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Another Roaring '20s For The US
Another Roaring '20s For The US
November 2023
Executive summary
An unusual and hard-to-explain US economy. GDP grew 4.9% q/q The case for a Roaring ‘20s outcome. There are necessary conditions for a
annualized in 3Q (8.5% nominal) despite the Fed hiking rates by 525 basis Roaring ‘20s outcome to occur. The following five are sufficient, in our view,
points since March 2022. The 10-year Treasury yield reached its highest though our conviction in each factor materializing declines in order.
level in 16 years. These outcomes are opposite of consensus forecasts at
▪ Inflation is contained below 3%. Once near 2%, inflation stays below
the start of the year.
3%, even with upside risk, because the Fed will tighten otherwise.
The data suggests the economy is in a new macro regime. A regime
▪ Large investment across the economy. Capex boom and megatrend
is defined by its growth, inflation, and rate attributes. These are all at their
investment lift growth cyclically and are the basis for productivity growth.
highest levels since prior to the global financial crisis (GFC). Their current
high levels stem partly from past stimulus and pandemic recovery. But they ▪ Economy is more dynamic post-pandemic. Entrepreneurial activity and
could also reflect positive structural changes to the economy. risk-taking are permanently altered, benefiting productivity growth.
What constitutes a Roaring ’20s outcome? A “higher for longer” ▪ Policy is a mild headwind at worst. Fiscal tightening is modest despite
decade with GDP growth averaging 2.5% or higher; inflation of 2–3%; 10- high deficits, debt, and rates, offset by megatrend spending demands.
year Treasury yield around 4%; and the federal funds rate at 3–4%. Monetary policy becomes neutral by 2025.
A Roaring ‘20s regime hinges on the supply side. Supply chain ▪ Productivity growth increases, with an upside skew. Investment and
problems plagued the economy during the pandemic. While those have AI drive up productivity growth from low base, with wide potential range.
eased, supply issues will keep dominating—from labor and housing Assessment: A Roaring ‘20s regime is still a bull case scenario, but its
shortages, to new investment and technologies being positive supply probability is trending higher. Positive supply-side developments (capex
shocks. boom, AI) and no negative supply shocks should lead to higher productivity.
Demand was weak in the 2010s; it should be fine this decade. Post- But the magnitude and timing may not materially lift growth and be
GFC, households focused on repairing balance sheets, limiting spending, disinflationary at all, or not until later this decade. However, the probability of
while there were abundant workers, housing, and production capacity. this regime is much closer to 50% than investors assume, in our view.
Households are now in good financial shape, supportive of demand. Many things could prevent a Roaring ’20s outcome. Several of them,
Four megatrends will impact supply this decade, for good and bad: including geopolitical conflicts, political dysfunction, and a debt crisis are
essentially policy choices that could be avoidable but are hard to predict.
Capex boom: Prior underinvestment and the need to substitute capital
Others risk factors are an energy crisis, climate disasters, and AI fizzling.
for scarce labor both suggest a surge of capex spending.
The best template for a Roaring ‘20s regime is the 1990s. The current
Green energy transition: Substantial investment is required over
hiking cycle is reminiscent of 1994. The economy then had a soft landing in
decades, with complex implications for energy supply and demand.
1995, which we expect in 2024. The rest of the ‘90s was characterized by
Security and deglobalization: A multipolar world and the need to faster growth, rising productivity, and disinflation.
secure vital resources and supply chains require large investment.
Preliminary investment implications: Higher growth may be positive for
AI: Deploying AI across industries amounts to a positive supply shock, equity returns, but higher inflation usually increases the correlation between
with large but uncertain productivity gains and labor market impact. stock and bond returns, diminishing portfolio diversification, and increasing
portfolio volatility. That increases the appeal of alternative asset classes.
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Public
Table of contents
Section 7 Appendix 49
Section 1
Large and steady rise all year in 2023 growth expectations… …and higher-than-expected move in yields
Bloomberg consensus 2023 GDP growth forecast, in % 10-year Treasury yield, in %, and Bloomberg consensus forecast
2.5 5.0
2.0
4.5
1.5
4.0
1.0
3.5
0.5
0.0 3.0
Dec-22 Mar-23 Jun-23 Sep-23 Dec-22 Mar-23 Jun-23 Sep-23
End of '23 Forecast USGG10YR Index
Source: Bloomberg, UBS, as of 6 November 2023 Source: Bloomberg, UBS, as of 6 November 2023
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Public
A hot economy may not just be cyclical, but also a new regime
Growth and inflation appear structurally higher than in the 2010s, comparable to or higher than pre-
GFC levels.
