WorldView 4Q 2014 INSIGHTS - J.P. MorganWorldView 4Q 2014 Central banks, the dollar and investing in 2015 MARKET INSIGHTS • Since the financial crisis of 2008/2009, the biggest central

WorldView 4Q 2014Central banks, the dollar and investing in 2015

MARKETINSIGHTS

• Since the financial crisis of 2008/2009, the biggest central banks of the developed world have generally moved in the same direction, providing monetary easing in a wide variety of ways. In 2015, this should end with the U.S. Federal Reserve and Bank of England tightening and the European Central Bank and Bank of Japan still expanding liquidity.

• One implication of tighter money and stronger growth in the U.S. should be a continued strong dollar. This has the potential to help the global economy by relieving inflation pressures in a supply-constrained U.S. economy while boosting exports from European and emerging market economies that could use the extra demand.

• In the U.S., a combination of higher interest rates and solid earnings growth suggests a continuation of an overweight to stocks over fixed income. However, supply constraints threaten returns from both bonds and stocks in the U.S. In the medium term, investors may look to increase their exposure to areas of global financial markets with greater potential for earnings growth and more attractive valuations.

2 | WorldView | 4Q 2014

Dr. David P. Kelly, CFAManaging Director Chief Global Strategist J.P. Morgan Funds

Stephanie Flanders Managing DirectorChief Market Strategist, UK & Europe J.P. Morgan Asset Management

Stephanie Flanders is the Chief Market Strategist for the UK and Europe for J.P. Morgan Asset Management. She delivers insight into the economy and financial markets to thousands of professional investors across the UK, Europe and globally.

Stephanie was previously the Economics Editor at the BBC, where her analysis and on-air commentary were widely respected and broadcast around the world. In this role she also hosted her own economics discussion show, ‘Stephanomics,’ named after her influential blog. Prior to joining the BBC in 2002, she worked as a reporter at the New York Times and a speechwriter and senior advisor to U.S. Treasury Secretaries Robert Rubin and Lawrence Summers in the second Clinton Administration, when she was closely involved in the management of the 1997-1998 emerging market financial crises. She has also been a Financial Times leader-writer and columnist and an economist at the Institute for Fiscal Studies and the London Business School.

During her career, Stephanie has won numerous awards for journalistic excellence. She obtained a first class degree in philosophy, politics and economic from Balliol College, University of Oxford and attended Harvard University as a Kennedy Scholar at the Kennedy School of Government.

Tai HuiManaging DirectorChief Market Strategist, Asia J.P. Morgan Funds

Tai Hui is the Chief Market Strategist for Asia for J.P. Morgan Funds, based in Hong Kong. With more than 10 years of experience, he is responsible for formulating and disseminating J.P. Morgan Funds’ view on markets, the economy and investing to financial advisors and their clients in the Asia Pacific region.

Prior to joining J.P. Morgan, Tai was the Regional Head of Research (Asia) with Standard Chartered Bank in Singapore, covering the economic and financial development of the Asia region and delivering his analysis to corporate and institutional clients.

Tai obtained a BA in economics from Cambridge University, UK, and a MA in international and public affairs from the University of Hong Kong.

W O R L D V I E WThe key to successful investing is not seeing the future with some kind of mythical vision — it is seeing the present with clarity. This is more true today than ever, in a world recovering from financial crisis, rife with political discontent, extreme monetary easing and deep-seated investor prejudice. In this quarterly publication, we strive to provide clarity by examining the key issues shaping the global investment landscape, while identifying risks and opportunities for investors.

PORTFOLIO DISCUSSION: Title Copy HereMARKETINSIGHTS WorldView | 4Q 2014

David Kelly is the Chief Global Strategist for J.P. Morgan Funds. With more than 20 years of experience, David provides valuable insight and perspective on the economy and markets to thousands of investment professionals and their clients. He is a keynote speaker at many national investment conferences. David is also a frequent guest on CNBC and other financial news outlets and is widely quoted in the financial press.

Prior to joining J.P. Morgan Funds, David served as Economic Advisor to Putnam Investments. He has also served as a senior strategist/economist at SPP Investment Management, Primark Decision Economics, Lehman Brothers and DRI/McGraw-Hill. David is a CFA charterholder. He also has a PhD and MA in economics from Michigan State University and a BA in economics from University College Dublin in the Republic of Ireland.

J.P. Morgan Asset Management | 3

When central banks diverge...Stephanie Flanders, Chief Market Strategist, UK & Europe

IntroductionDivergence in economic performance and policy is now a key focus and source of volatility for global markets as investors take stock of a widening gap between the Anglo-Saxon economies and other developed nations. Both the U.S. Federal Reserve (Fed) and the Bank of England (BoE) are likely to raise interest rates in 2015, as the U.S. and the UK move into a more mature stage of recovery. But feeble growth and the continued threat of deflation in Japan and continental Europe mean that monetary policy in those economies is headed firmly in the opposite direction.

V I E W P O I N TThe gap in policy and prospects between the Anglo-Saxon economies and the rest of the world could be helpful if it helps prolong the U.S. recovery, putting downward pressure on rates and inflation. The risks will come if the U.S. and its currency become the only game in town.

We see some advantages in this divergent picture. The U.S. and the UK are less likely to face rising inflation in this scenario, meaning a longer recovery and a slower path to higher rates. At the same time, the relatively greater attractiveness of U.S. assets to global investors could make it easier for the eurozone and Japan to import growth and inflation from the rest of the world, by depreciating their currencies against the U.S. dollar. But there are also risks—for example, if the gap in performance and policy becomes unsustainably wide and the U.S. becomes the only game in town.

In this section, we outline the factors driving global divergence and the key potential consequences for economies and markets. The implications for emerging markets and for investor asset allocations are discussed in the other two sections of this edition of WorldView.

EXHIBIT 1: PURCHASING MANAGERS’ INDEX (PMI) FOR MANUFACTURING

Index level

46

48

50

52

54

56

58

60

62

’10 ’11 ’12 ’13 ’14

U.S. Global (ex-U.S.)

Source: Markit, J.P. Morgan, J.P. Morgan Asset Management. For illustrative purposes only. Data as of November 18, 2014.

