ElectionWatch - United States of America · 21 October 2016 An extended report on asset class implications arising from the November general election Contents Perspectives on the

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ElectionWatch21 October 2016 An extended report on asset class implications arising from the November general election

Contents

Perspectives on the 2016 US elections from UBS CIO Wealth Management Research

US equities

Consumer discretionary

Autos

Durables and apparel

Media

Retail

Services

Consumer staples

Food, beverages and tobacco

Food and staples retailing

Household products

Energy

Financial services

Banks

Diversified financials

Insurance

Real estate

Healthcare

Equipment and services

Medical insurance

Pharma and biotech

Industrials

Defense

Transportation

Multi-industry

Master limited partnerships

Technology

Hardware

Semiconductors

Software and services

Telecommunications services

Utilities

US fixed income

Agencies

Agency mortgages

Corporate bonds

Government bonds

High-yield bonds

Municipal bonds

Preferred securites

Click on any item to go directly to the page on which it appears.

Legislative agenda

SCENARIO 1: Probability 42.5%.

Clinton White HouseDemocratic Senate majorityRepublican House majority

SCENARIO 2: Probability 15%.

Trump White HouseRepublican Senate majorityRepublican House majority


Clinton White HouseDemocratic Senate majorityDemocratic House majority


Clinton White HouseRepublican Senate majorityRepublican House majority


Trump White HouseDemocratic Senate majorityRepublican House majority


Trump White HouseDemocratic Senate majorityDemocratic House majority

Fiscal policy • Middle class tax cut• Limited corporate tax

reform• Increased public infrastruc-

ture spending

• Broad-based tax cuts• Corporate tax reform• Discretionary spending cuts• Limited public infrastruc-

ture spending• Limited entitlement reform

• Middle class tax cut• Increased marginal tax

rates• Limited corporate tax

reform• Closing of off-shore tax

loop holes• Increased public infrastruc-

ture spending

• Middle class tax cut• Limited corporate tax

reform• Increased public infrastruc-

ture spending

• Corporate tax reform• Limited public infrastruc-

ture spending

• Corporate tax reform• Limited public infrastruc-

ture spending

This is an update to the Elec-

tionWatch series companion

report, reflecting updated prob-

abilities from the US Office of

Public Policy. This report exam-

ines the impact of all plausible

election results, including those

that we view as having a lower

probability.

[continues next page]

This report has been prepared by UBS Financial Services Inc. Please see important disclaimer on page 16.

2 October 2016 ElectionWatch

FEATURE

Macro assumptions

Legislative agenda













Healthcare reform • Preserve Obamacare • Rollback/repeal of Obam-acare

• Preserve Obamacare• Expand Obamacare

• Preserve Obamacare — —

Trade policy • Retain current trade agree-ments

• Potential repudiation of trade agreement

• Tariffs and import restric-tions

• Retain current trade agree-ments

• Retain current trade agree-ments

• Focus on “fair trade” • Focus on “fair trade”

Immigration — • Strict enforcement of im-migration laws

• Aggressive legal action against illegal immigrants

• Lax enforcement and/or rollback of immigration laws

• Path to citizenship

— • Strict enforcement of im-migration laws

—

Regulatory reform — • Rollback of many Obama Administration executive orders

• Regulatory relief

• Increased regulation of financial, energy and healthcare sectors

— • Rollback of many Obama Administration executive orders

• Regulatory relief

—

Gun control — • Defense of Second Amend-ment rights

• Assault weapons ban• Stringent background

checks • Increased waiting period

— • Defense of Second Amend-ment rights

—

National security • Moderate increase in defense expenditures may have to be accompanied by some increase domestic social service spending.

• Substantial increase in de-fense expenditures likely

• More modest increase in defense expenditures ac-companied by more spend-ing on social services

• Moderate increase in defense expenditures – nominal increase in social service expenditures

• More modest increase in defense expenditures ac-companied by more spend-ing on social services

• Moderate increase in defense expenditures may have to be accompanied by some increase social services expenditures

Other — • Build a wall • Raise minimum wage• Relief/forgiveness of stu-

dent loans

— — —


IMPLICATIONS

Asset class implications SCENARIO 1: Probability 42.5%.












US equities By Jeremy Zirin and David Lefkowitz

Overview Modest positive. We believe that this scenario preserves the “status quo” for many major policy stances (e.g. the ACA, trade) and reduces policy uncertainty. While regula-tory pressures will remain high for select sectors, expect a modest positive market reaction as policy uncertainty diminishes and markets price out potentially more volatile or extreme scenarios. Prospects for greater fiscal spending on infrastructure support more balanced economic growth.