Nominal GDP growth defying recession calls and running hot CPI inflation also running faster
Quarter-over-quarter annualized rate, in % Year-over-year, in %
Pre-GFC avg. 10
10
Current
8 cycle 8 Pre-GFC
“Inflation above 2%”
6
4 6 Current
cycle
2
4
0
-2 Post-GFC avg.
2
-4
-6 0
-8 Post-GFC
“Inflation below 2%”
-10 -2
1990 2000 2010 2020 1990 2000 2010 2020
Note: Axes have been truncated Source: Bloomberg, BLS, UBS, as of 6 November 2023
Source: Bloomberg, BEA, UBS, as of 6 November 2023
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Higher rates and federal funds futures are indicative of a new regime
The 10-year Treasury yield breaking out of its 40-year downward trend is consistent with the market
pricing of the federal funds rate indefinitely above 4%
10-year Treasury yield reached 5%, reversing downward trend Actual and market-implied federal funds rate through 2028
In % In %
18 7
16
6
14
5
12
10 4
8 3
6
2
4
1
2
0 0
1970 1980 1990 2000 2010 2020 2000 2005 2010 2015 2020 2025
Federal Funds rate Market pricing
Source: Bloomberg, UBS, as of 27 October 2023 Source: Bloomberg, UBS, as of 27 October 2023
6
Section 2
Growth
Rates Inflation
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Why use supply-demand analysis? Supply (and demand) curve shifts can have profound impacts on
inflation and growth
• Many models have produced large forecast errors this year
because they are calibrated to economic relationships that Inflation
have changed. Negative Aggregate Positive
supply shock supply curve supply shock
• Simplifying to basic supply-demand analysis minimizes this
problem, while distilling the logic to its essential elements.
• It also provides a consistent way to evaluate how distinct
factors (e.g., green transition, AI, policy) could impact the
macro regime.
• At the macro level, think of aggregate supply and aggregate
demand as jointly determining the growth rate and inflation.
• Structural shifts in aggregate supply or demand will lead to
new market-clearing growth and inflation rates, i.e., a
regime change.
Aggregate
demand
curve
Growth rate
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Inflation
Inflation
quickens
slows
Inflation
falls
Demand
D D’ D’
D D˚
The 2010s were defined by weak The pandemic and aftermath periods Demand is likely to moderate to an
aggregate demand post-GFC. The experienced a positive demand shock due average level due to solid household
demand curve shifted inward, leading to policy support, and a negative supply balance sheets. The uncertainty resides
to a decrease in both the growth shock. more with supply.
rate and inflation (i.e., “lower for
longer”). Both curve shifts contributed to much A Roaring ’20s regime requires a
higher inflation, but also faster positive supply shock, which should lead
growth as strong demand has persisted to faster growth and disinflation.
while supply problems have eased.
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Public
More workers than jobs in 2010s; now 1.5 jobs per seeker Housing supply – from glut to historically low inventory
Ratio of job openings to unemployed Vacant housing units for sale, in millions
2.5 2.5
Pre-GFC housing glut
2.0 2.0
1.5 1.5
0.5 0.5
0.0 0.0
2001 2006 2011 2016 2021 1990 1995 2000 2005 2010 2015 2020
Source: BLS, Bloomberg, UBS, as of 6 November 2023 Source: NAR, Bloomberg, UBS, as of 6 November 2023
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Public
Output gap was negative during 2010s, now positive Supply chain stress has normalized
In % of GDP Federal Reserve Bank of New York Global Supply Chain Pressure Index
4 5
COVID squeeze
4
2 1 year
3
0
-4
0
-6
-1
-8 -2
1990 1995 2000 2005 2010 2015 2020 2000 2005 2010 2015 2020
Source: CBO, Bloomberg, UBS, as of 6 November 2023 Source: Federal Reserve, Bloomberg, UBS, as of 6 November 2023
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HH net worth higher than 4Q19 HH debt burden still very low Real wages turn positive
HH real net worth (pre-recession=100) US debt service ratio, in % Atlanta Fed real median wage tracker, in %
125 14 3
Covid
120
13
115 More
2
Rebased, prior peak =100
interest
110 12 burden
105
11 1
100
GFC
95 10
90 0
9
85
80 8 -1
-10 -5 0 5 10 15 20 1980 1990 2000 2010 2020 2016 2018 2020 2022
Quarters from recession
Source: BLS, BEA, Bloomberg, UBS, as of 6 November 2023 Source: Bloomberg, UBS, as of 6 November 2023 Source: Bloomberg, UBS, as of 6 November 2023
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Semi-
Labor conductors
Housing Oil
Raw materials
14
Section 3
Capex boom : Aging capital stock and tight labor supply will encourage companies to spend more after a
decade of underinvestment.
