Guide to the Markets - XSTREAMING.ES...Source: 2021 Long-Term Capital Market Assumptions, J.P....

Guide to the Markets

MARKET INSIGHTS

Karen Ward, Chief Market Strategist, EMEA

January 2021

| FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY – NOT FOR RETAIL USE OR DISTRIBUTION

Summary

• Monetary and fiscal policy provided a bridge over troubled waters

• And thanks to the vaccine we can now see the other side

• Bridges are expensive…interest rates will have to stay low

• So we need to work harder for portfolio returns:

• Identifying the equity market rotations that are likely as the

recovery takes hold

• Taking advantage of Asia’s decade

• Taking advantage of the shift from consumer tech to climate tech

• Using alternatives to improve the risk/return of a portfolio

• Remain watchful of the risks…particularly inflation


2021 Outlook: A bridge over troubled waters


|The policy bridge

Government budget deficits and central bank government bond purchases% of nominal GDP, 2020 estimate

Source: Bank of England, Bank of Japan, Bloomberg, European Central Bank, IMF, US Federal Reserve, J.P. Morgan Asset Management. Budget deficits as % of GDP are forecasts for 2020 from

Bloomberg contributor composite. Central Bank government bond purchases are J.P Morgan Asset Management forecasts for 2020. Past performance and forecasts are not reliable indicators of current

and future results. Data as of 17 November 2020.

0

2

4

6

8

10

12

14

16

UK US Eurozone Japan

2020 change in budget deficit as % of GDP Central banks' government bond purchases as % of GDP


US focus: Saving, borrowing and bankruptcies

Source: (Left) Bloomberg, US Federal Reserve, J.P. Morgan Asset Management. (Right) Administrative Office of the United States Courts, Refinitiv Datastream,

J.P. Morgan Asset Management. Periods of “recession” are defined using US National Bureau of Economic Research (NBER) business cycle dates. Past performance is not a reliable indicator of current

and future results. Guide to the Markets - Europe. Data as of 31 December 2020.

US net saving and borrowing by sector% of nominal GDP

US company bankruptciesThousands of companies per quarter

Net

borrowing

Net

saving

Recession

-30

-20

-10

0

10

20

30

'94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

Government

Households

0

2

4

6

8

10

12

14

16

18

20

'94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

25


Eurozone government debt and bond spreads

France, Germany, Italy and Spain government debt to GDP European 10-year government bond spreads over Germany% of nominal GDP % spread

Source: (Left) Bank for International Settlements, Refinitiv Datastream, J.P. Morgan Asset Management. Italy and France data are four-quarter moving averages. Debt refers to gross debt. Dotted lines

represent the IMF forecasts for government debt to GDP in 2020 and 2021. (Right) Refinitiv Datastream, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future

results. Guide to the Markets - Europe. Data as of 31 December 2020.

Germany

Spain

France

Italy

Spain

France

Italy

0

1

2

3

4

5

6

7

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21

0

20

40

60

80

100

120

140

160

180

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21

Forecast

34


|The bad news…starting valuations are stretched in some markets

Equity and credit valuations at the start of the cyclex, multiple (LHS); % point option-adjusted spread (RHS)

Source: Bloomberg Barclays, ICE BofA, MSCI, Refinitiv Datastream, Standard & Poor's, J.P. Morgan Asset Management. April 2009 and May 2020 mark the start of the last two US cycles as defined by the

trough in earnings per share estimates. US: S&P 500; Europe: MSCI Europe; EM: MSCI EM; Global HY: ICE BofA Global High Yield; Global IG: Bloomberg Barclays Global Aggregate – Corporates. Past

performance is not a reliable indicator of current and future results.

Data as of 17 November 2020.

0

2

4

6

8

10

12

14

16

0

5

10

15

20

25

US Europe EM Global HY Global IG

Equity CreditApril 2009 May 2020


Themes for 2021


The Covid winners/losers narrative could change


20

40

60

80

100

120

140

160

20

40

60

80

100

120

140

160

Equity focus: Earnings and stock market dispersion

Global equity forward earnings estimates Global equity performance by sectorNext 12 months’ earnings per share, rebased to 100 at the start of 2020 Total return index level, rebased to 100 at the start of 2020

Source: (All charts) IBES, MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. ACWI is the All Country World Index and includes developed and emerging market stocks. Past performance is not a

reliable indicator of current and future results. Guide to the Markets - Europe. Data as of 31 December 2020.

MSCI ACWI

Cons. Disc.

IT

Comm. Serv.

Financials

Industrials

Energy

Jul ’20Jan ’20 Mar ’20 Sep ’20 Nov ’20May ’20 Jul ’20Jan ’20 Mar ’20 Sep ’20 Nov ’20May ’20

MSCI ACWI

Cons. Disc.

IT

Comm. Serv.

Financials

Industrials

Energy

Jan ’21 Jan ’21

65


Asia’s decade


|China’s bounceback has been extraordinary

Real GDP levelsIndex level, rebased to 100 at 1Q 2006

Source: BEA, Bloomberg, Eurostat, National Bureau of Statistics of China, ONS, J.P. Morgan Asset Management. Forecasts are from Bloomberg

contributor composite. Past performance and forecasts are not reliable indicators of current and future results. Guide to the Markets - UK.

