St r ategy The stock market is near record highs and house prices are steadily An equity analyst specializing in rising, providing a boost to household budgets. There are some nega- consumer staples and general retail, tives, such as increasing household indebtedness in many countries I am based in Zurich. Before joining UBS in June 2014, I covered the and political uncertainty. global consumer sector at another Swiss bank. I graduated from the University of Applied Sciences Chur Luxury in 2003 and I am a CFA charter- The luxury sector has performed strongly this year, underpinned by earn- holder. ings momentum. However, valuations are now close to historical highs. Secto r St ategy Andreas Tomaschett, CFA, analyst Companies have delivered accelerating sales growth, which has underpinned performance and multiple expansion. This was confirmed with 3Q results. However, the sector has experienced a slight underperformance over the last month, as the market sees increasingly tougher Reg i on s comparables, but also because the environment continues to be volatile and fragile. Most Preferred Least Preferred Adidas AG EUR Debenhams GBP Fears about waning pricing power and lower new store openings are Compagnie Financiere CHF Ferragamo EUR weighing on the industry and reflected in lower expected medium-term Richemont SA Secto rs growth rates. Innovation is likely to once again come to the forefront to Compass Group GBP Luxottica EUR improve the pricing mix. China continues to be the driving force behind Inditex SA EUR Tod’s EUR the industry’s growth trajectory, something we expect to continue in the Kering EUR medium term. Our preference is for companies with good organic Moncler EUR growth opportunities and attractive valuations, but also with potential to Sodexo EUR restructure successfully. Source: UBS, as of 18 December 2017

Retail As our selections may change over time, please always consult the underlying The largest retail companies have underperformed in 2017. The negative Equity Preference List (EPL) for our up-to-date equity preferences. The respective EPL (which also lists the analyst(s) responsible for the selections and the thematic currency impact as well as online fears weighed on the sector, in particu- i nable nve s t ng Su s ta benchmark) can be found on the UBS CIO portal, which can be accessed via the lar on brick-and-mortar retailers. However, the economic environment e-banking platform or via Quotes. remains supportive. Improving employment and lower interest rates boost consumers’ disposable income. We expect the environment in the US and the Eurozone to remain supportive, while uncertainty surround- ing UK general retailers could increase. There is a risk that potential cost inflation due to sterling weakness or a worsening job market could weigh on UK-focused retailers. Eq uit y Ra d a r e-commerce channels will keep gaining market share. Companies with local sourcing and multi-channel offerings are better positioned to com- pete in the ”fast fashion” environment. The further rollout of new physical and online stores will remain a key growth driver for this segment. A potential downturn in Europe, adverse currency movements and more pressure on sales in emerging markets pose the highest risk for European For further reading: retailers. Conversely, a general acceleration in economic activity would • Investing in luxury: Diamonds are a girl’s best friend,

lead to faster like-for-like growth. published on 14 September 2017. Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 14 Sector

European

Eurozone preference Consumer Staples Underweight

An equity analyst specializing in Strategy consumer staples and general retail, The sector’s high and stable cash generation is attractive, supported I am based in Zurich. Before joining by solid growth prospects in emerging markets. However, high valua- UBS in June 2014, I covered the

tions limit the scope for a rerating amid rising US interest rates. The global consumer sector at another E ditori a l stronger euro is an additional challenge for Eurozone-based compa- Swiss bank. I graduated from the nies, given the sector’s high sales exposure outside the currency University of Applied Sciences Chur in 2003 and I am a CFA charter- union. holder. Our positioning within the European sector Andreas Tomaschett, CFA, analyst We prefer companies that are well positioned in faster-growing emerging markets. Those benefiting from efficiency improvements or

M&A synergies feature better earnings growth. Companies offering Reg i on St r ategy attractive and sustainable dividend yields due to their ability to generate cash also appeal to us. Most Preferred Least Preferred Ahold Delhaize EUR Barry Callebaut CHF The European consumer staples sector has benefited from M&A discus- Anheuser-Busch InBev EUR Carlsberg A/S DKK sions and increased pressure from shareholder activists in 2017. How- BAT UK GBP Henkel EUR ever, the sector underperformed the market due to the strong perfor- Danone EUR mance of more cyclical sectors. Diageo GBP Secto r St ategy Heineken EUR In 2018, we expect earnings per share growth to accelerate to around Imperial Brands GBP 10%. EPS growth will be driven by slightly better organic sales growth as Kerry Group EUR well as margin expansion due to ongoing efficiency programs as well as Unilever Plc GBP M&A synergies. Challenges and opportunities will remain the same. In Reg i on s particular, the structural shift to online will continue to impact corporate Source: UBS, as of 18 December 2017 strategies (e.g. marketing spend). Competition from local brands and As our selections may change over time, please always consult the underlying retailers’ private label products is also expected to persist. All in all, we Equity Preference List (EPL) for our up-to-date equity preferences. The respective expect the competitive environment to remain challenging but for EPL (which also lists the analyst(s) responsible for the selections and the thematic benchmark) can be found on the UBS CIO portal, which can be accessed via the Secto rs emerging markets to provide attractive growth. Therefore, we recom- e-banking platform or via Quotes. mend focusing on the following three investment areas:

1. European companies with high exposure to emerging markets, which should benefit from good economic momentum. 2. Companies with efficiency-improvement or synergy potential, which offer better earnings growth. 3. Tobacco companies, which offer attractive dividend yields owing to their highly cash-generative business models.

Companies’ strong balance sheets, low financing costs and intense focus i nable nve s t ng Su s ta on portfolio optimization could lead to further corporate transactions. Otherwise, these strong financial positions could also offer the opportunity to increase cash returns to investors.

However, high absolute and relative valuations seem to limit further upside potential and favor more cyclical sectors. In our view, further rises in interest rates pose a derating risk to the steep valuation of the sector, Eq uit y Ra d a r in particular for high dividend yield stocks. In addition, the sector is neg- atively exposed to an appreciation of the euro.

For further reading: • Investing in luxury: Is it all about the product?, pub-

lished on 14 December 2017. Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 15 Sector

European

Eurozone preference Energy Overweight

I have covered stocks since 1998 Strategy across various sectors, regions and The sector should be supported by another year of solid EPS and cash company sizes in Zurich, London and flow growth, helped by cost cutting and lowered capex. Free cash Singapore. The energy sector has

flows at major energy firms should be sufficient again to cover capex been my focus since 2006. I studied E ditori a l and dividend payments and even allow share buybacks for some. The economics and business administra- above-average dividend yield looks attractive and safe, unless there is tion in Switzerland and the Nether- lands and I am a Certified European a significant decline in oil prices. Financial Analyst (CEFA). Our positioning within the European sector Rudolf Leemann, analyst In 2018, investors should acknowledge that energy producers have achieved a turnaround with a focus on improving returns, and the

industry should acknowledge that investments are needed to ensure Reg i on St r ategy sufficient oil supply over the next decade.

Most Preferred Least Preferred Earnings and cash-flow generation in the sector has turned around in Galp Energia EUR Saipem EUR 2017 – which is positive in our view. However, we still get the impression Ophir Energy GBP Wood plc GBP that the stock market is hesitant to acknowledge this. Free cash flow Royal Dutch Shell GBP break-evens (cash generation after investments and dividend payments) TechnipFMC EUR have roughly halved compared to three years ago and continue to TOTAL EUR Secto r St ategy improve. The majors should have surplus cash-flows available for share Vallourec EUR buybacks and additional investments if oil prices exceed the USD 50–55 Source: UBS, as of 18 December 2017 range. We expect Brent oil to reach USD 57 in 12 months, lower than today, but still comfortably above the free cash flow break-even. As our selections may change over time, please always consult the underlying Equity Preference List (EPL) for our up-to-date equity preferences. The respective Reg i on s As the above becomes more consistent over the coming quarters (start- EPL (which also lists the analyst(s) responsible for the selections and the thematic benchmark) can be found on the UBS CIO portal, which can be accessed via the ing 1Q 2017), the more investors will acknowledge it by buying into the e-banking platform or via Quotes. sector.

Integrated companies not only have stronger balance sheets, they also Secto rs have more leeway to reduce costs. We see their dividends as sustainable, often added by share buy-backs. We particularly like Galp, Royal Dutch Shell, and Total.

Energy services should be supported by a (slowly) growing willingness to spend. This is already visible for US onshore “shale” producers today and in our view also will extend to other production areas and types. For now, we are taking a selective approach, with TechnipFMC and Vallourec rated Most Preferred, while we view Saipem as Least Preferred. i nable nve s t ng Su s ta In exploration and production, the pool of European companies with truly cost-competitive acreage is fairly limited. In addition, the traditional takeover optionality value has all but vanished. We think Ophir offers a compelling risk/return opportunity, even if it is riskier than other firms selected as Most Preferred. For further reading: • Investing in European energy: Recovery, published

on 6 October 2017. Eq uit y Ra d a r • US energy Equity Preferences List, continually updated. • Investment theme “US energy stocks: Time to refuel” (latest thematic one-pager as of 11 Decem- ber 2017). • Our energy future – series, edition 1: Are fossil fuels becoming extinct?, published on 5 December 2017. • Crude oil: No surprises from OPEC – deal extended,

published 30 November 2017. Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 16 Sector

European

Eurozone preference Financials Neutral

I lead our banking industry analysis. Strategy Previously, I was a fund manager at a Solid GDP growth and lower bad debt provisioning should provide leading Italian investment fund. I am support. But European banks’ interest margins should remain under a chartered public accountant and

pressure because of persistently low interest rates and bond yields. have a degree in economics from E ditori a l Credit growth in the Eurozone is picking up, albeit from a low base. Bocconi University in Milan. The sector is trading, as usual, at a discount to non-financials. A sec- Fabio Trussardi, analyst tor rerating is unlikely without a meaningful rise in ROEs.

Banks Reg i on St r ategy Our positioning within the European sector Banks are among the main beneficiaries from a pick-up in nominal Most Preferred Least Preferred growth, given the sector’s above-average operating leverage. The rise ABN AMRO EUR Bankia EUR in credit growth should allow for an improvement in ROE. Consensus BNP Paribas EUR Bankinter EUR estimates show good earnings momentum, with EPS growth in 2018 Credit Suisse Group CHF Deutsche Bank EUR expected to be slightly below the market average. Valuations are DnB ASA NOK Handelsbanken SEK compelling, but the sector needs to improve its profitability for this Erste Bank EUR value to be unlocked. Secto r St ategy ING Groep EUR Intesa SanPaolo EUR The Eurozone banking sector has outperformed the Eurozone market Unicaja Banco EUR this year thanks to higher earnings and positive macro developments UniCredit EUR Reg i on s (Eurozone GDP +2.3% and inflation +1.5% expected). While reported Source: UBS, as of 18 December 2017 earnings have been generally sound, they have not triggered major earnings upgrades for next year, which may prove conservative given the As our selections may change over time, please always consult the underlying markedly improving asset quality trend. We think that bank stocks could Equity Preference List (EPL) for our up-to-date equity preferences. The respective still be underpinned by the hope of rising earnings thanks to the pros- EPL (which also lists the analyst(s) responsible for the selections and the thematic

benchmark) can be found on the UBS CIO portal, which can be accessed via the Secto rs pect of rising interest rates, allowing for higher valuation multiples. e-banking platform or via Quotes.

A countdown to interest rate normalization has started, as the market has begun to factor in rate hikes that would benefit banks’ earnings. We calculated the sector’s profitability sensitivity to interest rate changes and derived a 38% increase in achievable profitability for a 1.0% increase in short-term interest rates, higher than the indications provided by management teams so far. Fundamentally, revenue growth is set to remain lackluster due to the low interest rate environment. But asset quality should continue to improve, offsetting the revenue pressure. Overall, for the first time in a while, we think that the market expectations of muted i nable nve s t ng Su s ta earnings growth for next year could prove conservative.

The current price-to-book value is compelling, at around 1x, which is below the historical average. The major risk to our investment thesis is a delay in interest rate hikes. Postponement of the first ECB hike expected in 2019 at the earliest might cause marked share price volatility, which investors should be prepared to accept as banks approach greater profit- Eq uit y Ra d a r ability.

