Yield & Income Cross asset ideas for Yield Monthly –– Octo ber 2019 Chief Investment Office GWM Division and discord Divisions have emerged or deepened within trade talks, Fed policy and national politics We remain cautiously optimistic that the US can avoid recession in 2020 We underweight equities overall; neutral US but favor over developed market and EM stocks ab This report has been prepared by UBS Financial Services Inc. (UBS FS). Analyst certification and required disclosures begin on page 23. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Contents Market Commentary About this report Division and discord ........................................................................... 3 The objective of this report is to provide an analysis of various income-generating securi- ties – sovereign, municipal and corporate Asset Allocation Commentary bonds, equities, master limited partnerships Waiting for direction.......................................................................... 4 (MLP), preferred securities, senior loans, real estate investment trusts and closed-end funds, Fixed Income Sector Reviews – in the context of current economic, fixed in- come and equity market conditions. US Gov't Bonds Raging repo ....................................................................................... 5 This report represents a compendium of previously-published views from UBS CIO US Municipal Bonds Global Wealth Management. These publica- Bout of volatility ................................................................................ 6 tions are referenced in each section in order to obtain more information. US Investment Grade Credit Spreads stay firm as yields rise from the lows ..................................... 7 This report will be published approximately every four weeks. Please note that the views US High Yield Credit in this report may change with market con- Neutral on high yield ......................................................................... 8 ditions at some point between publications. Emerging Market Debt Updates to the views in this report can be Preference for carry assets in emerging markets ................................ 9 found in the referenced sections of the Online Services Research website. Equity Sector Reviews US Equity Lead authors Expect range-bound markets ........................................................... 10 Jason Draho Frank Sileo International Developed Market Equity Bouncing back ................................................................................. 11 Authors (in alphabetical order) Emerging Market Equity Alejo Czerwonko Limited upside, massive uncertainty ................................................. 12 Jay Dobson Leslie Falconio Michael Gourd Yield Asset Reviews Daniel Kelsh Preferreds David Lefkowitz So far, so good ................................................................................ 13 Sangeeta Marfatia Barry McAlinden REITs Kathleen McNamara Falling rates keep lifting REITs .......................................................... 14 Edmund Tran MLPs Justin Waring Focus on quality ............................................................................... 15 Jonathan Woloshin Xingchen Yu Jeremy Zirin Closed-End Fund Highlight Nuveen Preferred Securities Income Fund (JPS) A preferred securities fund .............................................................. 16 House View Yield-Focused Portfolios Yield Monitor .................................................................................. 17 Strategic Asset Allocations (SAAs) .................................................... 18 CIO GWM 30 September 2019 2 Market Commentary Frank Sileo, CFA Division and discord Investors are focused on whether and how divisions might be More rate-sensitive sectors underperformed in September reconciled within three key areas of interest: Federal Reserve Apr-19 May-19 Jun-19 Jul-19Jul-19Jul-19 Aug-19 Sep-19 policy, US-China trade talks, and national politics. Over the past US Lg Cap US Gov't US Lg Cap US Lg Cap REITs Int'l DM Value several weeks, division within each of these spheres seems to Growth 4.5% 2.3% Value 7.2 % Growth 2.3% 3.4% '5.2 % US Lg Cap IG Corps US Lg Cap Preferreds US Gov't US Lg Cap have deepened. The US trade war with China escalated in Au- Value 3.5 % 1.5% Growth 6.9% 2.1% 3.4% Value 3.3 % gust with a series of incrementally higher, reciprocating tariffs. Int'l DM Muni Bond Emerging REITs IG Corps REITs Value 2.3 % 1.4% Mkts 6.2% 1.3% 3.1% 2.9% Among Fed policymakers, divisions became apparent following Emerging EM USD Int'l DM Sr Loans Muni Bond Emerging their 18 September meeting , during which the central bank cut Mkts 2.1% Bond 0.6% Value '5.3 % 1.0% 1.6% Mkts 2.0% its fed funds rate by 25 basis points. Three members dissented Sr Loans Preferreds EM Loc Bond EM USD Bond Preferreds Preferreds 2.1% 0.5% 4.4% 1.0% 0.8% 0.9% against that decision: one dovish voter wanted a deeper cut, High Yield REITs EM USD EM Loc Bond High Yield Sr Loans while two hawkish voters called for no cut. Further, the latest 1.4% 0.2% Bond 2.7% 1.0% 0.4% 0.7% projections from the 17 members showed that eight expect the Preferreds EM Loc Bond MLPs US Lg Cap EM USD Bond EM Loc Bond fed funds rate to be lower by the end of next year, while seven 0.9% 0.0% 2.6% Value 0.8 % 0.2% 0.6% IG Corps Sr Loans High Yield Muni Bond Sr Loans High Yield 1 expect it to be higher (two are calling for flat rates). 