Data as of 17 November 2020.

40

100

160

220

280

340

400

90

100

110

120

130

140

150

'06 '08 '10 '12 '14 '16 '18 '20 '22

Forecast

Eurozone

US

UK

China

Glo

ba

l e

co

no

my

48

49

GTM - Europe

GTM - UK


0

10

20

30

40

50

60

70

80

90

100

Emerging market focus: Share of global GDP and rising middle class

Source: (Left) Refinitiv Datastream, World Bank, J.P. Morgan Asset Management. (Right) Brookings Institute, J.P. Morgan Asset Management. Middle class is defined as $3,600-$36,000

annual per capita income in purchasing power parity terms. Historical (1995) and forecast figures (2019 and 2030) come from the Brookings Development, Aid and Governance Indicators.

Past performance is not a reliable indicator of current and future results. Guide to the Markets - Europe.

Data as of 31 December 2020.

Share of global real GDP%

Growth of the middle class% of population

0

5

10

15

20

25

30

'70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20

US

Eurozone

China

Japan

India

20191995 2030 forecast

India Indonesia China Brazil Mexico

46


|

0 2 4 6 8 10 12 14 16

EM stocks looks favourable on our long-term projections

2021 Long-Term Capital Market Assumptions expected returns in coming 10-15 years%, annualised return in EUR

Source: 2021 Long-Term Capital Market Assumptions, J.P. Morgan Multi-Asset Solutions, J.P. Morgan Asset Management. Returns are nominal and in EUR. Past returns are calculated from the start of

2009 up to the end of October 2020, or the most recent available data. The projections in the chart above are based on J.P. Morgan Asset Management’s proprietary long-term capital market assumptions

(10-15 years) for returns of major asset classes. The resulting projections include only the benchmark return associated with the portfolio and do not include alpha from the underlying product strategies

within each asset class. The assumptions are presented for illustrative purposes only. Past performance and forecasts are not reliable indicators of current and future results. Guide to the Markets - Europe.

Data as of 31 December 2020.

Euro cash

Euro government bonds

Euro government inflation-linked bonds

Euro investment-grade corporate bonds

US large cap

Global infrastructure

European ex-UK core real estate

Asia ex-Japan

Emerging markets

Fixed income

Equity

Alternatives

Historical return since 2009

Japan

Eurozone large cap

80GTM - UK


Global momentum towards tackling climate change


All regions will have to intensify efforts to meet their climate objectives

Emissions targets Global emissions covered by carbon pricing initiatives MtCO2e/year % of global emissions

Source: (Left) ClimateActionTracker, J.P. Morgan Asset Management. MtCO2e is metric tons of carbon dioxide equivalent. (Right) World Bank, J.P. Morgan Asset Management. ETS is emissions trading

system. *Carbon price or tax is based on nominal prices from 1 April 2020. China ETS carbon price is based on the Beijing pilot ETS. Other notable carbon prices are; Switzerland ETS carbon price: 19

USD; UK carbon price floor: 22 USD; US California ETS: 15 USD. Past performance and forecasts are not reliable indicators of current and future results. Data as of 31 October 2020. Past performance is

not a reliable indicator of current and future results. Guide to the Markets - Europe. Data as of 31 December 2020.

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

1990 2000 2010 2020 2030 2040 2050 2060

US

EU

China

Government net

zero targets

Carbon tax/price*

12 USD

3 USD

33 USD

19 USD

0

5

10

15

20

25

'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

Other

EU ETS

South Korea ETS

Japan carbon tax

China ETS

Forecast


0

2

4

6

8

10

12

14

16

Sustainable investment performance and market size

Sustainable investment assets under managementUSD trillions

Source: (Left) MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. The MSCI World ESG Leaders Index is a capitalisation-weighted index that provides exposure to companies with high

Environmental, Social and Governance (ESG) performance relative to their sector peers. It aims by design to have a relatively low tracking error to MSCI World. (Right) Global Sustainable Investment

Alliance (GSIA), J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Guide to the Markets - Europe. Data as of 31 December 2020.

17%

114%25%

19%

8%

2016

Compound annual

growth rate

2018

Europe US Japan Canada Australia/New

Zealand

MSCI World ESG performanceIndex level in USD, rebased to 100 at Jan 2008

MSCI World

MSCI World ESG leaders

40

60

80

100

120

140

160

180

200

'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

83


The debt deluge means lower interest rates for even longer


20

40

60

80

100

120

'40 '50 '60 '70 '80 '90 '00 '10 '20 '30

US debt

US federal net debt US nominal GDP growth and 10-year Treasury yield% of nominal GDP, by end of fiscal year %, nominal GDP growth is % change year on year

Source: (Left) BEA, Congressional Budget Office (CBO), Treasury Department, J.P. Morgan Asset Management. CBO forecast is from its September 2020 Budget forecast. (Right) BEA,

Haver Analytics, Robert Shiller, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results.

