Economic Outlook Spring 2014 Accelerating Economic Growth Ahead FROM ANTHONY CHAN, PHD, CHIEF ECONOMIST FOR CHASE Summary After a strong 2013 finish with U.S. and European stock markets posting double-digit returns, global equity markets experienced higher-thanusual volatility in the first few weeks of the New Year. Despite a rocky start, our longer-term views generally remain unchanged. Our outlook for 2014 calls for accelerated economic growth in the U.S. and other developed markets. Europe looks more attractive now that economic growth has turned positive, and we are encouraged by Japan s economic policies and its progress in eradicating deflation. In the shorter-term, we are less confident about some countries within the emerging markets sector, though strength from developed markets eventually may lead to positive spillover effects, especially in Asia. What s important to keep in mind is that global markets comprise many moving parts and are constantly evolving and changing. Recent turmoil around the globe reminds us that broad diversification and a long-term perspective are essential to investment success. U.S. EQUITIES EUROPE JAPAN GLOBAL EQUITY VIEWS EMERGING MARKETS OVERWEIGHT IMPROVING IMPROVING CAUTIOUS ANTHONY CHAN, PHD CHIEF ECONOMIST FOR CHASE Member of the J.P. Morgan Global Investment Committee. He travels extensively to meet with Chase clients and share the economic and investment insights of J.P. Morgan. Anthony is also a frequent guest on CNBC and other financial news outlets and is widely quoted in the financial press. ECONOMIC OUTLOOK, SPRING 2014 1
A Brighter Outlook for the U.S. Economy There are strong fundamental reasons to expect U.S. economic growth to accelerate in 2014. Among these, the unemployment rate showed its greatest year-over-year improvement in over 30 years! We expect the economy to continue to generate new jobs, lifting our There are strong 2014 forecast for real GDP growth to 2.7%-2.8%, up from 1.9% in 2013. While unusually severe weather in December and January will fundamental reasons affect job and manufacturing data releases through the first quarter, to expect U.S. economic U.S. fundamentals remain solid and should translate into firmer growth to accelerate growth as the year progresses. Our optimism is based on several in 2014. factors: We expect consumer spending to accelerate, as greater wealth from rising equity markets and home prices will give consumers the wherewithal to increase spending. Healthy corporate earnings along with an expected increase in capital spending in 2014 should serve as a positive catalyst for the economy. According to the nonpartisan Congressional Budget Office, the federal deficit is down sharply, and we expect government spending to be less of a drag on U.S. economic growth than over the last several years. Finally, a shift toward greater energy independence is an especially bright spot for the U.S. economy. New technology is facilitating access to untapped domestic energy sources that have the potential to contribute to firmer growth by reducing energy imports and to create significant efficiencies for U.S. manufacturers. Combined, these factors lead to overweight U.S. equities relative to normal. Jobs, Housing and Politics We continue to pay close attention to the U.S. job market, which has Meaningful job gains will improved but still remains somewhat muted, as articulated by new depend on the pace of Fed Chair Janet Yellen in her semiannual Congressional testimony in February 2014. Meaningful job gains will depend on the pace sustained growth. of sustained growth. An important beneficiary of an improving labor market, the housing market saw mortgage delinquency rates drop to their lowest level since April 2009. We expect housing to be a modest contributor to economic growth in 2014. Finally, as midterm elections approach, we see some risk of less cooperation between the political parties than we saw at the end of 2013. While that may complicate matters, we believe there are sufficient positive economic catalysts to offset any negative headwinds. An improving U.S. economy supports our position to overweight equities, while fixed income portfolios are defensively positioned for gradually rising U.S. interest rates. ECONOMIC OUTLOOK, SPRING 2014 2
U.S. Fixed Income Markets Federal Reserve Chairman Janet Yellen the first female leader in the Fed s 100-year history assumed leadership in February 2014. A former vice chair to outgoing chairman Ben Bernanke, she also served as the president of the San Francisco Federal Reserve and chairman of the Council of Economic Advisors. Her deep experience and labor markets expertise ensure both continuity and extraordinary preparedness for her new role. As the Federal Reserve gradually phases out its bond-buying program (also known as Quantitative Easing), a more defensive fixed income posture remains a top priority. While short-term interest rates (maturities of less than one year) are likely to remain low for quite some time, we expect long-term interest rates to drift higher over the next few years. Consequently, we favor a focus on shorter maturities in our bond portfolios; an overweight to high-yield bonds; and a preference for active fixed income fund managers who opportunistically adjust their portfolios as market conditions and outlooks change over time. Steady Progress in Europe The broad-based European economy emerged from its double-dip recession