INVESTMENT INSIGHTS

A review of global markets and portfolio positioning in July

Multi-Asset Solutions Weekly Strategy Report

MONTH IN REVIEWWe review trends across markets and economies in July, consider what theymean for our multi-asset portfolios and present an update on our positioning.

The month of July was a more turbulent time for investors than broad asset classperformance numbers may suggest: while global equities as a whole ended the monthroughly flat and major government bond yields moved only moderately lower, bothasset classes saw significant intra-month swings. Emerging market equities began tounderperform in earnest and most commodity prices took another large leg down.Meanwhile, the US dollar showed some renewed signs of strength and major yieldcurves began to flatten again. Developments were broadly consistent with our viewsof core investment drivers this year: a strengthening in developed market economiesled by the US., counterbalanced by a still-difficult economic picture for emergingmarkets; the start of a monetary tightening cycle in the US in the second half of theyear, with ongoing monetary easing across most of the rest of the world.

Timing of the first US rate hike remains unclear

Events during the month did little to clarify the exact timing of the first US rate hike inmore than nine years. Amid mixed progress for the US economy, the FederalReserve’s (Fed’s) July policy statement nodded towards steady improvement in thelabour market and further improvement in the housing market, while keeping thecharacterization of consumer spending as “moderate.” But there were no changes tothe Fed’s policy stance and it remained hedged on the timing of impending rate hikes.

August 03, 2015

Patrik SchöwitzEditorExecutive DirectorGlobal StrategistMulti-Asset Solutions

AUTHOR

For China, Australia, Vietnam and Canada distribution, please note this communication is for intended recipients only. In Australia for wholesale clients’ useonly and in Canada for institutional clients’ use only. For further details, please refer to the full disclaimer at the end. Unless otherwise stated, all data is as of July31, 2015, or most recently available.

IN BRIEF• Markets in July were dominated by discussions about the timing of US interest rate

hikes, intensification of the Greek crisis and Chinese equity volatility.

• While global equities ended the month roughly flat and major government bond yields moved only modestly lower, emerging market (EM) equities weakened severely, commodity prices fell and the US dollar strengthened again.

• We maintain a pro-risk stance, but at a reduced level and have tactically lightened our position in equities and reduced portfolio risk to below-normal levels. We remain underweight EM vs developed market (DM) equities, broadly constructive on duration and credit, and continue to be positioned for yield curve flattening.

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Index: 1/1/2010=100

MSCI emerging vs MSCI developd - USD termsMSCI emerging vs MSCI developd - local currency terms

Multi-Asset Solutions

In our view, the chance of a rate hike in September isroughly 60%, with the odds poised to be pushed heavilyin one direction or the other by the July employmentreport due out in early August. A lower-than-expectedemployment cost index reading and GDP growth numbersreleased late in the month did little to resolve the interestrate call. A significant upward revision to first quartergrowth was counterbalanced by slightly disappointingheadline growth data for the second quarter; on the otherhand, price gains were stronger than expected. In anycase, the Fed has recently been strongly signalling thatrates will rise in 2015, gradually quashing the chances of a2016 initial hike. This should support the curve flatteningbias in our portfolios as that process unfolds.

Greek crisis comes to a head

The long-running Greek crisis came to a head in early July,with the country only narrowly avoiding exit from theeuro area. The deal eventually struck was stricter thanwhat had gone before, making the passage of numerouseconomic reforms a precondition for even the start ofnegotiations on a third bailout package. For now, theproblem seems to have been kicked down the road yetagain – as ever, the question is for how long. Althoughthe relatively harsh deal may actually bode well for theattitude of Greece’s creditors going forward, it leavesGreek domestic politics under considerable strain. Earlyelections could quickly bring the issue back into marketfocus. This latest crisis round seems to have had limited

MULTI-ASSET SOLUTIONS WEEKLY STRATEGY REPORT

economic impact outside Greece. With the ECB standingready to intervene, peripheral bond yields have remainedcontained and bank deposits rock solid. Early indicationssuggest some damage to European consumer confidence,but with business confidence unaffected. Thus our positiveoutlook for the European economy and risk assets overthe medium term remains intact. In the near term we takea slightly more cautious view of European equities untilwe are convinced the deal in Greece will prove durable.

