JP Morgan Asset Management
Soft Patch not a Perfect Storm World Market Outlook August 2011
FOR PROFESSIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION
Contents
Portfolio process
Key portfolio themes
Main macro themes
Conclusions
1
Summary of process
Asset Allocation Research
Setting of Risk and Return Objectives Investment Constraints
Strategic Intermediate Cycle neutral, Secular, structural trends
Cyclical factors
Tactical Momentum, technical, event driven factors
Portfolio Construction and Risk Analysis and Monitoring
Portfolio Investment Solution
Manager Research
… delivers attractive risk adjusted returns through the active management of asset allocations FOR ILLUSTRATIVE PURPOSES ONLY
2
Investment Regime Map Asset class performance (high to low) by stage of the economic cycle Inflationary
Growth Falls
Latest
Stagflationary
Real Assets
Real Assets
Credit
Credit
Equity
Fixed Income
Fixed Income
Equity
Inflation Rises
Inflationary Growth Inflation
Stagflationary Growth Inflation
Reflationary Growth Inflation
Deflationary Growth Inflation
Reflationary
Inflation Falls Deflationary
Equity
Equity
Credit
Credit / Fixed Income
Real Assets
Real Assets
Fixed Income Growth Rises
Source: J. P. Morgan Asset Management Global Multi-Asset Group The above information is provided for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. They are based on current market conditions that constitute our judgment and are subject to change. Results shown are not meant to be representative of actual investment results. Past performance is not necessarily indicative of the likely future performance of an investment. PAST PERFORMANCE IS NOT A GUIDE TO THE FUTURE
3
Tactical allocation : Liquid relative value positions (3-6mths horizon)
Key Investment Decisions
Major Stock / Stock Peripheral Stock / Stock Style
Process Components
Quantitative models Market inefficiencies in global macro
markets
Asset Allocations
Relative value stock decisions amongst 12 countries and regions Australia/HK, Canada/U.S., EME/Developed Large/Small, Growth/Value
Relative value and market directional
strategies Major Bond / Bond Bond Sector
Qualitative insights Systematic and irregular market
U.S., Europe, U.K., Japan, Australia, Canada EMD/U.S. Bond and HY/Investment
opportunities Insights from economists and the
Stock / Bond Duration
investor network
FOR ILLUSTRATIVE PURPOSES ONLY
4
US, Europe, UK, Japan, Canada, Australia US, Europe, UK and Japan
Key portfolio decisions
LEVEL 1 – DIRECTIONAL DECISIONS
Overweight equities vs. bonds and cash
Neutral duration
LEVEL 2 – REGIONAL DECISIONS
Overweight North America vs. UK and Australian equities
Overweight UK vs. European and Japanese bonds
LEVEL 3 – INTRA-REGIONAL DECISIONS
Overweight core Europe equities vs. Periphery
Continue to avoid peripheral European bonds
5
Key macro themes
Structural headwinds vs cyclical tailwinds
Mid-cycle slowdown not a double dip
Policy stimulus to underwrite the cycle
Duration – a portfolio construction issue
Equities are attractively valued
6
Evidence supporting the alternative (negative) view Some market forecasters are warning of a “perfect storm” in the world economy, with a concerted downturn in place by 2013 US house prices, % y/y
Eurozone 10-year bond spreads (vs Bunds), bps
20%
1600
10%
1200
0%
800
-10%
400
Spain
-20% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
0 2008
Portugal
2009
Ireland
2010
Greece
2011
Japan manufacturing production index
China real credit growth, % y/y
130
35% 30% 25% 20% 15% 10% 5% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
120 110 100 90 80 70 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Sources: Thomson Datastream, MacData, J.P. Morgan Asset Management. Data up to July/August 2011.