Green energy transition : Meeting sustainability targets is a priority for more and more countries that
requires enormous investment.
Security and deglobalization : A multi-polar world argues for spending to de-risk access to critical
resources and securing supply chain.
Artificial intelligence (AI) : Deploying AI capabilities across many industries is a potentially positive and large
supply shock with uncertain productivity and labor market impacts.
16
Capex boom
Public
US firms using the oldest capital stock on record Investment peak as share of GDP is much lower than prior cycles
Average age of fixed assets, in years Private fixed investment, in % of GDP
25 20%
Investment is
24 still far below
previous peaks
23 18%
22
21 16%
20
19 14%
18
17 12%
1950 1960 1970 1980 1990 2000 2010 2020 1980 1985 1990 1995 2000 2005 2010 2015 2020
Source: BEA, UBS, as of 6 November 2023 Source: BEA, UBS, as of 6 November 2023
17
Capex boom
Public
Firms are investing beyond just replacing depreciating capital Firms also say they will invest more
S&P 500 capital expenditures-to-depreciation ratio ISM Manufacturing survey, capex, 3-month moving avg., index
1.8 35
1.6
30
1.4
25
1.2
1 20
2011 2013 2015 2017 2019 2021 2023 2011 2013 2015 2017 2019 2021 2023
Source: Bloomberg, UBS, as of 6 November 2023 Source: ISM, UBS, as of 6 November 2023
18
Capex boom
Public
Actual number of workers will grow slowly... ...supporting quick growth in the global robotics market
Net population growth, y/y in % In USD bn
0.9 Forecast 300 Forecast
0.8
250
0.7
0.6 200
0.5
150
0.4
0.3 100
0.2
Pandemic 50
0.1
0 0
2010 2015 2020 2025 2030 2035 2040 2015 2019 2020 2023 2030 2030
Upside
Services Robots
robots Autonomous vehicle
End-effectors Industrial robots
Source: CBO, UBS, as of 6 November 2023 Note “End-effectors” are peripherical devices that attach to a robot to better interact with its task
Source: BCG, UBS, as of 6 November 2023
19
Capex boom
Public
IRA-related expenditures picking up steam Manufacturing investment has surged the past year
CBO estimate, in USD bn US manufacturing construction investment, in % GDP
600 0.7
500 0.6
0.5
400
100 0.1
0 0
Initial estimate Updated estimate as of 2002 2006 2010 2014 2018 2022
Spring 2023
Source: CBO, UBS, as of 6 November 2023 Source: BEA, UBS, as of 6 November 2023
20
Green energy
Public
Estimated total global investment required to reach goals US energy transition investment is already accelerating
Annual spending, in USD tr In USD bn
160
10
9 120
8
80
40
6
5 0
2020 2021-25 2026-30 2031-35 2004 2007 2010 2013 2016 2019 2022
Current Net zero
Source: McKinsey, UBS as of 6 November 2023 Source: Bloomberg, NEF, UBS as of 6 November 2023
21
Green energy
Public
Energy markets must deal with green transition and rising demand
Energy supply nexus of reliability, affordability, and decarbonization is complicated by rising global
demand, which can bias energy prices to go higher before rising green supply could lower them.
Price of energy Supply and demand dynamics for the green energy transition
considerations
+• Energy security and reliability
Price of energy
Ss Sl
+• Decarbonization goals
+• Geopolitical risks
-• New investment cost
and energy affordability
Growth of energy demand
considerations
Range of
• Population growth in
+ outcomes
emerging markets (EMs)
• Global economic growth
+
• Per capita demand trends
+
•- Energy efficiency and
productivity Di
Dd
Quantity of energy
Demand growth can increase as energy
Ss Supply in the short run is biased toward Di
negative shocks during transition period. requirements for growing EMs are large.
