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3Q | 2013

3Q | 2013. As of June 30, 2013. Guide to the Markets ® Easing Up on Easy Money Anastasia Amoroso, CFA Vice President – Global Market Strategist. Topics. US: With the Fed winding down its bond purchase program, are there more peaks left to climb?

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3Q | 2013

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  1. 3Q | 2013 As of June 30, 2013 Guide to the Markets® Easing Up on Easy Money Anastasia Amoroso, CFA Vice President – Global Market Strategist

  2. Topics • US: With the Fed winding down its bond purchase program, are there more peaks left to climb? • International: How long can emerging markets continue to be casualties of the Fed and what might be the saving grace? • International: Europe and Japan are still marching up the mountain in hopes of reaching prior peaks - what could help them get there? • A Better Question: not when there will be a market pullback, but what to do amidst a market pullback?

  3. Topic 1 • US Economic and Market Outlook With the Fed winding down its bond purchase program, are there more peaks left to climb?

  4. 6 S&P 500 Index at Inflection Points GTM – U.S.

  5. Corporate Profits and Leverage 10 GTM – U.S.

  6. 34 To Taper, or Not to Taper, That Is the Question GTM – U.S.

  7. 24 Reasons to Taper - Cumulative Improvement in Employment GTM – U.S.

  8. 25 The Uncomfortable Truth about US Unemployment GTM – U.S.

  9. 20 Housing Market Is Key to Self-Sustaining Recovery GTM – U.S.

  10. Reasons to Taper - Who Says You Can’t Go Home? 19 GTM – U.S.

  11. 35 Banks – Able to Lend but Willing? GTM – U.S.

  12. Reasons Not to Taper - Credit Propelled Momentum Slowing … Mortgage Applications and Rates Housing Starts LHS MBA mortgage applications purchase index, RHS 30-year mortgage rate Annual rate, seasonally adjusted, reported versus consensus expectations (RHS) Mortgage Rates (LHS) Mortgage Applications to Purchase Index Consensus Expectation Economy Sources: Mortgage Bankers Association, Census Bureau, Bankrate, Bloomberg, FactSet, J.P. Morgan Asset Management. Data are as of 9/23/13.

  13. 29 Consumer Confidence Held Hostage No More GTM – U.S. Consumer Sentiment Index – University of Michigan Jan. 2000 -2.0% Jan. 2004 +4.4% Mar. 1984 +13.5% Aug. 1972 -6.2% Jan. 2007 -4.2% Economy May 1977 +1.2% Average: 85.3 Mar. 2003 +32.8% Oct. 2005 +14.2% Oct. 1990 +29.1% Feb. 1975 +22.2% Nov. 2008 +22.3% Aug. 2011 +15.4% Sentiment Cycle Low and subsequent 12-month S&P 500 Index return May 1980 +19.2% Source: University of Michigan, FactSet, J.P. Morgan Asset Management. Peak is defined as the highest index value before a series of lower lows, while a trough is defined as the lowest index value before a series of higher highs. Subsequent 12-month S&P 500 returns are price returns only, which excludes dividends. Data are as of 6/30/2013.

  14. Cyclical Indicators Have Room to Run 18 GTM – U.S.

  15. Confidence, Stocks, Yields and the Fed 12 GTM – U.S.

  16. Stocks Can Rise Alongside Rising Yields 13 GTM – U.S.

  17. Earnings Estimates and Multiples 8 GTM – U.S.

  18. Topic 2 • International How long can emerging markets continue to be casualties of the Fed and what might be the saving grace?

  19. 39 A Tale of Two Returns – Developed versus Emerging GTM – U.S.

  20. 55 Global Equity Valuations – Emerging Markets GTM – U.S.

  21. GEM Slows, G3 Grows … 41 GTM – U.S.

  22. 47 The Case for Stronger Dollar … GTM – U.S.

  23. … and the Carry Trade Unwind Currency Performance Year-to-date % change Relative to the U.S. Dollar Appreciated Depreciated International Source: FactSet, Federal Reserve, IMF, J.P. Morgan Global Economic Research, J.P. Morgan Asset Management. *U.S. Dollar Index is the nominal trade-weighted exchange rate index: broad definition. Past performance is not indicative of future results. Data are as of 8/28/13.

  24. Investors Flee the Weakest Links EM Sensitivity to Capital Flows and Currency Exposure Net Commodity Exporters Commodity Exports (% of GDP) Net Commodity Importers Commodity Imports (% of GDP) Current Account (% of GDP) Source: MRB Partners, U.N. Commodity Trade Statistics Database, IMF, J.P. Morgan Asset Management. *Commodities defined by SITC codes 0-4. Data are as of 8/22/13.

  25. 43 Know Your Time Horizon – Growth of Emerging Market Consumer GTM – U.S.