7
Debt resolution – The different outcomes*
Scenario
Govt bonds
Equities
Real assets
(1) Grow it away – growth strategy
–
++
+
(2) Pay it off – fiscal retrenchment
++
–
––
(3) Inflation tax – monetisation
––
N
++
+/–
+
+
+/––
––
++
(4) Default-lite – debt restructuring (5) Default-heavy – full-scale repudiation
Source: J.P. Morgan Asset Management Global Multi Asset Group. Assessments as at 12 August 2011. * Note: Table shows judgements made regarding the probable relative performance of the main asset classes for different potential outcomes over the next 5-10 years. Key: “+” = Outperformance, “—” = Underperformance, “N” = Neutral performance. Expected performance ranges from “++” to “– – ”
8
The required fiscal adjustment – an IMF simulation Stabilising debt ratios by 2030 requires a hefty fiscal tightening over a long period, averaging 8% of GDP in the advanced economies. Note this adjustment is even greater if age related spending is taken into account Required fiscal adjustment between 2010 and 2020 to achieve debt target * % of GDP 18 15
SW: Sweden Additional adjustment required for age-related spending, 2010/30
GE:
Germany
Required fiscal adjustment between 2010 and 2030
EM:
Emerging G20**
IT:
Italy
AU:
Australia
CA:
Canada
FR:
France
BE:
Belgium
12 9 6 3 0 SW
GE
EM
IT
AU
CA
FR
BE
SP
PO
UK
GR
JP
IR
US
SP:
Spain
PO:
Portugal
UK:
United Kingdom
GR:
Greece
JP:
Japan
IR:
Ireland
US:
United States
Source: IMF, Fiscal Monitor, April 2011 * Notes: The primary budget balance is the overall budget balance minus interest revenue plus interest expenditure. The cyclically-adjusted primary balance (CAPB) is the primary balance adjusted for the effects of the economic cycle, usually expressed as a per cent of potential GDP. The CAPB is assumed under these simulations to improve gradually from 2010 to 2020, thereafter it stays constant until 2030, which is seen as sufficient in most cases to bring a stable/falling debt path. The post-adjustment CAPB shows the CAPB needed to stabilise debt at the end-2012 level by 2030 (if debt/GDP is under 60%) or to bring the ratio to 60% by 2030. ** Emerging G20 countries comprise: Argentina, Brazil, China, India, Indonesia, Korea, Mexico, Russia, Saudi Arabia, South Africa and Turkey
9
The global savings glut – the barrier to successful rebalancing Fiscal austerity in the OECD requires offsetting growth elsewhere (OECD corporate capex / Asian consumption) to avoid a deflationary slump. This is not happening yet The so-called Eurasian savings surplus*
Consumption share of GDP, %
USD bn 4000
75%
60%
OECD private-sector balance** Germany
Japan
US
China (RHS)
North East Asian current account*** 70%
55%
2000
65%
50%
1000
60%
45%
0
55%
40%
3000
50%
-1000
35% 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Sources: MacData, Lombard Street Research. Notes: * Based on an approach adopted by Charles Dumas, “Globalisation Fractures, How major nations’ interests are now in conflict (2010); ** Household and business sectors; ***Comprising China, Japan, Korea, Taiwan and Hong Kong.
10
Source: MacData, data up to 2010 except for China which is estimated to 2009. RHS: Right hand scale
Real trade-weighted dollar The dollar is undervalued and close to its Bretton Woods lows. But it is not unprecedentedly cheap. Real trade-weighted U.S. dollar index, 2000=100 120
110
100
90
80
70 70
72
74
76
78
80
82
84
86
88
90
Sources: J.P. Morgan, Thomson DataStream. Data up to July 2011
11
92
94
96
98
00
02
04
06
08
10
Global growth indicator – consistent with a mid-cycle slowdown Our proprietary growth indicator has stabilised after being affected by the supply disruptions from Japan’s earthquake. Global earnings estimates are now catching up Percentile
Ratio of upgrades / downgrades
100%
2.0
80%
1.6
60%
1.2
40%
0.8
20%
0.4
0%
Global growth indicator (LHS)* Global earnings momentum (RHS)*
0.0 92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Sources: Thomson Datastream, J.P. Morgan Asset Management Global Multi-Asset Group. Data up to July 2011. *Notes: (1) The global growth indicator is a composite measure of 10 forward indicators. (2) Earnings momentum is defined as the ratio of analyst upgrades to downgrades over three months.