Negative. The potential for lower individual tax rates, corporate tax reform, and regulatory relief for finan-cials and energy sectors would boost near-term economic growth. How-ever, expect a significant increase in economic policy uncertainly in this scenario as real fears of trade wars and increased protectionism, sweeping changes to immigration policies, and ballooning deficits dominate the market narrative pushing equity valuations lower.

Negative. Increased regulation of financials, healthcare and energy increases economic policy uncertainty and puts a damper on sentiment de-spite the fact that a bigger fiscal spending program boosts economic growth. A hike in the minimum wage pressures profit margins for industries with high service intensity.

Neutral. Maximum gridlock occurs. While this scenario lowers the risk of more extreme legislation being passed, expect fre-quent impasses on budget setting, the debt ceiling and other policy initia-tives that may periodically unsettle markets.

Modest negative. The potential for corporate tax reform, regulatory relief for financials and energy sectors, and some infra-structure spending would boost near-term economic growth. However, expect some increase in economic policy uncertainly due to fears of trade wars, increased protectionism sentiment and changes in foreign policy which could depress valuations.

Modest negative. The po-tential for corporate tax re-form, and regulatory relief for financials and energy sectors, and some infra-structure spending would boost near-term economic growth. However, expect some increase in economic policy uncertainly due to fears of trade wars, increased protectionism sentiment and changes in foreign policy which could depress valuations.













GDP +1 +2 +2 0 +1 +1

Deficit +1 +3 +2 +1 +1 +1

CPI +1 +3 +1 0 +1 +1

Fed 0 +2 +1 -1 +1 +1

USD FX 0 -3 0 0 -2 -2

Each candidate’s policy platform, combined with our expectations regarding the market reaction to the results of the election, leads us to certain macroeconomic assumptions. Those assumptions are set forth above for each of the six most plausible elections results. The numerical assignment indicate the anticipated magnitude of the impact of each scenario on the associated macroeconomic indicator.

Macro assumptionsImpact on a +5/-5 scale














Healthcare By Jerry Brimeyer

Pharma and biotech Neutral. Clinton drug/biotech proposals to negotiate drug prices with Medicare unlikely. Other Clinton drug/biotech proposals to restrict usage of high-priced drugs are also unlikely.

Modest negative. Trump supports drug and biotech companies negotiating prices with Medicare, but unlikely congressional sup-port. Other drug/biotech proposals to restrict usage of high-priced drugs are unlikely.

Negative. Higher likeli-hood of drug price limitations; limits on usage of high-priced drugs pos-sible. Higher probability that drug and biotech companies would have to negotiate prices directly with Medicare.

Neutral. Clinton drug/biotech proposals to negotiate drug prices with Medicare unlikely. Other Clinton drug/biotech proposals to restrict usage of high-priced drugs are also unlikely.

Modest negative. Trump supports drug and biotech companies negotiating prices with Medicare, but unlikely congressional sup-port. Other drug/biotech proposals to restrict usage of high-priced drugs are unlikely.

Negative. Trump sup-ports drug and biotech companies negotiating prices with Medicare as would a Democratic Con-gress. Other drug/biotech proposals to restrict usage of high-priced drugs are unlikely.

Medical insurance Neutral. Status quo for Obamacare, including state health exchanges and Medicaid expansion. Without the support of Congress, aid for state health exchanges and Medicaid expansion could be limited.

Negative. No incremental support for Obamacare. Repeal possible if Republi-cans have a replacement. Possible elimination of health exchanges and fed-eral portion of Medicaid likely to become block grants, limiting Medicaid coverage.

Positive. Support for Obamacare, including state-exchanges and Med-icaid expansion, bodes well for insurers. In gen-eral, the more Americans covered with health insur-ance, the better for health insurers and healthcare companies.

Neutral. Status quo for Obamacare, including state health exchanges and Medicaid expansion. Without the support of Congress, aid for state health exchanges and Medicaid expansion could be limited.

Modest negative. No incremental support for Obamacare but no sup-port to repeal and replace. Less Administration sup-port for state exchanges and expansion of Medic-aid so fewer incremental Americans covered.

Modest negative. No incremental support for Obamacare but no sup-port to repeal and replace. Less Administration sup-port for state exchanges and expansion of Medic-aid so fewer incremental Americans covered.

Equipment and services

Modest negative. Status quo for Obamacare but the medical device excise tax could be reinstated in 2018. Medicare "bundled" payments for certain operations will likely lead to limitation on medical device prices.

Modest negative. No incremental support for Obamacare. Repeal pos-sible if Republicans have a replacement. Two-year reprieve on medical device excise tax could be ex-tended beyond 2018.

Neutral. Heavy support of Obamacare but the medi-cal device excise tax could be reinstated in 2018. Medicare “bundled” payments for certain operations will likely lead to limitation on medical device price

Modest negative. Status quo for Obamacare but the medical device excise tax could be reinstated in 2018. Medicare “bun-dled” payments for certain operations will likely lead to limitation on medical device prices.