Demand growth can decrease as
Sl Supply in the long run is likely increased Dd
by green energy spending. economies become more energy efficient.
22
Security
Public
Defense spending's share of GDP has been declining Nearshoring trade is happening, as is de-risking China trade
US defense spending as % of GDP % of US imports
10 30
Vietnam
9 Canada +
Mexico
8
25
7
Cold War
6
Iraq/Afghanistan
5 20
3
15 China
2
0 10
1962 1972 1982 1992 2002 2012 2022 2018 2022
Source: CBO, UBS, as of 6 November 2023 Source: Census Bureau, Bloomberg, UBS, as of 6 November 2023
23
AI
Public
Spending in AI’s market likely to significantly rise Large variation in potential labor impact across sectors
In USD bn Brookings AI Exposure score
350 Food preparation and service
Sales More affected
300
Healthcare support
250 Education
Office and admin.
200
Legal
150 Management
Healthcare practitioners
100
Arts and entertainment
24
AI
Public
Supply considerations Supply and demand potential dynamics for AI deployment across the economy
+• Investment in AI
infrastructure expected to Inflation Sm Ss
rise from USD 25.8bn now
to USD 130bn by 2027.
+• Productivity impact
forecasts are far less
precise, ranging from an
incremental annual
increase of 0.3% to 2%.
+• Regulation could
determine speed and depth
of AI adoption. Range of
outcomes
Demand considerations
-• AI estimated to automate
up to 25% of work,
potentially displacing many
workers. Dd
-• But new jobs created as a Growth
byproduct of AI could
make up most or all of the Sm Supply can have modest increase if Demand could decrease if the adoption
demand. On a net the economy gradually adopts AI.
Dd of AI technology displaces a significant
basis, lower employment number of workers.
and income are a risk to Ss Supply could have a substantial
increase if AI is adopted quickly.
demand.
25
Section 4
Investment
US potential GDP growth has trended lower the past 60 years
In %
6
4
Future potential
growth 2
0
1951 1961 1971 1981 1991 2001 2011 2021
Source: BEA, BLS, UBS as of 6 November 2023
27
Public
Aggregate supply and demand equilibrium at neutral Attributes of the neutral state:
Aggregate
demand
Potential Growth rate
growth
28
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Actual GDP has been above potential most of the past 5 years The unemployment rate is below estimates for NAIRU
Actual & potential real GDP, in % In %
10 9
5 Inflationary 7
Inflationary
6
0 5
Inflationary
4
3
-5
2012 2014 2016 2018 2020 2022
2015 2017 2019 2021 2023
Actual Potential Actual NAIRU
Note: Axes have been truncated Source: CBO, BEA, UBS, as of 6 November 2023
Source: CBO, BEA, UBS, as of 6 November 2023
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…and why potential growth also influences r*, and thus the regime
The higher potential growth, the higher interest rates can be without being restrictive. The policy
challenge is that the neutral rate r* is unobservable, with a wide range of different Fed estimates.
Productivity and neutral state estimates are correlated Where is r*? A wide range of estimates, even from the Fed
Total factor productivity’s contribution to GDP and real r* estimate, in % In %
0.5 5 5
0.4 4
4
0.3 3
0.2 2 3
0.1 1
2 Range of
0.0 0
r* from
-0.1 -1 1 the Fed
-0.2 -2
0
-0.3 -3
-0.4 -4 -1
2000 2005 2010 2015 2020 2000 2005 2010 2015 2020
30
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Productivity growth surged 1995–2004, low in 2010s Potential growth has fallen, and labor supply won’t help
3-year moving avg., y/y in % US potential growth breakdown, in %
4 6
Covid
5
3
GFC 4
2 3
2
1
1
0 0
1990 1995 2000 2005 2010 2015 2020 1950 1960 1970 1980 1990 2000 2010 2020 2030
Productivity contr.
Source: Federal Reserve, CBO, UBS, as of 6 November 2023 Source: Federal Reserve, UBS, as of 6 November 2023
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Best case for higher productivity: Capital deepening and scarce labor
Low unemployment and increasing the capital available to workers have both led to higher productivity.