12
US economy – reaching stall speed? Some analysts argue that the US economy will stall and head back into recession when growth falls below 2%. We are there, but recession is not our central case view Year-on-year change in real GDP, % 10% 8% US Recession periods as defined by the NBER*
6% 4% 2%
Real GDP growth, %y/y
0% -2% -4% -6% 1967
1972
1977
1982
1987
1992
1997
Sources: BEA, MacData, J.P..Morgan Asset Management. Data up to Q2 2011 Notes: * US recession periods as defined by the National Bureau of Economic Research.,
13
2002
2007
Monetary conditions – mainly stimulative Monetary conditions remain stimulative in the US and eurozone, while Japan has shifted back to neutral. The exception is China where policy has been tight but may be reversing US
Eurozone
100
100
Easy
80
80
60
60
40
40
Easy
20
20 Tight
99
00
01
02
03
04
05
06
07
08
09
10
Tight
0
0
99
11
Japan
00
01
02
03
04
05
06
07
08
09
10
11
China 100
100 Easy
80
Easy
80
60
60
40
40
20
20
Tight
0 99
00
01
02
03
04
05
06
07
08
09
10
Tight
0
11
99
Sources: Thomson Datastream, J.P. Morgan Asset Management. Data up to June or July 2011
14
00
01
02
03
04
05
06
07
08
09
10
11
Deflation alert indicator – signalling the need for QE3? Our forward-looking inflation indicator has heading back into deflation territory and any further deterioration could force the Fed’s hand Standard deviations
3
INFLATION CONCERN 2
1
0
-1
-2
DEFLATION CONCERN -3 1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Sources: Thomson Datastream, MacData, J.P. Morgan Asset Management Global Multi Asset Group. Data up to 12 August 2011 * Note: The Deflation Alert Measure comprises three variables: inflation expectations implied by US five year / five year forward break-even rates; the correlation of global stock / bond returns; and a breadth measure of commodity prices
15
Investor risk appetite – the most extreme risk aversion Risk appetite has evaporated, with the Credit Suisse* measure at its most risk averse – ever. This could be a contrarian signal to stick with risk assets Investment risk appetite indicator* 10 8 EUPHORIA
6 4 2 0 -2 -4 PANIC
-6 -8 81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
Sources: Credit Suisse. Data up to 11 August 2011 * Note: The Credit Suisse risk appetite indicator compares risk-adjusted returns across 64 equity and fixed income markets. The index aggregates six-month excess returns over cash compared with 12-month volatility
16
Correlations of stock/bond returns – the case for duration Correlations of equity and bond returns have been negative since the crisis began Correlation of US equity and bond returns, rolling 25-weeks 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 1997
1998
1999
2000
2001
2002
2003
2004
Sources: Thomson Datastream, J.P.Morgan Asset Management. Data up to 12 August 2011
17
2005
2006
2007
2008
2009
2010
2011
Margins – may prove more resilient than expected Consensus thinking believes that margins will compress back towards their long-term mean. This process may take longer in the current cycle due to the high levels of spare capacity and labour’s limited pricing power Per cent of total capacity, %
% year on year 8%
Per cent of labour force, %*
90
2
85
4
80
6
75
8
4%
0%
-4% 70 Change in GDP deflator less change in unit labour costs
Capacity utilisation (LHS) Unemployment rate (RHS)*
65
-8%
12 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09
55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 Sources : MacData, J.P.Morgan Asset Management. Data up to Q2 2011
Sources: MacData, J.P.Morgan Asset Management. Data up to July 2011. *Note: scale inverted
18
10
Global bond / equity valuation – downside protection Earnings-bond yield gap analysis suggests that equities are attractive vs. bonds and reached extremes in early August. Equity Yield - Bond Yield Gap*, Standard Deviations 3
Equity/bond yield gap sensitivity table
Index 1800
Combinations of bond yields and potential index changes (where 2.73% was the bond yield as at end-July 2011 and the EY/BY reading was -0.69 SDs)
Equities Overvalued 2
1600
1
1400
0
1200
-1
1000
-2
800
-3
Equities Undervalued
Latest estimate
-4
Equity Market Moves
Global Bond Yield
600 400
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 EY/BY Gap *, Standardised (LHS)
2.00%
2.50%
2.73%
3.00%
3.50%
+20%
0.04
0.56
0.80
1.08
1.60
+10%
-0.64
-0.12
0.12
0.40
0.92
0%
-1.45
-0.93
-0.69
-0.41
0.11
-10%
-2.44
-1.92
-1.68
-1.40
-0.88
-20%
-3.68
-3.16
-2.92
-2.64
-2.12
MSCI World (RHS)
Sources: Thomson Datastream, J.P. Morgan Asset Management Global Multi-Asset Group. Monthly data up to end July 2011, with estimate for 11 August *Note: The global earnings-bond yield gap measures the difference between the earnings yield and the nominal bond yield. The series has been standardised over three years. Data up to July 2011. This information reflects JPMAM’s opinion and is subject to change. LHS: left hand scale
19
Stock / bond – The portfolio construction case Recent trend declines in volatility and normalising correlations of stock and bond returns made it easier to take asset-class rather than relative-value positions. This has partially reversed with the recent market turbulence Rolling 6-month daily TE (annualised) of a 1% Stock/Bond Bet 0.7% Rolling S/B risk
Long-term average