The U.S. and the Anglo-Saxon world: Liftoff at last? After a rocky start to the year, the U.S. recovery seems to have now hit its stride. Growth is running at an annualized rate of well over 3% and unemployment is now below its long-term average of 6.1%. In normal times, the Fed would have raised its key policy rate some time ago, and investors would be expecting many more increases in 2015. But so far in this lackluster U.S. recovery, neither wages nor prices have followed the usual rules, and neither has the Fed. In fact, its policy makers made clear some time ago—in their policy of forward guidance—that they planned to stay “behind the curve” in tightening policy for some time after the recovery gained momentum, to maximize the chance of recovering output lost in the great recession.

In our last WorldView, our Chief Global Strategist explained why he believed the Fed might be overestimating America’s long-term growth potential with this strategy, and thereby storing up trouble for the future. But so far, at least, the fastest employment growth since before the financial crisis has brought only a modest pick-up in domestic wage costs, despite the fact that the U.S. labor force is barely growing at all. Nor has there been any significant pick-up in U.S. inflation. Quite the opposite.



V I E W P O I N T A weakening picture in Europe and falling inflation have pushed market expectations for the first U.S. rate rise back to the second half of 2015, but the Federal Reserve will act sooner if wage growth accelerates.

U.S. consumer prices rose at an annualized pace of just over one percent in the third quarter, and inflation may well remain at this level for the next few months, as downward pressure from falling oil prices and the stronger currency offsets any upward drift in domestic compensation. Senior figures at the Fed have indicated that they plan to “look through” this recent fall in inflation, focusing instead on core inflation, which has been picking up a little. But longer-term inflation expectations in the U.S. have also fallen sharply since the start of 2014. Exhibit 2 shows the 5 year/5 year swap rate since the turn of the year. This is what the five-year forecast for U.S. inflation will be in five years’ time, according to the swaps market. This has fallen sharply since the spring and has been highly correlated with the rise in the dollar.

EXHIBIT 2: U.S. DOLLAR AND INFLATION EXPECTATIONS

Dec-13 Jan-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14

áU.S. 5y/5y inflation expectations

U.S. dollar broad TWI* (inverted)â74

76

78

80

82

84

86

88

90 2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3.0 %

3.1

Source: Bloomberg, J.P. Morgan Asset Management. For illustrative purposes only. Data as of November 18, 2014. *TWI is trade-weighted index.

Against this backdrop, the consensus forecast of economists is now that the first increase in U.S. policy rates will happen in the middle of 2015, a little later than investors previously expected. David Kelly discusses our own expectations for short- and long-term U.S. rates in his contribution to this WorldView. The key point for investors is that the Fed can and will raise rates faster than the market now expects if U.S. wage growth continues to accelerate. Although Fed chair Janet Yellen and other “doves” remain nervous about tightening too soon, many on the Federal Open Market Committee (FOMC) are also concerned about the financial consequences of leaving rates too low for too long, and of leaving themselves little ammunition to confront the next downturn.

If and when the Fed does tighten in 2015, it will not be the first central bank in the Anglo-Saxon world to do so. New Zealand has already increased interest rates, and Australia’s central bank may well tighten policy in 2015.

Unlike the Fed, the UK has not undertaken any additional quantitative easing—bond purchases—since early 2012. So its monetary policy has already become somewhat less accommodative as the recovery has gained pace, at least in the sense that the central bank’s balance sheet has shrunk relative to GDP. We expect the BoE to continue the transition to more normal policy in 2015, with one or more interest rate increases from the middle part of the year.

EXHIBIT 3: CENTRAL BANK BALANCE SHEETS

0

10

20

30

40

50

60

70

80

90

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Japan

UK U.S.

Eurozone

% of nominal GDP

Projection*%

Source: U.S. Federal Reserve, ECB, Bank of England, Bank of Japan, J.P. Morgan Asset Management. *Projections are based on central banks’ stated economic intentions. For illustrative purposes only. Data as of November 18, 2014.

The UK has also seen dramatic jobs growth in the past few years, with little or no upward movement in inflation or wages. The big contrast with the U.S. is that labor force participation has been rising more or less continuously since the turn of the century, with only a brief pause during the recession. As a result, UK employment as a share of the population is now approaching levels not seen since the 1960s. This may bode well for the country’s long-term growth but it has come at the cost of productivity. Output per head in the UK has grown even more slowly than in the U.S. and is now lower than it was in 2008. The upshot is that there is probably somewhat less slack in the economy than in the U.S.

In our view, this makes it more likely that the UK’s central bank will raise its key policy rate before the Fed. But the governor of the BoE, Mark Carney, has made it clear that when rates do rise, they will do so only slowly—and will come to rest at a lower level than in the past. This is all reflected in market expectations for UK and U.S. policy rates over the next few years, as shown in Exhibit 4. The very different expectations for policy in the eurozone and Japan are explored in the next section.


If growth and inflation cannot break through the one per cent mark in countries such as Italy, there will be a continued risk that investors will again question the sustainability of these countries’ public finances. That possibility may yet force the ECB down the road of U.S.-style large-scale purchases of government debt, despite considerable internal opposition. However, euro for euro, we believe that the current approach of purchasing private asset-backed securities—and possibly other non-financial corporate bonds—is likely to be a more powerful tool for stimulating the supply of private credit in Europe than purchasing sovereign bonds.

The larger problem is that for the ECB’s policies to work, businesses also need to feel confident in the future of the recovery, which means governments need to do their part to support demand and raise Europe’s potential through structural reforms.

As Japan has demonstrated, that is a long and difficult road. But rising private investment and employment in Spain give some comfort that efforts to improve competitiveness can translate into faster growth. We are also beginning to see small victories on the reform front, such as Italy’s recent vote to advance Matteo Renzi’s Jobs Act, and talk of major policy action in France.

EXHIBIT 5: NOMINAL GDP GROWTH

Rebased to 100 at Q1 2008

85

90

95

100

105

110

115

120

125

'08 '09 '10 '11 '12 '13 '14

U.S.UKCore EuropePeripheral Europe

Japan

Source: Eurostat, BEA, ONS, Statistics Bureau of Japan, FactSet, J.P. Morgan Asset Management. For illustrative purposes only. Data as of November 18, 2014.

Under Shinzo Abe’s leadership, Japan has promised not just dramatic central bank action to confront deflation but also structural reforms to raise Japan’s long-term growth potential. The jury is still out on whether “Abenomics” can make a break with two decades of modest growth and falling prices. But we can confidently predict that monetary policy in Japan is going to be loose for the foreseeable future.