Considering the above, our focus is on the Eurozone banks that are already able to generate superior profitability and on areas where the investment risk/reward is particularly compelling. For further reading: • Investing in banks: Positive macro development and

earnings revisions, published on 17 November 2017. Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 17 Sector

European Financials

With around 15 years of experience Insurance covering the insurance sector at various global brokerage houses and banks in London and Zurich, I Our positioning within the European sector

rejoined UBS in 2014 and am respon- E ditori a l We expect companies to pursue M&A more aggressively as organic sible for the global insurance and growth opportunities and efficiency improvements become tougher luxury industries. I graduated from to achieve. Valuation and dividend yield support performance, as the London School of Economics does relative earnings momentum. Our general preference is for well- with a degree in Philosophy and Eco- capitalized firms. nomics and am a CFA charterholder. Michael Klien, CFA, analyst

The key drivers in the sector are unchanged. Reflation should be positive for life insurers, while pressures remain on underwriting profitability in Reg i on St r ategy an increasingly competitive environment. There is limited organic growth potential overall. Technology adoption is likely to accelerate but will take Most Preferred Least Preferred time to become a material contributor and differentiator and, therefore, Aviva GBP Gjensidige Forsikring ASA NOK is unlikely to result in material earnings impacts in the near term. Axa EUR Earnings momentum relative to the European market has been negative Direct Line Insurance Group GBP in 2017, but picked up again most recently. The sector has outperformed Hannover Re EUR NN GROUP EUR this year and over the last month. The performance over the last month Secto r St ategy was driven by a rebound in non-life insurers, while reinsurers have been Prudential GBP particularly weak. Sampo EUR St. James Place GBP The sector offers one of the highest dividend yields in Europe, under- Zurich Insurance Group CHF Reg i on s pinned by capitalization and cash generation. From a P/E perspective, the Source: UBS, as of 18 December 2017 discount is close to record lows, reflecting fears of peak earnings and a lack of cyclical gearing amid an improving economic environment. As our selections may change over time, please always consult the underlying Equity Preference List (EPL) for our up-to-date equity preferences. The respective Despite the hope of higher inflation in Europe, interest rates remain low EPL (which also lists the analyst(s) responsible for the selections and the thematic benchmark) can be found on the UBS CIO portal, which can be accessed via the Secto rs in a historical context. The most recent hurricane losses are unlikely to e-banking platform or via Quotes. result in any meaningful and lasting reversal in the price environment. For primary property and casualty companies, competition continues to be fierce, and margins are increasingly squeezed, with benefits from reserve releases waning and premiums under pressure. However, rates are showing signs of increasing in select markets, mitigating the impact on margins. Alongside higher capital returns, we expect more M&A, as companies try to improve growth prospects and bolster their positions.

At stock level, there is a wide divergence of risk/return profiles. Our preference is for well-capitalized firms with limited dependence on market i nable nve s t ng Su s ta returns, and companies undergoing major restructuring and turna- rounds. We also prefer high dividend yields and strong growth in capital returns. The sector’s high yield should underpin near-term performance. Eq uit y Ra d a r

For further reading: • Investing in insurance: Digital evolution not revolu-

tion, published on 17 October 2017. Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 18 Sector

European

Eurozone preference Healthcare Underweight

Currently covering the healthcare Strategy and chemicals sectors, I have over The prospect of higher US interest rates amid solid economic growth ten years’ experience in various is likely to be a drag on performance. Valuations are more attractive equity roles. Before joining UBS in

following the sector’s underperformance in 2017 and may provide 2015, I worked as a sell-side analyst E ditori a l support. The potential US tax reforms are unlikely to have a meaning- and specialist salesperson covering ful impact on net earnings compared to other sectors because the the pharma, biotech and medtech sectors. I graduated with a Master’s sector’s effective US tax rate is relatively low. degree from the University of Not- tingham and am a CFA charter Our positioning within the European sector holder. Healthcare companies typically offer consistent earnings growth, high Lachlan Towart, analyst returns on capital, and growing dividends. Pharma constitutes the

core of our sector recommendations: we prefer companies where Reg i on St r ategy pipeline and sales execution risks are positively biased. In medtech, we prefer companies with scope for self-help given expensive valua- Most Preferred Least Preferred tions. AstraZeneca GBP Vifor Pharma CHF Bayer EUR Healthcare underperformed in 2017 due to a challenging macro back- Galenica Santé CHF drop and uninspiring EPS momentum. Risks around US healthcare reform Grifols EUR and drug pricing receded during the year, but mixed clinical data kept Koninklijke Philips N.V EUR Secto r St ategy investors cautious on pharma. Medtech outperformed, due to higher Novartis CHF earnings growth, but accounts for a minority of the sector’s market cap. Roche CHF Source: UBS, as of 18 December 2017 Looking to 2018, we see these conditions broadly persisting. With strong economic growth and rising rates, cyclical sectors offer better earnings As our selections may change over time, please always consult the underlying Reg i on s growth and momentum, and pharma traditionally underperforms when Equity Preference List (EPL) for our up-to-date equity preferences. The respective bond yields rise. Additionally, many pharma companies have high US EPL (which also lists the analyst(s) responsible for the selections and the thematic benchmark) can be found on the UBS CIO portal, which can be accessed via the exposure, which could cause negative translation effects if the dollar e-banking platform or via Quotes. weakens further. Absent change in one or more of these factors, the sector is unlikely to outperform. However, valuations are below historical Secto rs averages, which could create attractive longer-term entry points.

Efforts to “repeal and replace” Obamacare have so far failed, although some changes to health insurance may pass with tax reform. The Trump administration promised to tackle drug prices, but there seems to be little political will here and we expect few near-term changes. Mid-term elections could present a tail risk, but the sector has become less sensi- tive to pricing headlines, as a consensus emerged that the rhetoric exceeds the likely reality. In commercial channels, we expect self-polic- ing, pressure from insurance companies and pharmacy benefit manag- i nable nve s t ng Su s ta ers’ actions to continue pressuring US pharma market growth.

We expect few major clinical data points in 2018; the launches of some newly approved drugs will be important to sector sentiment. The impact of US tax reform is still difficult to assess, but may rekindle hopes for M&A in the sector. Finally, pharma offers an element of “insurance” against a market sell-off, but this is not our base case. Eq uit y Ra d a r Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 19 Sector

European

Eurozone preference Industrials Overweight

After graduating in economics, Strategy I started my career as an analyst for Signs of accelerating capex should provide sector support, especially renewable energy stocks (solar, wind the construction, machinery, and electrical equipment subsectors. and biofuels). In early 2009, I joined

Valuations are stretched by historical standards, but they are in line UBS and have covered industrials and E ditori a l when measured relative to the wider market. Despite its cyclical tilt, renewables since. I am a CFA char- the sector’s performance is unlikely to diverge significantly from the terholder. European benchmark, given the diversity of its constituents. Alexander Stiehler, CFA, analyst

Our positioning within the European sector The industrials sector is diversified, ranging from machinery names to airlines or business service names. This makes stock picking very

important, as certain sub-sectors work better than others depending Reg i on St r ategy on the point in the cycle. Therefore, we recommend focusing on stock-specific stories. Most Preferred Least Preferred AENA S.A. EUR ABB Ltd CHF Brief look back Air France - KLM EUR Adecco CHF The European industrials sector has been one of the strongest perform- Alstom EUR Aggreko GBP ers in 2017. At the time of writing, it has outperformed European equi- Andritz EUR Ashtead Group GBP ties by more than 5%. It has benefited from a synchronized recovery Atlas Copco A SEK Dorma+Kaba CHF Secto r St ategy worldwide, and companies exposed to structural growth trends such as Bureau Veritas EUR Kone EUR automation and robotics equipment have performed particularly DCC Plc GBP Krones EUR strongly. Deutsche Post EUR Metso EUR What will 2018 bring? DKSH Holding AG CHF Panalpina World Transport CHF Reg i on s The outlook for 2018 is very good. Leading indicators are hovering Koninklijke Philips N.V EUR Philips Lighting N.V. EUR around multi-year highs, capital expenditures in important end-markets OSRAM LICHT EUR Safran SA EUR like oil and gas or mining are recovering, and structural trends like auto- Ryanair EUR Sandvik SEK mation continue to drive demand for more equipment. Valuations reflect Sulzer CHF Schindler CHF a lot of optimism, but compared to other sectors industrials’ growth pro- Thales EUR Secto rs file looks more attractive. In our equity preference list, we still recom- Vinci EUR mend many transport names, as we believe these companies are direct Source: UBS, as of 18 December 2017 beneficiaries of the European recovery (irrespective of what happens outside of this region in the shorter term). Otherwise, we are more cau- As our selections may change over time, please always consult the underlying tious on companies with exposure to the Chinese property market (e.g. Equity Preference List (EPL) for our up-to-date equity preferences. The respective EPL (which also lists the analyst(s) responsible for the selections and the thematic elevator companies), as the latest housing prices indicate a slowdown. benchmark) can be found on the UBS CIO portal, which can be accessed via the e-banking platform or via Quotes. Risks The most obvious short-term risk is weaker leading indicators. We don’t believe that they will stay at the same high level for the next 12 months. i nable nve s t ng Su s ta However, as long as they stay comfortably above the index level of 50 (indicating expansion) it should be okay. Below 50 (indicating contrac- tion), the sector normally underperforms. The other sector risks are unchanged, namely a drop in commodity prices, a significant slowdown in China, adverse currency movements and sector rotation out of cyclical stocks. Eq uit y Ra d a r Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 20 Sector

Global preference Information Technology Overweight

I began my career as an IT sector Strategy analyst in early 2006, and expanded The sector has had a strong year, but its premium rating to the wider coverage to include the Taiwan mar- market is not out of line historically and is justified by above-average ket and other thematic ideas. I am a

profitability. IT continues to look attractive because of strong struc- CFA and a CAIA charterholder, and E ditori a l tural earnings growth and above-average cash flow generation. studied commerce at university. Sundeep Gantori, CFA, analyst Our positioning within the global sector We continue to recommend diversified investment across companies with structural and cyclical growth opportunities. The structural opportunities come from leaders in fast-growing industries like the internet or the cloud, while the cyclical upside is driven by companies

with exposure to a sequential recovery or restructuring opportunities. Reg i on St r ategy

Tech ended 2017 on a strong note with solid returns and leading bench- Most Preferred Least Preferred mark indices across key markets like the US, China and Korea. While we Accenture PLC-CL A USD LG Display* KRW maintain our positive view on the sector in 2018, it is worth revisiting our Alibaba USD Wipro Ltd.* INR key three drivers of sector overweight: Alphabet Inc USD eBay USD • Relatively attractive valuations: Tech stocks have rerated by more than Facebook USD Secto r St ategy 10% in 2017. While we do not expect relative valuations to signifi- Global Unichip* TWD cantly expand once again in 2018, they still remain supportive, as the Intel Corp. USD premium at low teens is still below the historical average premium of Microsoft Corp. USD 15–20%. • Above-average earnings growth: Globally, the tech sector should SAP AG EUR Reg i on s continue its strong above-average momentum in 2018, with earnings Tencent Holdings HKD expected to grow by low-mid teens, driven by internet, software and Visa Inc. USD semiconductor industries. *Potential trading restrictions • Cash distribution: With the further progress of tax reforms in the US Source: UBS, as of 18 December 2017

and strong cash flow generation elsewhere, we believe strong cash Secto rs As our selections may change over time, please always consult the underlying distribution is a key upside risk in 2018. Equity Preference List (EPL) for our up-to-date equity preferences. The respective EPL (which also lists the analyst(s) responsible for the selections and the thematic To summarize, with moderate relative rerating, above-average earnings benchmark) can be found on the UBS CIO portal, which can be accessed via the e-banking platform or via Quotes. growth, and upside risks to cash distribution, at least mid-single digit outperformance for tech sector is feasible in 2018.

By region, we remain positive on US tech and we have recently turned positive on Eurozone tech. Regarding Asia tech, while 2017 has been a strong year, performance may be mixed, as the cyclical hardware and semiconductor companies in Asia could see a strong deceleration in i nable nve s t ng Su s ta earnings due to high base effects. At an industry level, software & services and internet still offer the best risk-reward.

Consumer tech may be at risk in 2018 due to likely limited innovation and elevated component prices, which in turn should weigh on the overall demand. Against this backdrop, we are somewhat selective on hardware and semiconductor companies. However, enterprise spending Eq uit y Ra d a r should remain healthy with software companies benefiting from rising recurring revenues. Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 21 Sector

European

Eurozone preference Materials Neutral

Currently covering the healthcare Strategy and chemicals sectors, I have over The sector should continue to benefit from solid, synchronized ten years’ experience in various growth, but is partly offset by an expected slowdown in China. In the equity roles. Before joining UBS in

Eurozone, the sector’s 12-month forward P/E is in line with its long- 2015, I worked as a sell-side analyst E ditori a l term average and we see limited potential for a rerating, unless earn- and specialist salesperson covering ings-per-share (EPS) exceed consensus estimates significantly. the pharma, biotech and medtech sectors. I graduated with a Master’s degree from the University of Not- Our positioning within the European sector tingham and am a CFA charter We remain overweight commodities and cyclicals in the mining sec- holder. tor, but are increasingly selective. Within chemicals, we favor upstream Lachlan Towart, analyst companies with earnings momentum, although we note that near-

term expectations have already risen considerably. We recommend Reg i on St r ategy select companies in paper & packaging and building materials to I am an equity analyst based in lower portfolio volatility. London, specialising in the Materials sector. Prior to joining UBS in 2015 I worked as a sell-side analyst cover- Materials stocks have benefited from the synchronized global upswing in ing Emerging Europe. I graduated with a Master’s degree in Finance 2017, although performance varied across subsectors. Chemicals saw from the University of Bath. strong volume growth and improving pricing, more so in the upstream names, while miners saw significant rallies in both underlying commod- Christof Koumoudos, analyst ity prices and equities. Looking to 2018, we expect cyclicals to continue Secto r St ategy to outperform, as earnings trends remain supportive.