0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% 1997
1998
1999
2000
2001
2002
2003
2004
2005
Sources: Bloomberg, J.P. Morgan Asset Management Global Multi Asset Group. Data up to 12 August 2011
20
2006
2007
2008
2009
2010
2011
Cyclically-adjusted valuations – moderate value support US cyclically-adjusted equity valuations are in line with their 10-year average, but are significantly above their long-term average of 16x. Other markets look comfortable on this basis with Europe and Japan the most attractive US Shiller PE ratio (based on 10 years trailing real earnings) and 10 year moving average 50 US Shiller PER
10 Year Average
Cyclically-adjusted PE ratios * (based on 10 years trailing earnings) US
24.0
Emg.Mkts
26.9
Japan
38.7
HK
19.4
40
30
20
UK
18.2
10
20.2
Europe 0 Jan-1881
Jan-01
Jan-21
Jan-41
Jan-61
Jan-81
Jan-01
10
15
20
25
Sources: Prof Robert Shiller, Datastream, J.P. Morgan Asset Management. Data up to July 2011 * Note: 10-year averages listed alongside
Source: Prof Robert Shiller. Data up to July 2011
21
30
Asset allocation – Overweight stocks vs. bonds
MACRO THEMES
INVESTMENT DECISIONS
Structural headwinds vs cyclical tailwinds
Overweight equities vs. bonds and cash
Mid-cycle slowdown not a double dip
Neutral duration
Policy stimulus to underwrite the cycle
Overweight North America vs. UK and Australian equities
Duration – a portfolio construction issue
Overweight UK vs. European bonds
Overweight core Europe equities vs. Periphery
Continue to avoid peripheral European bonds
Equities are attractively valued
22
J.P. Morgan Asset Management Contact: David Shairp, Managing Director – Global Multi-Asset Group
+44 20 7742 5709 [email protected]
About GMAG: The Global Multi-Asset Group is a 54-strong team of portfolio managers, analysts and strategists based mainly in London and New York, which is dedicated to developing and managing multi-asset and multi-country strategies, using J.P. Morgan Asset Management’s global expertise across core and alternative asset classes. GMAG is responsible for managing assets totalling over US$41bn, including traditional balanced portfolios, funds of funds, convertible bonds and total return funds and specialised TAA mandates. Responsibility for overall asset allocation lies with the Global Strategy Team, a group of senior investors with an average investment experience of 24 years. Neill Nuttall is Chief Investment Officer of the Global Multi Asset Group. Any forecasts, figures, opinions or investment techniques and strategies set out, unless otherwise stated, are J.P. Morgan Asset Management’s own at the date of this document. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. They may be subject to change without reference or notification to you. The views contained herein are not to be taken as an advice or recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate and investors may not get back the full amount invested. Both past performance and yield are not necessarily a guide to future performance. Exchange rate variations may cause the value of investments to increase or decrease. Investments in smaller companies may involve a higher degree of risk as they are usually more sensitive to market movements. Investments in emerging markets may be more volatile and therefore the risk to your capital could be greater. Further, the economic and political situations in emerging markets may be more volatile than in established economies and these may adversely influence the value of investments made. You should also note that if you contact J.P. Morgan Asset Management by telephone those lines could be recorded and may be monitored for security and training purposes. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co and its affiliates worldwide. The Fund may not be authorised or its offering may be restricted in your jurisdiction. Prior to any application investors should inform themselves as to the requirements within their own country for transactions in the Fund, any applicable exchange control regulation and the tax consequences of any transaction in the Fund. Shares may not be offered to or purchased directly or indirectly by US persons. All transactions should be based on the latest available simplified and full prospectuses and any local offering document. These documents together with the annual report, semi-annual report and the articles of incorporation for the Luxembourg domiciled Funds range are available free of charge upon request from JPMorgan Asset Management (Europe) S.à.r.l., European Bank & Business Centre, 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, your financial adviser or your J.P. Morgan Asset Management regional contact. Issued by JPMorgan Asset Management (Europe) Société à responsabilité limitée, European Bank & Business Centre, 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S. Luxembourg B27900, corporate capital EUR 10.000.000. Material issued in the United Kingdom are approved for use by JPMorgan Asset Management (UK) Limited, 125 London Wall, London EC2Y 5AJ, England. JPMorgan Asset Management (UK) Limited is authorised and regulated by the Financial Services Authority. Registered in England No. 01161446. Registered address: 125 London Wall, London EC2Y 5AJ. © 2011 JPMorgan Asset Management.
