Marketing MaterialFor professional clients only

June 2019

At the forefront of Emerging Markets

China Fixed Income

Uta Fehm Senior PM Emerging Markets DebtUBS Asset Management

1

Should China be seen as an Emerging market issuer or a Developed market issuer ?

As often, there is no clear YES or NO… (yet)

…but some development can point you in a long term direction:

1. Economic data and developments

2. Technical, technological and social developments

3. Market technical developments

China at the forefront of Emerging Markets

Global real GDP growth (% yoy)

Source: Macrobond as of June 2019

Nominal GDP (USD bn) GDP per capita (USD m)

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EM ex-China-DM growth SpreadEM ex ChinaDMChina

2

China at the forefront of Emerging Markets

Source: Macrobond as of June 2019

Gross debt (% GDP) Private debt (% GDP) Gross Debt vs FX debt (% of GDP)

Current Account Balance (% of GDP) Budget Balance (% of GDP) International reserves (USD bn)

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Gross Debt % of GDP

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3

The emerging safe haven – Chinese bonds performed wellChinese bonds increase your portfolio diversification & returns

Source: JP Morgan Index Monitor as of 31 December 2018

Source: JP Morgan Index Monitor as of June 2019

2018 EM USD debt total returns (% USD) 2018 EM local debt total returns (% unhedged)

-7-6-5-4-3-2-1012

JPM

EM

BI G

D

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China government bonds are starting to behave exactly the way you would expect safe haven assets to during times of heightened volatility. During historic spikes in the widely-used Volatility Index (VIX), yields on China government bonds tightened, indicating that investors increasingly look at the asset class as a safe haven.

-35-30-25-20-15-10

-505

JPM

GBI

-EM

GD

(unh

edge

d U

SD)

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VIX

0

1

2

3

4

5

0

20

40

60

80

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2013 2014 2015 2016 2017 2018 2019

VIX China 10y yields (rhs)

4

Comparison to established markets

Source: UBS-AM, Bloomberg as of June 2019

While real rates in China are attractive, correlation to other markets is low, supporting diversification

-1

0

1

2

3

4

5

2013 2014 2015 2016 2017 2018 2019

10y

yiel

d (%

)

UST 10y EURO 10y China 10y Japan 10y UK 10y

5

Source: Bloomberg, Standard Chartered Bank. As of December 2018 from data available June 2019

• Chinese bonds attract a broad range of investors:

– Active and Index managers

– Sovereign Wealth funds and Central banks

• Needed prerequisits:

– Global investors have direct access to Chinese bonds

– Global investors can directly hedge CNY currency

– Global bond indices are including the 3rd largest bond market ($12trn USD)

• Index inclusions support this trend

2018: China opened the bond door

China domestic RMB financial assets held by overseas entities – bondsHoldings in onshore bonds

Foreign investors

Domestic investors

But only hold

2.1%of market

6

How do China bonds compare to established markets

Asset Class VolatilityCorrelation to

China Treasury

China Treasury (CNY) 2.3

S&P 500 13.2 -0.02

EM Equity 19.0 -0.01

Global Equity 14.4 -0.03

EMD Sovereign 6.6 0.10

US IG Corp 4.5 0.07

US HY Corp 7.5 -0.05

US Treasury 3.6 0.20

Source: UBS Asset Management, Bloomberg. Past performance is not an indicator of future return. As of December 31, 2018

Source: UBS Asset Management, Bloomberg, based on 10 year monthly returns as of November 30, 2018. Investors can now hedge CNY exposures at no cost. Past performance is not an indicator of future return

2018 asset class total returns

Chinese bonds increase your portfolio diversification & returns

-20%

-15%

-10%

-5%

0%

5%

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15%

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China – economic overview

Sources: UBS, Macrobond

8

China government bonds offer attractive yields and low correlation:

• At the time of writing, China government bonds offer a real yield pick-up of between 100-330bps compared with similar assets in US, Japan, Germany and UK. Additionally, China government bonds have low correlation ranging between -0.05 and 0.20 against other major global aggregate benchmarks.

• We see three specific trends that will bolster the position of China government bonds as safe haven assets in the future, namely:

Ongoing reforms and improving accessibility:

• We've seen tax exemptions and the introduction of block trading in the past 12 months, and we expect further moves from the Chinese government like widening the Bond Connect system to continue opening up the onshore market to international investors.

The process of index inclusion:

• Bloomberg's inclusion of Chinese bonds is, we believe, the start of a process through which over index providers, like FTSE Russell and JP Morgan, bring onshore bonds into their indices, with China government bonds likely being only the first bond class to be included.

The rise of the RMB as a reserve currency:

• Though the USD is a dominant reserve currency, a number of trends are playing out that will boost the RMB as an alternative. Specifically, the closer integration of Chinese onshore markets with the global financial system, the process of index inclusion, the growing role of RMB-denominated oil payments, and the rise of CHAPS as an alternative to the USD-dominated SWIFT payment system.