Modest negative. Status quo for Obamacare but medical device excise tax could be reinstated in 2018. Medicare “bun-dled” payments for certain operations will likely lead to limitation on medical device prices.

Modest negative. Status quo for Obamacare but medical device excise tax could be reinstated in 2018. Medicare “bun-dled” payments for certain operations will likely lead to limitation on medical device prices.














Technology By Kevin Dennean

Software and services

Modest positive as higher GDP may drive somewhat higher corporate invest-ment and IT spending. Corporate tax reform unlikely to have material impact on IT demand or buybacks given easy ac-cess to capital.

Modest positive due to positive impact on corporate investment and IT spending of higher GDP. Regulatory rollback of finance/healthcare sectors (large IT spending verti-cals) also positive. Corpo-rate tax reform unlikely to have material impact on IT demand or buybacks given easy access to capital.

Modest negative as positive GDP impact is likely more than offset by higher offshore taxes and increased regulation in financials and healthcare verticals.

Modest negative primarily due to a lower Fed out-look that would negatively impact already weak IT spending by financial sector, which is one of the largest IT spenders.

Neutral as the positive im-pact on corporate invest-ment and IT spending of higher GDP likely is offset by increased regulation of finance/healthcare sectors and weaker USD. Corpo-rate tax reform unlikely to have material impact on IT demand or buybacks given easy access to capital.

Neutral as benefits of higher GDP/potentially higher IT spending would be somewhat offset by a weaker USD.

Hardware Neutral as the hardware sector is dominated by a leading smartphone man-ufacturer. Although there is significant offshore cash across the hardware sec-tor, corporate tax reform is likely material driver given existing easy and extremely low-cost access to capital for dividends and buybacks.

Modest positive as higher GDP likely has some posi-tive impact on corporate investment and IT spend-ing, although impact to hardware moderated by secular and deflationary shift to the cloud. Corpo-rate tax reform unlikely to have material impact on IT demand or buybacks given easy access to capital.

Modest negative as positive GDP impact is likely more than offset by higher offshore taxes and increased regulation in financials and healthcare verticals.

Modest negative primarily due to a lower Fed out-look that would negatively impact already weak IT spending by financial sector, which is one of the largest IT spenders.

Neutral as the hardware sector is dominated by a leading smartphone man-ufacturer. Although there is significant offshore cash across the hardware sec-tor, we don't see corpo-rate tax reform as material driver given existing easy and extremely low-cost access to capital for divi-dends and buybacks.

Neutral as benefits of higher GDP/potentially higher IT spending would be somewhat offset by a weaker USD.

Semiconductors Neutral as semiconduc-tor demand is driven by demand across end mar-kets including enterprise IT (compute, storage, networking), which is unlikely to see material ac-celeration, and consumer electronics (primarily smartphones).

Modest positive as semiconductor demand is driven by demand across end markets including enterprise IT (compute, storage, networking), which would see a modest acceleration in demand, and consumer electronics (primarily smartphones).

Modest negative as higher tax rates and likely nega-tive impacts on hardware and software demand across financials and healthcare verticals due to increased regulations.

Neutral as the modest negative net impact of lower financial services spending (from lower in-terest rate outlook) would not have a large enough impact on overall semicon-ductor demand.

Neutral as demand is driven by demand across end markets including enterprise IT (compute, storage, networking) and consumer electronics (smartphones), neither of which likely has a material demand acceleration. Lim-ited impact from weaker USD as semiconductors are generally sold in USD.

Neutral as end market demand for IT hardware is unlikely to see significant change.














Telecommunication services

Neutral as we believe the FCC is unlikely to allow further consolidation of US wireless industry regardless of all po-litical scenarios with the exception of a Republican sweep (which itself would take significant time given staggered board of FCC).

Modest positive as expec-tations of further consoli-dation of US wireless in-dustry under a Republican sweep would be partially offset by higher interest rate environment that would negatively impact sector valuation. Note that any change in FCC would take time given staggered board.

Modest negative as there would be no expectations of any further con-solidation of US wireless industry regardless given Democrat sweep. Valua-tion negatively impacted by higher rates.




Financial services By Brad Ball

Banks Modest negative. Positive GDP would be good for loan growth, but absence of rate increase would continue a margin drag. A Democratic Senate may seek a break-up of big banks but GOP House should resist and prevent significant new regulation of banks.

Positive. Stronger GDP and higher fed funds rate would be a positive for loan growth, margins, and credit quality. Rollback (or technical fixes) of regula-tions would be positive for banks.