After showing some momentum at the start of the year, Japan’s economy has struggled to get past the effects of the consumption tax rise implemented in the spring. Although Bank of Japan (BoJ)

EXHIBIT 4: MARKET EXPECTATIONS FOR TARGET POLICY RATE

Current Mid-2015 Dec-15 Dec-16 Dec-17

UK 0.50 0.75 1.15 1.75 2.15

U.S. 0.25 0.25 0.50 1.50 2.00

Europe 0.05 0.05 0.05 0.15 0.35

Japan 0.07 0.07 0.07 0.07 0.07

Source: Bloomberg, J.P. Morgan Asset Management. For illustrative purposes only. Data as of November 18, 2014.

The eurozone and Japan: Even looser for even longer Europe’s recovery lost momentum in the summer and has struggled to regain it. The consensus forecast is that the region will eke out some growth in the second half of 2014, but the slowdown in the largest economies—particularly Italy and France—is a cause for concern. The International Monetary Fund recently suggested that there was a 40% chance that the eurozone would slip back into recession.

As Exhibit 5 demonstrates, Europe’s problems are nominal as well as real. The eurozone as a whole, and particularly the periphery economies, need both growth and inflation to pick up in the near future if they are going to start to bring down their high levels of private and public debt. Since the summer, the European Central Bank (ECB) has stepped up its efforts to confront the falling inflation rate, with new lending programs to incentivize banks to lend to European businesses and an ongoing commitment to purchase private asset-backed securities. The ECB’s governing council has also explicitly committed itself to expanding the bank’s balance sheet back toward the EUR 3 trillion level and promised to take further action to confront deflation, if necessary.

V I E W P O I N TThe European Central Bank’s commitment to expand its balance sheet, a weaker euro and falling oil prices should be short-term positives for Europe. But low levels of growth and inflation pose a longer-term risk that worries over debt sustainability will return.

These developments have already produced a significant fall in the currency—the euro has fallen approximately 9% against the dollar and 4% on a trade-weighted basis since the start of June. With the completion of its Asset Quality Review of the state of European bank balance sheets, the ECB has also helped instill greater confidence in Europe’s financial system.

Overall, we believe these measures should be positive for European assets, at least in the short term. The sharp fall in the price of oil will also be a net positive for Europe, acting like a tax cut for businesses and households even if it makes the job of pushing up inflation a little more difficult.



governor Haruhiko Kuroda had insisted that Japan’s core inflation rate would never again move below 1%, it has now moved back toward that level. There is little hope of reaching the bank’s self-imposed target of 2% inflation by April 2015.

All of this has led the BoJ to redouble its efforts to reflate the economy by depreciating the currency and pushing down long-term bond yields. It has now made an open-ended commitment to buy JPY 80 trillion in Japanese government bonds a year—or around 15% of GDP. As Exhibit 3 demonstrates, this would take the Japanese central bank far beyond the quantitative easing efforts of other major central banks. It would mean that the central bank will be buying around 100% of Japanese government bonds that are issued, up from 70% before. This will entirely offset reduced buying by Japan’s state pension fund, which simultaneously announced it would invest a higher share of its JPY 127 trillion (U.S.D 1.1 trillion) assets in foreign and domestic stocks.

As in Europe, we believe these developments will be positive for Japanese markets and the economy in the short term and should help to support the improvement we were already seeing in the real economy. Retail sales and industrial production have both picked up recently, and surveys of private investment intentions have also been strengthening. The fall in the world price of oil is another positive for Japan. But for these improvements to be sustained into 2015 and beyond, it will be crucial to see a continued pick-up in nominal wages over the next few months and concrete progress on key structural reforms.

Economic and market implications The contrasting outlook for growth and policy on different sides of the Atlantic is well demonstrated by the 1.5 percent-age point gap that has opened up between the 10-year U.S. Treasury yield and the equivalent German Bund yield. As Exhibit 6 shows, the nominal yield differential is greater than it has been in many years, but it is not the largest gap we have seen in modern times.

EXHIBIT 6: REAL AND NOMINAL 10-YEAR SPREADS BETWEEN U.S. AND GERMAN GOVERNMENT BOND YIELDS

-8

-6

-4

-2

0

2

4

6

'72 '77 '81 '85 '89 '93 '97 '01 '05 '09 '13

Real Nominal

%

Source: Tullet Prebon, FactSet, J.P. Morgan Asset Management. For illustrative purposes only. Data as of November 18, 2014.

What is different about this bout of transatlantic divergence is that, for once, it is the U.S. that is tightening faster than the Europeans, and it is U.S. real yields that are higher. The more common pattern in the past was for U.S. policy to remain loose at a time when Europe, in those days, the German Bundesbank, was tightening. At various points, for example, the mid-1980s, this dynamic has been a source of diplomatic tension and market volatility, largely because of fears that it would lead to a collapse in the value of the dollar. Obviously, the dynamic today is rather different.

We don’t know what the market implications of this period of divergence will be, exactly. But we would highlight three likely implications for economies and investors. The first two are a stronger dollar and continued weak commodity prices. Their implications for emerging market economies are discussed in the next section. The third is that U.S. interest rates are likely to be lower than they would otherwise be—for even longer than previously thought.

V I E W P O I N T Three key implications of this divergent global picture are a stronger U.S. dollar, continued weakness in global commodity prices and looser monetary conditions globally.

Other things equal, lower inflationary pressures and lower interest rates should be good news for the U.S. recovery and therefore good news for the world. We saw a similar dynamic in the late 1990s, when crises and economic slowdown in emerging markets helped to keep commodity prices lower than they would otherwise be and prolong the U.S. recovery.

But there are potential downsides, the most obvious being that the dollar might soar in value and capital inflows might put excessive upward pressure on a U.S. equity market that already looks decently priced, if not yet expensive.

V I E W P O I N TThe fear is that the world will force the U.S. to resume its role as the spender of last resort—at a time when America might otherwise be moving towards more sustainable growth and more normal monetary conditions.

Traditionally, we have questioned whether European monetary policy can truly de-couple from the U.S., given the dominance of U.S. markets. This time, it seems at least possible that we will also see the opposite dynamic, with U.S. long-term rates being pushed down too far by continued global demand for safe assets and the divergent policies of the ECB and the BoJ.