• So with these trends in mind, plus compelling fundamentals, we believe that China government bonds may continue to emerge as a go-to, safe-haven asset, and that's something that all investors should be aware of.

The emerging safe haven

Source: UBS-AM as of June 2019

Investing in China with UBSSection 2

US-I

10

UBS China Fixed Income (RMB)

Average credit rating

AAAonshore rating

Lux-domiciled UCITS with base currency CNY1st

Investedacross sectors

UBS China Fixed Income (RMB) Fund

Your window to the China onshore bond market – it's too big to ignore!

Source: UBS Asset Management. As at end April 2019

• Efficient access to China's fast growing and very large onshore fixed income market

− 3rd largest bond market now

• Foreign investor interest and exposure is rising significantly, index inclusion is coming

• Active, diversified portfolio managed by a team with many years experience in onshore China securities

39%

37%

10%

6%3%

5%

Agencies

Treasuries

Industrial

Financial Institutions

Utility

Money_Markets

Cash & Equivalents

11

Representative portfolioAverage credit rating

AAAOnshore rating

Min AA- (onshore) credit rating (issue)

3.47%YTM, gross

5.25 yearsAverage duration

Investment limit +/- 3 years

Government / Government-related

Sector tiltRMB

Currency exposure

Bloomberg Barclays China Aggregate Index in CNY

Benchmark

Average Life Breakdown Sector Allocation

28%

28%9%

28%

7% 0 - 3 Year

3 - 5 Year

5 - 7 Year

7 - 10 Year

> 20 Year

Source: UBS Asset Management. As of end May 2019

39%

37%

10%

6%3%

0%5%

Agencies

Treasuries

Industrial

Financial Institutions

Utility

Money_Markets

Cash & Equivalents

12

Composite return summary

Source: UBS Asset Management

Note: The returns shown above are based on currently available information and are subject to revision. Past performance is no guarantee of future results. Performance figures are gross of fees. Please see attached disclosure information. Inception date as of 31 March 2018

1 Periods greater than 1 year are annualized.2 Value added is the arithmetic difference between the composite return and the benchmark return.

Total return (%) in CNY for periods ending 31 May 2019

MonthLast Three

Months Year to date One YearSince

Inception1

UBS Bond China Fixed Income 0.78 0.34 1.32 6.37 7.08

Bloomberg Barclays China Aggregate Index in CNY 0.75 0.30 1.34 6.70 7.29

Value Added2 0.03 0.05 -0.02 -0.33 -0.21

Appendix A

Additional information

14

Will CNY ever be freely convertible?Matter of "when" not if

Entry into SDR basket

5thcurrency in basket

with $, €, £, ¥

PetroYuanLaunch of oil trading futures on Chinese stock exchanges

Connect programsStock and bond connect

Increase in China's economic influence

Belt and roadPayments and financing could involve RMB

Source: UBS Asset Management. As of February 2018

15

Comparision to established markets

Source: Bloomberg PLC, SIX, JP Morgan as of 12 April 2019

J.P. Morgan Sovereign USA index

J.P. Morgan Sovereign

EMU index

SIX SchweizGovernment

Index J.P. Morgan GBI-EM GD

J.P. Morgan GBI-EM China

Bloomberg Barclays

China T+PB

Bloomberg Barclays

China AggUSD EUR CHF USD CNY CNY CNY

JPMTUS Index JPMGEMLC Index SBIDGT Index JGENVUUG Index JGCHULOC Index I32561CN Index I08271CN

Current yield tm in % 1.41 0.93 0.04 6.15 3.28 3.41 3.56

Duration 8.10 7.87 11.89 5.19 4.50 5.46 4.98

Time to maturity 10.00 9.70 6.95 7.55 5.46 7.40 6.45

Sectors included Sovereign Sovereign Sovereign Sovereign Sovereign Treasury and Policy Banks

Aggregate

Market cap in bn USD 9.545bn 6.988 bn 82 bn 876 bn 855 bn 3.270 bn 5.578 bn

Number of issues 252 316 22 217 57 347 2465

Number of issuers 1 10 1 19 1 4 564

16

Correlation China debt versus other markets

Source: UBS-AM, Bloomberg PLC as of 31 May 2019

MSCIEmerging

MarketsMSCIEMU

MSCIEurope

MSCINorth

AmericaMSCI

PacificMSCI

World

BBGBarclays

China Aggr.

BBGBarclays

ChinaTreasury +

Policy Bank

JPM EMBIGlobal

Div.China

ICE BofAML

Global HighYield

JPMCEMBI

Broad Div.

JPMEMBI

Global Div.

JPMGBI-EMGlobal

Div.