Negative. Despite GDP growth and slightly higher fed funds rate, increased regulation of the financial sector would be negative for banks. Liberal wing of Democratic party may push for bank break-ups.

Modest negative. Status quo scenario. No benefit to economic growth and no interest rate increases combined with ongoing Dodd-Frank implementa-tion would be a modest negative for banks.

Modest positive. While Senate would not likely pass regulatory reform, improved economic growth and a more busi-ness-friendly (lower taxes) Administration and House would alleviate some of the negative headline risks for financials.

Neutral. Slight positive GDP growth and higher fed funds rates would be positive but Trump would not likely make any head-way on regulatory reform.

Diversified financials

Modest negative. Positive GDP would be good for loan growth, but absence of rate increase would continue a margin drag.

Positive. Stronger GDP and higher fed funds rate would be a positive for loan growth, margins, and credit quality. Rollback (or technical fixes) of regula-tions would be positive for diversified financials. More controls over (or elimina-tion of) CFPB would be positive.

Negative. Despite GDP growth and slightly higher fed funds rate, increased regulation of the financial sector would be nega-tive for banks. Mandate for increased regulation (rollback Glass-Steagall reforms, mandate for tougher CFPB, hedge fund and asset management regulations).

Modest negative. Status quo scenario. No benefit to economic growth and no interest rate increases combined with increased regulation (no change to CFPB) through Dodd-Frank would be generally negative for diversified financials.

Modest positive. While Democratic Senate would not likely pass regula-tory reform, improved economic growth and a more business-friendly (lower taxes) Administra-tion and House would alleviate some of the negative headline risks for financials.

Neutral. Slight positive GDP growth and higher fed funds rates would be good, but Trump would not likely make any head-way on regulatory reform.














Insurance Neutral. GDP would be good for insurance in force growth, but absence of rate increase would con-tinue to negatively impact long-term returns.

Neutral. Stronger GDP and higher fed funds rate (with an upward sloping yield curve) should help invest-ment returns. Rollback (or technical fixes) of regula-tions would be positive for non-bank systemically important financial institu-tions. Market uncertainty could drive volatility and hamper returns.

Negative. Despite GDP growth and slightly higher fed funds rate, increased regulation of the financial sector would be negative. Mandate for broader/stricter regulation of non-banks financials including insurance companies.

Modest negative. Status quo scenario. No benefit to economic growth and no interest rate increases combined with continued implementation of Dodd-Frank (including FSOC focus on non-banks SIFIs) would be a modest nega-tive for insurance.

Modest positive. While Democratic Senate would not likely pass regula-tory reform, improved economic growth and a more business-friendly (lower taxes) Administra-tion and House would alleviate some of the negative headline risks for financials.

Neutral. Slight positive GDP growth and higher fed funds rates would be good, but Trump would not likely make any head-way on regulatory reform.

Real estate

By Jon Woloshin

Neutral. Clear benefit for housing but stricter regulatory oversight might incentivize challenges to housing and lending policies.

Neutral. Reduced regula-tion would be a positive for the housing and mort-gage market. But chances of significant tax reform increase – leading to uncertainty for real estate investments – changes to mortgage interest deduc-tion, 1031 exchanges, and the taxation of carried interest might be consid-ered.

Negative. Due to increased taxes and in-creased deficit spending.

Neutral. Clear benefit for housing and commercial real estate. Impact of tax reform uncertain based on potential changes to the mortgage interest deduc-tion, 1031 exchanges and the taxation of carried interest.

Neutral. Political gridlock. Neutral. Political gridlock

Consumer discretionary By Rob Samuels

Retail Modest positive. Middle class tax cut and raising minimum wage should be positive for consumer spending.

Positive. Broad-based tax cuts would be positive for consumer spending. Decline in the dollar could be a positive in addition to corporate tax reform. However, tariff and import restrictions would be a negative.

Neutral. Middle class tax cut and raising minimum wage should be positive for consumer spending. Increase in marginal tax rates may offset some-what.

Modest positive. Middle class tax cut could be positive for consumer spending.

Modest positive. Decline in the dollar could be a positive in addition to corporate tax reform.















Media Modest positive. Middle class tax cut could be viewed as a potential positive.

Positive. Broad-based tax cuts a positive. Corporate tax reform may have an impact with respect to potential M&A. Decline in dollar could be positive.

Modest negative. Corpo-rate tax reform and closing of tax loopholes may have an impact with respect to potential M&A.

Modest positive. Middle class tax cut could be viewed as a potential positive

Modest positive. Cor-porate tax reform and decline in the dollar may have an impact.

Modest positive. Cor-porate tax reform and decline in the dollar may have an impact.

Services Modest positive. Middle class tax cut and raising minimum wage should be positive for consumer spending.

