Portfolio Discussions

Transcription

1 MARKET INSIGHTS UK Q Portfolio Discussions Considering trends and opportunities for investors with Guide to the Markets CONTENTS in the UK 2 in emerging markets 8 in Europe 14 in the US 20 Global macro investing 26 jpmorgan.am/portfolio-discussions

2 INVESTING IN THE UK in the UK in the UK The Brexit negotiations continue to be a source of great economic uncertainty for the UK. The outcome of the negotiations with the European Union will have a significant effect on the future of the UK, the value of the pound and the relative performance of different sectors. Domestic vs. international exposure, large vs. small? The large-cap FTSE 100 gets most of its revenues from abroad, whereas the mid-cap FTSE 250 has a larger exposure to the domestic UK economy. Therefore, a fall in the pound should favour internationally exposed large-cap stocks, whereas a rise in the pound should favour smaller, more domestically-focused stocks. Mid-cap stocks have strongly outperformed large-cap stocks since the financial crisis but could be more exposed were the UK economy to slow further. The average UK equity fund has far more exposure to mid and small cap stocks than the FTSE All-Share. 2 PORTFOLIO DISCUSSIONS UK Q1 2018

3 Equities UK equities: Large vs. mid/small capitalisation Trade-weighted GBP and FTSE 250 / FTSE 100 Index level, rebased to 100 in Jan 2016 FTSE 250 / FTSE 100 % of revenues from overseas FTSE % FTSE % GBP trade weighted '16 '17 ' FTSE 100 vs. FTSE 250 Index level, rebased to 100 in Jan ,200 1,000 UK small & mid cap exposure* % th - 75 th percentile range GTM UK 0 '87 '92 '97 '02 '07 '12 '17 Average fund manager exposure* Weight of small & mid cap in FTSE All-Share 0 '13 '14 '15 '16 '17 Source: (Left) Bank of England, FTSE, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) FTSE, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) Morningstar, J.P. Morgan Asset Management. *Exposure to small & mid cap companies is the exposure of all UK funds excluding small & mid cap only funds. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December FTSE FTSE 100 in the UK 43 J.P. MORGAN ASSET MANAGEMENT 3

4 INVESTING IN THE UK in the UK Attractive income and commodity exposure In a world where income is still hard to come by, UK equities offer a very attractive dividend yield relative to other equity markets. UK listed companies have a higher proportion of commodity producers and refiners. For five years, the fall in commodity prices had depressed earnings expectations. As commodity prices have recovered from their lows, earnings expectations have also improved. UK equities stand to benefit more than most other developed markets from any further improvement in commodity prices. 4 PORTFOLIO DISCUSSIONS UK Q1 2018

5 FTSE All-Share earnings and performance Next 12 months earnings per share estimates (LHS); index level (RHS) 320 FTSE All-Share EPS FTSE All-Share 4,500 index level 300 UK equities 4,000 GTM UK Commodities weights in global equity markets % of index in the UK Equities '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 3,500 3,000 2,500 2,000 1, FTSE All-Share Dividend yield and ex-energy dividend yield % yield Source: (Left) FTSE, IBES, Thomson Reuters Datastream, J.P. Morgan Asset Management. EPS is earnings per share. (Top right) FactSet, FTSE, MSCI, Standard & Poor s, J.P. Morgan Asset Management. (Bottom right) IBES, MSCI, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December UK Eurozone EM World Japan US MSCI Europe ex-uk S&P 500 MSCI Japan Dividend yield Dividend yield ex-energy 42 J.P. MORGAN ASSET MANAGEMENT 5

6 INVESTING IN THE UK in the UK UK valuations are relatively attractive UK equities are neither cheap nor expensive relative to their historical average price-to-earnings (P/E) ratio, but relative to government bonds, the dividend yield available on UK equities looks attractive. UK earnings have plenty of room for recovery after their poor performance in recent years. As a result, the cyclicallyadjusted P/E, which takes into account our position in the earnings cycle, leaves UK equities looking cheap relative to their long-term average. Investment implications Undemanding cyclically-adjusted valuations and a high dividend yield, could provide support for UK equities. Large-cap equities are less exposed to potential domestic economic weakness than mid- and small-cap companies. That said, the uncertainty created by the Brexit negotiations argues for taking relatively small active sector and size bets relative to the benchmark. 6 PORTFOLIO DISCUSSIONS UK Q1 2018