JPMGBI

Global

MSCI Emerging Markets

1.00 0.77 0.80 0.77 0.81 0.83 0.35 0.33 0.35 0.82 0.74 0.68 0.82 0.30

MSCIEMU

0.77 1.00 0.98 0.81 0.77 0.91 0.20 0.18 0.18 0.80 0.60 0.55 0.62 0.20

MSCIEurope

0.80 0.98 1.00 0.85 0.81 0.94 0.21 0.20 0.21 0.83 0.65 0.59 0.65 0.23

MSCINorth America

0.77 0.81 0.85 1.00 0.79 0.97 0.21 0.19 0.14 0.74 0.54 0.46 0.52 0.06

MSCIPacific

0.81 0.77 0.81 0.79 1.00 0.87 0.27 0.25 0.20 0.75 0.62 0.55 0.66 0.16

MSCIWorld

0.83 0.91 0.94 0.97 0.87 1.00 0.23 0.21 0.18 0.81 0.61 0.54 0.61 0.13

BBG BarclaysChina Aggr.

0.35 0.20 0.21 0.21 0.27 0.23 1.00 1.00 0.19 0.21 0.24 0.29 0.37 0.29

BBG Barclays ChinaTreasury + Policy Bank

0.33 0.18 0.20 0.19 0.25 0.21 1.00 1.00 0.18 0.20 0.23 0.28 0.36 0.29

JPM EMBI GlobalDiv. China

0.35 0.18 0.21 0.14 0.20 0.18 0.19 0.18 1.00 0.34 0.63 0.72 0.46 0.56

ICE BofAMLGlobal High Yield

0.82 0.80 0.83 0.74 0.75 0.81 0.21 0.20 0.34 1.00 0.86 0.73 0.73 0.32

JPM CEMBIBroad Div.

0.74 0.60 0.65 0.54 0.62 0.61 0.24 0.23 0.63 0.86 1.00 0.90 0.78 0.43

JPM EMBIGlobal Div.

0.68 0.55 0.59 0.46 0.55 0.54 0.29 0.28 0.72 0.73 0.90 1.00 0.81 0.56

JPM GBI-EMGlobal Div.

0.82 0.62 0.65 0.52 0.66 0.61 0.37 0.36 0.46 0.73 0.78 0.81 1.00 0.54

JPM GBIGlobal

0.30 0.20 0.23 0.06 0.16 0.13 0.29 0.29 0.56 0.32 0.43 0.56 0.54 1.00

10 years as of 31 May 2019 in USD

17

UBS AM first international asset manager to hold both a Private Fund Management license and a Qualified Domestic Limited Partner (QDLP) scheme quota

UBS AM currently the #1 ranked foreign asset manager in China with a more holistic platform than any of our peers including one of the most successful JV

Onshore and Offshore RMB Capabilities

UBS-AM is a foreign asset manager with significant footprint covering Beijing, Shanghai, Hong Kong and Shenzhen

UBS AM (Hong Kong) Ltd• HQ: Hong Kong

UBS AM (Shanghai) Ltd – WFOE Traditional Investments• HQ: Shanghai

UBS AM (China) Ltd – Representative office• HQ: Beijing

UBS SDIC Fund Management Co Ltd. (49% JV)• HQ: Shanghai; Branch: Beijing, Shenzhen• Subsidiary: Hong Kong, Shenzhen

Footprint in China

UBS Asset Management in ChinaUBS-AM's belief in the China opportunity is reflected by both our footprint and RMB capabilities in both onshore and offshore investing

1st

1st

Shanghai

Hong KongShenzhen

Beijing

1 Total AUM includes CHF 32.7bn direct booked by UBS AM and CHF 9.75bn AuM of UBS SDIC (49% of total CHF 19.9bn; ) as of 30 June 2018

UBS AM in China

Offshore investors

in Onshoreassets

Onshoreinvestors

inOnshoreassets

Onshoreinvestors

inOffshore

assets

OnshoreOutbound Inbound ∑

18

UBS Bond China Fixed IncomeSchedule of composite performance

19

For marketing and information purposes by UBS.Before investing in a product please read the latest prospectus carefully and thoroughly. The information and opinions contained in this document have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the document. Members of the UBS Group may have a position in and may make a purchase and / or sale of any of the securities or other financial instruments mentioned in this document. Units of UBS funds mentioned herein may not be eligible for sale in all jurisdictions or to certain categories of investors and may not be offered, sold or delivered in the United States. The information mentioned herein is not intended to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not a reliable indicator of future results. The performance shown does not take account of any commissions and costs charged when subscribing to and redeeming units. Commissions and costs have a negative impact on performance. If the currency of a financial product or financial service is different from your reference currency, the return can increase or decrease as a result of currency fluctuations. This information pays no regard to the specific or future investment objectives, financial or tax situation or particular needs of any specific recipient. The details and opinions contained in this document are provided by UBS without any guarantee or warranty and are for the recipient's personal use and information purposes only. This document may not be reproduced, redistributed or republished for any purpose without the written permission of UBS Asset Management Switzerland AG or a local affiliated company. Source for all data and charts (if not indicated otherwise): UBS Asset ManagementThis document contains statements that constitute “forward-looking statements”, including, but not limited to, statements relating to our future business development. While these forward-looking statements represent our judgments and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from our expectations. More explanations of financial terms can be found at ubs.com/glossary© UBS 2019. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. .

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