Those conditions apply now, which suggests higher productivity growth later.
Workers are more productive with higher capital intensity Productivity tends to increase when unemployment falls
Capital intensity & labor productivity Unemployment rate & productivity growth since 1950
350 3
200 Switzerland
U.S.
Japan U.K.
150
Argentina 1
100
50 Mexico
Brazil
0 0
0 20 40 60 80 100 2 4 6 8 10
Capital intensity Unemployment rate, %
Note: Capital intensity is defined as the ratio of total capital stock over total hours worked. Labor Note: Recessionary periods excluded
productivity is defined as ratio of GDP over total hours worked. Bubble size corresponds to population. Source: BEA, BLS, as of 6 November 2023
Source: Bergeaud, A., Cette, G. and Lecat, R. (2016), UBS, as of 6 November 2016
32
Section 5
Fiscal and monetary policy could both be headwinds for Demand curve could shift in or out, depending on the policy
demand and thus a Roaring ’20s regime, but the outlook
is not simple, nor is it easy to assess potential adverse
Inflation
supply shocks due to geopolitics.
Aggregate
supply curve
Fiscal policy directly influences aggregate demand via
spending and tax policies, and indirectly impacts supply with tax
incentives, regulatory changes, and trade restrictions, among
other tools.
Large deficits and debt suggest fiscal policy must contract (i.e.,
aggregate demand shifts inward). But there are potentially
countervailing factors (energy transition, populism) that lead to
more spending. Plus, the IRA, CHIPS Act, and Infrastructure and
Jobs Act could have long-lived multiplier effects on growth and
productivity.
Negative Aggregate Positive
demand demand curve demand
Monetary policy mostly impacts aggregate demand, minimally shock shock
affecting supply. Inflation still well above 2% suggests policy
will stay restrictive for an extended period. But it is not that
Growth rate
restrictive, the Fed appears comfortable with inflation gradually
declining, and it could respond to fiscal consolidation that slows
growth with policy easing.
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The budget deficit is disconnected from fundamentals Government debt-to-GDP will soar without major action
In % CBO projections, in % GDP
8
14 -20 Forecast
7
12 -15
6
10
-10 5
8
-5 4
6
3
0
4 2
2 5
1
0 10 0
1962 1982 2002 2022 1962 1982 2002 2022 2042F
Unemployment rate Budget balance (right scale)
Source: BLS, CBO, Bloomberg, UBS, as of 6 November 2023 Source: BLS, CBO, Bloomberg, UBS, as of 6 November 2023
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More natural disasters necessitate spending Support of unions is the highest since the 1960s
Annual natural disasters cost in USD bn and count % of Americans who approve of labor unions
180 30 80
160
25 75
140
120 20 70
100
15 65
80
60 10 60
40
5 55
20
0 0 50
1980 1990 2000 2010 2020 1940 1950 1960 1970 1980 1990 2000 2010 2020
Cost (5Y MA), lhs Count, rhs
Source: NOAA, UBS, as of 6 November 2023 Source: Gallup, UBS, as of 6 November 2023
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The 1970s monetary policy error haunts the Fed The Fed thought 4% was the neutral rate just a decade ago
% Summary of Economic Projections long-term federal funds rate, %
20 4.5
3.5
10
3.0
5
2.5
0 2.0
1970 1975 1980 1985 2012 2017 2022
Inflation Federal Funds Rate
Source: BLS, Federal Reserve, UBS, as of 6 November 2023 Source: BLS, Federal Reserve, UBS, as of 6 November 2023
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…yet the cost of high rates and fiscal tightening favor an easier policy
The rising cost of interest payments on fiscal policy and attempts to reduce spending are potential drags
on the economy, which may lead the Fed to lower rates and tolerate inflation modestly above 2%
The federal interest burden will rise quickly at current rates Mild fiscal policy contraction is expected through 2024
% Contribution of fiscal policy on real GDP growth, in %
7 15
5 10
3 5
0
1
0
1990 1995 2000 2005 2010 2015 2020
-5
Federal Funds Rate, % Net interest payments, % GDP 2010 2012 2014 2016 2018 2020 2022 2024
Source: CBO, Federal Reserve, UBS as of 6 November 2023 Source: Brookings Instituter, UBS as of 6 November 2023
39
Section 6
Roaring '20s attributes: Roaring '20s factors: Low conviction High conviction
Investment spending is large due to the supply megatrends, lifting growth cyclically and
Inflation ~ 2–3% fulfilling a necessary precondition for faster productivity growth.
