The J.P. Morgan View. US is leading. See page 7 for analyst certification and important disclosures.

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1 US is leading Asset allocation Improved US activity data and reduced monetary and fiscal risks keep us long both risk and growth globally, overweight US risk assets, and underweight its bonds against the rest of the world. Economics Over the past month, our 2014 US growth forecast has been raised from 2.4% to 2.8%, on a stronger H2 for Global growth is unchanged at 2.9% on softer data elsewhere. Fixed Income Take profit on 3s10s UK gilt steepener. Stay long Euro area periphery vs. core, and German bunds vs. US Treasuries. Equities The rise in the global manufacturing PMI boosts our OW in Cyclical vs. Defensive sectors. Credit US HG themes for 2014 are OW financials vs. non-financials and OW the long end of the spread curve. FX Dollar is gaining broadly and will likely rally further. Commodities Expect 5% total return on the GSCI in 2014 driven by strong roll returns in energy. Click here for video. Equity and credit markets have been on a tear into year end, and bonds have been backing up badly, even as the new year is starting with some profit taking. The second half of December delivered strong US activity data and positive surprises from US fiscal and monetary policy. Only two days into 2014, we face the luxury problem that each of the themes we laid out in our 2014 outlooks (p. 5) is already fully in play and is becoming increasingly priced in. This leaves us with Momentum as the main force to fuel our long-risk strategy. We have argued before that in the case of equities & credit, this momentum force is not merely technical, but also reflects positive two-way interaction with fundamentals. Higher asset prices boost wealth & confidence that in turn stimulate spending that should further support risk prices. The opposite can be said of bonds and currencies, where one should thus hold a much shorter investment horizon. In line, we take profit on some of our bearish bond trades and go tactically flat in the US. The 2013 rally in risk assets was all driven by fading risk perceptions and not by any improvement in growth expectations. Instead, over the year, we cut our global 2013 and 2014 projections each by ¼%, all due to EM. Continuing to rely only on further falls in uncertainty does, of course, have its natural limits as there are fewer and fewer concerns remaining among investors. Here also, one would have to rely on the simple passage of time for uncertainty to fade further and confidence to build. Over the past month or so however, we have seen reason to signal upside risk bias on global growth as indicated by the steady rise in PMIs. Over the past few weeks, this has translated into outright upgrades for US growth with 2014 now at 2.8%, versus only 2.4% expected a month ago. This has not shown up in the rest of the world where slightly weaker data are keeping our global 2014 projection unchanged at 2.9%. Jan Loeys AC JPMorgan Chase Bank NA John Normand (44-20) john.normand@jpmorgan.com J.P. Morgan Securities plc Nikolaos Panigirtzoglou (44-20) nikolaos.panigirtzoglou@jpmorgan.com J.P. Morgan Securities plc Matthew Lehmann (1-212) matthew.m.lehmann@jpmorgan.com J.P. Morgan Securities LLC 2013 returns %, equities are in lighter color. MSCI AC World* MSCI Europe* US High Yield Europe Fixed Inc* Global Gov Bonds** US High Grade US Fixed Income EM Local Bonds** Topix* 47 S&P500 MSCI EM* US cash GSCI TR EM $ Corp. EMBIG EM FX Gold Source: J.P. Morgan, Bloomberg. Note: Returns in USD. *Local currency. **Hedged into USD. Euro Fixed Income is iboxx Overall Index. US HG, HY, EMBIG and EM $ Corp are JPM indices. EM FX is EMCI in $. See page 7 for analyst certification and important disclosures.