In metals & mining, we believe that diversified miners present an attractive investment opportunity. We expect volatility around the earn- Reg i on s ings season at the beginning of the year, as expected cash shareholder Most Preferred Least Preferred returns are already rather elevated. However, supply shutdowns in China ArcelorMittal EUR Air Liquide EUR and robust commodity demand are likely to remain supportive of metal BASF SE EUR Solvay EUR prices through 2018, and we see equity valuations as attractive. We also BHP Billiton Plc GBP like gold miners at current valuations, which offer less cyclical exposure. Secto rs CRH GBP Current trends in chemicals are also likely to continue in 2018, notably Croda International GBP a generally tight supply environment which supports upstream utiliza- DSM EUR tion rates and pricing, although the extent of outages remains an Fresnillo GBP unknown. Downstream companies will take time to pass on rising input Linde EUR costs, pressuring margins in the near-term, but this effect should wash Mondi GBP through later in the year. We expect stronger earnings momentum to Polymetal International GBP translate into cash flow generation, as capex remains below trend. Lon- Rio Tinto Plc GBP ger term, however, some signs are building of another investment cycle Smurfit Kappa Group EUR later in the decade. Valuations are still above average on a relative basis, i nable nve s t ng Su s ta especially among consumer-focused stocks. Balance sheets are generally SOUTH32 LTD GBP solid, which may lead to more M&A in the sector. Source: UBS, as of 18 December 2017

For further reading: • Investing in materials: Gold miners to sparkle, published on 13 December 2017. • Investing in materials: Diversifieds may have further

to go, published on 6 November 2017. Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 22 Sector

Global preference Real Estate Neutral

I studied economics at the University Strategy of St. Gallen, and have covered Earnings growth is expected to be around 5% p.a. (excluding emerg- global real estate markets since ing markets) toward 2019 due to constrained external growth oppor- 2009. Before joining UBS, I worked

tunities and a positive but weak rental reversion. Companies are as a portfolio manager with an inde- E ditori a l focusing on internal growth and ever-diminishing refinancing costs. pendent asset manager and as a sec- The cycle has matured since peaking in mid-2015, and transaction tor analyst at another global bank. volumes are decreasing. Higher risk spreads may hurt capital values if Thomas Veraguth, analyst they are not met with accelerating rental growth, which is not our base case amid stable demand but growing supply.

Our positioning within the global sector

We favor continental Europe, as the market environment remains Reg i on St r ategy supportive. We also favor UK-based real estate companies, as they are comparatively inexpensively valued. US REITs are preferred in a global Most Preferred Least Preferred context for the quality of their earnings. Australia REITs are least preferred after the recent rally that pushed up valuations. Japanese, ADO Properties EUR BWP Trust AUD Hong Kong and Singapore REITs are tactically unattractive because of alstria office REIT EUR Castellum AB SEK their relatively expensive prices. American Tower Corporation USD Keppel REIT SGD Aroundtown Prop EUR LEG Immobilien AG EUR Ayala Land PHP Omega Healthcare Investors USD Secto r St ategy Capital appreciation in physical real estate markets is set to slow or is Azrieli Group ILS already reversing. Transaction volumes and M&A are falling, but the Cheung Kong Property HKD financial environment is still supportive. The capital cycle, while further China Resources Land HKD maturing, is being lengthened by ultra-low interest rates and a lack of investment alternatives. Capital growth rates are still at risk of turning City Developments Limited SGD Reg i on s negative globally toward 2019 owing to weakening fundamentals and Corporacion Inmobiliaria MXN Vesta the fact that physical values are still excessive. This is because supply will Derwent London GBP further rise in the coming quarters, while demand will only remain stable Gecina EUR overall. In 2017, global office supply will have almost reached the record Hispania EUR levels of 2008. Market rental growth is already decelerating as a result, Secto rs while vacancies are growing except in Europe. Companies may see their Icade EUR earnings supported by internal growth opportunities and some ongoing Indiabulls Housing Finance* INR positive rental reversion. But they are no longer acquiring new properties Lippo Karawaci IDR given persistently high market prices and low yields. Megaworld Corporation PHP Merlin Properties SOCIMI S.A EUR The investment universe is trading at around a 10% discount to the net ProLogis USD asset value versus 7.2% historically, but we believe it to be expensively PSP Swiss Property CHF valued on the whole given the low earnings yield on a historical com- SEGRO GBP parison. The dividend yield of almost less than 4% remains the only per- Terrafina MXN formance driver, as the listed universe has delivered no significant price i nable nve s t ng Su s ta The Link Real Estate HKD return for three years. The focus should be on companies with high- Investment Trust quality portfolios that invest in properties with high entry barriers using UOL Group SGD moderate leverage. Vonovia EUR Wereldhave EUR *Potential trading restrictions Source: UBS, as of 18 December 2017 Eq uit y Ra d a r

Back to Contents page UBS CIO WM December 2017 23 Sector

European

Eurozone preference Telecoms Neutral

With around 15 years of experience Strategy covering the insurance sector at vari- Top-line growth should turn positive in 2018 after years of declining ous global brokerage houses and revenues. Low-single-digit earnings and sales growth remain unin- banks in London and Zurich, I

spiring, but the improvement in momentum should provide support. rejoined UBS in 2014 and am respon- E ditori a l While investments remain high, we expect them to decline moder- sible for the global insurance and ately, which should boost free cash flows. luxury industries. I graduated from the London School of Economics with a degree in Philosophy and Eco- Our positioning within the European sector nomics and am a CFA charterholder. The environment for telecoms has improved: revenues show signs of Michael Klien, CFA, analyst turning positive, market discipline is improving and free cash generation is robust. The sector’s key attraction is its dividend yield. We pre-

fer companies with good cash generation, market positions and/or Reg i on St r ategy growth prospects.

Most Preferred Least Preferred The sector is at a crossroads. Revenues are on the turn following years of Deutsche Telekom EUR Freenet EUR declines. Companies are showing discipline in cutting costs and deliver- Drillisch AG EUR Proximus EUR ing on operational gearing. Regulatory headwinds are also waning, but KPN Telecom EUR Swisscom CHF pricing overall remains mixed in various European countries. We never- Sunrise Communications CHF Telia SEK theless expect revenues and earnings to improve. Telefonica EUR Secto r St ategy Telenet Group EUR Over the last month, the sector has outperformed the overall market but Source: UBS, as of 18 December 2017 is down on a relative basis for the year as a whole. We expect relative performance to stabilize with an upward bias given that the top-line is As our selections may change over time, please always consult the underlying showing increased signs of improvements. The 3Q results season has Equity Preference List (EPL) for our up-to-date equity preferences. The respective Reg i on s been generally better than expected. While the competitive environment EPL (which also lists the analyst(s) responsible for the selections and the thematic benchmark) can be found on the UBS CIO portal, which can be accessed via the remains mixed, changes to roaming charges in Europe should increas- e-banking platform or via Quotes. ingly be absorbed. Capex has peaked but is likely to remain elevated given the investments needed to deliver on the European Commission’s ambitions for a Gigabit Society. Secto rs

The dividend yield is one of the highest among European sectors, and the sector retains its defensive qualities. Nevertheless, we would expect the sector to underperform in a reflationary environment.

The shift toward content should help to contain any revenue damage stemming from commoditization of the infrastructure, but it comes at a significant cost. From a longer-term perspective, the progression to fifth- generation (5G) wireless systems toward the end of this decade will likely result in further competition. i nable nve s t ng Su s ta

Our preference is for companies with strong cash generation, good market positions and attractive growth prospects. Within a portfolio context, we think that telecoms should be an attractive add-on to provide investors with stability and healthy income streams. As such, the sector should be appealing to yield-seeking and risk-averse investors. Eq uit y Ra d a r Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 24 Sector

European

Eurozone preference Utilities Neutral

I began working as an equity analyst Strategy in the late-90s and have covered sev- In the Eurozone, we do not see any near-term positive catalysts fol- eral sectors. In 2005 I joined UBS, lowing the sector’s strong gains in 2017. Generation overcapacity will where I’m currently responsible for

not disappear any time soon, while electricity demand is likely to the utility sector and the equity sector E ditori a l remain muted. The above-average prospective dividend yield of nearly strategy. I studied business adminis- 5% looks attractive, although a significant rise in bond yields would tration at universities in Germany and the US, and am a Certified European be a drag on relative performance. Financial Analyst charterholder. Our positioning within the European sector Carsten Schlufter, analyst We expect earnings trends to improve from this year thanks to stabi- lizing fundamental trends, lower interest costs, and restructuring.

Among our stock preferences are future-proof integrated companies Reg i on St r ategy with a focus on renewables and regulated businesses (versus pure regulated companies). Most Preferred Least Preferred E.ON EUR Enagas EUR In 2017, European utilities have been one of the best performing sectors. EDF EUR Endesa EUR This is rather unusual in a year where equities performed strongly. It was Enel EUR National Grid GBP helped by the sector’s return to positive earnings growth, favorable Engie EUR Red Electrica de España EUR earnings revisions, continued low bond yields, and higher confidence in Fortum EUR United Utilities GBP Secto r St ategy the attractive dividend payments. Regionally, German and French utilities Source: UBS, as of 18 December 2017 performed particularly well while Spanish and especially UK companies lagged. As our selections may change over time, please always consult the underlying Equity Preference List (EPL) for our up-to-date equity preferences. The respective For 2018, we expect another year of solid earnings growth of around EPL (which also lists the analyst(s) responsible for the selections and the thematic benchmark) can be found on the UBS CIO portal, which can be accessed via the Reg i on s 5–7%. This is less compared to most other sectors, but earnings visibility e-banking platform or via Quotes. and earnings momentum is good. Moreover, this should lead to another year of rising dividend payments. This is important, as the dividend yield of around 5% is a major argument for investing in utilities, especially in an environment where bond yields are relatively unattractive. Secto rs

The global energy transition is a structural and beneficial trend in the sector. We think utilities of the future have a stronger focus on clean energy technologies like renewables, manage smarter networks, and offer smart customer solutions. Companies with the financial and balance sheet flexibility to invest in these trends should offer superior (earnings) growth in the coming years.

Utilities are heavily impacted by politics, such as the UK’s announcement to introduce an electricity price cap and the nuclear phase out in Ger- i nable nve s t ng Su s ta many. So political and regulatory topics must be monitored constantly. Moreover, power prices are an important sector earnings driver. They have recovered in 2017. We believe more upside is possible depending on the development of commodity and CO2 prices as well as generation capacity closures in the next years (e.g. German nuclear plants), which may reduce oversupply. Eq uit y Ra d a r Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 25 Sustainable investing

Sustainable investing

In our Sustainability section, we present thematic ideas that address a range of environmental, social and governance (ESG) concerns. We also provide our Sustainable Investing (SI) single stock list, which takes

into account ESG aspects. All Investment themes and SI stock selec- E ditori a l tions are researched on a risk/return basis that aims to achieve outperformance relative to global equity markets. By directing assets to identifiable themes, investors can pursue return opportunities and express their values in their portfolio.

For short-to-medium-term investors, we recommend our investment themes of “Gender Diversity” and “Sustainable value creation in

emerging markets.” For long-term investors, several components of Reg i on St r ategy our Longer-Term Investment Themes fit our SI criteria.