Fiscal consolidation is limited in the next 18 months, and possibly thereafter, while avoiding
negative supply. Monetary policy is around neutral within two years.
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Megatrend spending is medium-term upside inflation risk... ...but inflation is likely to trend lower, and stay contained
Potential contribution to annual inflation, in % CPI inflation and forecasts, y/y in %
6
Market
4 expectations
3
Forecast
Fed’s tolerance band range
2
0
2023 2024 2025 2026
Note: Figures are meant to be illustrative only. Source: BLS, Bloomberg, UBS as of 6 November 2023
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Public
Dramatic increase in entrepreneurial activity post-pandemic Post-pandemic spending patterns likely permanently altered
New business formation, in thousands Real goods and services consumption, % of pre-pandemic trend
600 115
550
110
500
105
450
400 100
350 +50% 95
300
90
250
85
200
150 80
2009 2011 2013 2015 2017 2019 2021 2023 2020 2021 2022 2023
Goods Services
Source: US Census Bureau, UBS, as of 6 November 2023 Note: Pre-pandemic trend time frame between 2018 and 2019
Source: BEA, UBS, as of 6 November 2023
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Productivity growth set to rise from a low base, with upside skew
Tepid productivity growth in the 2010s sets a low baseline (~1.25%). The megatrends (capex boom and
AI) are reasons for it to rise, but the range of outcomes is large and the timing highly uncertain.
Megatrend adoption should be positive for productivity… …but with a vast range of potential outcomes by 2030
Potential long-term contribution to annual productivity growth, in % Productivity growth, y/y in %
AI’s impact could 4.0
be a revolution
3.5
3.0
2.5
High Forecast
productivity range
2.0 scenario
CBO Forecast
1.5
1.0
0.5
0.0
2023 2025 2027 2029
Note: Figures are meant to be illustrative only. Source: CBO, UBS, as of 6 November 2023
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Growth
Actual
Invest now,
growth
benefit later
High investment now
should lead to higher
Trend trend growth later.
growth
But there are still cycles
during the regime and
a growth slowdown
in 2024 due to higher
rates is not at odds
Cyclical slowdown with a Roaring '20s
with secular strength decade.
Time
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1990s redux? That decade is a good template for a possible Roaring '20s
The current Fed hiking cycle is similar to the '94 cycle. Growth slowed in ‘95, but to a soft landing.
A productivity boom followed that led to high growth and disinflation. It could happen again.
Current Fed policy may follow ’94 onwards path… …that slowed growth temporarily before it reaccelerated
Federal funds rate, in % Real GDP growth, y/y in %
7 7
‘94 pause
6 before cut 6
5 5 ’94 temporary
Q1 1994
growth
4 4 slowdown
3 3
2 2
1 1
0 0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarters from first hike
46
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Energy crisis
Climate disasters
47
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48
Section 7
Appendix
Public
Appendix
Statement of risk
1. Equity markets are difficult to forecast because of fluctuations in the economy, investor psychology, geopolitical conditions, and other important variables.
2. Bond market returns are difficult to forecast because of fluctuations in the economy, investor psychology, geopolitical conditions and other important variables.
Corporate bonds are subject to a number of risks, including credit risk, interest rate risk, liquidity risk, and event risk. Though historical default rates are low on
investment grade corporate bonds, perceived adverse changes in the credit quality of an issuer may negatively affect the market value of securities. As interest
rates rise, the value of a fixed coupon security will likely decline. Bonds are subject to market value fluctuations, given changes in the level of risk-free interest
rates. Not all bonds can be sold quickly or easily on the open market. Prospective investors should consult their tax advisors concerning the federal, state, local,
and non-U.S. tax consequences of owning any securities referenced in this report.
3. Prospective investors should consult their tax advisors concerning the federal, state, local, and non-U.S. tax consequences of owning preferred stocks. Preferred
stocks are subject to market value fluctuations, given changes in the level of interest rates. For example, if interest rates rise, the value of these securities could
decline. If preferred stocks are sold prior to maturity, price and yield may vary. Adverse changes in the credit quality of the issuer may negatively affect the market
value of the securities. Most preferred securities may be redeemed at par after five years. If this occurs, holders of the securities may be faced with a reinvestment
decision at lower future rates. Preferred stocks are also subject to other risks, including illiquidity and certain special redemption provisions.