2 A US upgrade counts for more than that of any other country, though. This is not merely because the US is the largest economy, but more so because the dollar financial markets make up half of world outstandings. And with many countries pegging, or shadowing the US dollar, the impact of US growth and policy surprises goes way beyond its 22% share in world GDP. Given a tendency for upgrades to be followed by more upgrades, we feel comfortable staying in bullish growth trades: long equities and credit, short bonds, and overweight Cyclicals. We also stay overweight US equities and the dollar against the rest of the world, and the reverse in fixed income. A second theme we have been pushing is that the Fed is not in a tightening mode and is more in a policy switching mode, from balance sheet expansion (QE) to Rate Guidance. We did not expect this switch to go 100% smoothly and thus stayed short duration, long dollars, and UW EM. In the event, the Fed communicated its tapering decision quite convincingly and did little damage to markets, but our positions got bailed out by stronger US activity data. EM assets performed better than we had feared. We thus cover the underweight of EM versus DM duration (see below). But with positive momentum on US growth views, we stay long the dollar against vulnerable EM FX, and overweight US equities. EM credit spreads --sovereign and corporate -- have rallied in line with US names, but not more so. We were fearful of the impact of tapering, but had decided not to underweight EM names given the high carry cost. We are watching supply and EM activity data to decide whether to move from neutral to long EM spread product. Fixed Income Bond yields rose across developed markets after the Fed announced on Dec 18 that it would begin reducing asset purchases in January. We had expected an announcement in the January meeting, and that the Fed would provide stronger guidance (USFIMS, Dec 13). With the macro outlook continuing to improve, we keep a short duration bias in US Treasuries. But given the rise in yields in recent weeks, we see a risk of a pull back and are neutral duration outright. We prefer to be short duration through a 2s10s steepener and cross-market against Bunds. Similarly, we held a bearish bias on UK duration given improvement in the macroeconomic outlook, and expressed this through a 3s10s steepener. In our mind, the key downside risk is that output and labor market data improve faster than the market expects. We now expect UK unemployment to decline below the 7% threshold set out by the BoE by the end of Q1 (UK: Unemployment to drop below 7% in 1Q14, earlier rate hike likely, Allan Monks, Dec 18). This creates a risk of further repricing at the front end, and thus we prefer to take profit on 3s10s UK steepener. In the Euro area, inflationary pressures remain very subdued (see The ECB in 2014: stuck at the zero nominal bound, David Mackie and Greg Fuzesi, Jan 3). With this in mind, we remain long duration in German bunds at the short end. At the same time the macro outlook does show signs of improvement, including yesterday s manufacturing PMI. Stay overweight peripheral vs. core government bonds. We expect EM local bonds to slightly outperform DM bonds on a currency hedged basis in 2014, largely due to carry. We saw near-term risk from the planned switch by the Fed from QE to forward guidance having adverse impact on EM bonds, and were tactically underweight EM bonds vs. DM bonds currency hedged. With the announcement of tapering behind us, the rationale of this tactical trade has gone, and we close the trade at a slight loss US GDP growth forecasts: J.P. Morgan vs. consensus % Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Source: J.P. Morgan, Blue Chip Economics, Consensus Economics 2014 Global GDP growth forecasts: J.P. Morgan vs. consensus % JPM Source: J.P. Morgan, Blue Chip Economics, Consensus Economics More details in... Consensus Potential JPM Consensus Potential 2.6 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Global Data Watch, Bruce Kasman, David Hensley and Joe Lupton Global Markets Outlook and Strategy, Jan Loeys et al. US Fixed Income Markets, Matt Jozoff, and Jay Barry Global Fixed Income Markets, Fabio Bassi et al. Emerging Markets Outlook and Strategy, Joyce Chang Key trades and risk: Emerging Market Equity Strategy, Adrian Mowat et al. US Equity Strategy FLASH, Tom Lee et al. European Equity Strategy, Mislav Matejka., et al. Flows & Liquidity, Nikos Panigirtzoglou et al. 2

3 Equities We maintain our bullish stance overall and within equities we overweight Japan and the US. These are the regions in which we see most upside on economic and earnings growth this year. We note that this view is working well, with both regions among the top performers over the past month. Japanese equities are being boosted by expectations of additional BoJ stimulus in April. US equities are being boosted by an improving economy and upward revisions to US growth forecasts. EM equities continue to underperform and EM equity funds witnessed outflows for the 10 th consecutive week to January 1. EM GDP decelerated 0.4% in 2013, to a below trend pace of 4.5%. Our Global Economic Outlook continues to expect subpar EM growth this year, which coupled with Fed tapering, raises the risk of further EM equity underperformance this year. We keep our OW in global Cyclicals vs. Defensives, which we re-entered a few months ago based on strong PMI momentum. Our global manufacturing PMI rose to 53.3 in December, up from 53.1 in November. The improvement in the PMI in the last quarter was the best since Q This is boosting our OW of Cyclical vs. Defensive equity sectors globally. Credit 2013 was a solid year for US HG bonds as spreads tightened 26bp, with 20bp of this tightening happening in the last two months. Spreads ended the year at 135bp, and HG bond yields closed Dec 31 at 4.22%, up 0.74% YTD. Excluding EM bonds which were 8bp wider in 2013, our index spread tightened by 30bp last year to 123bp. Our spread target for 2014 is 130bp, which we published in late November when the index was at 152bp. The strong market performance has come faster than we expected. This is because UST yields are higher (ending the year at 3.00% vs. our forecast of 2.85%), growth was stronger than expected, there was less uncertainty in Washington, and most importantly, the Fed communication on the end of tapering was very successful (JPM Daily Credit Strategy & CDS/CDX am update, Eric Beinstein, Jan 2). The main themes for this year in US HG are to OW financials vs. nonfinancials as financials continue to delever while non-financials are levering up, and to overweight the long end of the spread curve. We expect the 10s30s spread curve to flatten further from here. The successful Fed tapering and improved US economic outlook are also supportive of EM in the near term, providing domestic EM issues do not dominate the improved macro outlook. Foreign Exchange The past three weeks have been characterized by a widening of front-end yield spreads between the US and the rest of the world and a stronger USD (+0.7% on trade-weighted basis). The strengthening of the USD has come against other funding currencies within the G10 (CHF, JPY and EUR are all weaker versus USD) and against most EM FX, particularly those that are vulnerable to higher US rates (TRY, ZAR and THB have led the underperformance). The outperformers have been the Scandis (notably SEK) and GBP. Select pairs have tested historical extremes in recent weeks: USD/JPY traded above 105 (its 5-year high), EUR/USD and cable traded above their 2-year highs briefly, AUD/NZD reached its 5-year lows and USD/TRY made new record lows. In the FX 2014 Outlook, we were looking for a stronger USD against Equity returns in 2013 % MSCI EM Euro Stoxx 50 FTSE 100 FTSE MIB Index Stoxx Europe 600 MSCI AC World IBEX 35 Index DAX Index S&P 500 TOPIX Source: Bloomberg More details in... US Credit Markets Outlook and Strategy, Eric Beinstein et al. EM Corporate Weekly Monitor, Yang-Myung Hong et al. High Yield Credit Markets Weekly, Peter Acciavatti et al. European Credit Outlook & Strategy, Steven Dulake et al. Emerging Markets Cross Product Strategy Weekly, Eric Beinstein et al. -10% 0% 10% 20% 30% 40% 50% 60% 3