Positive. Broad-based tax cuts would be positive for consumer spending. Decline in the dollar could be a positive in addition to corporate tax reform.





Durables and apparel Modest positive. Middle class tax cut and raising minimum wage should be positive for consumer spending.

Neutral. Broad-based tax cuts would be positive for consumer spending. Decline in the dollar could be a positive in addition to corporate tax reform. However, tariff and import restrictions would be a negative.





Autos

By Sally Dessloch

Modest positive. Middle class tax cut and raising minimum wage should be positive for consumer spending.

Negative if trade agree-ments are terminated or tariffs enacted; original equipment manufacturers source some vehicles sold in the US from Mexico.





Consumer staples By Sally Dessloch

Food, beverages and tobacco

Neutral. Middle class tax cut and raising minimum wage unlikely to impact demand in a material way.

Positive. Could result in more lenient regulatory oversight of tobacco, food and beverage-related health and wellness issues, large-scale M&A transac-tions.

Negative. Could result in more stringent regulatory oversight of tobacco, food & beverage-related health and wellness issues, large scale M&A transactions.

Neutral. Middle class tax cut unlikely to impact de-mand in a material way.

Positive. Could result in more lenient regulatory oversight of tobacco, food and beverage-related health and wellness issues, large-scale M&A transac-tions.

Neutral. Policy gridlock.














Food and staples retailing

Neutral. Middle class tax cut and raising minimum wage unlikely to impact demand in a material way.

Negative for drug retail-ers if health care act is repealed and no substitute coverage provided.

Modest negative for food / drug retailers if minimum wage is increased. How-ever, drug retailers could benefit from expanded healthcare coverage and price controls, both of which could increase demand for prescription drugs.


Neutral. Subsector is largely domestic and unlikely to benefit materi-ally from a decline in the dollar.

Neutral. Policy gridlock.

Household products Neutral. Middle class tax cut and raising minimum wage unlikely to impact demand in a material way.

Neutral. Broad-based tax cuts unlikely to impact demand in a material way.





Energy By Nicki Decker

Modest negative from a policy and regulatory perspective for oil and gas. Deep partisan divides on energy policy could limit significant legislative ac-tion in Congress. A more certain economic outlook under Clinton may provide a clearer path to recovery in oil prices.

Neutral for oil & gas. From an energy policy and regulatory perspec-tive, this scenario would bode well for the US oil and gas industry. Coal is the largest beneficiary from executive rollbacks. However, market con-cerns about the impact of Trump initiatives on the US and global economy could lead to an early pullback in oil prices.

Negative for oil, gas and coal. Democrats likely to promote alternative energy with funding from oil and gas industry. Frack-ing ban unlikely but oil and gas investors may be initially concerned that the Administration will ban or severely limit fracking.

Neutral across the indus-try. Though more support-ive legislation for the oil & gas industry could pass through Congress, we would not expect Clinton to sign bills supporting the industry. A Republican-controlled Congress may compel Clinton, like President Obama, to take further executive action to drive greater operating and environmental regula-tion.”

Modest positive for the oil & gas industry. Coal industry is the largest beneficiary from poten-tial executive rollbacks, but divided Congress could prompt a balanced approach, with ongoing support for alternatives.

Neutral for energy indus-try. Trump may rollback Obama Administration regulations. Little lesgisla-tion is enacted.














Master limited partnerships By Jay Dobson

Modest negative for MLPs. Concern should fade quickly without big regula-tory push. Lower middle class tax rates could be a modest negative for tax pass-through vehicles.

Neutral. Positive for energy and energy infra-structure (MLP) on the margin but partially offset by larger impact of lower tax rates on tax pass-through vehicles. Increase in economic and energy demand risk offsets the balance.

Modest negative. Increased regulation will increase investor concerns and slow growth. Lower middle class tax rates could be a modest nega-tive for tax pass-through vehicles, but offset by higher marginal tax rates.

Modest negative. Neutral for broader energy industry and associated infrastructure, with very limited regulatory risk. But lower middle class tax rates could be a modest negative for tax pass-through vehicles.

Modest positive for MLPs. Positive for energy and en-ergy infrastructure (MLP) at the margin, with less regulatory risk. No tax im-pact on tax pass-through vehicles.

Neutral. Gridlock.

Utilities By Jay Dobson

Neutral. Little incremen-tal change from existing policy. Modest positive for renewables (wind and solar) and transmission capital spending, offset by continuing regula-tory burden (certainty on Clean Power Plan) and consumer-oriented federal regulatory policies. Little impact on electricity and natural gas demand.

Neutral. More favorable (and less) federal regula-tion. Positive for existing coal infrastructure, but limited long-term benefit. Negative for renewables (wind and solar). Little impact on electricity demand; slight positive for power generation-related natural gas demand (less renewables) and related infrastructure.