7 Equities UK equities: Valuations FTSE All-Share forward P/E ratio x, multiple 31 December 2017: 14.4x Average: 14.1x '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 FTSE 100 Shiller CAPE x, adjusted using trailing 10-year average inflation-adjusted earnings 31 December 2017: 15.7x GTM UK FTSE All-Share dividend yield and 10-year Gilt yield % yield Dividend yield 10-year Gilt yield December 2017: 3.6% in the UK Average: 16.9x 5 '83 '87 '91 '95 '99 '03 '07 '11 ' December 2017: 1.2% 0 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Source: (Top left) FTSE, IBES, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom left) FTSE, Goldman Sachs, J.P. Morgan Asset Management. Index is FTSE 100 due to availability of P/E data. (Right) FTSE,Thomson Reuters Datastream, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December J.P. MORGAN ASSET MANAGEMENT 7

8 INVESTING IN EMERGING MARKETS in emerging markets in emerging markets Emerging market (EM) equities performed very strongly in 2017, but earnings remain below their prior peaks with room to recover further. Emerging markets have the potential to grow much faster than developed economies, supporting further earnings growth. The long-term growth outlook is positive for EM Emerging economies have the potential to grow faster than developed economies with economic development and urbanisation starting from a much lower base. Rising urbanisation tends to coincide with rising productivity and hence rising income per capita. Rising incomes help boost local consumption and demand for more goods and services, further supporting stronger economic growth. Emerging markets have contributed the majority of global GDP growth since 2000, and this is likely to remain the case in the coming years. 8 PORTFOLIO DISCUSSIONS UK Q1 2018

9 Emerging markets structural dynamics GTM UK 32 Global economy Urbanisation and economic growth Urbanisation rates, % and GDP per capita, USD, ,000 60,000 50,000 40,000 30,000 20,000 GDP per capita US South Korea Contribution to global real GDP growth % of overall growth 6 Global economic growth EM growth 5 DM growth in emerging markets 0 10,000 China India Urbanisation rate -1-2 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Source: (Left) IMF, J.P. Morgan Asset Management. Urbanisation ratio refers to the proportion of the total population living within an urban area defined by national statistical offices. (Right) IMF World Economic Outlook October 2017, J.P. Morgan Asset Management and 2018 are forecasts from the IMF World Economic Outlook October Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December J.P. MORGAN ASSET MANAGEMENT 9

10 INVESTING IN EMERGING MARKETS Prior headwinds for EM have become tailwinds in emerging markets Even though emerging markets tend to grow faster than developed markets, they do not always outperform developed market equities. However, when the gap between the growth rate of emerging markets and developed markets increases, emerging markets tend to outperform and vice versa. Historically, a weakening US dollar has also been beneficial for the relative performance of EM equities. Commodity prices are also important for some commodity-exporting emerging markets, and historically rising commodity prices helped emerging markets outperform. 10 PORTFOLIO DISCUSSIONS UK Q1 2018

11 Emerging markets: Macro correlations GTM UK 56 Equities EM vs. DM growth and equity performance %, next 12 months growth estimates (LHS); index level (RHS) EM minus DM GDP growth EM growth & equity outperformance EM growth & equity underperformance MSCI EM / MSCI DM -1 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 ' EM equity relative performance and commodities Relative index level rebased to 100 at 1997 (LHS); index level (RHS) MSCI EM / MSCI DM CRB Commodity Index 40 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 Relative EM / DM equity performance and USD REER Relative index level rebased to 100 at 1997 (LHS); index level (RHS) MSCI EM / MSCI DM USD REER (inverted) 20 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 ' in emerging markets 56 Source: (Left) Consensus Economics, J.P. Morgan Asset Management. EM DM GDP growth is consensus estimates for emerging markets growth in the next 12 months minus consensus estimates for developed markets growth in the next 12 months, provided by Consensus Economics. Index level is a relative index level rebased to 100 at (Top right) Bloomberg, Commodity Research Bureau, MSCI, J.P. Morgan Asset Management. (Bottom right) BIS, Bloomberg, MSCI, J.P. Morgan Asset Management. For all charts, MSCI EM and MSCI DM returns are in USD. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December J.P. MORGAN ASSET MANAGEMENT 11