  26. Know Your Time Horizon - A Five Stage Global Cycle • Early Cycle Recovery • Mid Cycle Pause • Late Cycle Expansion - US • Tightening - China • Recession • Early part • Late part – Europe, Japan Source: IMF

  27. Know Your Time Horizon - Short-Term Market Drivers • Valuation • Positioning • Fund flows • Cash levels • BUT valuation + positioning ≠ outcome.. UNLESS … there is a catalyst • Catalysts • Central bank action • Liquidity • Credit • Fiscal policy • Cyclical forces • Data surprises

  28. The Importance of Exports – the Saving Grace for EM 43 GTM – U.S.

  29. 38 What’s Your EM Trade - Currency, Duration or Credit Spread? GTM – U.S.

  30. 55 Time to Break Apart the BRICs GTM – U.S.

  31. China : Shifting Gears • New government increasingly comfortable with slower growth Source: The Economist

  32. 50 China: Economic Growth – Slower but Steady GTM – U.S. Monetary Policy Rates China GDP Contribution Investment RRR Avg. since Jan. 2000 May 2013 Year-over-year % change Consumption Working Capital Rate Net Exports 9.1% Headline CPI: 2.3% 2.1% 10.4% Non-Food CPI: 1.0% 1.6% 9.6% 9.3% May 2013: 20% 7.8% May 2013: 6% Inflation Credit Growth* Year-over-year % change RMB billions, new for the month Other** RMB Bank Loans International Source: National Bureau of Statistics of China, The People’s Bank of China, FactSet, CEIC, J.P. Morgan Asset Management. Values may not sum to 100% due to rounding. RRR represents the reserve requirement ratio. *As defined by Total Social Financing. **Other: bankers acceptance bills (13%), trust loans (11%), entrusted loans (11%), corporate bond financing (11%), foreign currency loans (5%), and non-financial equity financing (2%). Data are as of 6/21/13.

  33. 52 China: Cyclical Indicators – a Second Half Rebound GTM – U.S. Residential Floor Space Started Fixed Asset Investment Year-over-year % change, 3-month moving average Year-over-year % change, 3-month moving average, seasonally adjusted Aug. 2013: 20.4% Auto and Retail Sales Residential Real Estate Price Year-over-year % change Index, rebased 2007=100, national average Retail Sales Property Tightening Measures Announced Aug. 2013: 13.4% International Auto Sales Aug. 2013: 10.3% Source: National Bureau of Statistics of China, China Association of Automobile Manufacturers, China Ministry of Construction, FactSet, J.P. Morgan Asset Management. Data are as of 9/18/13.

  34. 11 China and Europe – a Symbiotic Relationship

  35. Europe : Rome Wasn’t Built in a Day • Out of the woods at last? Source: The Economist

  36. 48 Europe: Economic Growth – Where Art Thou Growth? GTM – U.S.

  37. 42 Manufacturing Momentum – a Glimpse of a Better Tomorrow GTM – U.S.

  38. 50 Eurozone: Sovereign Bond Yields – Room to Maneuver GTM – U.S.

  39. 49 Europe: Austerity – When Less Is More GTM – U.S.

  40. Japan: Uncharted Waters (大航海時代, Dai-kōkaijidai) • A lot of hope for a sustained recovery needs to be supported by progress overtime to prove this time is different: • Bond purchase programs before were small relative to the size of the issue • Balance sheet problems for banks and firms were not fixed Source: The Economist

  41. 53 Japan: Economic Snapshot GTM – U.S.

  42. 17 Japan: Economic Snapshot

  43. 45 Sovereign Debt Stresses GTM – U.S.

  44. 19 Japan: Public Finance

  45. 54 Global Equity Valuations – Developed Markets GTM – U.S.

  46. Topic 3 • A Better Question What to do amidst a market pullback?

  47. A Better Question: What to Do Amidst a Market Pullback? • Evaluate sector positioning in both fixed income and equities • Add to core investment themes • Approach emerging markets selectively

  48. Investment Themes • Equities • US late cycle sectors • Regional opportunities • Secular growth themes • Info Tech • Energy • Emerging Market Consumer • Fixed Income • Converts • Floating rate • Credit sensitive non-agency MBS • High yield corporates – US, developed ex-US, emerging

  49. 32 Time to Re-Define ‘Safety’ in Fixed Income GTM – U.S.

  50. The World Is Not a One Peak Wonder • More peaks left to climb • US housing, Europe, Japan • Higher peaks require extra skills • Sector tilts in equities and fixed income • Security selection matters • New horizons warrant extra tools • Currency, commodity and emerging market performance is greatly differentiated • The world is a rich opportunity set • Active management is key to identifying pockets of opportunity in any set of market conditions

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