4 currencies where the central banks are easing/ staying accommodative (JPY, EUR, AUD) and against externally challenged EM FX (TRY, MYR, IDR). Among the crosses, we were in favor of lower AUD/NZD and higher NOK/SEK. We expected Sterling to be well supported as the economy challenges the BoE s forward guidance and tests the 7% unemployment threshold as early as in 1Q14. In EM, we looked for the global cyclical uplift to benefit KRW and TWD. These views have largely tracked in recent weeks but a notable exception is EUR/USD, which strengthened into year-end to above the 1.38 level versus our own forecast of 1.32 at mid-year. The themes outlined above should continue to hold well. Euro is screening expensive on our fair value models on all crosses except CHF and we look for a correction in the coming weeks (we are positioned for this in USD/CZK via options). USD/JPY should head higher still given the divergent monetary policies of the BoJ and the Fed (we target 106 by year-end), although on a tactical basis the pair could see a pullback given record spec shorts on JPY. We stay positioned for a lower AUD/NZD and higher NOK/SEK and GBP/JPY. As US yields increase further, outflows from countries that were beneficiaries of the low interest rate environment should weaken further (we are long USD/TRY and USD/IDR). KRW should outperform in Asia as it is not vulnerable to higher US rates and should benefit from the boost to exports from the global cyclical upturn. Commodities Commodities, proxied by the GSCI index, finished 2013 down 2%. Energy was up 3% but precious metals, base metals and agriculture were down 28%, 14% and 18% respectively. For 2014, we expect better performance for commodities and we forecast a 4.9% total return for the GSCI. This return should be driven largely by energy and from the backwardation (inverted future curve) that we expect to persist through the coming year. Spot commodity returns are likely to once again be lackluster. Agriculture prices should continue to fall on higher supply while precious metals stabilize and base metals move modestly higher as global manufacturing continues to improve (Commodity Markets Outlook and Strategy: 2014 Outlook And the walls come a-tumblin down, Colin Fenton et al., Dec 30, 2013). Our oil strategists have outlined the main risks to their oil outlook for Two of these risks are bullish for oil prices; if Venezuela suffers more supply losses or if restarting Sudanese production stalls. However, all the other risks are bearish for oil prices. These include: a faster than expected recovery of Libyan production; the US lifts its export ban on crude oil; US refineries are unable to resolve bottlenecks quickly enough to adjust for new shale oil output; Iraqi production finally surges; Iranian sanctions are removed; Syrian production resumes; and lastly, refinery demand falls and US crude inventories build further (Oil Market Weekly: Ten risks guiding the 2014 Outlook, Colin Fenton et al., Jan 2). We are also more positive on gold for 2014 as we expect that the trade policy blocking Indian gold imports will weaken somewhat and we also anticipate that outflows from gold ETFs will stabilize in the coming year, and begin to rise in 2H2014. A slower pace of gold mine growth in 2014 and 2015 is likely as lower prices feed into project delays and lower capex. We also still believe that central banks will be net buyers of gold in 2014 and All this should see prices stabilize and move modestly higher to round $1285/oz by the end of the year. FX weekly changes 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% USD TWI Source: Bloomberg, J.P. Morgan More details in... FX Markets Weekly, John Normand et al. Commodity Markets Outlook & Strategy, Colin Fenton et al. JPY EUR GBP CHF CAD AUD Oil Markets Monthly, Colin Fenton et al. Natural Gas Weekly, Scott Speaker and Shikha Chaturvedi Metals Monthly, Natasha Kaneva et al. Agriculture Weekly, Elizabeth Volynsky. 4