Source: getty images Sustainability-themed investing experienced yet another successful year in 2017, with most of our SI themes performing very well. We continue to believe that ESG thematic equities offer opportunities beyond a traditional index orientation. Sustainable investing EPL Most Preferred Secto r St ategy In November, our Sustainable Investing team published a series of infor- Accenture PLC-CL A USD mation papers, including one about ESG thematic equities. This high- American Tower Corporation USD lights that ESG thematic approaches, particularly those focused on a Baker Hughes-A Rg USD diversified set of themes, can represent attractive core equity exposure Bank Rakyat Indonesia IDR that provides investors with an improved understanding of how their Celgene Corporation USD Reg i on s capital is invested from a social, environmental and governance perspec- Colgate-Palmolive USD tive. Single-themed approaches can be used as satellite investments to DBS Group Holdings SGD complement more diversified core exposure. Investors can direct capital DCC Plc GBP toward issues they prioritize personally, while helping to address the Fujitsu JPY social and environmental challenges outlined by the SDGs (UN Sustain- Galp Energia EUR Secto rs able Development Goals). For more details about the SI information HINO MOTORS JPY papers, please contact Rachel Whittaker from the CIO Sustainable Invest- innogy EUR ing team or me for ESG thematic equity investments. Lilly (Eli) & Co. USD L'Oréal EUR In the report, we set out several themes within our long-term investment Moncler EUR (LTI) framework that offer exposure to companies with solutions to press- Mondi GBP ing sustainability challenges. All of them can be closely related to one or Nike Inc. USD more of the challenges addressed in the Sustainable Development Goals ProLogis USD (SDGs). Prudential GBP

SAP AG EUR i nable nve s t ng Su s ta In sum, we are convinced that sustainability-themed investing will con- SGS CHF tinue to be an important instrument for investors in 2018 to address the Taiwan Semiconductor Manufacturing* TWD SI topics we have discussed throughout the year. Our current preference Visa Inc. USD is unchanged. We will start 2018 with our well-known themes of ”Gen- Walt Disney Co. USD der Diversity” and ”Sustainable value creation in emerging markets.” For Rudolf Leemann, analyst investors with multi-cycle investment horizons, we offer several SI- *Potential trading restrictions Source: UBS, as of 18 December 2017 related longer-term investment themes (LTIs). Eq uit y Ra d a r Alexander Stiehler, CFA, analyst As our selections may change over time, please always consult the underlying Equity Preference List (EPL) for our up-to-date equity preferences. The respective EPL (which also lists the analyst(s) responsible for the selections and the thematic benchmark) can be found on the UBS CIO portal, which can be accessed via the e-banking platform or via Quotes. Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 26 Equity Radar

Our UBS Equity Radar provides topical equity ideas. We typically flag short-term ideas that we have identified across European sectors, countries and regions, focusing on single stocks selected as Most Pre-

ferred and/or Least Preferred. They complement our UBS Equity Com- E ditori a l pass and our broader-based investment themes and Long Term Invest- ments, and supplement our CIO equity offering among countries/ regions and sectors.

For detailed information about the Equity Radar topics and the EPL Equity Radar, please visit our UBS CIO homepage, subscribe to these Rolf Ganter, CFA, analyst Carsten Schlufter, analyst publication(s) and/or contact your client advisor. Reg i on St r ategy

The UBS Equity Radar currently features 14 topics. We had recently Most Preferred launched five new topics. On the other hand, we had closed the topics Vamos Espana! “Making Vifor a Galenica again,” “Defensive laggards: Low Beta oppor- AENA S.A. Inditex SA tunities” and “UK – tourist stocks to shine.” Gas Natural Fenosa Merlin Properties SOCIMI S.A. Grifols Telefonica Vamos Espana! (NEW) Iberdrola Unicaja Banco Spain has recovered from two crises. The country’s retail, telecom and Eurozone Momentum - the trend is your friend utility companies are best in class in their respective sectors. The earnings Alstom Fiat Chrysler Secto r St ategy outlook is strong owing to a high contribution of non-domestic exposure ASML Fortum (about 70%). On the other hand, market valuation is relatively cheap. Covestro AG Galp Energia Deutsche Lufthansa AG Icade Eurozone Momentum – the trend is your friend (NEW) DSM Kering Reg i on s Global growth has resynchronized in 2017, and leading indicators have Enel reached all-time highs across all regions. Momentum style investing usu- Cash-flow for catch-up ally outperforms in this part of the cycle. Momentum valuation’s dis- Ahold Delhaize GKN count to its history provides an opportunity. BP Hannover Re CRH Ingenico Group Secto rs Cash-flows for catch-up N( EW) Deutsche Telekom Leonardo Finmeccanica Ferguson Zurich Insurance Group We identify companies with attractive and growing cash-flows, but Gas Natural Fenosa which have underperformed the MSCI Europe over the past 12 months. Festive Season We think these companies are currently overlooked by the market, but Anheuser-Busch InBev LVMH Moet Hennessy Louis that their share prices will eventually catch-up. Vuitton SA Compagnie Financiere Richemont SA Moncler Festive Season (NEW) Diageo Pernod Ricard Sales during the upcoming festive season will likely be an important rev- Kering Remy Cointreau enue catalyst for consumer sector companies. As consumer confidence Lindt & Sprüngli is high, we see companies with significant exposure to discretionary Small Caps: Favor France over Germany i nable nve s t ng Su s ta spending as the main beneficiaries, above what markets currently expect. Air France - KLM Bureau Veritas Alstom Icade Small Caps: Favor France over Germany (NEW) Arkema Over the last five years, small cap stocks’ performance has been out- Least Preferred standing. While French small caps still offer attractive valuations, Ger- Small Caps: Favor France over Germany man small caps are trading at high multiples. We suggest reducing the Freenet LEG Immobilien AG exposure to German small caps in favor of their French peers, which are Krones Eq uit y Ra d a r also likely to offer superior earnings growth over the coming 12 months. Source: UBS, as of 18 December 2017

As our selections may change over time, please always consult the underlying Equity Preference List (EPL) for our up-to-date equity preferences. The respective EPL (which also lists the analyst(s) responsible for the selections and the thematic benchmark) can be found on the UBS CIO portal, which can be accessed via the e-banking platform or via Quotes. For further reading: • UBS Equity Radar: Topical stock ideas in Europe, published on 6 Decem-

ber 2017. Inv estme n t h emes

Back to Contents page UBS CIO WM December 2017 27 Investment themes

Investment themes

Diversified dividends in the UK Eurozone dividend growth E ditori a l

• Our preferred strategy within UK equities is one of diversi- • The low interest rate environment supports dividend strat- Reg i on St r ategy fied dividends, which is a renaming of the existing theme egies, which we consider a relatively defensive investment defensive dividends. We believe the 4.3% yield for the UK style. market remains attractive against a backdrop of low fixed • While the MSCI EMU‘s expected dividend yield of 3.3% is income yields. attractive, our selections carry even higher yields. • Given rising global growth and inflation, we advocate a • We like the stocks of companies with attractive, good- spread across sectors within our strategy and advise inves- quality dividends that are expected to grow. tors to take a diversified dividend approach during this Read more* period of fluctuating bond yields. Additional returns can Secto r St ategy be achieved from companies benefiting from favorable currency exposure.

Read more*

Back to Contents page UBS CIO WM December 2017 30 Recommended reading

A monthly guide to investing in Swiss financial markets Pointing the way to our favorite equity recommendations Investing in Switzerland Investing in Switzerland UBS Equity Radar UBS Equity Radar

Chief Investment Office WM — December 2017 / January 2018 Chief Investment Office WM – December 2017 Investing in Switzerland is a cross-asset Our UBS Equity Radar provides topical investment guide for those interested to equity ideas. The topics we flag are invest in the Swiss financial markets, typically short-term ideas that we have covering equities, bonds, real estate, identified across European sectors, currency and more. countries and regions, with a focus on Available in: English, German, French, single-stock ideas selected as either Most

Italian Topical stock ideas in Europe Preferred and/or Least Preferred. They

A look ahead to the new year UK winners and losers of interest rate rises (CLOSED) ...... 2 11 December 2017 – 9:04 am BST Eurozone momentum – the trend is your friend ...... 3 Vamos Espana! ...... 4 Cash-flows for catch-up...... 5 Festive Season ...... 6 complement our UBS Equity Compass Small Caps: Favor France over Germany ...... 7 Diversified chemicals outpacing specialties ...... 8 Equities Bonds Economy UK – winners and losers of sterling strength ...... 9 Equities – the place to be ...... 10 Using dividend strategies Negative total EU brings tailwind In sync with the economic cycle ...... 11 to participate in growth returns loom Stock picks in case interest rates rise ...... 12 and our broader-based Investment Swiss beneficiaries of a stronger EURCHF ...... 13 US corporate tax cut – European beneficiaries ...... 14 M&A beneficiaries ...... 15 themes and Long Term Investments, and a b supplement our CIO equity offering among countries/regions and sectors. Available in: English

Chief Investment Office WM b November 2017 Chief Investment Office WM a UBS House View 14 December 2017 For investors domiciled CIO Monthly Letter in Switzerland UBS Outlook Monthly Letter

Social More options New activism Asset allocation responsibility A broader and deeper sus- With more data available, We are opening an over- tainable investment market investors are better able to weight in a basket of four The CIO Monthly Letter presents the lat- The investment world has Switzerland changed. There is now solid means investors can have a engage with businesses to high-yielding emerging mar- evidence that incorporating diversified portfolio of sus- drive positive change as well ket (EM) currencies versus a social responsibility into tainable assets, from green as excess returns. set of lower-yielding curren- UBS Outlook investment decisions does bonds to funds that buy cies, and an overweight in not sacrifice returns. stock in firms with strong EM local currency bonds est version of the UBS Investment House environmental, social, and against high grade bonds. governance records. Switzerland UBS Outlook Switzerland is aimed View, assessing the impact of current The digital age Sustainable performance primarily at entrepreneurs and managers

The end of the year is a time to reflect on past successes and plan for the months economic trends on asset classes and to come. Regular readers will know that we took our portfolio management responsibilities seriously, held some contrarian views, and added value overall with our market calls. Yet the question of our social responsibility as portfolio in Switzerland. Each edition presents an managers is coming up more and more. For 20 years I answered that question by citing the influential article, “The Social Responsibility of Business is to Increase its portfolio allocation. Profits,” by Nobel prize-winning economist Milton Friedman. But I now believe investors must consider social responsibility when making invest- analysis on the topics of the global and ments. This is not because I would advocate mixing investing and philanthropy: Mark Haefele there is little room for emotion in investment decisions. Rather it’s because the Global Chief Investment Officer Wealth Management investment world has changed. A more transparent world means that environ- Available in: German, English, French, mental, social, and governance (ESG) factors are now more easily measured and Follow me on LinkedIn are increasingly internalized into market prices. There is now strong evidence that linkedin.com/in/markhaefele thinking about social responsibility as part of the investment decision-making Swiss economy, currencies, interest rates, Follow me on Twitter process does not sacrifice returns. Indeed, it can actually help de-risk, diversify, twitter.com/UBS_CIO and enhance them. Italian, Spanish, Portuguese, Chinese The sustainable investment market has broadened and deepened, particularly into fixed income instruments, such as green bonds. This means that private investors can now achieve the goals of traditional diversified portfolios with sus- regions, sectors and the real estate tainable assets. Sustainable investing can now move from the “satellite” to the “core” of an investor’s portfolio. (simplified and traditional), Japanese and We are striving to be the leader in sustainability and sustainable investing (SI). You can read more about our efforts on our page UBS and Society. market. In our tactical asset allocation this month, we remain overweight in global equities, a position that remains supported by strong global economic data. In addition, Russian. we are opening two new positions: an overweight in a basket of four high-yielding emerging market currencies (Brazilian real, Indian rupee, Turkish lira, Russian ruble) against a set of four pro-cyclical lower yielding counterparts (Australian Available in: English, German, French dollar, Hungarian forint, Norwegian krone, Taiwan dollar), and an overweight in EM local currency bonds against high grade bonds. b a This report has been prepared by UBS AG. Please see important disclaimers and disclosures at the end of the document. and Italian

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UBS CIO WM December 2017 31 Appendix

Rating history changes (past 12 months)

Company Release date Current selection Equity Preference List Company Release date Current selection Equity Preference List

