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Jan G. Loeys is Chief Investment Strategist for J.P. Morgan. He works from New York and writes and edits
J.P. Morgan’s Global Asset Allocation, The J.P. Morgan View, and Investment Strategies.
Mr. Loeys joined J.P. Morgan in New York in 1986 where he worked in International Economics and in
Markets Research. Between 1992 and 2010, he worked from London as Chief Bond Strategist and then as
Head of Markets Research. Prior to his arrival at J.P. Morgan, Mr. Loeys was Senior Economist at the
Federal Reserve Bank of Philadelphia. He has taught finance and economics at UCLA, the Wharton School,
NYU, and Fordham University.
Mr. Loeys received a Lic. in Economics and Bac. in Philosophy from the Katholieke Universiteit te Leuven
(Belgium) in 1975 and a Ph.D. in Economics from UCLA in 1982.
Jan G. Loeys
(1-212) 834-5874
D E C E M B E R 2016
Global Investment Strategy
See the end pages of this presentation for important disclosures
2
Trump Trade joins the Growth Trade
Source: J.P. Morgan, GAA, Nov 30, 2016
Allocation Direction Country Sector
Asset
allocation
OW EQ, CR,
CO;
UW Bonds,
Cash
US vs. EM Banks, Energy
Equities 15% Long and OW US vs. EMEnergy, Banks,
Cyclicals
Bonds - 17%UW.
Short durationNZ, Periphery Inflation linked
Credit +5%OW
vs BondsUSD
HY, Loans, Financials,
UW EM
FX Long USD Short EM
Comd’s +2% OW
OW Energy,
Industrials, Ag. vs.
Precious
Cash -5% UW
The Growth Strategy is growing This means equities, cyclicals, energy, commodities, credit, and inflation-linked bonds, while UW Bonds, duration and Gold. Global growth entered the top of the trading ranges in Q3. Global profits have started to rise.
The Trump Trade joins in Part I means tax cuts and reform. This boosts after-tax earnings, even without a stronger economy, and thus boosts our Equity OW. Foreign profit repatriation reduces the need for US companies to issue debt. US HG net issuance to fall by ¼ in 2017.
Part II is America First Threats of tariffs on China/Mexico create down side risk on EM, upside on the dollar. We are UW EM across asset classes, but see this as tactical and a hedge. Trade tensions could escalate or defuse rapidly and we are ready to get back into EM if trade tensions fade.
Bonds are in overshooting mode US bond yields are up 60bp since Nov 8, despite only minimal changes to forecasts for growth, the Fed, inflation, and the US deficit. Markets are pricing the worst. Technically, bonds are oversold. But economic and price momentum and an unfinished rotation back into stocks keep us with a small short duration.
Global Asset Allocation We are now 15% OW Equities (up from +5%), stay +5% Credit, add CO to +2%, and reverse Cash to -5% UW. Bonds are UW a large -17%.
Investment Themes
3
Growth Trade Trump Trade
Source: J.P. Morgan
• Long Equities vs cash, Bonds• Cyclicals, Banks
• OW Credit vs Bonds• Financials
• OW Commodities• Industrial, Ag, Oil• OW/short precious
• Short Bonds, Duration• OW Inflation linked
• Bond – equity correlation turns negative
• Be long volatility and cash.
• America First• OW US in Equities, Credit, USD• UW multinationals and EM. OW
small caps. Country selection becomes more important.
• Tax cuts benefit after-tax earnings before economy: Long Equities
• Trade and be ready to deploy cash or take profits on extreme moves
• Fiscal easing Short duration. UW Bonds. OW Banks.