23
FOR PROFESSIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION
Contents
Portfolio process
Key portfolio themes
Main macro themes
Conclusions
1
Summary of process
Asset Allocation Research
Setting of Risk and Return Objectives Investment Constraints
Strategic Intermediate Cycle neutral, Secular, structural trends
Cyclical factors
Tactical Momentum, technical, event driven factors
Portfolio Construction and Risk Analysis and Monitoring
Portfolio Investment Solution
Manager Research
… delivers attractive risk adjusted returns through the active management of asset allocations FOR ILLUSTRATIVE PURPOSES ONLY
2
Investment Regime Map Asset class performance (high to low) by stage of the economic cycle Inflationary
Growth Falls
Latest
Stagflationary
Real Assets
Real Assets
Credit
Credit
Equity
Fixed Income
Fixed Income
Equity
Inflation Rises
Inflationary Growth Inflation
Stagflationary Growth Inflation
Reflationary Growth Inflation
Deflationary Growth Inflation
Reflationary
Inflation Falls Deflationary
Equity
Equity
Credit
Credit / Fixed Income
Real Assets
Real Assets
Fixed Income Growth Rises
Source: J. P. Morgan Asset Management Global Multi-Asset Group The above information is provided for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. They are based on current market conditions that constitute our judgment and are subject to change. Results shown are not meant to be representative of actual investment results. Past performance is not necessarily indicative of the likely future performance of an investment. PAST PERFORMANCE IS NOT A GUIDE TO THE FUTURE
3
Tactical allocation : Liquid relative value positions (3-6mths horizon)
Key Investment Decisions
Major Stock / Stock Peripheral Stock / Stock Style
Process Components
Quantitative models Market inefficiencies in global macro
markets
Asset Allocations
Relative value stock decisions amongst 12 countries and regions Australia/HK, Canada/U.S., EME/Developed Large/Small, Growth/Value
Relative value and market directional
strategies Major Bond / Bond Bond Sector
Qualitative insights Systematic and irregular market
U.S., Europe, U.K., Japan, Australia, Canada EMD/U.S. Bond and HY/Investment
opportunities Insights from economists and the
Stock / Bond Duration
investor network
FOR ILLUSTRATIVE PURPOSES ONLY
4
US, Europe, UK, Japan, Canada, Australia US, Europe, UK and Japan
Key portfolio decisions
LEVEL 1 – DIRECTIONAL DECISIONS
Overweight equities vs. bonds and cash
Neutral duration
LEVEL 2 – REGIONAL DECISIONS
Overweight North America vs. UK and Australian equities
Overweight UK vs. European and Japanese bonds
LEVEL 3 – INTRA-REGIONAL DECISIONS
Overweight core Europe equities vs. Periphery
Continue to avoid peripheral European bonds
5
Key macro themes
Structural headwinds vs cyclical tailwinds
Mid-cycle slowdown not a double dip
Policy stimulus to underwrite the cycle
Duration – a portfolio construction issue
Equities are attractively valued
6
Evidence supporting the alternative (negative) view Some market forecasters are warning of a “perfect storm” in the world economy, with a concerted downturn in place by 2013 US house prices, % y/y
Eurozone 10-year bond spreads (vs Bunds), bps
20%
1600
10%
1200
0%
800
-10%
400
Spain
-20% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
0 2008
Portugal
2009
Ireland
2010
Greece
2011
Japan manufacturing production index
China real credit growth, % y/y
130
35% 30% 25% 20% 15% 10% 5% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
120 110 100 90 80 70 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Sources: Thomson Datastream, MacData, J.P. Morgan Asset Management. Data up to July/August 2011.