Guide to the Markets - Europe. Data as of 31 December 2020.

CBO

Forecast

2020:

100,1%

2030:

108,9%

0

2

4

6

8

10

12

14

16

'40 '50 '60 '70 '80 '90 '00 '10 '20

US nominal GDP

10-year moving

average

US 10-year Treasury yield

21


|

-2

-1

0

1

2

3

4

5

6

7

8

Fixed income yields

Fixed income yields%

Source: Bloomberg, Bloomberg Barclays, ICE BofA, J.P. Morgan Economic Research, Refinitiv Datastream, J.P. Morgan Asset Management. Beta to MSCI World is calculated using monthly total returns since 2008.

Indices used are as follows: Euro IG: Bloomberg Barclays Euro-Aggregate – Corporate; Global IG: Bloomberg Barclays Global Aggregate – Corporate; UK IG: Bloomberg Barclays Sterling Aggregate – Corporate; US

IG: Bloomberg Barclays US Aggregate – Corporate; Euro HY: ICE BofA Euro Developed Markets Non-Financial High Yield Constrained Index; Global HY: ICE BofA Global High Yield Index; US HY: ICE BofA US High

Yield Constrained Index; EMD corporate: CEMBI Broad Diversified; EMD local: GBI-EM Global Diversified: EMD local – China: GBI-EM China: EMD sovereign: EMBI Global Diversified; EMD sov. IG: EMBI Global

Diversified IG; EMD sov. HY: EMBI Global Diversified HY. Past performance is not a reliable indicator of current and future results. Guide to the Markets - Europe. Data as of 31 December 2020.

Developed market

government bondsInvestment-grade bonds High yield bonds Emerging market bonds

Return beta to MSCI World

-0,1 0,0 -0,1 0,1 -0,2 0,1 0,2 0,3 0,2 0,2 0,2 0,2 0,4 0,5 0,4 0,5 0,5 0,3 0,0 0,3 0,1 0,4 0,5

67GTM - UK


Rethinking the 60:40 portfolio


Fixed income focus: Yield compression and government bond returns

Developed market government bond yields% of ICE BofA Global Government Bond Index

Source: (Left) Bloomberg, ICE BofA, J.P. Morgan Asset Management. Index shown is the ICE BofA Global Government Bond index. (Right) Refinitiv Datastream, J.P. Morgan Asset Management. Returns

are shown over the period when MSCI World was falling in local currency terms. Tech bubble: 24 Mar '00 to 21 Sep '01; Global financial crisis: 13 Jul '07 to 9 Mar '09; Eurozone sovereign debt crisis: 18 Feb

'11 to 3 Oct '11; Covid-19: 19 Feb '20 to 23 Mar '20. Past performance is not a reliable indicator of current and future results. Guide to the Markets - Europe. Data as of 31 December 2020.

10-year government bond returns during equity market shocks

%, total return over the period

% yielding below 1%

% yielding below 0%

US

Germany

UK

-5

0

5

10

15

20

25

30

35

Eurozone sov.

debt crisis

Tech bubble Covid-19Global financial

crisis0

10

20

30

40

50

60

70

80

90

100

'14 '15 '16 '17 '18 '19 '20

74


|

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1

2

3

4

5

6

0 2 4 6 8 10 12 14 16 18

Co

mp

ou

nd

retu

rn

Volatility

Expected returns and volatility for a EUR investor in coming 10-15 years % annual compound return

Source: 2021 Long-Term Capital Market Assumptions, J.P. Morgan Multi-Asset Solutions, J.P. Morgan Asset Management. The resulting projections include only the benchmark return associated with the

portfolio and do not include alpha from the underlying product strategies within each asset class. Macro hedge fund return expectations are currency hedged. The assumptions are presented for illustrative

purposes only. Past performance and forecasts are not reliable indicators of current and future results. Guide to the Markets - Europe. Data as of 31 December 2020.

100% Eurozone

large cap60% Eurozone large cap

10% Euro government bonds

10% Europe ex-UK core real estate

10% Global infrastructure equity

10% Macro hedge funds

60% Eurozone large cap



Adding alternatives may help improve the risk/return profile of a portfolio

Oth

er

asse

ts

82GTM - Europe


Central projections and risks


Inflation would be an unwanted guest

UK and US headline inflation with forecasts US headline personal consumption deflator% change year on year % change year on year

Source: (Left) BLS, ONS, J.P. Morgan Securities Research, J.P. Morgan Asset Management. Forecasts are from J.P. Morgan Securities Research and are from Q4 2020 onwards. (Right) Refinitiv

Datastream, J.P. Morgan Asset Management. Past performance and forecasts are not reliable indicators of current and future results. Data as of 30 November 2020.

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

'13 '14 '15 '16 '17 '18 '19 '20 '21

US

UK

Forecast

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

'11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22

Fed’s 2% target

3-year

avg.: 1.6%

Required 3-year

avg.: 2.4%


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Guide to the Markets - XSTREAMING.ES...Source: 2021 Long-Term Capital Market Assumptions, J.P....

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