12 INVESTING IN EMERGING MARKETS Valuations are not stretched and earnings remain below prior peaks Despite a strong rebound in 2017, EM earnings remain below prior peaks, having experienced a very weak period from 2011 to 2015, as commodity prices depressed revenues. in emerging markets Rising GDP growth should continue to boost corporate earnings if commodities are no longer the drag they were in prior years. Despite the very strong performance of EM equities, the strong rebound in earnings has meant that valuations still do not look stretched relative to their long-term average. Investment implications Strong GDP growth, as incomes rise, should boost EM earnings over the long run. Valuations don t look expensive compared with their long-run average or with other equity markets. A weaker dollar, rising commodity prices and rising EM growth provide a good backdrop for EM equities. 12 PORTFOLIO DISCUSSIONS UK Q1 2018

13 Relative equity earnings and valuations GTM UK 36 Global earnings NTM USD earnings per share estimates, rebased to 100 in Jan 2009 Global valuations Current and 25-year historical valuations Axis US Japan EM 40x 75x 35x 30x 25x Current 31 Dec year range 25-year average 5.2x 4.8x 4.4x 4.0x 3.6x 3.2x in emerging markets Equities UK Europe ex-uk Price-to-earnings 20x 15x 10x 5x 2.8x 2.4x 2.0x 1.6x 1.2x 0.8x 0.4x Price-to-book 40 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: (Left) FTSE, IBES, MSCI, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. NTM is next twelve months. (Right) MSCI, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. Valuations refer to NTM aggregate P/E for Europe ex-uk, US, Japan, UK and P/B for emerging markets. Valuation and earnings charts use MSCI indices for all regions/countries, except for the US, which is the S&P 500. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December x US Europe ex-uk UK Japan EM 0.0x 36 J.P. MORGAN ASSET MANAGEMENT 13

14 INVESTING IN EUROPE in Europe While Europe is growing strongly, company earnings are coming off of a low base and have plenty of room to rise as the economic recovery continues. We do not expect a recession in Europe and, if political risks continue to subside, investors could start to focus more on the improving economic and corporate fundamentals. in Europe The European economy is recovering, with recession risk low Unemployment in Europe is falling, but given it is still high, there is still plenty of room for the jobless rate to fall further. As falling unemployment is both a sign of corporate optimism and supportive of consumer spending, unemployment continuing to fall should support both the economy and markets. Retail sales and industrial production are also recovering, showing that the recovery is broad based. Business sentiment surveys suggest growth should remain healthy. 14 PORTFOLIO DISCUSSIONS UK Q1 2018

15 Eurozone growth monitor GTM UK 16 Global economy Unemployment rate % Recession Retail sales and industrial production Index level Industrial production (LHS) 120 Retail sales (RHS) '00 '02 '04 '06 '08 '10 '12 '14 ' '00 '02 '04 '06 '08 '10 '12 '14 '16 Composite PMI and GDP Index level (LHS); % change year on year (RHS) 65 PMI 60 Source: (Left and top right) Eurostat, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) Bloomberg, Eurostat, Markit, J.P. Morgan Asset Management. Light grey columns in all charts indicate recession. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December GDP 35 '00 '02 '04 '06 '08 '10 '12 '14 ' in Europe 16 J.P. MORGAN ASSET MANAGEMENT 15

16 INVESTING IN EUROPE Room for recovery in European earnings Companies had struggled to grow earnings since 2011, thanks to a combination of slow growth and little corporate pricing power. Economic recovery should normally be expected to lead to an improvement in earnings growth. For years, earnings expectations for Europe have started the year high and then been downgraded throughout the year. In 2017, however, earnings expectations were not revised down. It is not only expectations that are improving - actual delivered earnings are growing as well and the growth is broad based across most sectors. in Europe 16 PORTFOLIO DISCUSSIONS UK Q1 2018

17 Europe ex-uk equities: Earnings GTM UK 39 MSCI Europe ex-uk earnings and performance Next 12 months earnings per share estimates (LHS); index level (RHS) MSCI Europe ex-uk EPS MSCI Europe ex-uk index level 1,400 1,300 1,200 Eurozone yearly earnings EPS, % change year on year Expected earnings growth Delivered earnings growth 120 1, Equities '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 1, '11 '12 '13 '14 '15 '16 '17 '18 Eurozone Q317 earnings by sector EPS, % change year on year in Europe Source: (Left) IBES, MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. EPS is earnings per share. (Top right) IBES, MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. Expected earnings growth and delivered earnings growth are calculated using IBES consensus estimates for next 12 months EPS and last 12 months EPS respectively. Year on year growth rates are calculated using year end data. (Bottom right) J.P. Morgan Securities Research, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December J.P. MORGAN ASSET MANAGEMENT 17