7
Debt resolution – The different outcomes*
Scenario
Govt bonds
Equities
Real assets
(1) Grow it away – growth strategy
–
++
+
(2) Pay it off – fiscal retrenchment
++
–
––
(3) Inflation tax – monetisation
––
N
++
+/–
+
+
+/––
––
++
(4) Default-lite – debt restructuring (5) Default-heavy – full-scale repudiation
Source: J.P. Morgan Asset Management Global Multi Asset Group. Assessments as at 12 August 2011. * Note: Table shows judgements made regarding the probable relative performance of the main asset classes for different potential outcomes over the next 5-10 years. Key: “+” = Outperformance, “—” = Underperformance, “N” = Neutral performance. Expected performance ranges from “++” to “– – ”
8
The required fiscal adjustment – an IMF simulation Stabilising debt ratios by 2030 requires a hefty fiscal tightening over a long period, averaging 8% of GDP in the advanced economies. Note this adjustment is even greater if age related spending is taken into account Required fiscal adjustment between 2010 and 2020 to achieve debt target * % of GDP 18 15
SW: Sweden Additional adjustment required for age-related spending, 2010/30
GE:
Germany
Required fiscal adjustment between 2010 and 2030
EM:
Emerging G20**
IT:
Italy
AU:
Australia
CA:
Canada
FR:
France
BE:
Belgium
12 9 6 3 0 SW
GE
EM
IT
AU
CA
FR
BE
SP
PO
UK
GR
JP
IR
US
SP:
Spain
PO:
Portugal
UK:
United Kingdom
GR:
Greece
JP:
Japan
IR:
Ireland
US:
United States
Source: IMF, Fiscal Monitor, April 2011 * Notes: The primary budget balance is the overall budget balance minus interest revenue plus interest expenditure. The cyclically-adjusted primary balance (CAPB) is the primary balance adjusted for the effects of the economic cycle, usually expressed as a per cent of potential GDP. The CAPB is assumed under these simulations to improve gradually from 2010 to 2020, thereafter it stays constant until 2030, which is seen as sufficient in most cases to bring a stable/falling debt path. The post-adjustment CAPB shows the CAPB needed to stabilise debt at the end-2012 level by 2030 (if debt/GDP is under 60%) or to bring the ratio to 60% by 2030. ** Emerging G20 countries comprise: Argentina, Brazil, China, India, Indonesia, Korea, Mexico, Russia, Saudi Arabia, South Africa and Turkey
9
The global savings glut – the barrier to successful rebalancing Fiscal austerity in the OECD requires offsetting growth elsewhere (OECD corporate capex / Asian consumption) to avoid a deflationary slump. This is not happening yet The so-called Eurasian savings surplus*
Consumption share of GDP, %
USD bn 4000
75%
60%
OECD private-sector balance** Germany
Japan
US
China (RHS)
North East Asian current account*** 70%
55%
2000
65%
50%
1000
60%
45%
0
55%
40%
3000
50%
-1000
35% 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Sources: MacData, Lombard Street Research. Notes: * Based on an approach adopted by Charles Dumas, “Globalisation Fractures, How major nations’ interests are now in conflict (2010); ** Household and business sectors; ***Comprising China, Japan, Korea, Taiwan and Hong Kong.
10
Source: MacData, data up to 2010 except for China which is estimated to 2009. RHS: Right hand scale
Real trade-weighted dollar The dollar is undervalued and close to its Bretton Woods lows. But it is not unprecedentedly cheap. Real trade-weighted U.S. dollar index, 2000=100 120
110
100
90
80
70 70
72
74
76
78
80
82
84
86
88
90
Sources: J.P. Morgan, Thomson DataStream. Data up to July 2011
11
92
94
96
98
00
02
04
06
08
10
Global growth indicator – consistent with a mid-cycle slowdown Our proprietary growth indicator has stabilised after being affected by the supply disruptions from Japan’s earthquake. Global earnings estimates are now catching up Percentile
Ratio of upgrades / downgrades
100%
2.0
80%
1.6
60%
1.2
40%
0.8
20%
0.4
0%
Global growth indicator (LHS)* Global earnings momentum (RHS)*
0.0 92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Sources: Thomson Datastream, J.P. Morgan Asset Management Global Multi-Asset Group. Data up to July 2011. *Notes: (1) The global growth indicator is a composite measure of 10 forward indicators. (2) Earnings momentum is defined as the ratio of analyst upgrades to downgrades over three months.