Global long-only portfolio Allocation
4
Active Weights ∆
Equities 15%
Bonds -17%
Credit 5%
Commodities 2%
Cash -5%
Major Sectors within each Asset Class Active Weights ∆ vs. US Benchmark
Equities Countries US 7.5% US Sectors Financials 2.5%
Europe ex-UK 0.0% Energy 2.5%
Japan 0.0% Healthcare 2.5%
UK 0.0% Consumer Staples -2.5%
EM -7.5% Other -5.0%
Other 0.0% vs. Benchmark
Bonds Countries US -5.6% Note Yield (bp) +6
Linkers 3.4% Dur (months) -0.7
Europe Core -2.5% Inflation-linked vs Nominal 3.4%
Europe Periphery 2.7% Periphery vs Core 2.7%
Japan 0.0% Australia vs US 2.0%
UK 0.0%
EM Local 0.0%
MBS 0.0%
Other 2.0% vs. Benchmark
Credit HG US -0.5% Note Yield (bp) +19
Europe -2.0% Duration (months) -2.4
UK -3.0% US vs Europe 6.0%
HY US 2.5% HY vs HG 7.5%
Europe 1.0%
US Loans 6.0%
EM Sovereigns -2.0%
Corporates -2.0%
Commodities Energy 10%
Industrial metals 5%
Agriculture 5%
Precious metals -20%
Livestock 0%
Major Asset Classes UW | OW
UW | OW UW | OW
Source: J.P. Morgan, GAA, Nov 30, 2016
VaR size
OVERALL 119
FIXED INCOME 37
Long 5Y US breakevens 15
5Y NZ vs. US 12
5Y Spain vs. Germany 10
10Y USD vs. NOK swaps (cross-market rules) 8
10Y NZD vs. EUR swaps (cross-market rules) 8
Short GBI Global (FX-hedged) (duration rule) 6
EQUITIES 44
Long US Banks vs. S&P500 15
World Cyclicals vs. Defensives (PMI) 15
US Small Cap vs. Large Cap 15
US vs. EM 15
Long US Energy vs. S&P500 10
Long US Healthcare vs. Staples 10
UK vs. South Africa (FX signal) 2
Sweden vs. Australia (PMI signal) 2
Euro area vs. South Africa (CF signal) 2
CREDIT 29
US HY Loan vs. Cash 15
US HY vs. UST 10
US HG vs. UST 10
US HG vs. EMBIGD 8
US HG Financials vs. Non-Financials 8
US HG vs. CEMBI 6
Long Euro HY vs. Swaps 6
iTraxx Senior Financials vs. iTraxx Main 6
iTraxx Main vs. Euro HG 6
CDX.IG vs. iTraxx Main 6
Global long-short portfolio VaR in bp, annualized
5
HEDGES 20
Short EMCI 20
COMMODITIES 18
Long LME Mar'17 Zinc 8
Long ICE Mar'17 Brent vs. Dec'17 Brent 8
Long ICE Dec'17 #2 Cotton 8
Long ICE Dec'17 Brent vs. Dec'17 WTI 6
Short UK NBP NG Summer'17 Strip vs. NYMEX NG
Summer'17 Strip 6
Long CBOT Jul'17 Kansas Wheat vs. Chicago Wheat 6
CROSS ASSET 45
MSCI AC World vs. GBI Global 45
FX 23
NOK vs. CAD 14
ARS vs. USD 10
CHF vs. EUR 9
USD vs. KRW 7
CZK vs. EUR 2
Short GBP/USD via long 2-mo 1.20-1.15 put spread,
short 1.27 call 3
Short 1-mo CHF/JPY straddle (108 strike) 3
Buy 6-mo NZD put/SEK call, strike of 6.10 2
Source: J.P. Morgan, GAA, Nov 30, 2016
Little wage gains despite tighter jobs and weak productivity
6
-20
-10
0
10
20
30
40
50
-1
0
1
2
3
01 03 05 07 09 11 13 15
%oya; both scales
Productivity and profit margin, DM
Source: J.P. Morgan
Profit margin
Productivity
-1.5
0.0
1.5
3.0
4.5
6.0
02 04 06 08 10 12 14 16
%oya; estimated as real GDP growth less empl. growth
Labor productivity
Emerging
Developed
Source: J.P. Morgan; Excludes China, India.
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
3 4 5 6 7 8 9 10
Unemployment rate at beginning of year
ECI growth, %oya
Source: BLS, J.P. Morgan
3.25% = 2% inflation
NAIRU
Most recent observations
Global equities EPS, P/E multiple, US equity quality
7
MSCI AC World 12-month trailing EPSUSD
Source: J.P. Morgan, MSCI, as of Nov 30.