Modest negative. In-creased regulation and more consumer-oriented federal regulatory poli-cies will increase investor concern. Modest positive for renewables (wind and solar) and transmission capital spending, offset by continuing regulatory burden (certainty on Clean Power Plan).

Neutral. Legislative changes difficult, but Clinton would likely ad-vance similar initiatives by executive action. Modest positive for renewables and transmission capital spending, offset by con-tinuing regulatory burden and consumer-oriented federal regulatory policies. Little impact on electricity and natural gas demand.

Neutral. More favorable (and less) federal regula-tion. Slight positive for existing coal infrastructure, but limited long-term ben-efit. Less negative for re-newables (wind and solar). Little impact on electricity demand; slight positive for power generation-related natural gas demand (less renewables) and related infrastructure.

Neutral. More favorable (and less) federal regula-tion. Negative for renew-ables (wind and solar). Little impact on electricity demand; slight positive for power generation-related natural gas demand (less renewables). Gridlock.

Industrials By David Lefkowitz and Jon Woloshin

Defense Positive. Clinton has expressed support for more military spending. The Republican House is concerned about the US deficit but the level of anxiety regarding the deficit is lower now than at any time in the last five years.

Positive. Trump supports a substantial increase in military spending. Same dynamics at work here - perceived need for a more aggressive military posture is likely to outweigh deficit concerns.

Modest positive. Clinton's support for more military spending but a Demo-cratic House majority may limit size and scope of increase.

Positive. Clinton has expressed support for more military spending. While we can expect more partisanship in this scenario, defense spend-ing is an area in which the two parties can strike an agreement.

Positive. Trump supports a substantial increase in military spending. Enough centrist Democrats should support the initiative.

Modest positive. Grid-lock may constrain size of increase in defense spending.














Transportation Modest positive. Faster GDP growth due to fiscal stimulus should boost freight volumes. No sub-stantial changes to trade agreements should mean that international freight volumes are unaffected in this scenario.

Neutral. Faster GDP growth due to fiscal stimulus should boost freight volumes. How-ever this could be offset by higher trade barriers that reduce international freight volumes.

Modest positive. Faster GDP growth due to larger fiscal stimulus will boost transportation volumes. But more regulatory scru-tiny and more stringent labor laws may restrain corporate profitability. More stringent environ-mental regulation could raise operating costs for transports.

Neutral. No GDP boost from fiscal stimulus but no increase in regulation.

Modest negative. Trump's support for trade barriers may be resisted by House Republicans but president has broad authority in this area – political uncertainty may affect valuations of companies engaged in export trade.

Modest negative. Higher infrastructure spending likely but US president has broader authority on trade. Some Democrats in Congress may support imposition of barriers to free trade, reducing freight volumes.

Multi-industry Neutral. Imposition of trade barriers unlikely. Im-port of raw materials and export markets remain relatively unaffected. More stingent environmental regulation, if not impeded by the GOP House in some manner, could tilt the impact toward modest negative outcome.

Modest negative. Export markets threatened by imposition of trade barri-ers by the US. House GOP may resist but a Republi-can sweep may be seen as a mandate for action on trade. Tax reform and faster GDP growth may provide partial positive offset in this scenario.

Modest negative. Clinton unlikely to impose new trade barriers but Demo-cratic House may support more labor-friendly legisla-tion that could constrain profits.

Neutral. Status quo on trade should allow major US manufacturers to oper-ate as they have.

Modest negative. House Republicans will resist im-position of trade barriers but US president retains broad discretion in this area. Policy uncertainty.

Modest negative. Political gridlock exists but political left and Trump agree on one thing – tariffs and protection of US labor force from importation of cheaper goods.

US fixed income By Leslie Falconio

Positive. The status quo environment will keep volatility range-bound and interest rates will rise gradually – an overall posi-tive for spread products.

Negative. The potential for a sharp rise in interest rates and a spike in volatil-ity will not bode well for fixed income; neither safe havens nor risk assets.

Modest negative. In-creased regulations on banks and balance sheet restrictions heighten potential for illiquidity in combination with the po-tential for higher interest rates would not bode well for fixed income.

Neutral. Slightly weaker growth and Fed hikes removed will keep interest rates range-bound. Credit may be supported by the need for yield assuming US growth does not mate-rially decline.

Modest positive. Not much regulatory reform will be passed, how-ever stronger growth will benefit fixed income risk assets overall.

Modest positive. Lack of regulatory reform and range-bound interest rate environment would be a modest positive for fixed income. Corporate tax reform would bode well for spread product such as IG corporates.