4. Although historical default rates are very low, all municipal bonds carry credit risk, with the degree of risk largely following the particular bond’s sector.
Additionally, all municipal bonds feature valuation, return, and liquidity risk. Valuation tends to follow internal and external factors, including the level of interest
rates, bond ratings, supply factors, and media reporting. These can be difficult or impossible to project accurately. Also, most municipal bonds are callable and/or
subject to earlier than expected redemption, which can reduce an investor’s total return. Because of the large number of municipal issuers and credit structures,
not all bonds can be easily or quickly sold on the open market.
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Appendix
Emerging Market Investments
Investors should be aware that Emerging Market assets are subject to, amongst others, potential risks linked to currency volatility, abrupt changes in the cost of capital and the
economic growth outlook, as well as regulatory and socio-political risk, interest rate risk and higher credit risk. Assets can sometimes be very illiquid and liquidity conditions can abruptly
worsen. WMR generally recommends only those securities it believes have been registered under Federal U.S. registration rules (Section 12 of the Securities Exchange Act of 1934) and
individual State registration rules (commonly known as "Blue Sky" laws). Prospective investors should be aware that to the extent permitted under US law, WMR may from time to time
recommend bonds that are not registered under US or State securities laws. These bonds may be issued in jurisdictions where the level of required disclosures to be made by issuers is
not as frequent or complete as that required by US laws.
For more background on emerging markets generally, see the WMR Education Notes "Investing in Emerging Markets (Part 1): Equities", 27 August 2007, "Emerging Market Bonds:
Understanding Emerging Market Bonds," 12 August 2009 and "Emerging Markets Bonds: Understanding Sovereign Risk," 17 December 2009.
Investors interested in holding bonds for a longer period are advised to select the bonds of those sovereigns with the highest credit ratings (in the investment grade band). Such an
approach should decrease the risk that an investor could end up holding bonds on which the sovereign has defaulted. Sub-investment grade bonds are recommended only for clients
with a higher risk tolerance and who seek to hold higher yielding bonds for shorter periods only.
Non-Traditional Assets
Non-traditional asset classes are alternative investments that include hedge funds, private equity, real estate, and managed futures (collectively, alternative investments). Interests of
alternative investment funds are sold only to qualified investors, and only by means of offering documents that include information about the risks, performance and expenses of
alternative investment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund is speculative and involves
significant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same regulatory requirements as mutual funds; (2) may have performance that is
volatile, and investors may lose all or a substantial amount of their investment; (3) may engage in leverage and other speculative investment practices that may increase the risk of
investment loss; (4) are long-term, illiquid investments, there is generally no secondary market for the interests of a fund, and none is expected to develop; (5) interests of alternative
investment funds typically will be illiquid and subject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation information to investors; (7) generally
involve complex tax strategies and there may be delays in distributing tax information to investors; (8) are subject to high fees, including management fees and other fees and expenses,
all of which will reduce profits.
Interests in alternative investment funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured
by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Prospective investors should understand these risks and have the financial
ability and willingness to accept them for an extended period of time before making an investment in an alternative investment fund and should consider an alternative investment fund
as a supplement to an overall investment program.
In addition to the risks that apply to alternative investments generally, the following are additional risks related to an investment in these strategies:
• Hedge Fund Risk: There are risks specifically associated with investing in hedge funds, which may include risks associated wi th investing in short sales, options, small-cap stocks,
"junk bonds," derivatives, distressed securities, non-U.S. securities and illiquid investments.
• Managed Futures: There are risks specifically associated with investing in managed futures programs. For example, not all man agers focus on all strategies at all times, and managed
futures strategies may have material directional elements.
• Real Estate: There are risks specifically associated with investing in real estate products and real estate investment trusts. They involve risks associated with debt, adverse changes in
general economic or local market conditions, changes in governmental, tax, real estate and zoning laws or regulations, risks associated with capital calls and, for some real estate
products, the risks associated with the ability to qualify for favorable treatment under the federal tax laws.
