Quarterly Perspectives UK | Q3 2016

THIS QUARTER’S THEMES

1 Assessing EU political risks after Brexit

2 Investing in a maturing US economy

3 Flat curves and negative yields: Investing in a lower for longer world

4 Where next for commodities?

STRATEGISTS

Stephanie Flanders Managing Director Chief Market Strategist for the UK & Europe

Tilmann GallerExecutive DirectorGlobal Market Strategist

Vincent Juvyns Executive Director Global Market Strategist

Dr. David Stubbs Executive Director Global Market Strategist

Maria Paola Toschi Executive Director Global Market Strategist

Michael Bell, CFA Vice President Global Market Strategist

Alex Dryden AssociateMarket Analyst

Nandini Ramakrishnan Market Analyst

J.P. Morgan Asset Management is pleased to present the latest edition of Quarterly Perspectives. This piece explores key themes from our Guide to the Markets, providing timely economic and investment insights.

Guide to the MarketsUK | |

MARKET INSIGHTS

Q3 2016 As of 30 June 2016

MARKET INSIGHTS

2 | QUARTERLY PERSPECTIVES | Q3 2016

1 Assessing EU political risks after Brexit

Europe and the need for reform

• Eurosceptic movements such as Podemos in Spain, the 5-Star Movement (5SM) in Italy and the Front National in France have gained support in recent years, in reaction to the prolonged period of austerity and slow growth that has accompanied the eurozone financial crisis.

• The chart below shows the importance of reform in Europe. Fiscal integration, less bureaucracy and the re-thinking of labour market rules and pension systems are conditions to promote more self-sustaining economies and to reduce debt burdens.

• The risk is that Brexit will reinforce support for anti-establishment parties and make it even more difficult to implement these reforms. However, if the UK now suffers economically as a result of Brexit, the political impact could be more benign.

21

GTM – UK |

0

20

40

60

European reform potential

Potential GDP boost by 2025 from implementing reforms Service sector productivityIndex level, rebased to 100 as of December 2006

Difficulty of doing businessIndex level, 2015, lower score indicates an easier business environment

Source: (Left) OECD, J.P. Morgan Asset Management. The size of each bar shows the effect on GDP of each policy simulated in isolation. The reform of retirement policies assumes that the ratio of working-life to life-expectancy converges towards that of Switzerland. Labour market reforms are assumed to gradually reduce the structural unemployment rate to 5% in all countries where it would otherwise be above this level. Product market reforms move each countryʼs regulation gradually towards best practice. (Top right) BEA, BLS, Eurostat, Haver, J.P. Morgan Asset Management. (Bottom right) World Bank, J.P. Morgan Asset Management.Guide to the Markets - UK. Data as of 30 June 2016.

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Labour market reform

Product market reformRetirement policy reform

21

9095

100105110115120125

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

US

Eurozone

% GDP growth

0

2

4

6

8

10

12

Source: Guide to the Markets – UK, page 21

OVERVIEW

• The prospect of the UK leaving the European Union (EU) opens a period of negotiations between the two sides. We expect Europe’s economic growth to be negatively affected by the uncertainty, but we do not think it poses a fundamental threat to the eurozone recovery.

• More difficult to calculate is the broader political impact of Brexit. Europe still needs reforms to support faster and more inclusive growth. If Brexit hastens the rise of eurosceptic parties, these reforms will be more difficult to achieve. But it is also possible that watching the UK suffer the consequences of its decision might cause support for those other parties to wane.

• Whatever happens, we can expect a short-term period of financial volatility. But, European assets still have important arguments in their favour. Both personal consumption and government spending are supportive of growth, reforms are moving forward—albeit slowly—and monetary policy by the European Central Bank (ECB) remains extraordinarily loose.

Europe needs reforms to create conditions for healthier economies with higher growth and lower debt burdens in coming years.

MARKET INSIGHTS

J .P. MORGAN ASSET MANAGEMENT | 3

Many political events are yet to come

• There are a number of political events in Europe that will provide a clue to how Brexit is affecting the environment for policymakers.

• The repeat general election in Spain, held only three days after the Brexit vote, did not put an immediate end to the country’s political instability. But the unexpectedly strong showing for the two establishment parties in the election and the lower-than-expected support for Podemos gave no early indication of political contagion from the UK.

• In Italy, recent municipal elections saw the ascent of two 5SM mayors (Rome and Turin). The key test for the current coalition will be the referendum on recently-passed constitutional reforms, to be held in October.

• Most important will be the 2017 general elections in France and Germany. Investors will watch France especially closely for signs that the Front National has been boosted by Brexit. We can predict that French and German negotiators will be mindful of domestic politics in any discussions with the UK.