0.5% -0.7% 2.3% 0.8% -0.4% 0.4% EM USD MLPs IG Corps High Yield US Lg Cap MLPs Meanwhile in Washington, DC, political discord, which has Bond 0.4% -1.1% 2.3% 0.6% Growth -0.8% 0.3% been acrimonious for several years, entered a new phase with Muni Bond High Yield REITs IG Corps EM Loc Bond EM USD Bond the launch of a formal impeachment inquiry into President 0.4% -1.2% 1.3% 0.5% -2.0% 0.0% Trump. While the market reaction has been minimal so far, it REITs Int'l DM Preferreds US Gov't US Lg Cap IG Corps -0.2% Value '-5.8 % 1.2% -0.1% Value -2.9 % -0.7% could capture more investor attention if upcoming hearings US Gov't US Lg Cap US Gov't MLPs Int'l DM Value US Lg Cap uncover more damaging evidence against the president. -0.3% Growth - 0.9% -0.2% '-4.1 % Growth -0.7% EM Loc Bond US Lg Cap Muni Bond Emerging Mkts Emerging Muni Bond For the most part, investors have taken these events in stride. -0.9% Value -6.4 % 0.4% -1.2% Mkts -4.9% -0.8% To be sure, interest rates have been more volatile. Escalating MLPs Emerging Sr Loans Int'l DM Value MLPs US Gov't trade tensions in August led investors to seek out safe-haven -1.3% Mkts -7.3% 0.2% '--2.2 % -5.5% -0.9% Source: Bloomberg, BAML, UBS. Returns as of 27 September 2019 assets, driving Treasury yields lower. The 10-year Treasury yield fell to a low of 1.46% in early September. But a series of Note: US Gov't – Bloomberg Barclays US Govt Index; Muni Bond – Bloomberg Bar- clays Muni Bond Index; IG Corporates – Bloomberg Barclays US Credit Index; High goodwill gestures between the US and China calmed investor Yield – Bloomberg Barclays US Corp High Yield Index; EM USD Bond - Bloomberg nerves and the Treasury yield snapped back to 1.9%, before Barclays EM USD Agg Index; EM Local Bond - Bloomberg Barclays EM Local Currency Gov't Index; Sr Loan – S&P / LSTA US Leveraged Loan 100 Index; REITs – FTSE NAREIT settling toward the 1.7% level. The conciliatory trade news Equity REIT Index; MLPs – Alerian MLP Index; Preferreds – ICE BofAML Core Plus helped drive stocks higher, although there were mixed signals Fixed Rate Preferred; US Large Cap Value – Russell 1000 Value Index; US Large Cap Growth – Russell 1000 Growth Index; Int'l Developed Market Value – MSCI EAFE in the final week of September. Still, stocks ended the month Value USD Index; Emerging Markets – MSCI Emerging Market Index. higher. Similarly, equity-based Yield & Income sectors per- formed well including value stocks and emerging market (EM) equity, while municipal and corporate bonds were weaker. At CIO, we are cautiously optimistic and believe that, while risks have risen, the US can avoid recession in 2020. Trade poli- cy could dampen the outlook if it were to include further esca- lation and more aggressive measures. Given the heightened risks to the global economy and markets, we are underweight equities, including a neutral view on US stocks. We favor US over international developed and EM stocks (see pages 10–12 for details). Importantly, we are not bearish and see cash as less attractive than other choices like Treasury Inflation Protected Securities (TIPS) and USD-denominated EM sovereign bonds (page 9). Overall, investors should remain fully engaged and invested. While we may have division and discord, the economy and markets could still advance as long as proceedings avoid disruption and disorder. 1 "Fed cuts rates amid lack of consensus," Rose, B., CIO Blog, 18 September 2019 CIO GWM 30 September 2019 3 Asset Allocation Commentary Jason Draho, PhD Waiting for direction As we assess what could happen to markets over the com- substantive in details. ing months, memories of what transpired in the final quarter The markets could look past the trade and political risks if of 2018 are still fresh. In late September 2018 the S&P 500 economic growth clearly started to accelerate, especially reached a new all-time high of 2,930 before the wheels outside the US. But that's unlikely as long as trade uncer- came off (Fig. 1). By 24 December the index was down tainty, which has already weighed heavily on manufacturing 20%, with only a post-Christmas rally limiting the damage activity, lingers. Last September manufacturing sentiment to a 14% decline for the fourth quarter. Since that 2018 was running at full steam based on the Institute for Supply high the S&P 500 has only returned 4% on a total return Management (ISM) survey (Fig.