Government By Leslie Falconio

Neutral. This would be the status quo scenario with a gradual rise in interest rates coinciding with a continuing (albeit slowly) growing economy. Interest rate volatility will remain range-bound given the unlikely disruption to current policy. Ten-year yield will progress toward the 2.0% level and foreign demand will likely remain high given the expected lower volatility.

Negative. A GOP sweep would likely end in a bear-ish steepener of interest rates. Rising deficit will result in larger Treasury auctions and supply entering the market place; while tax cuts should spur consumer spend-ing/growth and inflation thereby steepening the yield curve. Volatility will increase substantially.

Negative. Interest rates rise with increasing growth and rising deficit. Volatility increases as financials underperform/completion of Dodd Frank and government-sponsored enterprise /mortgage reforms imple-mented – i.e., principal forgiveness. More than likely, curve will steepen even with a hawkish Fed.

Neutral. Slightly weaker growth could lead to a de-cline in interest rates, how-ever still within the range that has been witnessed in 2016 – 1.35%–2.0%. A dovish Fed will lead to a steepener led by the short end outperformance as the potential for future Fed hikes diminishes. Side-ways trend in volatility.

Negative. A weaker dollar and increasing growth will lead to higher interest rates and a steepening yield curve. The Fed will hike more than anticipated to maintain a constant rate of economic growth – as an offset to the weaker dollar. Volatility will more than likely increase.

Neutral. Range-bound interest rates and neither outwardly bullish or bear-ish on interest rates. How-ever a weaker dollar may lead to a slight rise but nothing overly dramatic. Corporate tax cuts may spur growth but very mild as policies will be stalled and volatility remains subdued.

Agencies By Leslie Falconio

Positive. Status quo, low volatility, Agency debt outperforms Treasury.

Negative. Less implicit support for government-sponsored enterprises may reduce the attractiveness of agency bonds.

Negative. Greater un-certainty regarding the degree of regulation and policy changes.

Neutral. Unless some form of Johnson/Crapo legislation is brought to the table.

Neutral. Unless some form of Johnson/Crapo legislation is brought to the table.

Neutral. Unlikely meeting of the minds in terms of reform.














Agency mortgages By Leslie Falconio

Positive. In a low volatility, range-bound environ-ment, MBS performs well and remains the “carry” trade over Treasuries. Fed continues on its reinvest-ment path of principal and interest as currently imple-mented not anticipating an end until fed funds reach 1%. Strong environ-ment for MBS.

Neutral. Negative in the short term but longer-term positive. MBS should initially underperform as the housing market begins to slow as mortgage rates increase. If growth is strong enough and the Fed hikes, then cash flow reinvestment will end and an inflow of supply will hit the market. Spreads widen, volatility increases. However, longer term, as MBS adjusts to the new rate environment, spreads should compress as the option of refinancing be-comes less attractive with higher mortgage rates. If Dodd Frank is repealed, it would be a positive for MBS. Yield curve will likely steepen – also a positive for MBS longer term.

Negative. Affordable housing initiatives gain traction, with principal for-giveness a possibility. MBS spreads widen as banks are subject to higher regulations. Initial increase in interest rates may hurt housing market.

Modest positive. Johnson/Crapo bill (bipartisan leg-islation that would replace FNMA and FHLMC with a catastrophic guarantee – transferring credit risk to the private market) may be put forth in some form. Although new initiatives and unknown results are a negative to MBS, given the little movement in interest rate and policy changes, MBS to outperform slightly via carry.

Modest positive. Johnson/Crapo bill under consider-ation. Higher interest rates initially cause an under-performance in asset class and a higher mortgage rate – thereby higher mortgage payments (may cool the housing market). However, declining dollar makes housing cheap to foreign investors and increasing growth may temper housing downturn.

Neutral. Status quo with no large change in policy or interest rates. MBS will tighten. Declining dollar may spur foreign housing demand and counter initial home price cooling from rising interest rates, higher mortgage payments and lack of refinancing oppor-tunity. Volatility remains range-bound a long-term positive for MBS.

Corporates By Barry McAlinden

Positive. Moderate growth economy and deliberate Fed limit the extent by which rates rise. Strong demand supersedes any industry-specific influences such as tighter bank regu-lation that affects 20% of the US IG market.

Negative. Strong growth, higher inflation, and a hawkish Fed lead to higher rates. Declining bond prices lead to retail outflows and weaker tech-nicals supersede the posi-tive risk-on environment and corporate-friendly legislation.

Modest negative. Stronger growth, higher inflation, and a hawkish Fed lead, higher rates and retail out-flows. Tighter bank regu-lation (20% IG market) while good for creditors, may be too excessive.

Neutral. Spread widen-ing from the risk-off environment offsets lower rates caused by the slow economy. US rates are still likely to be above other DM FI markets, keeping ex-US demand steady. Po-litical gridlock limits any industry-specific influ-ences.