5 Forecasts & Strategy Interest rates Current Mar-14 Jun-14 Sep-14 Dec-14 United States Fed funds rate year yields Euro area Refi rate year yields United Kingdom Repo rate year yields Japan Overnight call rate year yields Emerging markets GBI-EM - Yield Credit Markets US high grade (bp over UST) Euro high grade (asset swap sprd) USD high yield (bp vs. UST) Euro high yield (bp over Bunds) EMBIG (bp vs. UST) EM Corporates (bp vs. UST) Foreign Exchange EUR/USD USD/JPY GBP/USD AUD/USD USD/BRL USD/CNY USD/KRW USD/TRY Quarterly Averages Commodities Current 14Q1 14Q2 14Q3 14Q4 Brent ($/bbl) Gold ($/oz) Copper ($/metric ton) Equity Sector Performance* US Europe Japan EM$ Energy 20.1% OW 5.8% N 19.3% UW -11.0% N Materials 18.4% OW -3.6% UW 40.5% UW -18.8% UW Industrials 32.9% OW 19.2% N 44.9% OW -2.7% OW Discretionary 37.1% OW 23.7% OW 58.6% OW 3.6% N Staples 23.4% UW 10.1% N 50.6% OW -4.7% UW Healthcare 36.6% OW 21.3% OW 43.5% UW 6.7% N Financials 30.4% OW 19.5% OW 64.2% OW -4.3% N Information Tech. 22.4% OW 21.4% OW 50.0% UW 12.6% OW Telecommunications 8.4% N 32.8% UW 110.8% OW -3.8% UW Utilities 10.8% UW 9.2% N 41.1% UW -4.9% N Overall 27.4% 16.1% 46.8% -3.4% Source: J.P. Morgan Investment themes and impacts From QE to Rate Guidance FOMC is not in tightening mode and only wants to change method. Steeper curve. Hurts EM and QE assets. The Bernanke/Yellen put is alive and well Fed underwrites broad economy. Boost for economic risk premia: equities and credit. Neutral for bonds. The power of zero return on cash Not new, but not going away and still the major driver of asset reflation Upside bias on global growth Signaled by rise in PMIs. Boost from rising wealth. Capex may finally accelerate. Good for Cyclicals and metals; bad for bonds. Where is the reform? China and Japan have a long list and will achieve a decent amount. OW Asia Pac stocks. Cycle at mid-age Low macro vol. Bonds in slow bear market; credit spread tightening close to over. HY preferred. Equities outperform bonds. Confidence rises. Momentum Still best asset allocation signal. Long equities versus bonds and commodities; neutral credit. Source: J.P. Morgan, GMOS, Nov 6, 2013 Tactical overview Asset allocation Equities Bonds Direction Country Sector Earn risk and vol premia. Long Short EU JA, US, EM Asia EU vs. US; DM vs EM Credit OW UW EM FX Comd s Bullish USD. UW given no yield UW EM vs USD OW Equities, HY credit vs bonds, cash and Comm s Cyclicals; Small Caps; Value. Euro periphery. UW Belly. HY, FINs; BBB s vs. A s. UW Belly Long CNY; GBP, MXN; short JPY, AUD. TRY, IDR, CZK, INR. Long gasoline vs Brent. Short Ags Source: J.P. Morgan 5

6 Global Economic Outlook Summary Real GDP Real GDP Consumer prices % over a year ago % over previous period, saar % over a year ago Q13 4Q13 1Q14 2Q14 3Q14 4Q14 4Q13 2Q14 4Q14 4Q15 United States Canada Latin America Argentina Brazil Chile Colombia Ecuador Mexico Peru Uruguay Venezuela Asia/Pacific Japan Australia New Zealand EM Asia China India EM Asia ex China/India Hong Kong Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Western Europe Euro area Germany France Italy Spain Norway Sweden United Kingdom EMEA EM Czech Republic Hungary Israel Poland Romania Russia South Africa Turkey Global Developed markets Emerging markets Source: J.P. Morgan 6

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