There are still opportunities in Europe

• The Brexit vote promises to deliver a period of uncertainty and volatility. But European equities can benefit from a supportive macroeconomic environment. Earnings are unexciting but relatively respectable, if we exclude sectors such as energy and financials, which have seen hits to profits. For the many global investors now looking for income, there is also the important attraction of a relatively high dividend yield on European equities, compared to negative yields on 10-year German government bonds.

• Periphery bonds could come under pressure, being more vulnerable to contagion risk. However, ECB action is expected to reduce volatility, and periphery spreads did not widen in the weeks after the Brexit vote.

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GTM – UK |

5

15

25

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45

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'80 '84 '88 '92 '96 '00 '04 '08 '12 '16 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15-1

0

1

2

3

4

5

6

MSCI Europe ex-UK equity valuations

Dividend yield and 10-year bond yield% yield

MSCI Europe ex-UK forward P/E ratiox, multiple

MSCI Europe ex-UK cyclically adjusted P/E ratiox, adjusted using trailing 10-year average inflation-adjusted earnings

Source: (Top left) FactSet, J.P. Morgan Asset Management. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by consensus estimates for earnings in the next 12 months and is provided by FactSet Market Aggregates. (Bottom left and right) FactSet, MSCI, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 30 June 2016.

'02 '04 '06 '08 '10 '12 '14 '168

12

16

20

24

30 June 2016:14.0x

Average: 13.5x

Average: 19.4x30 June 2016:

15.0x

Eq

uit

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Dividend yield

10-year German bund yield

30 June 2016:3.8%

30 June 2016:-0.1%

38

Source: Guide to the Markets – UK, page 38

INVESTMENT IMPLICATIONS

• The Brexit vote has the potential to increase support for eurosceptic movements in Europe and thereby slow the pace of necessary reforms. However, it will take time to gauge the degree of contagion and early signs from the Spanish election are cautiously positive.

• Political uncertainty is likely to produce further volatility in Europe in the next 12 months, but there are still reasons to maintain exposure to European equities, including decent macroeconomic fundamentals and the search for income.

• With interest rate increases off the table, European investment grade credit should continue to benefit from the ongoing purchase programme of the ECB. Investors may also be drawn to European high yield markets due to the attractive combination of yield and improving fundamentals.

MARKET INSIGHTS

The dividend yield of European equities is high compared with the negative yield of the 10-year Bund.

4 | QUARTERLY PERSPECTIVES | Q3 2016

2 Investing in a maturing US economy

Where are we in the cycle?

• Different indicators are giving conflicting signals as to how far we are from the next US recession. Weak manufacturing data has been a cause for some concern but has not been broad based, suggesting a recession is not imminent.

• The number of homes being built is recovering but is only back to levels that would normally be seen close to the start of a more normal housing cycle. Home building started from such a low level because of the severity of the last recession, and should therefore have further room to recover.

• However, the labour market looks to be in a relatively late-cycle phase, with initial jobless claims close to multi-decade lows. This suggests that while the probability of a recession this year remains relatively low, the medium-term probability is rising.

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GTM – UK |

-30

-20

-10

0

10

20

'74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16

US growth monitor

Industrial production% change year on year

Source: (Top) Haver, J.P. Morgan Asset Management. (Bottom left) US Census Bureau, J.P. Morgan Asset Management. (Bottom right) FactSet,J.P. Morgan Asset Management. Light grey columns in all charts indicate recession. Guide to the Markets - UK. Data as of 30 June 2016.

'74 '79 '84 '89 '94 '99 '04 '09 '140

500

1,000

1,500

2,000

2,500

3,000Recession

'74 '79 '84 '89 '94 '99 '04 '09 '14020406080100120140

160

100

200

300

400

500

600

700

Initial jobless claims vs. consumer confidenceJobless claims in thousands (LHS); Index level (RHS)

Consumer confidenceJobless claims

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25

Manufacturing,ex-metals &machinery

Metals &machinery

Housing startsThousands, SAAR

Source: Guide to the Markets – UK, page 25

OVERVIEW

• The US economic and market recovery is ageing but probably isn’t on its last legs yet.

• There is still a place for US equities in portfolios, but investors should focus on the cheaper parts of the market and on income opportunities rather than hoping for large capital gains.

• It’s also important to focus on strategies that will be able to outperform the market when the next recession does eventually arrive.

Housing still has room to recover.

MARKET INSIGHTS

J .P. MORGAN ASSET MANAGEMENT | 5

The jobs outlook is critical

• For now, despite weak employment growth in May, other indicators suggest the US labour market remains healthy. There are plenty of job openings being advertised and an increasing number of workers quitting their jobs—a sign of labour market strength.

• Historically, such a low unemployment rate has been consistent with an acceleration in wage growth as workers’ bargaining power increases.