18 INVESTING IN EUROPE The end of European equity underperformance? Earnings growth really matters for the performance of European equities. A stronger euro does not mean that European earnings cannot grow strongly, as shown by the period prior to the 2008 financial crisis. Margins in Europe are depressed but are starting to rise as stronger nominal growth boosts sales and operating leverage amplifies that into even stronger earnings growth. As European margins are coming off of a low base, they should be able to rise further. Some investors fear they are too late to the party in European equities but flow data suggests that not all of the money that came out of European equities is yet to return. in Europe Investment implications European equities could benefit from continued economic recovery feeding through into corporate earnings growth. The European Central Bank has noted that political winds are becoming tailwinds. If concerns around the Italian election in March prove to be overdone, as they did were in France, this could provide a boost for European equities given the improving economic backdrop. A stronger euro does not necessarily prevent European companies earnings from growing. 18 PORTFOLIO DISCUSSIONS UK Q1 2018

19 Europe ex-uk equities: Earnings fundamentals GTM UK 38 Eurozone earnings per share (EPS) and nominal GDP % change year on year Europe vs. US operating profit margins %, earnings per share / sales per share GDP forecast: 3.3% S&P 500 MSCI Europe ex-uk Equities '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 European earnings vs. the euro Last 12 months earnings per share, euros (LHS); US dollars per euro (RHS) MSCI Europe ex-uk EPS in Europe -4 Eurozone nominal GDP MSCI EMU trailing EPS '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 ' EURUSD '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Source: (Left) Eurostat, IBES, IMF World Economic Outlook, MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. Trailing EPS is last 12 months earnings per share. Nominal GDP forecast is from the IMF World Economic Outlook October (Top right) MSCI, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December J.P. MORGAN ASSET MANAGEMENT 19

20 INVESTING IN THE US in the US US equities have had a fantastic run since We believe we are now in the late stage of the economic cycle. In the final stages of an economic cycle equity returns have historically been very strong. The US economy is late cycle but a recession does not seem imminent US unemployment has fallen to very low levels. Historically, such low levels of unemployment have been a warning sign that we are late in the economic cycle. in the US However, wage growth has tended to accelerate at the end of a cycle, causing a more aggressive monetary policy tightening than we have seen so far this cycle. The recovery could well continue until wages accelerate, causing the Fed to tighten too much. We expect unemployment to keep falling, wage growth to start rising and interest rates to keep rising in 2018, but at a very gradual pace. 20 PORTFOLIO DISCUSSIONS UK Q1 2018

21 US labour market GTM UK 22 US unemployment rate and wage growth %, wage growth is year on year 12 Global economy 10 8 Unemployment 6 4 November 2017: 4.1% 2 Wage growth November 2017: 2.3% 0 '67 '72 '77 '82 '87 '92 '97 '02 '07 '12 '17 in the US Source: BEA, Thomson Reuters Datastream, J.P. Morgan Asset Management. Wage growth is average hourly earnings of total private production and nonsupervisory employees. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December J.P. MORGAN ASSET MANAGEMENT 21

22 INVESTING IN THE US Warning signs are not yet flashing red While we are probably getting closer to the end of this economic cycle, we do not think we are there yet. Historically, the number of people claiming benefits in the US has started to rise before a bear market, and that hasn t happened yet. Business surveys, such as the ISM manufacturing survey, are likely to fall in 2018, if history is any guide. However, while this means the pace of economic growth may slow, bear markets have tended to require the ISM business survey to fall below 50, indicating economic contraction rather than just slower growth. The conference board s leading economic indicator has fallen before every recession in the last 50 years and has acted as a helpful canary in the coal mine for US equities. Currently, this leading indicator paints a positive picture for the US outlook. in the US 22 PORTFOLIO DISCUSSIONS UK Q1 2018

23 US equities: Macro correlations GTM UK 46 ISM manufacturing and S&P 500 performance Index level 65 ISM manufacturing S&P 500 index level ,000 2,500 2,000 Initial jobless claims vs. S&P 500 performance Thousands, three-month moving average (LHS); index level (RHS) Initial jobless claims S&P 500 index level 3,000 2,500 2,000 1,500 1, Equities '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 1,500 1, '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 Leading economic indicator vs. S&P 500 performance Index level Leading economic 130 S&P 500 index level indicator '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 0 3,000 2,500 2,000 1,500 1, in the US Source: (Left) ISM, Standard & Poor s, J.P. Morgan Asset Management. The Institute for Supply Management (ISM) survey assesses the economic health of the manufacturing sector by surveying output and employment intentions. Dashed line at 50 indicates the level of the ISM survey where economic conditions are neither accelerating nor deteriorating. (Top right) BLS, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) Conference Board, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December J.P. MORGAN ASSET MANAGEMENT 23