MSCI AC World 12-month trailing P/E multipleRatio
US Equity QualityRed line is equity quality, measured as difference between reported earnings and operating earnings, as a percentage of reported earnings. Blue line is historical average since Dec 1988.
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
88 91 94 97 00 03 06 09 12 15
8
10
12
14
16
18
20
22
24
26
28
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
9
11
13
15
17
19
21
23
25
27
29
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
S&P earnings (operating after 1991)
8
Cycle average and current cycleMeasures change in S&P500 12m trailing EPS throughout the cycle with the beginning of expansions normalized to zero. We assume current cycle lasts 9 years. Quarterly data since 1954.
Source: J.P. Morgan, Bloomberg, Thomson Financial and S&P, Last observation is 3Q’16.
S&P500 EPS during expansions and recessionsMeasures change in S&P500 12m trailing EPS throughout the cycle with the beginning of expansions normalized to zero. We assume current cycle lasts 9 years. Quarterly data since 1954.
54
58
6171
7583
91
01
09
-20%
20%
60%
100%
140%
180%
0% 20% 40% 60% 80% 100%
1954 1958 1961
1970 1975 1982
1991 2001 2009
-10%
10%
30%
50%
70%
90%
110%
130%
150%
0% 20% 40% 60% 80% 100%
Average
Current Cycle (9 years)
RecessionsExpansions
Near-term recession risk has fallen from 27% to 26%
9
8
10
12
14
16
18
70 75 80 85 90 95 00 05 10 15
% of corporate value added
Source: BEA, FRB
US domestic corporate profit margin
ex. BP oil settlement
Probabilities of US recession within 12 months from near-term indicators
Indicator Probability Current levelLevel at 50%
probability
Historical av erage unconditional probability 17%
Consumer sentiment 17% 65.3 59.2
Nonmanufacturing sentiment 18% 59.3 50.7
Manufacturing sentiment 11% 57.6 43.3
Residential building permits 17% 1236 1023
Auto sales 28% 17.8 15.5
Pay rolls 31% 176 22
Unemploy ment rate 31% 4.9 5.2
Initial claims 15% 252 289
Senior loan officer opinion surv ey 19% 7.4 16.0
Composite probability from near-term indicators 20%
Background risk from medium-term indicators 36%
Probability including background risk 26%
10
Scary capex fall has stabilized
-5
0
5
10
49.0
50.0
51.0
52.0
53.0
54.0
55.0
2014 2015 2016 2017
DI, sa
Global capex equipment proxies
%q/q, saar; incl Sep 16 est
* Model based on G-3 capital goods shipments and global ex China cap goods imports.Source: J.P. Morgan
Model *
Investment goods PMI
-8
-4
0
4
8
12
16
2010 2011 2012 2013 2014 2015 2016 2017
%q/q, saar and %oya
Global equipment capex, ex China
Source: J.P. Morgan
%q/q, saar
%oya
11
Inflation rise to lift profits, then business spending
-40
-20
0
20
40
60
2
3
4
5
6
7
8
9
98 01 04 07 10 13 16
%oya; both scales
Global nominal GDP and corporate profits
Sour ce: J.P. Mor gan; MSCI ear nings
Profits
Nominal GDP
1
2
3
4
5
6
10 11 12 13 14 15 16 17
%ch at annual rate over 1 quarter
Global real GDP
Source: J.P. Morgan
Trend-line since 2013
12
Stronger US nominal growth supports profits
Source: J.P. Morgan
US Nominal GDP and Earnings Growth%oya
US Inflation vs Earnings Growth and Multiples%oya, dots indicate average for inflation buckets of -2%-0%, 0%-2%, …,14%-16%
-40%
-20%
0%
20%
40%
60%
0%
3%
6%
9%
12%
15%
53 58 63 68 73 78 83 88 93 98 03 08 13
Operating EPSNominal GDP
y = -86.809x + 18.843R² = 0.3069
6
12
18
24
30
-2% 0% 2% 4% 6% 8% 10% 12% 14% 16%
Opera
ring P
/E
US Inflation %oya
-2
0
2
4
6
8
10
12
14
16
18
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
-2% 0% 2% 4% 6% 8% 10% 12% 14% 16%Inflation Bucket %oya
Average Operating EPS %oya
Average Operating P/E
P/E Multiple
EPS growth
y = 2.8005x - 1.4043R² = 0.2533
-40%
-20%
0%
20%
40%
60%
-5% 0% 5% 10%
Opera
ring E
PS G
row
th %
oya
US Real GDP Growth %oya
US equities peak 0-13 months before recession starts
13
Cycle average and current cycleY-axis is cumulative return throughout the cycle. The current cycle is assumed to last 9 years. We use monthly data since 1954.