posting positive economic growth in the latter part of 2013. And while our expectations for growth in 2014 are modest, we have many reasons to be optimistic. Industrial production is showing early signs of recovery, consumer sentiment is improving and inflation continues to hover significantly below its central bank target levels. The European Central Bank has many tools at its disposal to continue to support economic growth and provide greater liquidity to the financial markets. Not only is economic growth accelerating in some European We also see positive countries, like Great Britain and Germany, but we also see positive momentum in the European... momentum in the European Monetary Union peripheral countries, such as Greece, Ireland and Portugal. Encouraging developments in peripheral countries. Italy and Spain now focus on conversation about stimulating the economy, a subject that wasn t even discussed just a few years ago. Many of these countries have agreed to support structural reform rather than rely on austerity measures that had stalled growth. Combined, all these developments should contribute to an economic growth rate of 1.0% or better in 2014 and support our neutral to overweight exposure to Europe. Cooperative government policies and improving fundamentals signal positive growth for Europe and Japan, supporting our neutral to overweight exposure to both regions. ECONOMIC OUTLOOK, SPRING 2014 3
Continued Moderate Growth in Japan Following two decades of stagflation, Japan is another positive story for investors. Through its aggressive quantitative easing program significantly larger relative to that of the United States the Bank of Japan is buying securities to add liquidity into the market to jump-start the economy and get it back on more solid footing. Those efforts resulted in outsized rates of return for equity investors in 2013 and we expect moderate growth to continue through 2014. Mixed View on Emerging Markets While we believe that emerging market equity returns could outperform developed market equity returns over the next decade (though emerging markets are admittedly more volatile), our shorter-term view of these markets is less upbeat. Some of the least stable emerging market economies are coping with tighter global credit conditions, caused in part by the lack of badly needed structural reforms. Many also point to the Federal Reserve s recent decision to taper its monthly bond purchase program as an added source of their woes. Our approach to emerging market investing is very selective Our approach to emerging as risks and opportunities are not homogenous from country to market investing is very country. Several are dealing with political unrest, like Turkey and Thailand, while others struggle with inflation, especially Brazil selective as risks and and Argentina. China, meanwhile, is showing signs of slower opportunities are not growth as policymakers attempt to reel in speculative credit creation. homogenous from Many emerging markets including Brazil, India, Indonesia, country to country. Romania and Turkey will hold important elections in 2014, a variable that also contributes to uncertainty. India, for example, is undergoing a transition and may be able to implement reforms and structural changes that would benefit equity markets. Many of these country-specific issues support our neutral position in emerging markets relative to our long-term strategic allocations. We are focused on emerging markets in Asia, especially China, Taiwan and South Korea, but remain cautious on Latin America. Consumer-based growth policies position China and its neighbors for opportunity; our neutral emerging markets outlook favors Asian economies. TAKE THE NEXT STEP: As the markets change, reviewing your portfolio with our advisors can help you stay on track. Work with our advisors to make the most of our global perspective and investment expertise.
Not all investment ideas referenced are suitable for all investors. Investing involves market risk, including the possible loss of principal. There is no guarantee that investment objectives will be reached. Disclosure International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Also, some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in emerging markets can be more volatile. The opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described herein may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. In general, the bond market is volatile: bond prices rise when interest rates fall and vice versa. Longer-term securities are more prone to price fluctuation than are shorter-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss. Dependable income is subject to the credit risk of the issuer of the bond. If an issuer defaults, no future income payments will be made. Chase Private Client is the marketing name for a product and service offering. Bank products and services, including fiduciary and custody products and services, are offered by JPMorgan Chase Bank, N.A. and its affiliates. Assets held under these products and services are segregated by law and are not subject to FDIC or SIPC coverage. Securities and investment advisory services are offered through J.P. Morgan Securities LLC (JPMS). JPMS, a member of FINRA, NYSE and SIPC, is an affiliate of JPMorgan Chase Bank, N.A. Investment products: Not FDIC insured No bank guarantee May lose value JPMorgan Chase & Co., March 2014 LC-TLACCPC1314