24 INVESTING IN THE US Historically, investors have benefitted from the strength of late-cycle returns Many investors have been surprised by the strength of US equity returns in However, strong returns in the last few years of an economic cycle are the norm, not the exception. The columns on the right of the table show that in the final year of a bull market, equity returns have never been less than 15%. In the final two years of a bull market, the median return has been nearly 40%. Investment implications We believe we are in the late stages of the US economic cycle but not yet at the end. Historically, equity returns in the late stage of the economic cycle have always been very strong. in the US Equity markets have tended to peak only once the economic data start to indicate the economy is heading into recession; warning signs that warned of past recessions and bear markets are not yet flashing red. 24 PORTFOLIO DISCUSSIONS UK Q1 2018

25 US bull and bear markets GTM UK 50 Equities S&P 500 declines from all-time highs, % '28 '33 '38 '43 '48 '53 '58 '63 '68 '73 '78 '83 '88 '93 '98 '03 '08 '13 Characteristics of past bear and bull markets* 4 Recession 20% market decline Macro Bear markets Bull markets Return before peak environment Market corrections Market Bear Duration Bull Bull Duration peak return (months) Recession start date return (months) months months 1 Crash of 1929 excessive leverage, irrational exuberance Sep % Fed Tightening premature policy tightening Mar Jun % 58 27% 119% 3 Post WWII crash post-war demobilisation, recession fears May Apr Flash crash of 1962 flash crash, Cuban Missile Crisis Dec Jun Tech crash of 1970 economic overheating, civil unrest Nov Jun Stagflation OPEC oil embargo Jan May Volcker Tightening campaign against inflation Nov Oct crash programme trading, overheating markets Aug Aug Tech bubble extreme valuations, dot com boom/bust Mar Dec Global Financial Crisis leverage/housing, Lehman collapse Oct Oct Current cycle Mar MEDIAN - 42% % 68 27% 39% in the US Source: Bloomberg, NBER, Robert Shiller, Standard & Poor s, J.P. Morgan Asset Management. *A bear market represents a 20% or more decline from the previous market high using a monthly frequency; a bull market represents a 20% increase from a market trough. Periods of recession are defined using US National Bureau of Economic Research (NBER) business cycle dates. Chart and table shows price return. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December J.P. MORGAN ASSET MANAGEMENT 25

26 GLOBAL MACRO INVESTING Global macro investing Themes and trends in the global economy are the biggest driver of asset price returns. Global macro investing seeks to take advantage of these changes by delineating macroeconomic thinking into a set of themes or trends and assigning certain levels of probability as to how these will evolve through time. To efficiently reflect macro themes in a portfolio, investors must draw on a broad set of asset classes. Macro investing typically aims to generate positive returns in different market environments, with a lower level of volatility than equities to limit falls in periods of market stress and achieve a smoother path of portfolio growth. Aim for positive risk-adjusted returns Risk-adjusted returns for a traditional balanced equity and bond portfolio have been very strong over the last few years. As we get closer to the end of this economic cycle, returns from traditional assets are likely to fall and volatility is likely to rise, meaning risk-adjusted returns could be lower. In this environment, it probably makes sense to seek exposure to a mix of assets that can provide a lower volatility than equities but that can still deliver attractive positive returns. Investors should not rely solely on a negative correlation between stocks and bonds for diversification as this relationship cannot always be relied on when it is needed most, such as in August Global macro investing Funds that can use sophisticated strategies, such as options and shorting, have the potential to protect against portfolio downside and can aim to make money without simply relying on equities or bonds rising in value. 26 PORTFOLIO DISCUSSIONS UK Q1 2018