S&P500 in expansions and recessionsY-axis is cumulative return throughout the cycle. The current cycle is assumed to last 9 years. We use monthly data since 1954.
% of expansion or recession completed % of expansion or recession completed
Source: J.P. Morgan, Bloomberg, Federal Reserve. Last observation is Nov 30.
54
58
61
70
75
80
82
91
01
09
-50%
0%
50%
100%
150%
200%
250%
300%
350%
400%
0% 20% 40% 60% 80% 100%
1954 1958 1961 19701975 1980 1982 19912001 2009
0%
20%
40%
60%
80%
100%
120%
140%
160%
0% 50% 100%
RecessionsExpansions
Current Cycle (9 years)
Average
Risk premium momentum: US risk premia vs cash are cyclical
14
Source: J.P. Morgan. IRRs are calculated as current yield, minus expected default or downgrade losses in the case of credit. The IRR for equities is earnings yield, based on trend earnings for operating earnings, plus the expected long-term rate of inflation. The x-axis is historical vol. The slope is calculated by applying a linear regression of the IRR of various assets against their historical vol that intersects through the cash yield. Last observation is Nov 30.
Last observation is Oct 2016.
Risk-return tradeoff line%. Monthly data since 1954. HG is US long maturity BBBs. USTs are the 10YR UST.
Slope of the risk-return trade-off line Monthly data since 1954. Red dots mark the start of each recession.
0
2
4
6
8
10
12
0.00 5.00 10.00 15.00
HG
USTs
Nov-16
IRR %
Historic vol %
Cash
Jun-11
S&P500
Mar 09
Jun-09
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
53 59 65 71 77 83 89 95 01 07 13
US risk premia in expansions and recessions
15
Cycle average and current cycleMeasures change in term premium throughout the cycle with the beginning of expansions normalized to zero. For example, by the end of the average expansion, term premium will compress by about 30 basis points. We assume current cycle lasts 9 years. Monthly data since 1954.
Source: J.P. Morgan, Bloomberg, Federal Reserve. Last observation is Nov 30.
US risk premia during expansions and recessionsMeasures change in term premium throughout the cycle with the beginning of expansions normalized to zero. We assume current cycle lasts 9 years. Monthly data since 1954.
% of expansion or recession completed
5458
61
70
75
80
82
91
01
09
-0.60
-0.50
-0.40
-0.30
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
0% 20% 40% 60% 80% 100%
1954 1958 1961 19701975 1980 1982 19912001 2009
-0.40
-0.35
-0.30
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0% 50% 100%
RecessionsExpansions
Current Cycle (9 years)
Average
1616
Global US Euro area
Japan DMEM
Source: J.P. Morgan, Consensus Economics, Blue Chip. Last observation as of Nov 25
2016 GDP expectationsGDP estimates of JP Morgan and consensus with current JP Morgan estimates of potential growth. Consensus Economics forecasts for global growth are done using the same 5-year rolling USD GDP country/region weights that we use for our own global growth forecast.
2.4
2.6
2.8
3.0
3.2
3.4
3.6
Jan-15 Jul-15 Jan-16 Jul-16
Consensus
JPM
Potential
1.1
1.4
1.7
2.0
2.3
2.6
2.9
3.2
Jan-15 Jul-15 Jan-16 Jul-16
Consensus
JPM
Potential
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
Jan-15 Jul-15 Jan-16 Jul-16
Consensus
JPM
Potential
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Jan-15 Jul-15 Jan-16 Jul-16
JPM
Consensus
Potential
3.8
4.0
4.2
4.4
4.6
4.8
5.0
5.2
5.4
Jan-15 Jul-15 Jan-16 Jul-16
JPMConsensus
Potential
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
Jan-15 Jul-15 Jan-16 Jul-16
JPM
Consensus
Potential
1717
Global US Euro area
Japan DMEM
Source: J.P. Morgan, Consensus Economics, Blue Chip. Last observation as of Nov 25
2017 GDP expectationsGDP estimates of JP Morgan and consensus with current JP Morgan estimates of potential growth. Consensus Economics forecasts for global growth are done using the same 5-year rolling USD GDP country/region weights that we use for our own global growth forecast.