ASE 31/10/17 Not Listed AxJ Focus 20 Santander 12/06/17 Not Listed European Banks Baidu, Inc. 19/07/17 Most Preferred AxJ Focus 20 Santander 12/01/17 Most Preferred European Banks Bank Mandiri 21/04/17 Most Preferred AxJ Focus 20 Societe Generale 06/01/17 Not Listed European Banks Bank of China 31/10/17 Not Listed AxJ Focus 20 UniCredit 05/01/17 Most Preferred European Banks CP All Plc 23/06/17 Most Preferred AxJ Focus 20 Unicaja Banco 29/08/17 Most Preferred European Banks China Construction Bank 31/10/17 Most Preferred AxJ Focus 20 VZ Holding 05/04/17 Not Listed European Banks ComfortDelgro 15/05/17 Not Listed AxJ Focus 20 VZ Holding 21/12/16 Least Preferred European Banks DBS Group Holdings 09/11/17 Most Preferred AxJ Focus 20 Accor 10/10/17 Not Listed European Consumer Discretionary Dr. Reddy's Labs 21/04/17 Not Listed AxJ Focus 20 Accor 23/12/16 Most Preferred European Consumer Hon Hai Precision 15/11/17 Not Listed AxJ Focus 20 Discretionary Hon Hai Precision 31/10/17 Most Preferred AxJ Focus 20 Burberry 10/11/17 Not Listed European Consumer LG Display 26/07/17 Not Listed AxJ Focus 20 Discretionary LG Display 16/03/17 Most Preferred AxJ Focus 20 Burberry 10/04/17 Most Preferred European Consumer Discretionary MediaTek Inc. 15/11/17 Most Preferred AxJ Focus 20 Compagnie Financiere 14/09/17 Most Preferred European Consumer POSCO 26/07/17 Most Preferred AxJ Focus 20 Discretionary President Chain Store 18/09/17 Not Listed AxJ Focus 20 Dufry 25/10/17 Not Listed European Consumer Discretionary SK Telecom 16/03/17 Not Listed AxJ Focus 20 Ferragamo 15/03/17 Least Preferred European Consumer SM Prime Hldgs 23/06/17 Not Listed AxJ Focus 20 Discretionary SM Prime Hldgs 20/01/17 Most Preferred AxJ Focus 20 Ferragamo 25/01/17 Not Listed European Consumer Semen Indonesia 29/09/17 Most Preferred AxJ Focus 20 Discretionary Hugo Boss 01/12/17 Not Listed European Consumer Singapore Telecom 09/11/17 Not Listed AxJ Focus 20 Discretionary Singapore Telecom 15/05/17 Most Preferred AxJ Focus 20 Hugo Boss 22/02/17 Least Preferred European Consumer Sunny Optical Technology 19/07/17 Not Listed AxJ Focus 20 Discretionary Sunny Optical Technology 13/02/17 Most Preferred AxJ Focus 20 Kering 28/06/17 Most Preferred European Consumer Discretionary Taiwan Semiconductor 18/09/17 Most Preferred AxJ Focus 20 LVMH Moet Hennessy Louis 12/12/17 Not Listed European Consumer Telkom Indonesia 29/09/17 Not Listed AxJ Focus 20 Discretionary Tenaga Nasional 20/01/17 Not Listed AxJ Focus 20 Luxottica 11/10/17 Least Preferred European Consumer WH GROUP 13/02/17 Not Listed AxJ Focus 20 Discretionary Luxottica 17/03/17 Not Listed European Consumer Autoliv Inc 11/12/17 Not Listed European Automobiles Discretionary Autoliv Inc 03/02/17 Least Preferred European Automobiles Merlin Entertainments Plc 18/10/17 Not Listed European Consumer BMW 23/03/17 Not Listed European Automobiles Discretionary BMW 25/01/17 Least Preferred European Automobiles Sodexo 19/07/17 Most Preferred European Consumer Discretionary Continental AG 07/06/17 Most Preferred European Automobiles Swatch Group AG 27/04/17 Not Listed European Consumer Continental AG 10/01/17 Not Listed European Automobiles Discretionary Daimler AG 07/03/17 Not Listed European Automobiles Tod's 10/01/17 Least Preferred European Consumer Discretionary Faurecia 25/04/17 Not Listed European Automobiles Whitbread 23/01/17 Not Listed European Consumer Fiat Chrysler 28/04/17 Most Preferred European Automobiles Discretionary Fiat Chrysler 13/01/17 Not Listed European Automobiles Beiersdorf 19/07/17 Not Listed European Consumer Staples Fiat Chrysler 09/01/17 Most Preferred European Automobiles Carrefour 11/04/17 Not Listed European Consumer Staples Gestamp Automocion 08/08/17 Not Listed European Automobiles Heineken 27/10/17 Most Preferred European Consumer Staples Gestamp Automocion 29/05/17 Most Preferred European Automobiles Henkel 06/06/17 Least Preferred European Consumer Staples Peugeot SA 08/11/17 Not Listed European Automobiles Reckitt Benckiser 05/06/17 Not Listed European Consumer Staples Schaeffler Vz 27/03/17 Not Listed European Automobiles Unilever NV 17/02/17 Not Listed European Consumer Staples Schaeffler Vz 10/01/17 Least Preferred European Automobiles Unilever Plc 01/03/17 Most Preferred European Consumer Staples Volkswagen Preference 25/01/17 Most Preferred European Automobiles OMV 20/10/17 Not Listed European Energy Volvo B 12/01/17 Least Preferred European Automobiles Saipem 06/03/17 Least Preferred European Energy ABN AMRO 05/01/17 Most Preferred European Banks TechnipFMC 06/03/17 Most Preferred European Energy Bankia 24/07/17 Least Preferred European Banks Tullow Oil 20/01/17 Not Listed European Energy Barclays 30/10/17 Not Listed European Banks Vallourec 06/03/17 Most Preferred European Energy Caixa Bank 10/03/17 Not Listed European Banks Wood plc 20/10/17 Least Preferred European Energy Cembra Money Bank AG 20/12/16 Not Listed European Banks AstraZeneca 01/08/17 Most Preferred European Healthcare HSBC 23/02/17 Not Listed European Banks Coloplast A/S 15/11/17 Not Listed European Healthcare Intesa SanPaolo 04/01/17 Most Preferred European Banks Coloplast A/S 21/07/17 Least Preferred European Healthcare SEB Group 18/01/17 Not Listed European Banks ConvaTec Group Plc 07/11/17 Not Listed European Healthcare

UBS CIO WM December 2017 32 Appendix

Rating history changes (past 12 months)

Company Release date Current selection Equity Preference List Company Release date Current selection Equity Preference List

ConvaTec Group Plc 28/09/17 Least Preferred European Healthcare Spirax-Sarco 02/03/17 Most Preferred European Industrials ConvaTec Group Plc 28/08/17 Not Listed European Healthcare Sulzer 21/04/17 Most Preferred European Industrials ConvaTec Group Plc 16/03/17 Most Preferred European Healthcare Thales 13/04/17 Most Preferred European Industrials Essilor International 02/10/17 Not Listed European Healthcare VAT Group N 04/04/17 Not Listed European Industrials Essilor International 21/07/17 Most Preferred European Healthcare ASR Nederland 11/09/17 Not Listed European Insurance Fresenius SE & Co KGaA 08/12/17 Not Listed European Healthcare Admiral Group 23/11/17 Not Listed European Insurance Fresenius SE & Co KGaA 15/11/17 Least Preferred European Healthcare Admiral Group 10/01/17 Most Preferred European Insurance Galenica Santé 27/07/17 Most Preferred European Healthcare Allianz 22/02/17 Not Listed European Insurance GlaxoSmithKline 27/10/17 Not Listed European Healthcare Aviva 25/10/17 Most Preferred European Insurance Grifols 11/05/17 Most Preferred European Healthcare Aviva 10/03/17 Not Listed European Insurance Koninklijke Philips N.V 26/07/17 Most Preferred European Healthcare Aviva 26/01/17 Most Preferred European Insurance Sanofi 07/12/17 Not Listed European Healthcare Axa 11/05/17 Most Preferred European Insurance Shire Pharmaceuticals 01/08/17 Not Listed European Healthcare Axa 10/01/17 Not Listed European Insurance Smith & Nephew 01/08/17 Not Listed European Healthcare Baloise-Holding 31/03/17 Not Listed European Insurance Straumann 27/03/17 Not Listed European Healthcare Direct Line Insurance Group 29/06/17 Most Preferred European Insurance Straumann 05/01/17 Least Preferred European Healthcare Generali 22/11/17 Not Listed European Insurance Vifor Pharma 08/12/17 Least Preferred European Healthcare Hannover Re 19/09/17 Most Preferred European Insurance Vifor Pharma 03/11/17 Not Listed European Healthcare Lancashire 01/11/17 Not Listed European Insurance Vifor Pharma 27/07/17 Least Preferred European Healthcare Lancashire 04/08/17 Least Preferred European Insurance Adecco 19/09/17 Least Preferred European Industrials Legal & General 23/11/17 Not Listed European Insurance Adecco 11/07/17 Not Listed European Industrials Munich Re 19/09/17 Not Listed European Insurance Adecco 10/03/17 Least Preferred European Industrials NN GROUP 13/03/17 Most Preferred European Insurance Aggreko 12/07/17 Least Preferred European Industrials RSA Insurance Group 04/07/17 Not Listed European Insurance Air France - KLM 06/07/17 Most Preferred European Industrials RSA Insurance Group 10/01/17 Least Preferred European Insurance Airbus Group NV 09/10/17 Not Listed European Industrials Saga 23/10/17 Not Listed European Insurance Airbus Group NV 18/09/17 Most Preferred European Industrials Saga 08/03/17 Most Preferred European Insurance Airbus Group NV 26/12/16 Not Listed European Industrials Sampo 19/01/17 Most Preferred European Insurance Applus Services SA 26/07/17 Not Listed European Industrials St. James Place 29/06/17 Most Preferred European Insurance Ashtead Group 12/07/17 Least Preferred European Industrials Storebrand 14/07/17 Not Listed European Insurance Assa Abloy 26/12/16 Not Listed European Industrials Storebrand 19/01/17 Least Preferred European Insurance Atlas Copco A 25/08/17 Most Preferred European Industrials Swiss Life 23/06/17 Not Listed European Insurance Bodycote 01/03/17 Not Listed European Industrials Swiss Life 19/01/17 Most Preferred European Insurance Bodycote 26/12/16 Most Preferred European Industrials Swiss Re 17/01/17 Not Listed European Insurance Bureau Veritas 18/09/17 Most Preferred European Industrials Tryg A/S 23/11/17 Not Listed European Insurance Cobham 17/02/17 Not Listed European Industrials Tryg A/S 10/10/17 Most Preferred European Insurance DCC Plc 09/01/17 Most Preferred European Industrials Akzo Nobel 10/03/17 Not Listed European Materials DKSH Holding AG 26/01/17 Most Preferred European Industrials Anglo American 07/04/17 Not Listed European Materials Deutsche Lufthansa AG 08/05/17 Not Listed European Industrials Anglo American 06/02/17 Least Preferred European Materials Deutsche Lufthansa AG 09/01/17 Least Preferred European Industrials Antofagasta Plc 25/09/17 Not Listed European Materials Fraport AG 24/07/17 Not Listed European Industrials Antofagasta Plc 13/09/17 Least Preferred European Materials Georg Fischer 26/01/17 Not Listed European Industrials ArcelorMittal 18/07/17 Most Preferred European Materials Hexagon 26/12/16 Not Listed European Industrials ArcelorMittal 20/12/16 Not Listed European Materials Krones 20/11/17 Least Preferred European Industrials BASF SE 27/09/17 Most Preferred European Materials Legrand 28/06/17 Not Listed European Industrials Clariant 23/05/17 Not Listed European Materials National Express 25/09/17 Not Listed European Industrials Clariant 06/01/17 Most Preferred European Materials OERLIKON 01/03/17 Not Listed European Industrials Croda International 26/07/17 Most Preferred European Materials OSRAM LICHT 06/12/17 Most Preferred European Industrials DSM 06/11/17 Most Preferred European Materials Panalpina World Transport 27/03/17 Least Preferred European Industrials Evonik 08/12/17 Not Listed European Materials Philips Lighting N.V. 06/12/17 Least Preferred European Industrials Evonik 06/02/17 Most Preferred European Materials Phoenix Mecano 25/01/17 Not Listed European Industrials Fresnillo 09/11/17 Most Preferred European Materials Ryanair 09/01/17 Most Preferred European Industrials Fresnillo 11/07/17 Not Listed European Materials SPIE SA 26/12/16 Not Listed European Industrials Fresnillo 16/05/17 Least Preferred European Materials Safran SA 03/02/17 Least Preferred European Industrials Fresnillo 26/04/17 Not Listed European Materials Spirax-Sarco 29/05/17 Not Listed European Industrials Fresnillo 28/12/16 Most Preferred European Materials

UBS CIO WM December 2017 33 Appendix

Rating history changes (past 12 months)

Company Release date Current selection Equity Preference List Company Release date Current selection Equity Preference List