In response, either the Fed would be forced to make sharper, possibly destabilizing increases in short-term rates, or the U.S. would have inappropriately loose monetary conditions at a mature stage of its recovery. Neither possibility is very desirable. But if growth and inflationary pressures in the rest of the world continue to fall short, such a scenario cannot be ruled out.


The return of the greenbackTai Hui, Chief Market Strategist, Asia

IntroductionAfter investing against a weak dollar backdrop for more than a decade, investors are paying close attention to the strength of the U.S. dollar, which could have a significant impact on the global investment landscape in the coming years. The perfor-mance of emerging market (EM) assets will represent a partic-ular concern, given that they have typically underperformed relative to developed market (DM) assets in a strong dollar environment, notably in the 1990s. We believe that more flexible exchange rates and more robust fundamentals should help to reduce the risk of balance-of-payments crises. But differentiation is still the key to generating returns from both EM equities and bonds over the next few years.

The dollar is finding new supportsThe dollar, on a trade-weighted basis, bottomed in 2011. However, its appreciation in recent months has been particularly rapid, catching investors’ attention. On balance, we believe this trend is likely to be sustainable based on two key factors.

First, the Federal Reserve (Fed) is on track to continue with its normalization of monetary policy. It announced the end of the quantitative easing program at its October Federal Open Market Committee (FOMC) meeting. The ongoing improvement in the U.S. economy should allow the central bank to start raising policy rates in 2015. This contrasts sharply with the eurozone and Japan, whose central banks are still in easing mode.

The Bank of Japan surprised the market on October 31 by upsizing its asset purchase program, including increasing

Japanese government bond purchases from JPY 60 trillion—JPY 70 trillion to JPY 80 trillion. The European Central Bank has also pledged to buy covered bonds and asset-backed securities, with the prospect of adopting a more fully fledged program of asset purchases in 2015. This should keep the interest rate differential in favor of the dollar, as shown in Exhibit 1.

The divergence in monetary policy amongst major central banks is also a function of the divergence in economic performance. Solid growth in the U.S. could imply that its authorities could be more tolerant of currency strength compared with Europe and Japan. In fact, an orderly appreciation of the dollar may help to keep inflationary pressure in check and avoid the need for aggressive policy tightening.

Second, the current account position of the U.S. economy has improved considerably since the mid-2000s. As Exhibit 2 shows, the U.S. current account deficit reached 5.8% of GDP in 2006 and dropped to 2.4% by 2013. In 2013, U.S. exports of goods and services were 56% higher than 2006, whereas imports of goods and services were only 24% higher over the same period.

V I E W P O I N TThe U.S. dollar is expected to be supported by favorable interest rate differentials and an improved current account position due to a lower dependence on imported energy.

While the International Monetary Fund (IMF) estimates this should stabilize around 2.5—3% in coming years, this will largely depend on the development of U.S. energy production. In 2013, the domestic production of energy satisfied 84% of domestic consumption, the highest since the early 1990s, according to the Energy Information Agency. A reduction in dependence on imported energy should help to further improve U.S. trade balances. The recent drop in the price of oil is also helpful.

EXHIBIT 1: SPREAD OF FIVE-YEAR SWAPS BETWEEN THE U.S., EUROPE AND JAPAN

EXHIBIT 2: U.S. CURRENT ACCOUNT BALANCE

-2

-1

0

1

2

3

4

5

6

7

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

% USD-EUR spread USD-JPY spread

-8

-6

-4

- 2

0

2

-250

-200

-150

-100

-50

0

50

'60 '66 '72 '78 '84 '90 '96 '02 '08 '14

$bn

Current account balance (LHS)

Current account balance as a % of GDP (RHS)

%

Source: Bloomberg, J.P. Morgan Asset Management. For illustrative purposes only. Data as of November 18, 2014.

Source: BEA, FactSet, J.P. Morgan Asset Management. For illustrative purposes only. Data as of November 18, 2014.



Déjà vu 1990 for emerging markets?Historically, emerging economies have underperformed devel-oped markets during periods of dollar strength from 1994 to 2000, as shown in Exhibit 3. Various financial crises in emerg-ing markets have also brought chaos to EM fixed income. The negative relationship between commodity prices and the dol-lar exchange rate partially explains the underperformance of commodity exporters amongst the emerging markets. We believe this is still applicable in 2015, not only due to expected dollar appreciation but also due to lack of demand growth momentum from China.

EXHIBIT 3: USD REAL EFFECTIVE EXCHANGE RATE AND RELATIVE PERFORMANCE OF MSCI EM/MSCI WORLD

Index, rebased 1993 = 100

MSCI EM / MSCI World (DM)

80

90

100

110

120

130

20

60

100

140

180

'93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13

USD REER

Source: FactSet, MSCI, J.P. Morgan Asset Management. The Real Effective Exchange Rate (REER) is the weighted average of a country’s currency relative to a basket of other major currencies adjusted for the effects of inflation. The weights are determined by comparing the relative trade balances, in terms of one country’s currency, with other countries within the basket. For illustrative purposes only. Data as of November 18, 2014.

Another more critical reason for the poor performance of emerging markets during the 1990s was the number of financial crises that hit the region. Blind faith in currency pegs, despite insufficient foreign exchange reserves to support such arrangements, led to excessive borrowing in the cheaply funded dollar. This generated asset bubbles in Latin America and Asia, which were ultimately were popped by sizeable currency depreciation. This led to severe recessions and economic setbacks.

V I E W P O I N TEmerging markets have traditionally underperformed developed markets during periods of dollar strength.

Looking at the correlation of EM equities performance and dollar trade-weighted index in the past 10 years (Exhibit 4), we note that the MSCI EM Index has a strong negative correlation with the dollar. However, there is significant variation for

different regions within emerging markets. The negative correlation is particularly high with Asia (-0.85) and Latin America (-0.86), but low for EMEA (-0.31). This could be partly explained by the strong influence of the U.S. over Asia and Latin America, as well as Europe‘s status as an alternative source of revenue for companies in the EMEA region.