• Private Equity: There are risks specifically associated with investing in private equity. Capital calls can be made on short no-tice, and the failure to meet capital calls can result in
significant adverse consequences including, but not limited to, a total loss of investment.
• Foreign Exchange/Currency Risk: Investors in securities of issuers located outside of the United States should be aware that even for securities denominated in U.S. dollars, changes
in the exchange rate between the U.S. dollar and the issuer’s "home" currency can have unexpected effects on the market value and liquidity of those securities. Those securities
may also be affected by other risks (such as political, economic or regulatory changes) that may not be readily known to a U. S. investor.
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UBS Chief Investment Office's ("CIO") investment views are prepared and published by the Global Wealth Management business of UBS Switzerland AG (regulated by FINMA in Switzerland)
or its affiliates ("UBS"), part of UBS Group AG ("UBS Group"). UBS Group includes Credit Suisse AG, its subsidiaries, branches and affiliates. Additional disclaimer relevant to Credit Suisse
Wealth Management follows at the end of this section.
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herein does not constitute a personal recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient.
It is based on numerous assumptions. Different assumptions could result in materially different results. Certain services and products are subject to legal restrictions and cannot be offered
worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be
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In no circumstances may this document or any of the information (including any forecast, value, index or other calculated amount ("Values")) be used for any of the following purposes (i)
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issuer, the investment instrument itself or to/for any company commercially or financially affiliated to such issuers. At any time, investment decisions (including whether to buy, sell or hold
securities) made by UBS and its employees may differ from or be contrary to the opinions expressed in UBS research publications. Some investments may not be readily realizable since the
market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to
control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is not suitable for every investor
as there is a substantial risk of loss, and losses in excess of an initial investment may occur. Past performance of an investment is no guarantee for its future performance. Additional
information will be made available upon request. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may
be required to pay more. Changes in foreign exchange rates may have an adverse effect on the price, value or income of an investment. The analyst(s) responsible for the preparation of this
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research organization may differ, for example, in terms of investment recommendations, investment horizon, model assumptions, and valuation methods. As a consequence, except for
certain economic forecasts (for which UBS CIO and UBS Global Research may collaborate), investment recommendations, ratings, price targets, and valuations provided by each of the
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The compensation of the analyst(s) who prepared this report is determined exclusively by research management and senior management (not including investment banking). Analyst
compensation is not based on investment banking, sales and trading or principal trading revenues, however, compensation may relate to the revenues of UBS Group as a whole, of which
investment banking, sales and trading and principal trading are a part.
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Tax treatment depends on the individual circumstances and may be subject to change in the future. UBS does not provide legal or tax advice and makes no representations as to the tax
treatment of assets or the investment returns thereon both in general or with reference to specific client's circumstances and needs. We are of necessity unable to take into account the
particular investment objectives, financial situation and needs of our individual clients and we would recommend that you take financial and/or tax advice as to the implications (including tax)
of investing in any of the products mentioned herein.
This material may not be reproduced or copies circulated without prior authority of UBS. Unless otherwise agreed in writing UBS expressly prohibits the distribution and transfer of this
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investment views and publication offering, and research and rating methodologies, please visit www.ubs.com /research-methodology. Additional information on the relevant authors of this
publication and other CIO publication(s) referenced in this report; and copies of any past reports on this topic; are available upon request from your client advisor.
Important Information About Sustainable Investing Strategies: Sustainable investing strategies aim to consider and incorporate environmental, social and governance (ESG) factors into
investment process and portfolio construction. Strategies across geographies approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable
Investing considerations may inhibit UBS’s ability to participate in or to advise on certain investment opportunities that otherwise would be consistent with the Client’s investment objectives.
The returns on a portfolio incorporating ESG factors or Sustainable Investing considerations may be lower or higher than portfolios where ESG factors, exclusions, or other sustainability issues
are not considered by UBS, and the investment opportunities available to such portfolios may differ.
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(the "Municipal Advisor Rule") and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of the Municipal
Advisor Rule
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Except as otherwise specified herein and/or depending on the local Credit Suisse entity from which you are receiving this report, this report is distributed by Credit Suisse AG, authorised and
regulated by the Swiss Financial Market Supervisory Authority (FINMA). Credit Suisse AG is a UBS Group company.
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Version D/2023. CIO82652744
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