12
US economy – reaching stall speed? Some analysts argue that the US economy will stall and head back into recession when growth falls below 2%. We are there, but recession is not our central case view Year-on-year change in real GDP, % 10% 8% US Recession periods as defined by the NBER*
6% 4% 2%
Real GDP growth, %y/y
0% -2% -4% -6% 1967
1972
1977
1982
1987
1992
1997
Sources: BEA, MacData, J.P..Morgan Asset Management. Data up to Q2 2011 Notes: * US recession periods as defined by the National Bureau of Economic Research.,
13
2002
2007
Monetary conditions – mainly stimulative Monetary conditions remain stimulative in the US and eurozone, while Japan has shifted back to neutral. The exception is China where policy has been tight but may be reversing US
Eurozone
100
100
Easy
80
80
60
60
40
40
Easy
20
20 Tight
99
00
01
02
03
04
05
06
07
08
09
10
Tight
0
0
99
11
Japan
00
01
02
03
04
05
06
07
08
09
10
11
China 100
100 Easy
80
Easy
80
60
60
40
40
20
20
Tight
0 99
00
01
02
03
04
05
06
07
08
09
10
Tight
0
11
99
Sources: Thomson Datastream, J.P. Morgan Asset Management. Data up to June or July 2011
14
00
01
02
03
04
05
06
07
08
09
10
11
Deflation alert indicator – signalling the need for QE3? Our forward-looking inflation indicator has heading back into deflation territory and any further deterioration could force the Fed’s hand Standard deviations
3
INFLATION CONCERN 2
1
0
-1
-2
DEFLATION CONCERN -3 1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Sources: Thomson Datastream, MacData, J.P. Morgan Asset Management Global Multi Asset Group. Data up to 12 August 2011 * Note: The Deflation Alert Measure comprises three variables: inflation expectations implied by US five year / five year forward break-even rates; the correlation of global stock / bond returns; and a breadth measure of commodity prices
15
Investor risk appetite – the most extreme risk aversion Risk appetite has evaporated, with the Credit Suisse* measure at its most risk averse – ever. This could be a contrarian signal to stick with risk assets Investment risk appetite indicator* 10 8 EUPHORIA
6 4 2 0 -2 -4 PANIC
-6 -8 81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
Sources: Credit Suisse. Data up to 11 August 2011 * Note: The Credit Suisse risk appetite indicator compares risk-adjusted returns across 64 equity and fixed income markets. The index aggregates six-month excess returns over cash compared with 12-month volatility
16
Correlations of stock/bond returns – the case for duration Correlations of equity and bond returns have been negative since the crisis began Correlation of US equity and bond returns, rolling 25-weeks 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 1997
1998
1999
2000
2001
2002
2003
2004
Sources: Thomson Datastream, J.P.Morgan Asset Management. Data up to 12 August 2011
17
2005
2006
2007
2008
2009
2010
2011
Margins – may prove more resilient than expected Consensus thinking believes that margins will compress back towards their long-term mean. This process may take longer in the current cycle due to the high levels of spare capacity and labour’s limited pricing power Per cent of total capacity, %
% year on year 8%
Per cent of labour force, %*
90
2
85
4
80
6
75
8
4%
0%
-4% 70 Change in GDP deflator less change in unit labour costs
Capacity utilisation (LHS) Unemployment rate (RHS)*
65
-8%
12 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09
55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 Sources : MacData, J.P.Morgan Asset Management. Data up to Q2 2011
Sources: MacData, J.P.Morgan Asset Management. Data up to July 2011. *Note: scale inverted
18
10
Global bond / equity valuation – downside protection Earnings-bond yield gap analysis suggests that equities are attractive vs. bonds and reached extremes in early August. Equity Yield - Bond Yield Gap*, Standard Deviations 3
Equity/bond yield gap sensitivity table
Index 1800
Combinations of bond yields and potential index changes (where 2.73% was the bond yield as at end-July 2011 and the EY/BY reading was -0.69 SDs)
Equities Overvalued 2
1600
1
1400
0
1200
-1
1000
-2
800
-3
Equities Undervalued
Latest estimate
-4
Equity Market Moves
Global Bond Yield
600 400
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 EY/BY Gap *, Standardised (LHS)
2.00%
2.50%
2.73%
3.00%
3.50%
+20%
0.04
0.56
0.80
1.08
1.60
+10%
-0.64
-0.12
0.12
0.40
0.92
0%
-1.45
-0.93
-0.69
-0.41
0.11
-10%
-2.44
-1.92
-1.68
-1.40
-0.88
-20%
-3.68
-3.16
-2.92
-2.64
-2.12
MSCI World (RHS)
Sources: Thomson Datastream, J.P. Morgan Asset Management Global Multi-Asset Group. Monthly data up to end July 2011, with estimate for 11 August *Note: The global earnings-bond yield gap measures the difference between the earnings yield and the nominal bond yield. The series has been standardised over three years. Data up to July 2011. This information reflects JPMAM’s opinion and is subject to change. LHS: left hand scale
19
Stock / bond – The portfolio construction case Recent trend declines in volatility and normalising correlations of stock and bond returns made it easier to take asset-class rather than relative-value positions. This has partially reversed with the recent market turbulence Rolling 6-month daily TE (annualised) of a 1% Stock/Bond Bet 0.7% Rolling S/B risk
Long-term average
0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% 1997