EXHIBIT 4: CORRELATION MATRIX: USD VS. EM REGIONS

10-year correlations

U.S. TWI MSCI EM Latam EM Asia EM EMEA EM

U.S. TWI 1.00 -0.82 -0.86 -0.85 -0.31

MSCI EM 1.00 0.95 0.99 0.70

Latam EM 1.00 0.94 0.58

Asia EM 1.00 0.62

EMEA EM 1.00

Source: MSCI, FactSet, J.P. Morgan Asset Management. 10-year correlations are from October 2004 to October 2014. For a more detailed discussion, please see “Market Bulletin – Should investors fear a rising dollar?” (November 2014). For illustrative purposes only. Data as of September 30, 2014.

V I E W P O I N TEMEA equities enjoy a relatively low negative correlation with the dollar, compared with Asia and Latam.

Overall, we believe emerging markets are in better shape now than in the 1990s when it comes to external payment stresses. Many of them have made their exchange rates more flexible to deal with imbalances, and a strong currency is no longer mistaken for a sign of economic virility. According to the IMF, out of more than 30 EM countries, 81% of them had some form of a soft currency peg arrangement in 1995 and only 9% had flexible exchange rates. This proportion dropped to 34% soft pegs and 50% floating in 2001, and this ratio has remained steady since (Exhibit 5). Greater flexibility in exchange rates acts as a safety valve. It also allows an economy to adjust to imbalances and have greater autonomy in setting interest rate policy to suit domestic conditions, instead of relying on the U.S.

EXHIBIT 5: TYPES OF EXCHANGE RATE REGIME IN EMERGING MARKETS

1995 2001 2013

Hard pegs 9.4% 15.6% 12.9%

Intermediary regimes

81.3% 34.4% 35.5%

Floating 9.4% 50% 51.6%

Source: IMF, J.P. Morgan Asset Management. Emerging markets include: Argentina, Brazil, Bulgaria, Chile, China, Colombia, Egypt, Ecuador, Hong Kong SAR, Hungry, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Nigeria, Pakistan, Panama, Peru, the Philippines, Poland, Russia, Singapore, South Africa, Sri Lanka, Thailand, Turkey and Venezuela. Intermediary regimes include conventional pegs or bands, crawling pegs or bands, stabilized arrangement and other managed arrangement. For illustrative purposes only. Data as of November 18, 2014.


EM countries have also built up a higher level of foreign exchange reserves relative to their current account position and external debt exposure, as shown by Exhibit 6. Emerging markets now hold more than USD 8 trillion worth of currency reserves. Bilateral and multi-lateral swap agreements have also been signed to enhance defense in the event of capital outflow. Although these emergency measures have not been deployed, they are helpful to reinforce investor confidence.

V I E W P O I N TThe risk of EM currency crisis is reduced by more flexible currency regimes and stronger FX reserve positions.

EXHIBIT 6: FX RESERVE TO CURRENT ACCOUNT BALANCE AND SHORT-TERM EXTERNAL DEBT

14%

54% 84%

108%

146% 158% 166% 167%

234%

330% 353%

11%

69%

15%

142%

58% 35% 29%

16%

87% 110%

33%

0

50

100

150

200

250

300

350

400

China India Malaysia Turkey Mexico Thailand Brazil Philippines Indonesia South Africa Korea

1997

2012

%

Source: OECD, Institute of International Finance, J.P. Morgan Asset Management. For illustrative purposes only. Data as of November 18, 2014. (latest data only up to 2012).

In summary, we feel more confident about emerging markets avoiding balance-of-payments crises. In fact, since the dollar index bottomed in 2011, the relative performance of DM and EM currencies is far from clear cut. Exhibit 7 shows the currency performance against the dollar since 2011. Some of the currencies that have seen the least depreciation against the dollar are from emerging markets, such as Korea, the Philippines and Singapore. The euro’s depreciation thus far is similar to currency depreciation seen in Taiwan, Malaysia and Thailand. Meanwhile, monetary policy saw the Japanese yen depreciate by 40%—a similar amount to the Turkish lira and the Indonesian rupiah. This highlights the importance of differentiation amongst emerging markets.

As highlighted previously, an important differentiator will be a country’s external payment position. Most countries are in a good position. The countries labeled the “Fragile Five” due to their perceived vulnerability to higher U.S. rates have already

seen their currencies depreciate significantly during the 2013 “taper tantrum.” Nonetheless, further adjustments are probably needed for Turkey and South Africa given their sizeable current account deficit. Indonesia and India also need to do more to address their imbalances, but at least their central banks rebuilt credibility with investors with their response to the taper tantrum.

Another differentiator will be an emerging market’s economic and trade connection with the U.S. Economies such as Mexico, Malaysia, Taiwan and Thailand are in a good position to benefit from the U.S. recovery. Exhibit 8 shows the relationship between trade of goods to the U.S. as percentage of GDP and also value-added exports to the U.S. as a share of GDP. Finally, domestic factors, such as prospects for economic reform, are also important. India is a leading candidate in this area given the Modi administration and the upturn in its economic cycle.



Investment implicationsSolid U.S. economic recovery, global monetary policy divergence and an improved U.S. current account position should remain supportive forces for the dollar in the medium term. This could attract international capital to dollar assets. In such an environment, investors could become concerned with the performance of emerging markets given the negative relationship with the dollar historically. We believe the risk of a 1990-style currency crisis is much reduced due to greater currency flexibility and better fundamentals.

Moreover, current valuation of EM equities is low relative to its 20-year average despite mediocre earnings growth. Differentiation is key for investment in emerging markets, both considering the external payment position of the individual market as well as the ability to benefit from the U.S. economic rebound. Idiosyncratic factors, such as economic policy and reforms, will also be a critical factor in determining the outlook of a particular market.

EXHIBIT 7: CURRENCY PERFORMANCE AGAINST THE DOLLAR SINCE MAY 2011

EXHIBIT 8: GROSS EXPORTS AND EXPORT VALUE TO THE U.S. AS A SHARE OF GDP

-80

-70

-60

-50

-40

-30

-20

-10

0

10

Russ

ia

S .A

fric

a

Braz

il

Turk

ey

Japa

n

Indo

nesi

a

Indi

a

Aust

ralia

Euro

pe

Mex

ico

Mal

aysi

a

Thai

land

Taiw

an

UK

Sing

apor

e

Phili

ppin

es

Kore

a

Chin

a

%

Mexico

Hungary

Chile

Turkey

Brazil

China

Taiwan

S. Africa Indonesia

Malaysia

Philippines

Russia

Saudi Arabia

India

Thailand

0

2

4

6

8

10

1 3 5 7 9 11 13

Gros

s m

erch

andi

se tr

ade

to U

.S.,

% o

f GDP

, 201

3

Value-added exports to U.S., % of GDP, 2009

%

%

Source: FactSet, J.P. Morgan Asset Management. For illustrative purposes only. Data as of November 18, 2014.