Givaudan 18/10/17 Not Listed European Materials ABN AMRO 09/01/17 Most Preferred Eurozone Givaudan 04/04/17 Least Preferred European Materials ASML 28/12/16 Not Listed Eurozone Lanxess AG 08/12/17 Not Listed European Materials ASR Nederland 11/09/17 Not Listed Eurozone Lanxess AG 20/11/17 Least Preferred European Materials ASR Nederland 16/01/17 Most Preferred Eurozone Polymetal International 30/11/17 Most Preferred European Materials Akzo Nobel 10/03/17 Not Listed Eurozone Randgold Resources 26/04/17 Not Listed European Materials Anheuser-Busch InBev 15/02/17 Not Listed Eurozone Randgold Resources 28/12/16 Most Preferred European Materials ArcelorMittal 20/12/16 Not Listed Eurozone SOUTH32 LTD 06/04/17 Most Preferred European Materials Axa 10/01/17 Not Listed Eurozone SSAB AB 21/04/17 Not Listed European Materials BNP Paribas 24/11/17 Most Preferred Eurozone SSAB AB 21/12/16 Least Preferred European Materials CRH 20/12/16 Most Preferred Eurozone Smurfit Kappa Group 01/03/17 Most Preferred European Materials Caixa Bank 10/03/17 Not Listed Eurozone Solvay 11/10/17 Least Preferred European Materials Carrefour 15/02/17 Not Listed Eurozone Symrise 18/10/17 Not Listed European Materials Casino 15/02/17 Not Listed Eurozone Symrise 11/05/17 Most Preferred European Materials Continental AG 07/06/17 Most Preferred Eurozone Deutsche Telekom 21/09/17 Most Preferred European Deutsche Bank 06/02/17 Least Preferred Eurozone Telecommunication Services E.ON 23/01/17 Not Listed Eurozone Drillisch AG 23/06/17 Most Preferred European Erste Bank 13/02/17 Most Preferred Eurozone Telecommunication Services Freenet 03/10/17 Least Preferred European Evonik 08/12/17 Not Listed Eurozone Telecommunication Services Evonik 06/02/17 Most Preferred Eurozone Inmarsat 05/12/17 Not Listed European Faurecia 25/04/17 Not Listed Eurozone Telecommunication Services Ferrari NV 07/06/17 Most Preferred Eurozone Inmarsat 23/06/17 Least Preferred European Telecommunication Services Grifols SA (B Share) 13/12/17 Most Preferred Eurozone KPN Telecom 23/06/17 Most Preferred European Hannover Re 11/12/17 Not Listed Eurozone Telecommunication Services Hannover Re 03/10/17 Most Preferred Eurozone Proximus 23/06/17 Least Preferred European Telecommunication Services Hugo Boss 01/12/17 Not Listed Eurozone Sunrise Communications 24/10/17 Most Preferred European Hugo Boss 07/06/17 Least Preferred Eurozone Telecommunication Services Iberdrola 06/02/17 Not Listed Eurozone Swisscom 07/12/17 Least Preferred European Legrand 28/06/17 Not Listed Eurozone Telecommunication Services Swisscom 24/10/17 Not Listed European Michelin 07/06/17 Not Listed Eurozone Telecommunication Services NN GROUP 11/12/17 Most Preferred Eurozone Swisscom 23/06/17 Most Preferred European OMV 20/10/17 Not Listed Eurozone Telecommunication Services OSRAM LICHT 06/12/17 Most Preferred Eurozone Telefonica 23/06/17 Most Preferred European Telecommunication Services Philips Lighting N.V. 06/12/17 Least Preferred Eurozone Telenet Group 23/06/17 Most Preferred European SAP AG 28/12/16 Most Preferred Eurozone Telecommunication Services Sanofi 07/12/17 Not Listed Eurozone Telia 21/09/17 Least Preferred European Schneider Electric 09/08/17 Most Preferred Eurozone Telecommunication Services Centrica 18/07/17 Not Listed European Utilities Societe Generale 06/01/17 Not Listed Eurozone Centrica 05/05/17 Least Preferred European Utilities UniCredit 09/01/17 Most Preferred Eurozone DONG Energy 18/07/17 Not Listed European Utilities Unibail-Rodamco 03/10/17 Not Listed Eurozone E.ON 21/03/17 Most Preferred European Utilities Valeo 07/06/17 Not Listed Eurozone E.ON 23/01/17 Not Listed European Utilities ASML 27/12/16 Not Listed Information Technology EDF 23/01/17 Most Preferred European Utilities Adobe Systems Inc. 22/03/17 Not Listed Information Technology Enagas 17/02/17 Least Preferred European Utilities Asustek Computer Inc. 13/11/17 Not Listed Information Technology Endesa 24/07/17 Least Preferred European Utilities Asustek Computer Inc. 15/05/17 Least Preferred Information Technology Fortum 04/12/17 Most Preferred European Utilities Asustek Computer Inc. 13/02/17 Not Listed Information Technology Fortum 23/01/17 Not Listed European Utilities Global Unichip 26/10/17 Most Preferred Information Technology Iberdrola 12/06/17 Not Listed European Utilities International Business 18/10/17 Not Listed Information Technology National Grid 23/01/17 Least Preferred European Utilities LG Display 19/10/17 Least Preferred Information Technology Red Electrica de España 09/01/17 Least Preferred European Utilities MediaTek Inc. 06/06/17 Not Listed Information Technology SSE PLC 05/05/17 Not Listed European Utilities Microsoft Corp. 06/10/17 Most Preferred Information Technology Snam 04/12/17 Not Listed European Utilities Nokia 23/12/16 Not Listed Information Technology United Utilities 31/10/17 Least Preferred European Utilities Paypal 18/07/17 Not Listed Information Technology United Utilities 23/01/17 Not Listed European Utilities Paypal 31/01/17 Least Preferred Information Technology ABN AMRO 24/11/17 Not Listed Eurozone Qualcomm Inc. 24/01/17 Not Listed Information Technology

UBS CIO WM December 2017 34 Appendix

Rating history changes (past 12 months)

Company Release date Current selection Equity Preference List Company Release date Current selection Equity Preference List

Qualcomm Inc. 30/12/16 Least Preferred Information Technology Sharp 13/03/17 Not Listed Japan SAP AG 27/12/16 Most Preferred Information Technology Sharp 30/12/16 Least Preferred Japan eBay 27/12/16 Most Preferred Information Technology Shinsei Bank 23/08/17 Most Preferred Japan Alps Electric 19/10/17 Not Listed Japan Sony 30/06/17 Not Listed Japan Alps Electric 17/08/17 Most Preferred Japan Sony 07/03/17 Most Preferred Japan Alps Electric 18/05/17 Not Listed Japan Sumitomo Mitsui Financial 27/06/17 Most Preferred Japan Alps Electric 14/04/17 Most Preferred Japan TDK 22/11/17 Most Preferred Japan CyberAgent 08/06/17 Not Listed Japan Toshiba 15/11/17 Most Preferred Japan Dena 10/02/17 Most Preferred Japan Toshiba 29/12/16 Not Listed Japan East Japan Railway 22/11/17 Most Preferred Japan Yaskawa Electric 28/11/17 Not Listed Japan Fanuc 11/10/17 Most Preferred Japan Yaskawa Electric 03/08/17 Least Preferred Japan Fast Retailing 05/12/17 Not Listed Japan Aroundtown Prop 09/02/17 Most Preferred Real Estate Fast Retailing 20/07/17 Most Preferred Japan BWP Trust 26/07/17 Least Preferred Real Estate Fujitsu 07/03/17 Most Preferred Japan Castellum AB 15/06/17 Least Preferred Real Estate H.I.S. 05/09/17 Not Listed Japan China Evergrande Group 27/07/17 Not Listed Real Estate H.I.S. 22/02/17 Most Preferred Japan China Evergrande Group 15/06/17 Least Preferred Real Estate HINO MOTORS 09/11/17 Most Preferred Japan China Evergrande Group 06/02/17 Not Listed Real Estate JSR 09/11/17 Least Preferred Japan China Resources Land 10/02/17 Most Preferred Real Estate Japan Airlines 22/11/17 Most Preferred Japan City Developments Limited 10/02/17 Most Preferred Real Estate Japan Airlines 19/04/17 Not Listed Japan Country Garden Holdings 05/09/17 Not Listed Real Estate Japan Post Holdings 18/12/17 Most Preferred Japan Derwent London 26/07/17 Most Preferred Real Estate Japan Post Holdings 12/09/17 Not Listed Japan Derwent London 03/02/17 Not Listed Real Estate Japan Post Holdings 26/04/17 Most Preferred Japan GGP Inc 11/05/17 Not Listed Real Estate Kakaku.com 06/11/17 Not Listed Japan Gecina 07/06/17 Least Preferred Real Estate Kakaku.com 12/09/17 Most Preferred Japan Hammerson 06/12/17 Not Listed Real Estate Kubota 22/11/17 Most Preferred Japan Hispania 20/07/17 Most Preferred Real Estate Mabuchi Motor 07/03/17 Most Preferred Japan Keppel REIT 20/07/17 Least Preferred Real Estate Mitsubishi Estate 22/11/17 Most Preferred Japan LEG Immobilien AG 15/06/17 Least Preferred Real Estate Mitsubishi Estate 11/10/17 Not Listed Japan Lippo Karawaci 15/06/17 Most Preferred Real Estate Murata Manufacturing 02/05/17 Not Listed Japan Macerich REIT 14/06/17 Not Listed Real Estate Murata Manufacturing 17/04/17 Most Preferred Japan Megaworld Corporation 11/08/17 Most Preferred Real Estate Nidec 27/07/17 Most Preferred Japan Omega Healthcare 15/08/17 Least Preferred Real Estate Nippon Yusen 09/11/17 Not Listed Japan PSP Swiss Property 24/08/17 Most Preferred Real Estate Nissan Motor 06/01/17 Not Listed Japan Simon Property Group 18/05/17 Not Listed Real Estate ORIX 23/08/17 Most Preferred Japan Suntec REIT 19/05/17 Not Listed Real Estate Ono Pharmaceuticals 16/01/17 Not Listed Japan Swiss Prime Site 24/10/17 Not Listed Real Estate Panasonic 20/07/17 Not Listed Japan Terrafina 04/08/17 Most Preferred Real Estate Panasonic 13/02/17 Most Preferred Japan The Link Real Estate 26/07/17 Most Preferred Real Estate Park24 28/08/17 Not Listed Japan The Link Real Estate 16/05/17 Not Listed Real Estate Park24 17/04/17 Most Preferred Japan UOL Group 09/08/17 Most Preferred Real Estate Rakuten 18/12/17 Not Listed Japan Unibail-Rodamco 13/12/17 Not Listed Real Estate Rakuten 22/11/17 Most Preferred Japan Wharf Holdings 06/02/17 Not Listed Real Estate Rakuten 30/05/17 Not Listed Japan ASML 28/12/16 Not Listed Sustainable investing Rakuten 07/03/17 Most Preferred Japan Allianz 22/02/17 Not Listed Sustainable investing Renesas Electronics 06/11/17 Not Listed Japan Baker Hughes-A Rg 15/12/17 Most Preferred Sustainable investing Renesas Electronics 20/07/17 Most Preferred Japan Bank Rakyat Indonesia 17/02/17 Most Preferred Sustainable investing Resorttrust 07/03/17 Most Preferred Japan Celgene Corporation 05/09/17 Most Preferred Sustainable investing SUBARU 12/01/17 Not Listed Japan DBS Group Holdings 23/02/17 Most Preferred Sustainable investing SUMCO 27/11/17 Least Preferred Japan DCC Plc 23/02/17 Most Preferred Sustainable investing SUMCO 26/09/17 Not Listed Japan Fujitsu 15/12/17 Most Preferred Sustainable investing SUMCO 17/08/17 Most Preferred Japan Georg Fischer 27/01/17 Not Listed Sustainable investing Screen Holdings 09/11/17 Least Preferred Japan HINO MOTORS 15/12/17 Most Preferred Sustainable investing Screen Holdings 08/09/17 Not Listed Japan Huaneng Renewables 07/07/17 Not Listed Sustainable investing Seven & I holdings 22/11/17 Most Preferred Japan Kering 21/12/16 Not Listed Sustainable investing

UBS CIO WM December 2017 35 Appendix

Rating history changes (past 12 months)

Company Release date Current selection Equity Preference List Company Release date Current selection Equity Preference List