Chinese markets at the epicentre of further EMweakness

The slump in Chinese equities that started in Junecontinued to occupy headline space in July, but themarket stabilised and the declines partly reversed earlyon in the month on the back of increasingly aggressiveintervention by the authorities. Volatility and weaknessreturned towards the end of the month and it remains tobe seen whether further intervention will be required. Theknock-on effect on the Chinese economy is unclear. Arelatively limited share of household wealth is invested inthe stock market, so confidence effects may be theclearest transmission channel. Here the evidence so far ismixed. While consumer confidence seems unscathed, thelatest Chinese purchasing managers index (PMI) readingssuggest renewed weakness following the stabilisation inhard economic activity data during the second quarter.Looking more broadly across EM, equity weakness waswidespread in July. This reflected the ongoing litany of

The long-running under perfor-mance of emerging market (EM)equities vs. developed market (DM)equities that began in late 2010accelerated again in July. This trendhas been exacerbated in commoncurrency terms by the concurrentweakening in emerging marketcurrencies. In our view this trend islikely to run further and we remainunderweight EM equites in ourmulti-asset portfolios.

EXHIBIT 1: EMERGING MARKET EQUITY UNDERPERFORMANCE TREND CONTINUES

Source: MSCI, ThomsonReuters Datastream, J.P. Morgan Asset Management; data as of 30 July 2015For illustrative purposes only.

3J.P. MORGAN ASSET MANAGEMENT

ASSET CLASS IMPLICATIONSIn our Multi-Asset Solutions portfolios we maintain a pro-risk stance, but at a reduced level compared with thepositioning after our most recent Strategy Summit, heldin April. We have tactically lightened up our overweightposition in equities in view of rising volatility as the USinterest rate lift-off approaches, and as significant eventrisks are playing out in Greece and China. Consistent withthis change we have reduced overall risk levels to below-normal levels.

We maintain our long-standing conviction to beunderweight emerging market equities in favour ofoverweight positions across developed equity markets.Recent weakness across EM equites further strengthensour confidence in this position. Our medium-term view onglobal duration remains broadly constructive, as we seelittle risk of a rapid sell-off in duration in the comingmonths. However, as we near the turn in US interest rateswe have tactically neutralised this position. Ourexpectation for renewed flattening of yield curves - in theUS in particular - remains in place and with bond marketsnow once again moving in that direction, we remainunderweight the front end of the US curve, albeit insomewhat reduced size to account for the risk that theFed postpones its rate hike to later in the year. Wecontinue to hold a positive medium-term view on credit,but our portfolios are neutrally positioned in high yield atthe moment, given ongoing worries about liquidity andthe fallout from low oil prices. In currencies, our views arelargely unchanged – we are positive on the US dollar,although we expect that the focus of its strength is likelyto keep shifting towards emerging and commoditycurrencies. We maintain a negative stance on thecommodity complex, driven by subdued demand fromemerging economies and robust commodity supplygrowth.

weak economic data, particularly from EM Asia and Brazil,as well as the impact of the approaching lift-off in USinterest rates. The latter effect was also visible in renewedweakness of EM currencies against the US dollar and thecontinuing downdraft in EM growth-driven commodities.These developments further reinforce our negative stanceon EM equities in our portfolios.

MULTI-ASSET SOLUTIONS WEEKLY STRATEGY REPORT

EXHIBIT 2: APRIL 2015 ASSET CLASS VIEWS*

Source: J.P. Morgan Asset Management GIM Solutions-Multi-AssetSolutions; assessments are made using data and information up to 29April 2015.For illustrative purposes only.

Diversification does not guarantee investment returns and does not eliminate the risk of loss. Diversification among investment options and asset classes may help to reduce overall volatility.*These asset class views apply to an intermediate-term horizon (that is, 12 to 18 months). Up/down arrows indicate a positive (▲) or negative(▼) change in view since the prior thrice-yearly Strategy Summit. This summary of our individual asset class views shows absolute directionand strength of conviction, but is independent of portfolio construction considerations. Live portfolios may drift modestly from thisqualitative assessment due to opportunity set, risk considerations, portfolio optimization, and input from quantitative signals during ourmonthly investment cycle.

Important Disclaimer:

The views contained herein are not to be taken as an advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is 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. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance.

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J.P. Morgan representative.

John BiltonHead of Global Multi-Asset StrategyLondon

Thushka MaharajGlobal StrategistLondon

Katrina LeeGlobal StrategistLondon

Michael HoodGlobal StrategistNew York

Michael AlbrechtGlobal StrategistNew York

Patrik SchöwitzGlobal Strategist, EditorLondon

Beth LiGlobal StrategistLondon

Jonathan LoweGlobal StrategistHong Kong

Benjamin MandelGlobal StrategistNew York

Diego GilsanzGlobal StrategistNew York

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