Source: OECD, FactSet, World Bank, IMF, Lombard Street Research, J.P. Morgan Asset Management. For illustrative purposes only. Data as of November 18, 2014.

The risks associated with foreign securities are magnified in countries in “emerging markets.” These countries may have relatively unstable governments and less-established market economies than developed countries. Emerging markets may face greater social, economic, regulatory and political uncertainties. These risks make emerging market securities more volatile and less liquid than securities issued in more developed countries.


Investment choices in the year aheadDr. David P. Kelly, CFA, Chief Global Strategist

“I have but one lamp by which my feet are guided; and that is the lamp of experience. I know of no way of judging of the future but by the past.” Patrick Henry,

March 23, 1775

IntroductionPatrick Henry’s words could be applied to all types of economic and financial market forecasting. The problem for those making investment choices today is that the dominant forces shaping global financial markets will be the decisions by global central banks to either contract or expand their truly unprecedented monetary stimulus programs. Stephanie Flanders, in this edition of WorldView, lays out our assumptions on the behavior of the major central banks in the year ahead. In theory, a gradual return to normal monetary policy in the United States should be accompanied by a return to “normal” real long-term interest rates. However, the pace at which long-term interest rates might increase is highly uncertain precisely because we have no “lamp of experience”—there is simply no prior example in global financial history of central banks having so deliberately distorted financial markets or, therefore, how markets might react as they remove this distortion.

Fixed incomeWith this serving as a more forceful-than-normal caveat on forecast precision, there is a logical starting point for any global asset allocation discussion and that is the path of short-term U.S. interest rates. At their September meeting, members of the Federal Open Market Committee (FOMC) provided forecasts of where they expected the federal funds rate to be at the end of 2015, 2016 and 2017. The median of these forecasts projects a federal funds rate of between 1.25% and 1.50% by the end of 2015, or 1.25% higher than today.

WorldView readers should also take note of two additional points of clarification. First, there is, of course, no such thing as a truly global investor. Most investors, be they individual or institutional, are interested in returns measured in their home currency. For the purposes of WorldView, all asset choices are assumed to be hedged with exchange rate views being expressed in currency overlays. Second, while most investors should take a long-term perspective, in practice we believe readers of WorldView are most interested in our view of the year ahead and thus this is the focus of our asset allocation views.

This level of interest rates represents more tightening than the market appears to be pricing in, with the January 2016 fed funds futures contract still implying a rate below 0.75%. However, it is important to recognize that these futures contracts are likely being impacted by a very distorted cash market.

In fact, a forecast of a 1.25% increase in the fed funds rate over the course of 2015 seems quite reasonable. The unemployment rate continues to fall faster than expected by the Federal Reserve (Fed) and could hit 5% (which is below the Fed’s own view of the optimal long-term unemployment rate) with a more significant pick-up in wage growth by the end of next year. This scenario would suggest no need for an expansionary monetary policy at all. While this very dovish Fed will probably increase the federal funds rate by no more than a quarter of a percentage point in any one meeting, it will surely appreciate that a smooth move to monetary neutrality requires it to start soon and keep going.

V I E W P O I N TDespite having a fundamentally dovish approach to monetary policy, falling unemployment in 2015 along with signs of wage growth will push the Fed to increase short-term interest rates, leading to higher long-term rates also.

Assuming no bumps in the road (except for a faster-than-the- Fed-expected tightening of the labor market), a first hike in short-term interest rates could occur as early as the Fed meeting in March 2015. However, given inevitable bouts of volatility, still low inflation and an even more dovish composition of the Fed in 2015, on balance, it seems slightly more probable that it will announce a first rate hike at its meeting in June 2015 (March or June seem a little more likely than April, as the FOMC may want to explain its logic through the media of new forecasts and through a press conference from Fed chairwoman Janet Yellen,

At the risk of stating the obvious, in asset allocation, every investor should start with a portfolio that is appropriate for their return expectations, risk tolerance, investment horizon and institutional constraints. To the extent they deviate from this, it should be due to perceived mispricing. But when it comes to the big picture, with millions of investors carefully placing bets on both sides, mispricing should be harder to find than in individual securities. We believe mis-pricing does exist, however, for three reasons: (i) a general misunderstanding of the evolution of the global economy and financial markets; (ii) prejudices in favor of, or against, various asset classes; and (iii) overwhelming official actions, which distort financial markets. All of these forces are present in today’s global investment environment and they are at the root of our asset allocation views.

Diversification does not guarantee investment returns and does not eliminate the risk of loss.



which are scheduled for the March and June meetings but not the April meeting). Either way, once the Fed gets going, it will likely keep going, as a first rate increase in June followed by a quarter of a percentage point increase in rates in every subsequent meeting would still only get rates to the Fed’s long-term target of 3.75% by early 2017, at which time the unemployment rate, on current trends, could be at a highly inflationary sub-4% level.

EXHIBIT 1: FEDERAL FUNDS RATE, 1999-PRESENT, AND FOMC MEDIAN RATE ESTIMATES FROM 2014-2017

0

1

2

3

4

5

6

7

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Long run

Fede

ral f

unds

rat

e

Actual fed funds rate FOMC year-end estimates* Long-run estimate

%

Source: Federal Reserve, FactSet, J.P. Morgan Asset Management. For illustrative purposes only. Data as of November 18, 2014. *FOMC year-end estimates are median estimates of the 17 FOMC participants.

Long-term Treasury rates will likely move higher as the Fed begins to tighten. Fixed income relationships since 2008 have been severely distorted by the financial crisis and policy responses to it. However, in the 50 years to 2007, the 10-year Treasury yield averaged almost 0.9% above the federal funds rate. In a normal economy, this makes perfect sense—investors should not be willing to take on board the extra duration risk of long-term bonds without some compensation.