L'Oréal 05/09/17 Most Preferred Sustainable investing Vifor Pharma 27/07/17 Least Preferred Switzerland Moncler 23/02/17 Most Preferred Sustainable investing Vontobel 05/04/17 Most Preferred Switzerland Nike Inc. 23/02/17 Most Preferred Sustainable investing Ashtead Group 31/01/17 Least Preferred UK Nippon Yusen 17/11/17 Not Listed Sustainable investing AstraZeneca 01/08/17 Most Preferred UK Ono Pharmaceuticals 16/01/17 Not Listed Sustainable investing Aviva 31/01/17 Most Preferred UK SAP AG 28/12/16 Most Preferred Sustainable investing Barclays 13/11/17 Not Listed UK SGS 17/02/17 Most Preferred Sustainable investing GlaxoSmithKline 27/10/17 Not Listed UK innogy 07/07/17 Most Preferred Sustainable investing Intu Properties 06/12/17 Not Listed UK ABB Ltd 06/09/17 Not Listed Switzerland Intu Properties 31/10/17 Least Preferred UK Adecco 19/09/17 Least Preferred Switzerland Legal & General 14/07/17 Not Listed UK Adecco 11/07/17 Not Listed Switzerland Merlin Entertainments Plc 18/10/17 Not Listed UK Adecco 10/03/17 Least Preferred Switzerland National Grid 23/01/17 Least Preferred UK Aryzta AG 25/01/17 Not Listed Switzerland Reckitt Benckiser 31/01/17 Not Listed UK Baloise-Holding 21/12/16 Not Listed Switzerland Saga 23/10/17 Not Listed UK Clariant 23/05/17 Not Listed Switzerland Saga 23/03/17 Most Preferred UK Credit Suisse Group 25/04/17 Most Preferred Switzerland Shire Pharmaceuticals 01/08/17 Not Listed UK DKSH Holding AG 25/01/17 Most Preferred Switzerland Whitbread 23/01/17 Not Listed UK Dorma+Kaba 03/05/17 Not Listed Switzerland AENA S.A. 06/12/17 Most Preferred EPL Equity Radar Dufry 25/10/17 Not Listed Switzerland AENA S.A. 03/10/17 Not Listed EPL Equity Radar Flughafen Zuerich 24/10/17 Most Preferred Switzerland AENA S.A. 31/05/17 Most Preferred EPL Equity Radar Galenica Santé 27/07/17 Most Preferred Switzerland ASML 12/04/17 Most Preferred EPL Equity Radar Geberit 14/06/17 Most Preferred Switzerland Alstom 20/11/17 Most Preferred EPL Equity Radar Georg Fischer 18/07/17 Most Preferred Switzerland Alstom 03/10/17 Not Listed EPL Equity Radar Givaudan 02/11/17 Not Listed Switzerland Alstom 12/04/17 Most Preferred EPL Equity Radar Givaudan 04/04/17 Least Preferred Switzerland DSM 11/10/17 Most Preferred EPL Equity Radar Gurit 06/09/17 Least Preferred Switzerland Deutsche Lufthansa AG 06/12/17 Most Preferred EPL Equity Radar Gurit 27/06/17 Not Listed Switzerland Enel 06/12/17 Most Preferred EPL Equity Radar Julius Baer Group 01/03/17 Most Preferred Switzerland Enel 27/07/17 Not Listed EPL Equity Radar Kudelski 10/07/17 Not Listed Switzerland Enel 16/06/17 Most Preferred EPL Equity Radar Kudelski 09/01/17 Least Preferred Switzerland Fortum 06/12/17 Most Preferred EPL Equity Radar LafargeHolcim 12/06/17 Not Listed Switzerland Fortum 21/09/17 Not Listed EPL Equity Radar LafargeHolcim 25/04/17 Most Preferred Switzerland Fortum 12/04/17 Most Preferred EPL Equity Radar Landis+Gyr Gr N 25/10/17 Most Preferred Switzerland Galp Energia 06/12/17 Most Preferred EPL Equity Radar Lindt & Sprüngli 18/07/17 Not Listed Switzerland Galp Energia 21/09/17 Not Listed EPL Equity Radar OERLIKON 01/03/17 Not Listed Switzerland Galp Energia 12/04/17 Most Preferred EPL Equity Radar PSP Swiss Property 24/10/17 Not Listed Switzerland Gas Natural Fenosa 27/11/17 Most Preferred EPL Equity Radar PSP Swiss Property 24/08/17 Most Preferred Switzerland Grifols 06/12/17 Most Preferred EPL Equity Radar Phoenix Mecano 25/01/17 Not Listed Switzerland Iberdrola 06/12/17 Most Preferred EPL Equity Radar Rieter 21/04/17 Not Listed Switzerland Iberdrola 12/06/17 Not Listed EPL Equity Radar Straumann 27/03/17 Not Listed Switzerland Iberdrola 12/04/17 Most Preferred EPL Equity Radar Straumann 05/01/17 Least Preferred Switzerland Icade 20/11/17 Most Preferred EPL Equity Radar Sulzer 21/04/17 Most Preferred Switzerland Inditex SA 16/06/17 Most Preferred EPL Equity Radar Sunrise Communications 24/10/17 Most Preferred Switzerland Kering 20/11/17 Most Preferred EPL Equity Radar Sunrise Communications 25/05/17 Not Listed Switzerland Kering 11/10/17 Not Listed EPL Equity Radar Swatch Group AG 27/03/17 Not Listed Switzerland Kering 10/07/17 Most Preferred EPL Equity Radar Swiss Re 17/01/17 Not Listed Switzerland Merlin Properties SOCIMI S. 06/12/17 Most Preferred EPL Equity Radar Swisscom 07/12/17 Least Preferred Switzerland Telefonica 06/12/17 Most Preferred EPL Equity Radar Swisscom 24/10/17 Not Listed Switzerland Unicaja Banco 06/12/17 Most Preferred EPL Equity Radar Swisscom 13/06/17 Most Preferred Switzerland Ahold Delhaize 28/04/17 Most Preferred EPL Equity Radar Temenos 24/10/17 Not Listed Switzerland Anheuser-Busch InBev 12/04/17 Most Preferred EPL Equity Radar Temenos 27/03/17 Least Preferred Switzerland BP 27/11/17 Most Preferred EPL Equity Radar VAT Group N 04/04/17 Not Listed Switzerland Compagnie Financiere 20/11/17 Most Preferred EPL Equity Radar VZ Holding 05/04/17 Not Listed Switzerland Deutsche Telekom 28/04/17 Most Preferred EPL Equity Radar VZ Holding 21/12/16 Least Preferred Switzerland Diageo 20/11/17 Most Preferred EPL Equity Radar

UBS CIO WM December 2017 36 Appendix

Rating history changes (past 12 months)

Company Release date Current selection Equity Preference List

Ferguson 27/11/17 Most Preferred EPL Equity Radar

GKN 27/11/17 Most Preferred EPL Equity Radar E ditori a l Gas Natural Fenosa 27/11/17 Most Preferred EPL Equity Radar Hannover Re 27/11/17 Most Preferred EPL Equity Radar Ingenico Group 27/11/17 Most Preferred EPL Equity Radar Kering 20/11/17 Most Preferred EPL Equity Radar Kering 11/10/17 Not Listed EPL Equity Radar Kering 10/07/17 Most Preferred EPL Equity Radar LVMH Moet Hennessy Louis 20/11/17 Most Preferred EPL Equity Radar

LVMH Moet Hennessy Louis 11/10/17 Not Listed EPL Equity Radar Reg i on St r ategy LVMH Moet Hennessy Louis 10/07/17 Most Preferred EPL Equity Radar Leonardo Finmeccanica 27/11/17 Most Preferred EPL Equity Radar Lindt & Sprüngli 20/11/17 Most Preferred EPL Equity Radar Moncler 20/11/17 Most Preferred EPL Equity Radar Moncler 11/10/17 Not Listed EPL Equity Radar Moncler 10/07/17 Most Preferred EPL Equity Radar Pernod Ricard 20/11/17 Most Preferred EPL Equity Radar

Remy Cointreau 20/11/17 Most Preferred EPL Equity Radar Secto r St ategy Zurich Insurance Group 12/04/17 Most Preferred EPL Equity Radar Air France - KLM 20/11/17 Most Preferred EPL Equity Radar Alstom 20/11/17 Most Preferred EPL Equity Radar Alstom 03/10/17 Not Listed EPL Equity Radar

Alstom 12/04/17 Most Preferred EPL Equity Radar Reg i on s Arkema 11/10/17 Most Preferred EPL Equity Radar Bureau Veritas 20/11/17 Most Preferred EPL Equity Radar Freenet 20/11/17 Least Preferred EPL Equity Radar Icade 20/11/17 Most Preferred EPL Equity Radar Secto rs Krones 20/11/17 Least Preferred EPL Equity Radar LEG Immobilien AG 23/08/17 Least Preferred EPL Equity Radar i nable nve s t ng Su s ta Eq uit y Ra d a r Inv estme n t h emes

UBS CIO WM December 2017 37 Appendix

Contact If you require information on UBS Chief Investment Office WM, its research publications and UBS disclosures with regard to financial instruments and/or issuers, please contact the mailbox [email protected] (note that e-mail communication is unsecured) or contact your client advisor for assistance. Frequency of updates Equity recommendation lists can be updated on a daily basis, and are refreshed at least every two weeks. Risk views on bond issuers and instruments are affirmed sporadically and changed ad hoc, subject to market developments. Competent authority of the producer UBS Switzerland AG is regulated by the Swiss Financial Market Regulatory Authority (FINMA). UBS Europe SE, Succursale Italia is regulated by Commissione Nazionale per le Società e la Borsa (CONSOB). UBS AG Tokyo Branch is regulated by the Financial Ser- vices Agency (FSA). UBS Asesores Mexico, S.A. de C.V. is regulated by Comisión Nacional Bancaria y de Valores (CNBV). UBS AG Singapore Branch is regulated by the Monetary Authority of Singapore (MAS). UBS Europe SE, sucursal en España is regulated by Comisión Nacional del Mercado de Valores (CNMV). UBS AG London Branch is regulated by the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). UBS AG Hong Kong Branch is regulated by the Securities and Futures Commis- sion (Hong Kong) and the Hong Kong Monetary Authority. UBS Brasil Administradora de Valores Mobiliarios Ltda is regulated by Comissão de Valores Mobiliários.

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UBS CIO WM equity selection system We provide two equity selections: Most Preferred (MP) and Least Preferred (LP).

Most Preferred We expect the stock to outperform the benchmark in the next 12 months. Least Preferred We expect the stock to underperform the benchmark in the next 12 months. Suspended Sometimes legal, regulatory, contractual or best-business-practice obligations restrict us from issuing research on a company. This situation normally stems from UBS Investment Bank’s involvement in an investment banking transaction associated with that company. Equity selection: An assessment relative to a benchmark Equity selections in Equity Preferences lists (EPLs) are assessments made relative to a sector/industry, country/regional or thematic benchmark. The chosen benchmark is disclosed on the front page of each EPL. It is also used to measure the performance of the individual analyst. Including a stock in the EPL constitutes neither a view on its expected, standalone absolute performance nor a price target. Rather, EPLs are meant to support the UBS House View, with the stocks included in them selected for their superior risk/return profiles. Our selection is based on an assessment of the company’s fundamental outlook and valuation, the risks owning the stock entails and the diversification benefits it provides in an investment portfolio, among many other factors. UBS WM CIO’s selection methodology enables wealth management clients to invest in a specific investment theme or focus on a sector/industry or country/region. Stocks can be selected for multiple EPLs. For consistency’s sake, a stock can only be selected as either Most Preferred or Least Pre- ferred, not both simultaneously. As EPL benchmarks differ, stocks do not need to be included on every list to which they could theoretically be added. Only stock views prepared by UBS Financial Services Inc. (UBS FS) which are compatible with the above equity selection system are provided. A stock cannot be selected as Most Preferred if it is rated Sell, while a Buy-rated stock cannot be selected as Least Preferred. Whenever CIO has an investment view (such as with the tactical asset allocation TAA) on an entire country/region, or sector/industry on a three to 12-month time horizon, we state our preference by using the terms overweight, neutral and underweight. For more information about our present and past recommendations, please contact [email protected]

Current UBS CIO global rating distribution (as of last month-end) Least Preferred 14% Most Preferred 86%

UBS CIO WM December 2017 38 Appendix

Terms and abbreviations Term / Abbreviation Description / Definition Term / Abbreviation Description / Definition 1H, 2H, etc. or 1H07, First half, second half, etc. or first EmV Embedded value = net asset value 2H07, etc. half 2007, second half 2007, etc. + present value of forecasted 1Q, 2Q, etc. or 1Q07, First quarter, second quarter, etc. future profits (for life insurers) 2Q07, etc. or first quarter 2007, second EPS Earnings per share quarter 2007, etc. Equity Ratio (%) Shareholders’ equity divided by 2007E, 2008E, etc. 2007 estimate, 2008 estimate, etc. total assets ADR American depositary receipt EV Enterprise value = market value of AUM Assets under management = total equity, preferred equity, value of own and third-party outstanding net debt and assets managed minorities bn Billion (109) FCF Free cash flow = cash a company bp or bps Basis point or basis points generates above outlays required (100 bps = 1 percentage point) to maintain/expand its asset base BVPS Book value per share = FCF Yield (%) Free cash flow divided by market shareholders’ equity divided by the capitalization number of shares FFO Funds from operations CAGR Compound annual growth rate FY Fiscal year / financial year Cant Inc/Capita Cantonal income per capita (Switzerland only) GDP Gross domestic product Capex Capital expenditures GF Grandfathered status CFO 1) Cash flow from operations Gross Margin (%) Gross profit divided by revenues 2) Chief financial officer h/h Half-year over half-year; half on CFPS Cash flow per share half Cost/Inc Ratio (%) Costs as a percentage of income Interest Coverage Ratio that expresses the number of CPI Consumer price index times interest expenses are CR Combined ratio = ratio of claims covered by earnings and expenses as a percentage of Interest exp Interest expense premiums (for insurance companies) ISIN International securities CY Calendar year identification number DCF Discounted cash flow LLP/Net Int Inc (%) Loan loss provisions divided by net DDM Dividend discount model interest income Dividend Yield (%) Dividend per share divided by price LLR/Gross Loans (%) Loan loss reserves divided by gross per share loans DPS Dividend per share m/m Month-over-month; month on EBIT Earnings before interest and taxes month EBIT Margin (%) EBIT divided by revenues mn Million (106) EBIT(D)A Earnings before interest, taxes, M&A Merger & Acquisition (depreciation) and amortization n.a. or NA Not available or not applicable EBITDA Margin (%) EBITDA divided by revenues NAV Net asset value EBITDA/Net Interest EBITDA divided by net interest Net Debt Short- and long-term interest- expense bearing debt minus cash and cash equivalents EBITDAR Earnings before interest, taxes, depreciation, amortization and Net Int Margin (%) Net interest income divided by rental expense average interest-bearing assets EFVR Estimated fair value range Net Margin (%) Net income divided by revenues