2.5
2.7
2.9
3.1
3.3
Jan-16 Apr-16 Jul-16 Oct-16
Consensus
JPM
Potential
1.2
1.5
1.8
2.1
2.4
2.7
Jan-16 Apr-16 Jul-16 Oct-16
Consensus
JPM
Potential
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
Jan-16 Apr-16 Jul-16 Oct-16
Consensus
JPM
Potential
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Jan-16 Apr-16 Jul-16 Oct-16
JPM
Consensus
Potential
4.4
4.5
4.6
4.7
4.8
4.9
Jan-16 Apr-16 Jul-16 Oct-16
JPM
Consensus
Potential
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
Jan-16 Apr-16 Jul-16 Oct-16
JPM
Consensus
Potential
18Source: J.P. Morgan. Last observation is Nov 25.
Forecast revision indices since 2013The FRI is cumulative weekly changes in GDP forecasts for the current Quarter (Q), Q-1, Q+1 and Q+2 made by J.P. Morgan economists. The beginning of every series is normalized to begin at zero.
Will higher bond yields drag equities down?
19
Bond-equity return correlationDM bonds, local for MSCI World, FX hedged for GBI, 3-month rolling of daily returns
Global bond and equity fund flows$bn per year of Net Sales – net new sales + reinvested dividends – for mutual funds and ETFs
Source: J.P. Morgan, MSCI, as of Nov 30 Source: Bloomberg, ICI, EFAMA, J.P. Morgan, as of Nov 25
-90%
-70%
-50%
-30%
-10%
10%
30%
50%
70%
90%
93 95 97 99 01 03 05 07 09 11 13 15
588
452
-210
219 225
1
82
580
478
402
-70
119100
-172
673
503
282
849
196
512
295
358
-300
0
300
600
900
06 07 08 09 10 11 12 13 14 15 16
Equity funds
Bond funds
YTD
20
Rising yields depress multiples only >9% or if +150bp q/q
Source: J.P. Morgan
Multiples and Bond Yield Multiples changes and how fast bond yield risesDots indicate average for quarterly change in bond yield buckets in increments of 50bp
0
5
10
15
20
25
30
35
0%
2%
4%
6%
8%
10%
12%
14%
16%
53 58 63 68 73 78 83 88 93 98 03 08 13
10Y UST YieldP/E Multiple
y = -64.807x + 19.628R² = 0.169
6
12
18
24
30
0% 2% 4% 6% 8% 10% 12% 14% 16%
Opera
ting P
/E
Bond Yield
y = -17.339x + 0.0343R² = 0.0053
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
-3% -2% -1% 0% 1% 2% 3%
d(O
pera
ting P
/E)
d(Bond Yield)
-2
-1
0
1
2
-3% -2% -1% 0% 1% 2% 3%Change in Bond Yield Bucket
Average Change inOperating P/E
Change in P/E Mutiple
S&P P/E multiple (operating after 1991)
21
Cycle average and current cycleMeasures change in S&P500 trailing P/E ratio adjusted by using latest earnings known (e.g. Dec P/E uses Sep EPS, Jan-Mar P/E uses Dec EPS) throughout the cycle with the beginning of expansions normalized to zero. We assume current cycle lasts 9 years. Monthly data since 1954.
Source: J.P. Morgan, Bloomberg, Thomson Financial and S&P. Last observation is Nov 30.
S&P500 P/E during expansions and recessionsMeasures change in S&P500 trailing P/E ratio adjusted by using latest earnings known (e.g. Dec P/E uses Sep EPS, Jan-Mar P/E uses Dec EPS) throughout the cycle with the beginning of expansions normalized to zero. We assume current cycle lasts 9 years. Monthly data since 1954.