27 Risk-adjusted returns and downside protection GTM UK 73 Risk-adjusted returns of a 50/50 portfolio Sharpe ratio of a portfolio of 50% global equities and 50% global bonds* 3.5 Six-month stock and bond correlations Of total return on US equities (S&P 500) and US Treasuries (10-yr) year Sharpe ratio 5-year Sharpe ratio '91 '96 '01 '06 '11 '16 Hedge fund returns in different market environments %, average total return in up and down months, Other assets '04 '06 '08 '10 '12 '14 '16 ' S&P 500 HFRI FW** S&P 500 up S&P 500 down Bond up Bond down Source: (Left) MSCI, J.P. Morgan Multi-Asset Solutions, J.P. Morgan Asset Management. *The equity index is the MSCI World (GBP hedged) and the bond index is the JP Morgan Global Bond Index (GBP hedged). The portfolio is rebalanced monthly. Sharpe ratio is calculated as (Return - Risk free rate) / Volatility. (Top right) Bloomberg, J.P. Morgan Asset Management. (Bottom right) Barclays, Hedge Fund Research, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. **HFRI FW is Hedge Fund Research Index Fund Weighted. ***US bonds is the Bloomberg Barclays US Aggregate Bond Index. Downside protection refers to attempting to minimise the impact of any falls in the underlying investments. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December US bonds*** HFRI FW** -0.7 Global macro investing J.P. MORGAN ASSET MANAGEMENT 27

28 GLOBAL MACRO INVESTING Go beyond traditional multi-asset investing Global macro investing is about assigning probabilities to potential outcomes of trends as they evolve, and understanding the implications for asset classes. Macro investing should be highly dynamic, with the ability to move exposures quickly as trends change or surprise events unfold. Macro-driven portfolios often draw on a very broad opportunity set across many asset classes. This multi-asset, unconstrained investment style moves away from traditional equity funds that tend to underweight their least preferred regions or sectors. Instead, a macro portfolio only has exposure to investments and strategies that it expects to make positive returns. As well as having the ability to use long equity and fixed income strategies to generate positive returns, macro investing can also exploit relative value opportunities. For example, global macro investing can benefit from the expectation that one currency will outperform another based on a prevailing economic theme. Global macro investing 28 PORTFOLIO DISCUSSIONS UK Q1 2018

29 Asset class returns (GBP) GTM UK Q yr ann. Vol. Govt bonds 52.6% EM E 59.4% REITS 31.6% EM D 10.0% REITS 14.9% DM Equities 25.0% REITS 35.1% REITS 8.2% HY bonds 36.3% EM E 25.8% EM E 6.6% HY bonds 12.3% EM E 26.1% IG bonds 26.5% HY bonds 41.9% EM E 22.9% REITS 8.1% HY bonds 14.4% Hedge Funds 9.6% EM D 12.8% EM D 7.7% Cmdty 33.4% DM Equities 12.4% DM Equities 4.8% REITS 12.0% Govt bonds 17.0% EM D 25.0% Hedge Funds 18.4% Cmdty 20.5% Govt bonds 7.1% EM E 13.4% Portfolio 6.0% DM Equities 12.1% DM Equities 5.5% EM E 33.1% Hedge Funds 6.0% Cmdty 3.8% EM D 11.0% Cmdty 16.2% Cash 6.9% Portfolio 16.5% HY bonds 18.4% IG bonds 5.1% EM D 12.9% HY bonds 5.3% IG bonds 9.6% HY bonds 2.9% EM D 30.8% Portfolio 6.0% Portfolio 2.5% DM Equities 9.8% REITS 14.8% Portfolio 1.3% DM Equities 16.4% DM Equities 15.9% HY bonds 3.9% DM Equities 11.4% REITS 1.3% Portfolio 8.7% Govt bonds 2.3% REITS 30.4% HY bonds 0.9% REITS 1.5% Portfolio 8.5% HY bonds 14.1% HY bonds 1.2% REITS 13.5% EM D 15.3% Cash 1.2% Portfolio 8.0% Cash 0.5% HY bonds 6.2% IG bonds 2.0% DM Equities 29.0% Cash 0.4% Hedge Funds 0.9% IG bonds 8.4% DM Equities 12.8% Cmdty -12.5% EM D 12.1% Portfolio 14.9% Portfolio -0.9% Hedge Funds 7.5% IG bonds -1.5% Govt bonds 5.4% Portfolio 1.3% Portfolio 25.8% REITS -0.2% IG bonds 0.6% Govt bonds 6.7% EM D 11.0% REITS -13.2% Cmdty 7.3% Hedge Funds 10.6% Hedge Funds -2.9% IG bonds 6.3% EM E -4.1% EM E 4.3% Cash 0.7% IG bonds 24.4% IG bonds -0.4% Govt bonds 0.3% EM E 6.0% Hedge Funds 9.4% DM Equities -17.4% IG bonds 6.1% Govt bonds 9.2% DM Equities -4.3% Cash 1.4% Govt bonds -6.1% Hedge Funds 4.1% Hedge Funds -0.8% Govt bonds 21.3% EM D -1.1% Cash 0.1% Hedge Funds 2.9% IG bonds 9.1% Hedge Funds -18.3% Cash 2.2% IG bonds 9.2% Cmdty -12.7% Govt bonds -2.6% EM D -10.0% Cash 0.6% EM E -9.7% Cash 0.7% Govt bonds -2.0% HY bonds 0.0% Cash 1.5% Portfolio 7.8% principles 83 EM E -35.2% Govt bonds -8.6% Cash 1.0% EM E -17.6% Cmdty -5.4% Cmdty -11.2% Cmdty -11.8% Cmdty -20.3% Hedge Funds -1.1% Source: Barclays, Bloomberg, FactSet, FTSE, MSCI, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Annualised return covers the period from 2008 to Vol. is the standard deviation of annual returns. Govt bonds: Bloomberg Barclays Global Aggregate Government Treasuries; HY bonds: Bloomberg Barclays Global High Yield; EMD: J.P. Morgan EMBI+; IG bonds: Bloomberg Barclays Global Aggregate Corporates; Cmdty: Bloomberg Commodity; REITS: FTSE NAREIT All REITS; DM Equities: MSCI World; EME: MSCI EM; Hedge funds: Credit Suisse/Tremont Hedge Fund; Cash: JP Morgan Cash United Kingdom (3M). Hypothetical portfolio (for illustrative purposes only and should not be taken as a recommendation): 30% DM equities; 10% EM equities; 15% IG bonds; 12.5% government bonds; 7.5% HY bonds; 5% EMD; 5% commodities; 5% cash; 5% REITS and 5% hedge funds. All returns except Hedge Funds are unhedged. All returns are total return, in GBP. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December Cmdty -7.1% EM D -1.1% Cmdty -3.2% Cash 1.8% Global macro investing J.P. MORGAN ASSET MANAGEMENT 29