1998
1999
2000
2001
2002
2003
2004
2005
Sources: Bloomberg, J.P. Morgan Asset Management Global Multi Asset Group. Data up to 12 August 2011
20
2006
2007
2008
2009
2010
2011
Cyclically-adjusted valuations – moderate value support US cyclically-adjusted equity valuations are in line with their 10-year average, but are significantly above their long-term average of 16x. Other markets look comfortable on this basis with Europe and Japan the most attractive US Shiller PE ratio (based on 10 years trailing real earnings) and 10 year moving average 50 US Shiller PER
10 Year Average
Cyclically-adjusted PE ratios * (based on 10 years trailing earnings) US
24.0
Emg.Mkts
26.9
Japan
38.7
HK
19.4
40
30
20
UK
18.2
10
20.2
Europe 0 Jan-1881
Jan-01
Jan-21
Jan-41
Jan-61
Jan-81
Jan-01
10
15
20
25
Sources: Prof Robert Shiller, Datastream, J.P. Morgan Asset Management. Data up to July 2011 * Note: 10-year averages listed alongside
Source: Prof Robert Shiller. Data up to July 2011
21
30
Asset allocation – Overweight stocks vs. bonds
MACRO THEMES
INVESTMENT DECISIONS
Structural headwinds vs cyclical tailwinds
Overweight equities vs. bonds and cash
Mid-cycle slowdown not a double dip
Neutral duration
Policy stimulus to underwrite the cycle
Overweight North America vs. UK and Australian equities
Duration – a portfolio construction issue
Overweight UK vs. European bonds
Overweight core Europe equities vs. Periphery
Continue to avoid peripheral European bonds
Equities are attractively valued
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J.P. Morgan Asset Management Contact: David Shairp, Managing Director – Global Multi-Asset Group
+44 20 7742 5709 [email protected]
About GMAG: The Global Multi-Asset Group is a 54-strong team of portfolio managers, analysts and strategists based mainly in London and New York, which is dedicated to developing and managing multi-asset and multi-country strategies, using J.P. Morgan Asset Management’s global expertise across core and alternative asset classes. GMAG is responsible for managing assets totalling over US$41bn, including traditional balanced portfolios, funds of funds, convertible bonds and total return funds and specialised TAA mandates. Responsibility for overall asset allocation lies with the Global Strategy Team, a group of senior investors with an average investment experience of 24 years. Neill Nuttall is Chief Investment Officer of the Global Multi Asset Group. Any forecasts, figures, opinions or investment techniques and strategies set out, unless otherwise stated, are J.P. Morgan Asset Management’s own at the date of this document. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. They may be subject to change without reference or notification to you. The views contained herein are not to be taken as an advice or recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate and investors may not get back the full amount invested. Both past performance and yield are not necessarily a guide to future performance. Exchange rate variations may cause the value of investments to increase or decrease. Investments in smaller companies may involve a higher degree of risk as they are usually more sensitive to market movements. Investments in emerging markets may be more volatile and therefore the risk to your capital could be greater. Further, the economic and political situations in emerging markets may be more volatile than in established economies and these may adversely influence the value of investments made. You should also note that if you contact J.P. Morgan Asset Management by telephone those lines could be recorded and may be monitored for security and training purposes. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co and its affiliates worldwide. The Fund may not be authorised or its offering may be restricted in your jurisdiction. Prior to any application investors should inform themselves as to the requirements within their own country for transactions in the Fund, any applicable exchange control regulation and the tax consequences of any transaction in the Fund. Shares may not be offered to or purchased directly or indirectly by US persons. All transactions should be based on the latest available simplified and full prospectuses and any local offering document. These documents together with the annual report, semi-annual report and the articles of incorporation for the Luxembourg domiciled Funds range are available free of charge upon request from JPMorgan Asset Management (Europe) S.à.r.l., European Bank & Business Centre, 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, your financial adviser or your J.P. Morgan Asset Management regional contact. Issued by JPMorgan Asset Management (Europe) Société à responsabilité limitée, European Bank & Business Centre, 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S. Luxembourg B27900, corporate capital EUR 10.000.000. Material issued in the United Kingdom are approved for use by JPMorgan Asset Management (UK) Limited, 125 London Wall, London EC2Y 5AJ, England. JPMorgan Asset Management (UK) Limited is authorised and regulated by the Financial Services Authority. Registered in England No. 01161446. Registered address: 125 London Wall, London EC2Y 5AJ. © 2011 JPMorgan Asset Management.
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