Modest positive. Risk assets perform well with stronger growth and infla-tion. This supersedes retail outflows created by higher rates. Corporate-friendly legislation in the financial and energy sectors ben-efits these segments.

Modest positive. Risk assets perform well with stronger growth and infla-tion. This supersedes retail outflows created by higher rates. Political gridlock limits any industry-specific influences.














High-yield By Dan Kelsh

Positive. Modest GDP and CPI growth limits the po-tential for Fed rate hikes. Limited Fed action will be positive for high yield investors and support tight spreads in credit as global buyers continue to seek yield continuing the migra-tion of investors down the ratings spectrum.

Negative. Political uncer-tainty, combined with rate hikes, to have a negative impact on high yield. US credit less appealing to global investors following the election. Rate hikes will challenge trading levels in the market. Credit spreads on existing debt widen as investors position themselves for new issues in a higher rate environ-ment and begin migration up the ratings spectrum.

Positive. GDP growth drives risk-on sentiment and outpaces Fed rate hike activity. Credit spreads will remain tight as global buy-ers sustain their presence in US credit markets and favor improving US GDP data.

Modest negative. Lack of Fed activity driven by weak macro fundamen-tals which contribute to a risk-off sentiment with investors leading to credit spreads widening. Inves-tors focus on GDP data looking for signs of weak-ness in the business cycle and to identify sectors for potential defaults.

Modest positive for US high yield market. GDP growth offsets moder-ate Fed rate hikes and contributes to a risk-on sentiment with investors. Credit spreads on existing debt remain tight and international buyers focus on US credit markets in search for yield.

Modest positive for US high yield market. GDP growth offsets moder-ate Fed rate hikes and contributes to a risk-on sentiment with investors. Credit spreads on existing debt remain tight and international buyers focus on US credit markets in search for yield.

Municipals By Kathleen McNamara

Modest positive. The plans to increase infra-structure spending could lead to higher municipal bond issuance. But this is more than offset by the probability that tax rates will remain where they are, which is supportive to muni prices.

Negative. Broad based tax cuts would reduce the value of municipal bond tax-exemption. Municipal bond mutual funds would likely experience net cash outflows causing munis to underperform US Treasury securities. Healthcare credits would underper-form on the repeal of Obamacare. While the Alternative Minimum Tax (AMT) segment of the muni market would rally (based on the elimination of the AMT), it represents a smaller part of the market.

Modest positive. An increase in marginal tax rates would boost the ap-peal of tax-exempt munis leading to lower muni-to-Treasury yield ratios. But, the risk of capping the muni exemption at 28% increases and will bear monitoring. The preservation of Obam-acare may cause not-for-profit healthcare credits to outperform. Revival of the taxable Build America Bonds program could increase demand from non-traditional investors.

Modest positive. Plans to increase infrastructure spending could lead to higher municipal bond issuance. This in turn could help broaden the municipal bond market’s buyer base and improve liquidity.

Modest negative. We expect that a Trump presidency would initially introduce some volatility in municipal yields. This, combined with limited changes to infrastructure spending, could place downward pressure on muni prices.

Neutral. Given that no major changes in mar-ginal individual income tax rates or in infrastructure spending are anticipated, we believe the impact to the municipal asset class under this scenario would be limited.














Preferreds By Frank Sileo

Positive. Best-case sce-nario for preferreds, similar to the experience of past 2½ years. Mild inter-est rate pressures, a Fed reluctant to raise rates too quickly, and benign credit backdrop should drive a continued hunt for yield and support the sector.

Negative. A rapid eco-nomic expansion would support spreads, but fur-ther tightening is limited at current levels. A sharp backup in rates (inflation-ary pressures, more hawk-ish Fed) would pressure the sector. Bank regulatory relief could provide a slight offset.

Negative. Economic expansion would support spreads (further tightening is limited at current levels).However mild rate pres-sure (faster rate normaliza-tion), as well as the poten-tial impact of increased financial regulation on bank profitability, would pressure the sector in this scenario.

Modest negative. More accommodative Fed than current CIO base case would minimize interest rate risk but suggests economic risks that would widen credit spreads and would exert pressure on the sector.

Modest positive. Mild rate pressures (faster rate normalization) and benign credit backdrop. Financial sector regulatory relief could improve bank profit-ability.

Neutral. Mild rate pres-sures (faster rate nor-malization) and benign credit backdrop (similar to scenario 4). However, the absence of bank regulato-ry relief may mean a more neutral outcome.

Note: UBS, as of 23 August 2016. UBS US Office of Public Policy, which is separate from UBS CIO Wealth Management Research, provided both the scenarios and the legislative agenda.


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