UBS CIO WM December 2017 39 Appendix

Terms and abbreviations Term / Abbreviation Description / Definition n.m. or NM Not meaningful NPL Non-performing loans Op Margin (%) Operating income divided by revenues p.a. Per annum (per year) P/BV Price to book value P/CFPS Price/Cash flow per share P/E Price to earnings P/E Relative P/E relative to the market P/EmV Price to embedded value PEG Ratio P/E ratio divided by earnings growth PPI Producer price index Prim Bal/Cur Rev (%) Primary balance divided by current revenue (total revenue minus capital revenue) Profit Margin (%) Net income divided by revenues q/q Quarter-over-quarter; quarter on quarter REIT Real Estate Investment Trust ROA (%) Return on assets ROCE (%) Return on capital employed = EBIT divided by difference between total assets & current liabilities ROE (%) Return on equity ROAE (%) Return on average equity ROIC (%) Return on invested capital Solvency Ratio (%) Ratio of shareholders’ equity to net premiums written (for insurance companies) Tax Burden Index Swiss tax index; 100 = average tax burden of all cantons Tier 1 Ratio (%) Tier 1 capital divided by risk- weighted assets; describes a bank’s capital adequacy tn Trillion (1012) Valor Swiss company identifier WACC Weighted average cost of capital UBS CIO WM UBS Chief Investment Office WM y/y Year-over-year; year on year YTD Year-to-date

UBS CIO WM December 2017 40 Appendix

Analyst certification Each analyst primarily responsible for the content of this report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her per-sonal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that analysis in the report.

Any price of securities written in this publication is taken as at the close of business on the main market of listing on the date shown unless otherwise stated.

Disclosures (18 December 2017) ABB Ltd 3, 5, 6, 7, 14, 15. ABN AMRO 1, 2. Accenture PLC-CL A 5, 8, 9, 15, 24. Adecco 1, 3, 6, 7, 14, 15. Adidas AG 8, 9. ADO Properties 1, 34. AIA Group 3, 16. Air France - KLM 1, 2. Alibaba 3, 5, 12. Alphabet Inc 3, 5, 6, 7, 8, 9, 12. Alstom 15. alstria office REIT 1, 2, 3, 14. American Tower Corporation 5. Anheuser-Busch InBev 1, 5. ArcelorMittal 5. Aroundtown Prop 1, 2, 14. ASML 5. AstraZeneca 3, 5, 8, 9. Autoneum Holding AG 3, 14. Aviva 3. Axa 3, 8, 9. Baidu, Inc. 5, 12. Bangkok Bank NVDR 3. Bank Man- diri 3. Bank Rakyat Indonesia 3. Bankia 1, 2, 3. Bankinter 3. Barry Callebaut 14. BASF SE 1, 2, 3, 11, 14. BAT UK 1, 3, 5, 11, 14, 23. Bayer 1, 3. BHP Billiton Plc 1, 3, 5, 11, 12, 13. BNP Paribas 1, 3, 4, 8, 9, 12. BP 1, 2, 3, 4, 5, 11, 12, 14. Celgene Corporation 3, 5, 7. Cheung Kong Property 1, 2, 16. China Construction Bank 3, 16. China Mobile (HK) Ltd 1, 5, 12, 16. China Resources Land 16. Colgate-Palmolive 5, 8, 9, 15, 24. Compagnie Financiere Richemont SA 1, 3, 14, 15, 35. Covestro AG 2. Credit Suisse Group 3, 5, 8, 9, 12, 14. CRH 1, 3, 5, 11. DBS Group Holdings 1, 2, 3, 4. Derwent London 11. Deutsche Bank 1, 2, 3, 4, 5, 8, 9, 12, 14, 15, 20. Deutsche Lufthansa AG 1, 2, 3. Deutsche Post 3. Deutsche Telekom 1, 3, 8, 9. Diageo 1, 3, 5, 24. Direct Line Insurance Group 3. DKSH Holding AG 3, 14. DnB ASA 1, 2, 3, 12, 14. Dorma+Kaba 1, 2, 3, 14, 15. E.ON 3, 8, 9, 15. eBay 3, 5, 7, 8, 9. EDF 3, 15. Ems-Chemie 14. Enel 3. Engie 3. Erste Bank 1, 2, 3. Facebook 5, 12. Ferguson 14. Ferrari NV 3, 5. Fiat Chrysler 3, 5. Flughafen Zuerich 14. Fresnillo 3, 6, 7. Galenica Santé 2, 14, 19. Geberit 1, 3, 14, 15. Georg Fischer 3, 6, 7, 14, 19. GKN 3, 11. Grifols 5. Grifols SA (B Share) 5. Gurit 3, 14. Handelsbanken 1, 2, 3, 4. Hannover Re 3, 8, 9. HDFC Bank 3, 5. Heineken 2, 14. HSBC FRANCE 1, 2, 3, 4, 5, 8, 9, 14, 16, 17. Iberdrola 1, 2, 3. ICICI Bank 1, 3, 5. Imperial Brands 3. Indiabulls Housing Finance 22. ING Groep 1, 2, 3, 5, 8, 9, 14. Ingenico Group 1, 14. Intel Corp. 1, 3, 4, 5, 6, 7, 8, 9, 24. Intesa SanPaolo 1, 2, 3. Japan Airlines 3, 14. Japan Post Holdings 1, 2, 14. Julius Baer Group 1, 2, 3, 14. KB Financial Group 3, 5. Kering 3. Koninklijke Philips N.V 1, 3, 5, 30. L’Oréal 1. Landis+Gyr Gr N 1, 2, 14, 15. Leonardo Finmeccanica 1, 3, 11. LG Display 5. Lilly (Eli) & Co. 1, 3, 4, 5, 6, 8, 9. Linde 3, 15. Lindt & Sprüngli 3, 6, 7, 14. Lippo Karawaci 1. LVMH Moet Hennessy Louis Vuitton SA 3. Microsoft Corp. 1, 3, 4, 5, 6, 7, 8, 9, 10. Mitsubishi UFJ 1, 2, 3, 4, 5, 12. Moncler 1, 14. Mondi 11, 15, 23. National Grid 3, 5, 15. Nike Inc. 5, 12. NN GROUP 12. Novartis 1, 2, 3, 4, 5, 6, 7, 10, 12, 14, 15, 18, 26, 31, 32. Omega Healthcare Investors Inc 5. ORIX 1, 2, 3, 5, 8, 9. OSRAM LICHT 1, 3. Panalpina World Transport (Holding) 3, 14, 15. Philips Lighting N.V. 2. Ping An Insurance (Group) 3, 12, 15, 16. POSCO 5. ProLogis 5. Prudential PLC 1, 2, 3, 5, 8, 9, 11, 14. PSP Swiss Property 1, 2, 14, 18, 19. Renault SA 3, 15. Rio Tinto Plc 3, 5, 12. Roche 3, 6, 7, 14, 26. Royal Dutch Shell 1, 3, 4, 5, 12, 15. Ryanair 5. Safran SA 3. Sampo 3. Samsung Electronics 12. Sandvik 25. SAP AG 2, 3, 5, 8, 9. Schindler 1, 3, 6, 7, 14, 15. Segro 1, 2, 3, 11. SGS 1, 2, 3, 6, 7, 14, 15. Shinsei Bank 3. SMFG 1, 2, 3, 4, 5, 8, 9, 14, 15. SOUTH32 LTD 23. St. James Place 3. Sulzer 2, 3, 14, 15. SUMCO 1, 2. Sunrise Communications 1, 3, 14, 15, 19. Swisscom 1, 2, 3, 6, 7, 14, 18. Taiwan Semiconductor Manufacturing 5. TechnipFMC 5. Telefonica 2, 3, 5, 14. Telia 1, 3, 14, 28, 29. Tencent Holdings 16. Terrafina 21. Thales 8, 9. The Link Real Estate Investment Trust 16, 27. Toshiba 1, 2. TOTAL 3, 5, 12. Unicaja Banco 1, 2, 3, 14. UniCredit 1, 2, 3, 4. Unilever Plc 1, 2, 3, 5, 11. Vifor Pharma 1, 3, 14. Vinci 8, 9. Visa Inc. 5, 12, 15. Vodafone Group 1, 2, 3, 5, 11, 14, 33. Volkswagen Preference 3, 15. Vontobel 3, 14. Walt Disney Co. 5, 8, 9, 10, 24, 26. Wipro Ltd. 5. Yahoo Japan 3. Zurich In- surance Group 3, 14, 15.

1. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity or one of its affiliates. 2. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months. 3. Within the past 12 months, UBS Securities LLC and/or its affiliates have received compensation for products and services other than investment banking services from this company/entity. 4. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided. 5. UBS Securities LLC makes a market in the securities and/or ADRs of this company. 6. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided. 7. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided.

UBS CIO WM December 2017 41 Appendix

8. This company/entity is, or within the past 12 months has been, a client of UBS Financial Services Inc, and non-investment banking securities-related services are being, or have been, provided. 9. Within the past 12 months, UBS Financial Services Inc has received compensation for products and services other than investment banking services from this company. 10. The UBS Wealth Management strategist, a member of his or her team, or one of their household members has a long common stock position in this company. 11. UBS Limited acts as broker to this company. 12. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month‘s end (or the prior month‘s end if this report is dated less than 10 working days after the most recent month‘s end). 13. UBS South Africa (Pty) Ltd is acting as JSE Sponsor to the company. 14. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 15. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company‘s common equity securities as of last month‘s end (or the prior month‘s end if this report is dated less than 10 days after the most recent month‘s end). 16. UBS Securities (Hong Kong) Limited is a market maker in the HK-listed securities of this company. 17. UBS Limited is acting as manager/co-manager, underwriter, placement or sales agent in regard to an offering of securities of this company/entity or one of its affiliates. 18. An employee of UBS AG is an officer, director, or advisory board member of this company. 19. UBS Fund Management (Switzerland) AG beneficially owns more than 5% of the total issued share capital of this company. 20. UBS AG, its affiliates or subsidiaries beneficially held more than 5% of the total issued share capital of this company; or for UK and Irish companies, a line of stock of this company; as of the date shown in this disclosure table. 21. UBS Casa de Bolsa, SA de CV, UBS Grupo Financiero makes a market in the securities of this company. 22. Because this security exhibits higher-than-average volatility, the FSR has been set at 15% above the MRA for a Buy rating, and at -15% below the MRA for a Sell rating (compared with 6/-6% under the normal rating system). 23. UBS South Africa (Pty) Limited acts as JSE sponsor to this company. 24. UBS Financial Services Inc., its affiliates or subsidiaries owns a net long position exceeding 0.5% of the total issued share capital of this company. 25. UBS Limited is acting as financial advisor to Sandvik AB on the divestment of Sandvik Hyperion to KKR & Co LP. 26. The equity analyst covering this company, a member of his or her team, or one of their household members has a long common stock position in this company. 27. UBS is acting as financial advisor to Link Asset Management Limited in relation to its disposal of seventeen properties to Gaw Capital Partners. 28. UBS Limited is acting as advisor to TeliaSonera on its announced plans for the potential disposal of its Eurasian assets. 29. UBS Limited is acting as Financial Advisor to TeliaSonera AB on its announced agreement for the sale of Ncell Pvt Ltd to Axiata Group. 30. UBS Switzerland AG, its affiliates or subsidiaries owns a net long position exceeding 0.5% of the total issued share capital of this company. 31. UBS AG is acting as agent in regard to Novartis AG‘s announced share buyback programme. 32. The UBS Wealth Management strategist, a member of his or her team, or one of their household members is an officer, director, or advisory board member of this company. 33. UBS is acting as financial advisor for Vodafone Group PLC in relation to the merge of Vodafone India Ltd with Idea Cellular Ltd. 34. UBS Limited has entered into an arrangement to act as a liquidity provider and/or market maker in the financial instruments of this company. 35. UBS AG is acting as agent in regard to Cie Finance Richemont SA‘s announced share buyback programme.

UBS CIO WM December 2017 42 Instrument/issuer-specific 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. 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UBS CIO WM December 2017 43 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. 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