54
58
61
70
75
80
82
91
01
09
-12
-8
-4
0
4
8
12
16
0% 20% 40% 60% 80% 100%
1954 1958 1961 19701975 1980 1982 19912001 2009
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
0% 50% 100%
Average
Current Cycle (9 years)
EM-DM equity returns in line with growth up/downgrades
22
EM-DM FRI and MSCI EM/World since 2002The FRI is Cumulative weekly changes in GDP forecasts for the current Quarter(Q), Q-1, Q+1 and Q+2 made by J.P. Morgan economists.
Source: J.P. Morgan. Last obs. is Nov 30.
EM-DM FRI and MSCI EM/World since 2011The FRI is Cumulative weekly changes in GDP forecasts for the current Quarter(Q), Q-1, Q+1 and Q+2 made by J.P. Morgan economists.
0.5
0.6
0.7
0.8
0.9
1.0
1.1
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16
EM FRI - DM FRI
MSCI EM/World
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Feb-02 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12 Feb-14 Feb-16
EM FRI - DM FRI
MSCI EM/World
US credit spreads
US High Grade Credit US High Yield Credit and default rates (rhs)
23
Source: J.P. Morgan, Barclays, as of Nov 30.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
200
400
600
800
1000
1200
1400
1600
1800
2000
87 90 93 96 99 02 05 08 11 14
Last observation:
30-Nov-16
bp
0
50
100
150
200
250
300
350
400
450
500
550
600
73 77 81 85 89 93 97 01 05 09 13
bp
Last observation:
30-Nov-16
US credit spreads in expansions and recessions
24
Cycle average and current cyclePercent. Monthly data since 1954. Moody’s BAA corporate bond index. Spread to US 20YR yield.
US BBB spread to USTs expansions and recessionsPercent. Monthly data since 1954. Moody’s BAA corporate bond index. Spread to US 20YR yield.
% of expansion or recession completed% of expansion or recession completed
Source: J.P. Morgan, Federal Reserve, Moody’s. Last observation is Nov 30.
-150
-100
-50
0
50
100
0% 50% 100%
RecessionsExpansions
Current Cycle (9 years)
Average
54
58
61
70
75
80
82
91
01
09
-300
-200
-100
0
100
200
300
0% 20% 40% 60% 80% 100%
1954 1958 19611970 1975 19801982 1991 20012009
Worsening leverage and interest coverage
Source: Capital IQ and J.P. Morgan, as of 2Q16. Data based on the Non-Financial companies in JPMorgan’s HG bond index.
25
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16
Net Leverage
Net Leverage ex Commodities
7
8
9
10
11
12
13
14
15
1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16
Interest Coverage
Interest Coverage ex Commodities
Systematic duration and cross-country signals
26Source: J.P. Morgan, GAA, Nov 30, 2016.
High income yields
27
Source: J.P. Morgan, Bloomberg, as of Nov 30
Yields across high income assets%
Yield-to-vol ratiosVol is measured by 1yr daily volatility.
3.16
5.10
3.07
4.74
2.38
1.21
0.29
6.50
3.92
6.91
1.27
3.96
3.16
5.91
5.255.27
0
1
2
3
4
5
6
7
8
US H
igh D
iv
Euro
pe H
igh D
iv
Japan H
igh D
iv
EM
Hig
h D
iv
US D
ura
tion
Euro
pe D
ura
tion
Japan D
ura
tion
EM
Dura
tion
US H
G
US H
Y
Euro
HG
Euro
HY
GBP H
G
EM
BIG
D
CEM
BI
EM
FX
0.250.23
0.14
0.25
0.56
0.12
0.02
0.64
1.01
1.21
0.54
1.06
0.52
1.08
1.80
0.66
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
US H
igh D
iv
Euro
pe H
igh D
iv
Japan H
igh D
iv
EM
Hig
h D
iv
US D
ura
tion
Euro
pe D
ura
tion
Japan D
ura
tion
EM
Dura
tion
US H
G
US H
Y
Euro
HG
Euro
HY
GBP H
G
EM
BIG
D
CEM
BI
EM
FX
US Growth FRI and multiple changes are correlated
28
Cycle average and current cycleMeasures change in US FRI throughout the cycle with the beginning of expansions normalized to zero. We assume current cycle lasts 9 years. Quarterly data since 1969. Last observation is Q3’16.
