Multi asset Multi asset Expected Five-Year Returns by Scenario Economic Assumptions Baseline Deep Recession Stagflation Goldilocks Reflation Coupon-paying assets Chart 4: The disappearance of global negative-yielding debt Inflation 2.8% 1.3% 6.0% 2.0% 5.0% Across the major liquid asset class of equities, government bonds and credit, our baseline outlook for expected returns 20 Economic Growth 2.5% 1.1% 1.2% 3.0% 3.0% is meaningfully higher as of October 2022 than in July 2021 Nominal Growth 5.3% 2.5% 7.3% 5.1% 8.2% (Chart 3). The improvement in the return profile is most 15 evident in assets that pay a coupon – government bonds and Nominal Terms credit. This is a function of the higher starting point for risk- n Starting Yield Baseline Deep Recession Stagflation Goldilocks Reflation free rates thanks to central bank tightening. 10 Cash Cash 4.5% 3.8% 1.5% 6.5% 3.2% 4.9% USD trillio Fixed Income Global Government Bonds 3.0% 4.2% 5.5% 2.1% 4.4% 2.1% With this regime shift, it is finally possible to earn some 5 Global Investment Grade Bonds 6.0% 6.8% 8.2% 5.0% 7.0% 6.2% income in bonds. Perhaps this development is best illustrated Global Agg 3.8% 5.0% 6.0% 3.1% 5.1% 3.4% by the dwindling stock of negative-yielding debt globally Global High Yield 10.0% 8.6% 5.5% 5.3% 11.0% 10.1% (Chart 4). Credit markets, across both investment grade and 0 Nov-17 Nov-18 Nov-19 Nov-20 Nov-21 Nov-22 TIPS 1.7% 4.9% 4.5% 8.5% 3.6% 6.0% high yield, are looking particularly attractive too. For example, Equity Global Equity 8.2% -1.7% -1.6% 12.4% 15.1% the expected return of global investment grade credit has seen Source: Bloomberg Global Aggregate Negative Yielding Debt Market Value (USD) 60/40 Portfolio 7.1% 1.4% -0.2% 10.1% 10.5% Index, as of 17 November 2022 a huge jump, rising from a mere 0.5% to 6.8%. We believe Standard Deviation 10.7% 14.1% 16.4% 8.8% 9.3% this leads to the end of the TINA era (“there is no alternative” Diversified Portfolio 7.4% 1.2% 1.2% 10.5% 11.9% besides stocks). This should be a good-news story on the Scenario analysis Standard Deviation 10.7% 14.1% 16.4% 8.8% 9.3% outlook for diversified multi-asset portfolios. We believe We also explore how sensitive our return expectations are diversification beyond a broad 60/40 portfolio matters now to different mixes of growth and inflation over five-year more than ever with positive expected returns across asset time frames: Real Terms classes and a less reliable negative stock-bond correlation. – Deep recession: lower inflation, lower (or negative) growth. Starting Yield Baseline Deep Recession Stagflation Goldilocks Reflation – Stagflation: a sustained period of above-trend inflation and Cash 4.5% 1.0% 0.2% 0.5% 1.2% 0.0% below-trend growth. Fixed Income Global Government Bonds 3.0% 1.4% 4.1% -3.7% 2.4% -2.8% Chart 3: Five-year expected returns: then and now – Goldilocks: a moderation of inflation, along with above- Global Investment Grade Bonds 6.0% 3.9% 6.7% -0.9% 4.9% 1.2% % trend growth. Global Agg 3.8% 2.2% 4.6% -2.8% 3.1% -1.5% 10 – Reflation: above-trend inflation and above-trend growth. Global High Yield 10.0% 5.6% 4.1% -0.7% 8.8% 4.8% TIPS 1.7% 2.0% 3.1% 2.4% 1.6% 0.9% 8 These scenarios (see tables) reflect the economic backdrop Equity Global Equity 5.3% -3.0% -7.2% 10.2% 9.6% that will play out over the first two years of the horizon, 60/40 Portfolio 4.2% -0.4% -6.2% 8.0% 5.5% 6 followed by a three-year period of mean reversion (that is, Standard Deviation 10.9% 14.2% 16.8% 9.0% 10.0% baseline annual returns). As shown in the previous section, the Diversified Portfolio 4.5% -0.2% -4.5% 8.3% 6.6% 4 global 60/40 portfolio has a nominal expected annual return Standard Deviation 10.9% 14.2% 16.7% 8.9% 9.8% of 7.1% and a real expected annual return of 4.2% over the 2 next five years in our baseline projection. Source: UBS-AM, forecasts & data in USD terms, as at 31 October 2022. Diversified portfolio consists of 55% global equities (unhedged), 33% global bonds - government, securitized, investment grade, high yield, and 12% real assets - global real estate (unhedged), US Treasury inflation protected securities, and commodities 0 Global Global Global Global US US Expected annual real returns are 5.5% and 8.0% in the equities, government investment high yield cash inflation reflation and goldilocks scenarios, respectively. Real expected A good time to diversify Brighter outlook for longer-term investors unhedged bonds, grade credit, credit, returns are meaningfully negative in a stagflation scenario We strongly believe that the persistence of unusually elevated Our five-year capital market expectations send a clear hedged hedged hedged (-6.2%), with a positive stock-bond correlation challenging macroeconomic uncertainty increases the appeal of diversifying message: 2022’s pain may be laying the foundation for better July 2021 Oct 2022 performance in all parts of the 60/40 portfolio. In a deep portfolio exposures beyond traditional stocks and government future gains. The range of return projections, both at the Source: Source: UBS-AM, as of October 31, 2022. Note: returns shown in USD terms. recession, real projected returns are also modestly to the bonds. In particular, adding a larger suite of assets to the portfolio level and for individual asset classes, remains wide – Reference indexes for these asset classes are the MSCI All-Country World Index downside (-0.4%). portfolio should help address challenges posed by a prolonged particularly in the near term. But for medium- and long-term (unhedged USD), Bloomberg Global Treasuries (hedged USD), Bloomberg Global period of elevated inflation. investors, the outlook is much brighter now than it was in the Credit (hedged USD), Bloomberg Global High Yield (hedged USD), 3-Month Treasury middle of last year. Bill, and US Consumer Price Index For example, in the Table we also present a more diversified portfolio consisting of global equities, a wider array of bonds such as global We see benefits to diversifying beyond a broad 60/40 high yield, and exposure to real assets that can provide inflation portfolio by incorporating additional building blocks in protection. Applying our capital market assumptions, this diversified portfolio construction – a wider selection of markets within portfolio offers the same risk profile as the 60/40 portfolio, but fixed income such as credit, as well as exposure to real with a superior baseline expected return despite a 5% reduction in assets. These diversified multi-asset portfolios are likely to be the global equities allocation. Importantly, this portfolio’s projected more resilient and better positioned to perform in different returns are meaningfully better than the 60/40’s when inflation regimes, and in particular, more inflationary macroeconomic runs hot, that is, in the stagflation and reflation scenarios. environments going forward. 8 9