A return to the historical relationship between the federal funds rate and 10-year Treasuries would thus imply a 10-year yield of more than 4.5% by early 2017 compared to 2.3% at the time of this writing. It may well be less than this if monetary easing from foreign central banks pushes global money into U.S. Treasuries. However, it is important to note that the purpose of monetary tightening by the Federal Reserve is to raise long-term interest rates to slow demand growth and prevent overheating. If the Fed was blithely to accept low long-term interest rates due to foreign conditions while boosting short-term rates, it would end up simulating rather than suppressing demand (since consumers generally earn interest on short-term deposits but pay interest on long-term mortgages).

This being the case, the Fed may ultimately want to ensure that long-term rates stay above short-term rates. With a bloated balance sheet of more than USD 4.5 trillion, which it eventually wants to right-size, the Fed undoubtedly has the firepower to engineer an increase in long-term interest rates. This being the case, we expect 10-year Treasury yields to increase to more than 3.0% by the end of 2015 and to close to 4.0% by the end of 2016.

Such a scenario implies negative total returns along the entire Treasury yield curve for maturities of two years and above over the course of 2015. Consequently, 2015 should be a year to be underweight Treasuries and short duration in the United States. TIPS (Treasury inflation-protected securities) are also likely to provide negative returns in 2015 since the increase in nominal Treasury yields is likely to come from higher real yields rather than higher inflation.

Corporate bonds may outperform Treasuries in an improving economy with rising Treasury rates. As can be seen in Exhibit 2, high yield and high quality corporate bond spreads are at close to average levels, and their higher coupons relative to

EXHIBIT 2: FIXED INCOME SECTOR VALUATIONS: CURRENT AND AVERAGE

VALUATION

YTDReturns

Nominal yields Real yields Spread to Treasury* Duration(Yrs.)Sector Cur. Avg. Cur. Avg. Cur. Avg.

10-Year Treasury 8.6% 2.35% 4.41% 0.78% 2.29% – – 8.9

TIPS 4.6% 2.09% 4.02% 0.52% 2.03% -0.12% 0.33% 6.3

U.S. Agg 5.0% 2.24% 4.81% 0.62% 2.69% 0.12% 0.60% 5.6

MBS 5.2% 2.72% 5.32% 1.14% 3.20% 0.69% 1.18% 4.7

EMD (USD) 7.3% 4.86% 8.89% 3.28% 6.77% 2.58% 4.53% 6.0

Investment Grade Corp. 6.4% 3.03% 5.59% 1.36% 3.47% 0.66% 1.16% 7.2

High Yield 4.6% 5.83% 9.53% 4.39% 7.42% 3.88% 5.46% 4.3

Munis 8.0% 2.11% 4.07% 0.45% 1.95% -0.36% -0.44% 6.6

Source: U.S. Treasury, Barclays Capital, FactSet, J.P. Morgan Asset Management. All data is month-end, all are 20-year averages except for TIPS, which are 15-year averages due to data availability. *Spread to Treasury is calculated using interpolated values for Treasuries to account for differences in maturities. For illustrative purposes only. Data as of November 18, 2014.

Investments in fixed income securities are subject to interest rate risk. If rates increase, the value of the investment generally declines.


Within the U.S. market, large-cap stocks have clearly outperformed small caps on a year-to-date basis, while growth appears cheaper than value relative to the last two decades. However, the most obvious sector or style call is just to consider how different stocks are likely to respond to a stronger growth/higher interest rate environment. In other words, 2015 should be a year for cyclicals rather than defensives.

EXHIBIT 3: LATEST AND 25-YEAR U.S. EQUITY VALUATION MEASURES

U.S. equity: valuation measures

Valuation measure Description Latest 25-year avg*

Forward P/E Price to Earnings 15.7x 15.6x

CAPE Shiller's P/E 26.4x 25.2x

Div. yield Dividend Yield 1.9% 2.1%

REY Real Earnings Yield

3.7% 2.3%

P/B Price to book 2.8x 2.9x

P/CF Price to cash flow

11.2x 11.3x

EY Spread EY minus Baa yield

1.7% -0.7%

Source: Standard & Poor’s, FactSet, Robert Shiller Data, FRB, J.P. Morgan Asset Management. *P/CF is a 20-year average due to cash flow data availability. For illustrative purposes only. Data as of November 18, 2014.

V I E W P O I N TIn the sixth year of an historic bull market, U.S. equity markets still have room to rise based on solid earnings growth, still attractive valuations relative to cash and bonds and oversized investor allocations to cash that should continue to flow toward risk assets.

Outside the United States, the economic picture is not as good, but nor has the market rally been as strong. In Europe, a double-dip recession caused by the sovereign debt crisis prevented earnings from returning to their 2007 peak. However, in 2015 a lower euro, lower oil prices and less austerity and accumulated pent-up demand should boost European economic growth, helping earnings rise. It should be noted, however, that European valuations have already moved up somewhat in anticipation of better earnings growth, potentially limiting further gains.

Treasuries should insulate them somewhat from the impact of higher interest rates. Similarly, the sharp rise in top federal tax rates at the start of 2013 has increased the attractiveness of municipal bonds. Mortgage-backed securities also carry higher yields and relatively normal spreads to Treasuries, and could therefore outperform government bonds in a rising rate environment. However, it is important to recognize that this is mostly an exercise in minimizing losses as rising interest rates should hurt all domestic bonds, with the longest durations likely suffering the greatest losses.

Outside the United States, bond markets may fare better. Recent announcements from the Bank of Japan (BoJ) and the European Central Bank confirm the determination of these central banks to provide further monetary stimulus, and neither Japan nor Europe are showing signs of much economic growth or inflation. Peripheral European debt, however, could be vulnerable to election outcomes as any renewed concern about countries leaving the European Union or the euro would presumably lead to increased credit worries. Still, given the higher yields available on European debt vs. Japanese Government Bonds, we would tend to favor the former over the latter.

Emerging market bonds also, of course, offer higher yields than those available across the developed world. While there are plenty of idiosyncratic risks across emerging markets, countries such as India, where strong central banks are both protecting their currencies and subduing inflation, should offer relatively good returns. The Fed’s tightening path in 2015 has been very well telegraphed and so should cause less volatility than the “taper tantrum” of 2013.