Source: J.P. Morgan, Federal Reserve Bank of Philadelphia. Last observation is Q3’16.
US FRI during expansions and recessionsMeasures change in US FRI throughout the cycle with the beginning of expansions normalized to zero. We assume current cycle lasts 9 years. Quarterly data since 1969. Last observation is Q3’16.
70
75
80
82
91
01
09
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
0% 20% 40% 60% 80% 100%
1970 1975 19801982 1991 20012009
-4
-3
-2
-1
0
1
2
3
4
5
0% 50% 100%
RecessionsExpansions
Current Cycle (9 years)
Average
SPX trailing multiples: Negative serial correlation, but positive with GDP growth upgrades
29Source: J.P. Morgan, Bloomberg, Thomson Financial, S&P, Federal Reserve Bank of Philadelphia, US. Bureau of Labor Statistics
1954 1958 1961 1970 1975 1980 1982 1991 2001 2009 Average
Full cycle
Corr(P/E, FRI) 0.61 0.44 0.66 -0.39 0.85 0.43 -0.12 0.35
Corr(P/E, Productivity growth) 0.46 0.52 -0.70 -0.39 -0.65 0.53 0.49 0.86 -0.89 0.28 0.05
y = 0.4606x + 0.0536R² = 0.1114
-7
-5
-3
-1
1
3
5
7
-6 -4 -2 0 2 4 6
Change i
n P
/E
Change in FRI
30
Global growth volatility setting new lows
Source: J.P. Morgan
Global GDP growth volatility 3yr rolling standard deviation of %q/q, saar global GDP growth
0.4
0.8
1.2
1.6
2.0
2.4
2.8
3.2
3.6
70 75 80 85 90 95 00 05 10 15
GDP growth correlation between DM and EM3yr rolling correlation of %q/q, saar growth
-0.5
0.0
0.5
1.0
98 00 02 04 06 08 10 12 14 16
Global GDP correlations3yr rolling correlation of %q/q, saar growth
-1.0
-0.5
0.0
0.5
1.0
00 02 04 06 08 10 12 14 16
EMU - China
US - Japan
US - EMU
European and Japanese investors have a lot to catch up with US investors on equities
31
Equity allocations of US households %, sum of equities held directly or via mutual fund shares or via Defined
Contribution plans divided by total financial assets. Last obs. is Q2 ’16
Equity allocation of households%of financial assets. Excludes equities held via defined benefit pension plans.
Latest obs. is Q2’16 for US for Japan and Q1’16 for Euroarea.
Source: Fed, J.P. Morgan Source: Fed, ECB, BoJ, J.P. Morgan
10%
15%
20%
25%
30%
35%
40%
45%
52 62 72 82 92 02 12
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
97 99 01 03 05 07 09 11 13 15
Euro area
Japan
US
Equity – Bond - Cash of Global Investor, ex banks
32
Cash, equity and bond allocation of global non-bank investorsGlobal equities as % total holdings of equities/bonds/M2 by non-bank investors. Global M2 as % total holdings of equities/bonds/M2 by nonbank investors. Global bonds held by non-bank investors as % total holdings of equities/bonds/M2 by non-bank investors.
Box: Cash, equity and bond allocation for non-bank investors.
Cash: Global M2 reflects the cash balance of
nonbank
investors, such as households, corporations,
pension funds,
insurance companies and SWFs.
Bonds: Bond universe for non-bank investors
is the sum of the market value of global
bond indices, adjusted by excluding the
bonds held by central banks, FX reserve
managers and commercial banks.
Equities: Equity is market value of
DataStream world equity
index, which is mostly held by non-bank
investors.
Details in Flows & Liquidity dated Nov 14,
2016.
Source: J.P. Morgan.
10%
20%
30%
40%
50%
60%
99 01 03 05 07 09 11 13 15
Bonds Cash Equity
World financial markets
Source: J.P. Morgan, Barclays, MSCI, as of Oct 201633
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Disclosures