30 GLOBAL MACRO INVESTING Focus on diversification and correlation Diversification is key to macro investing. Generating positive returns in varying market environments requires a diversified return stream. It is therefore critical to understand the relationship between asset classes in normalised market conditions and in periods of market stress. As well as seeking diversification within the portfolio, macro investing may seek to have a low correlation to equity and/or fixed income markets when they look less attractive, or when the traditional negative correlation between them comes under stress and is no longer a good source of diversification. Investment implications Global macro is an attractive investment approach, taking advantage of the longer-term trends and rapid changes in the economic environment that have been the principal drivers of asset price returns in recent years. A macro strategy is typically complementary to core equity and fixed income funds as it has the ability to be more lowly correlated to traditional markets when they look less attractive and increase exposure when there are greater opportunities. Global macro investing 30 PORTFOLIO DISCUSSIONS UK Q1 2018

31 Correlation of returns (GBP) GTM UK year correlations FTSE 100 S&P 500 MSCI Europe ex-uk MSCI Japan MSCI Asia ex-japan MSCI EM UK Gilts FTSE 100 S&P 500 MSCI Europe ex-uk MSCI Japan MSCI Asia ex-japan MSCI EM UK Gilts EM debt High yield bonds Global bonds Cmdty Hedge funds Real estate Other assets 75 EM debt High yield bonds Global bonds Commodities Hedge funds Real estate year correlations Source: Barclays, Bloomberg, Citigroup, FTSE, J.P. Morgan Economic Research, MSCI, NCREIF, Standard & Poor s, US Federal Reserve, J.P. Morgan Asset Management. UK Gilts: FTSE Actuaries Government Securities UK Gilts All Stocks; EM debt: JP Morgan EMBI Global; High yield bonds: JP Morgan Domestic High Yield; Global bonds: Bloomberg Barclays Global Aggregate; Commodities: Bloomberg Commodity; Hedge Funds: CS/Tremont Multi- Strategy; Real estate: blended index, which includes NCREIF Property Index data and Federal Reserve estimates of changes in capital value. All indices are total returns based on quarterly return data in GBP, real estate correlations are lagged by one quarter. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December Global macro investing J.P. MORGAN ASSET MANAGEMENT 31

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