EquitiesThe outlook for global equities continues to look more promising than for fixed income. In the United States, the growth in corporate earnings continues to be really impressive, with just over a 10% year-on-year growth in S&P 500 operating earnings in the third quarter. In 2015, earnings should continue to grow at a roughly mid-single digit pace. Headwinds will include the impact of a stronger dollar on overseas earnings as well as a gradual acceleration in wages and interest costs. However, for at least the next year or two, these forces should be more than offset by higher nominal GDP growth and somewhat stronger productivity growth. In addition, as is shown in Exhibit 3, because of very strong growth in earnings, valuations still look reasonable in absolute terms and attractive relative to inflation and interest rates. Finally, by the end of October, individuals and institu-tions in the United States were holding on to over USD 11 trillion in cash accounts earning essentially zero. As the fear engendered by the financial crisis continues to dissipate, this money is likely to continue to move into both stocks and bonds, helping fuel the continuing stock market rally.

The price of equity securities may rise or fall because of changes in the broad market or changes in a company’s financial condition — sometimes rapidly or unpredictably. These price movements may result from factors affecting individual companies, sectors or industries, such as changes in economic or political conditions. Equity securities are subject to “stock market risk” meaning that stock prices may decline over short or extended periods of time.



EXHIBIT 4: EARNINGS PER SHARE (EPS) FOR NEXT 12-MONTH CONSENSUS, LOCAL CURRENCY, REBASED TO 100, MONTHLY

’07/’08 peak Current % change

MSCI EM 217 182 -16%

S&P 500 150 185 23%

MSCI Europe 161 124 -23%

MSCI Japan 153 144 -6%

0

50

100

150

200

250

'04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Earn

ings

per

sha

re

'14

Source: MSCI, Standard & Poor’s, FactSet, J.P. Morgan Management. For illustrative purposes only. Data as of November 18, 2014.

EXHIBIT 5: FORWARD PRICE TO EARNINGS (P/E) RATIOS FOR THE NEXT 12-MONTH CONSENSUS EPS

Average Current

MSCI EM 11.3x 10.9x

S&P 500 13.8x 15.9x

MSCI Europe 12.0x 13.8x

MSCI Japan 15.9x 14.3x

6x

10x

14x

18x

22x

26x

'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Forw

ard

P/E

Source: MSCI, Standard & Poor’s, FactSet, J.P. Morgan Management. For illustrative purposes only. Data as of November 18, 2014.

In Japan, valuations now look very cheap by historical standards and extreme monetary easing from the BoJ, along with a greater allocation to stocks by the Government Pension Investment Fund, could help Japanese stocks outperform in 2015. It must be noted, however, that Japan’s long-term debt situation remains untenable, increasing medium-term risks.

V I E W P O I N TWhile the U.S. equity market is well positioned in the short run, economic capacity constraints will limit both stock and bond gains in the long-run, pointing to the need to invest in markets with more economic slack for cyclical reasons (in Europe) or structural reasons (in emerging markets).

By contrast, there are many concerns hanging over emerging market equities today, including the gradual slowing of Chinese growth, weakness among commodity producers, political drift away from free enterprise and the potential impact of higher U.S. interest rates on EM flows. However, beyond this, given a faster pace of economic growth, EM earnings should have strong long-term growth potential and valuations do not look extended. Within emerging markets, it should be noted that the Europe, Middle East and Africa region, which can benefit from a European revival, and the Asian region, which should be helped by stronger U.S. growth, look more attractive than Latin America.

Other investment choicesOutside of fixed income and equities, global markets offer plenty of alternative investment choices entering 2015:

• Real estate offers a stream of income, which should continue to be attractive particularly in Europe and Japan, where very easy money should continue to depress fixed income yields.

• Commodities should stay under pressure in the short run. However, they will continue to offer diversification benefits as well as inflation protection in the long run. Energy continues to be a good hedge against geopolitical strife while food and industrial metals should do well if EM growth picks up or the U.S. dollar begins to fall.

• Other alternative strategies should become more attractive as short-term interest rates in the U.S. back up, particularly if this occurs in an environment of more stretched equity valuations.

Finally, 2015 should still be a year for most investors to be underweight cash. The combined efforts of the world’s largest central banks are pushing the world’s savers to either become investors or to suffer near-zero returns. Even as the Fed and Bank of England begin the long road back to normal in 2015, this should continue to be the case. The fundamental rule in investing that has applied over the past five years still applies to the investment environment entering 2015, namely, that when cash pays you nothing it is time to get invested in something.

Americas

Dr. David P. Kelly, CFAManaging DirectorChief Global StrategistNew York

Andrew D. GoldbergManaging DirectorGlobal Market StrategistNew York

Anastasia V. Amoroso, CFAVice PresidentGlobal Market StrategistHouston

James C. Liu, CFAVice PresidentGlobal Market StrategistChicago

Julio C. CallegariExecutive DirectorGlobal Market StrategistSao Paulo

David LebovitzAssociateGlobal Market StrategistNew York

Gabriela D. SantosAssociateGlobal Market StrategistNew York

Ainsley E. WoolridgeMarket AnalystNew York

Hannah J. AndersonMarket AnalystNew York

Europe

Stephanie Flanders Managing DirectorChief Market Strategist, UK & EuropeLondon

Dr. David Stubbs Executive Director Global Market StrategistLondon

Maria Paola Toschi Executive Director Global Market Strategist Milan

Vincent JuvynsExecutive DirectorGlobal Market Strategist Geneva

Tilmann Galler, CFA Executive Director Global Market Strategist Frankfurt

Manuel ArroyoExecutive Director Global Market Strategist Madrid

Lucia Gutierrez Vice President Global Market Strategist Madrid

Kerry Craig, CFA Vice President Global Market Strategist London

Alexander W. Dryden Market Analyst London

Nandini L. Ramakrishnan Market Analyst London

Asia

Tai HuiManaging DirectorChief Market Strategist, AsiaHong Kong

Geoff LewisExecutive DirectorGlobal Market StrategistHong Kong

Yoshinori ShigemiExecutive DirectorGlobal Market StrategistTokyo

Grace Tam, CFAVice PresidentGlobal Market StrategistHong Kong

Ian HuiAssociateGlobal Market StrategistHong Kong

Ben LukAssociateGlobal Market StrategistHong Kong

GLOBAL MARKET INSIGHTS STRATEGY TEAM

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The views contained herein are not to be taken as an advice or 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 should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, the Investor should make an independent assessment of the legal, regulatory, tax, credit, and accounting and determine, together with their own professional advisers if any of the investments mentioned herein are 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. 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.

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Documents

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