• As wages rise, this could put pressure on corporate margins. But even if profits fall as a percentage of GDP and of revenues, profits can still grow in absolute terms if GDP and, therefore, revenues expand. As wage growth accelerates, the rate of profit growth has historically slowed, but in absolute terms, profits haven’t fallen until wage growth has been much higher than it is now.

24

GTM – UK |US labour market

Unemployment rate and wage growth

Quits and job openings

%, wage growth year on year, seasonally adjusted, wages of production and non-supervisory workers

Source: (Top) BEA, FactSet, J.P. Morgan Asset Management. (Bottom left) BLS, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) BEA, FactSet, J.P. Morgan Asset Management.. Guide to the Markets - UK. Data as of 30 June 2016.

24

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Unemployment

Wage growth50-yr average: 4.3%

50-yr average: 6.1%May 2016:

4.7%

June 2016: 2.4%

QuitsJob openings

Thousands % of GDPEmployee compensation and profitability

Corporate profitsEmployee compensation

1,000

2,000

3,000

4,000

5,000

6,000

'01 '03 '05 '07 '09 '11 '13 '15

Source: Guide to the Markets – UK, page 24

MARKET INSIGHTS

The labour market is still healthy.

Profit recovery is key

• Recently, profit growth has stalled and equities have subsequently moved sideways. The problem at the moment is that corporate output prices have been rising at a slower pace than unit labour costs. When this happens, corporate profits decline. The key for the profit outlook is whether corporates will be able to raise prices and whether productivity will pick up—reducing the pace of unit labour cost gains—as the labour market tightens.

• If not, and profits were to contract further, the risk is that US companies could cut back on investment and cut costs by firing people, which could tip the economy into recession. However, if the rebound in oil prices and the fall in the dollar lead to a rebound in profits, as expected, then a recession and bear market is unlikely this year.

• While low unemployment and initial jobless claims indicate that we are approaching the later stages of this economic cycle, they aren’t a reason to panic. In the last two bear markets US equities didn’t suffer until the trend in initial jobless claims started to rise.

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GTM – UK |

0

500

1,000

1,500

2,000

2,500

200

300

400

500

600

700

'97 '99 '01 '03 '05 '07 '09 '11 '13 '15

S&P 500 index level

US S&P 500 performance and drivers

S&P 500 earnings and performanceIndex level, next 12 monthsʼ earnings estimates (LHS); Index level (RHS)

Unit labour costs vs. business output prices% change year on year, four-quarter moving average

Source: (Left) FactSet, Standard & Poorʼs, J.P. Morgan Asset Management. (Top right) BLS, Standard & Poorʼs, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) BLS, Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - UK.Data as of 30 June 2016.

Eq

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43

'08 '09 '10 '11 '12 '13 '14 '15 '1650

60

70

80

90

100

110

120

130

600

800

1,000

1,200

1,400

1,600

1,800

2,000S&P 500 index levelS&P 500 EPS

Initial jobless claims vs. S&P 500 performanceThousands, four week moving average (LHS); Index level (RHS)

Initial jobless claims

Business output pricesUnit labour costs

-3-2-1012345

'88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16

Source: Guide to the Markets – UK, page 43

6 | QUARTERLY PERSPECTIVES | Q3 2016

MARKET INSIGHTS

Monitor initial jobless claims.

INVESTMENT IMPLICATIONS

• Don’t panic, but expect lower returns from US equities as the cycle matures and rising wage growth puts pressure on corporate margins. Earnings can still grow if sales grow, but probably only slowly. Therefore, focus on income and value opportunities rather than expecting strong capital returns from the S&P 500.

• The healthy labour market suggests that the medium-term probability of a recession is increasing even though the near-term probability is low, so investors may contemplate seeking out US equity funds that have proven outperformance in difficult periods for markets.

• Investors may consider complementing US equity holdings with alternative strategies that aim to capture some of the upside that is probably left in this recovery, but that have the ability to limit downside when the next recession does eventually arrive.

3 Flat curves and negative yields: Investing in a lower-for-longer world

Older, slower, weaker

• The new normal. Lower for longer. Secular stagnation. The phases that define the public debate on our economic future hardly bring cheer to the soul. The belief that the slower growth world is here to stay now seems accepted in most policy circles (the International Monetary Fund’s estimate in the chart below shows an organisation coming to terms with the fact that medium-term growth will be slower than expected). You can see why: the numbers are merciless.

• Potential growth comes from more people and productivity. The outlook for both has rarely been worse. The labour force seems set to grow at an ever-slower pace as population growth slackens and the proportion represented by the elderly rises rapidly. On the productivity side, there is less certainty. Theories abound on what drives it: investment, regulation, financial systems, technological transfer, debt levels, necessity, to name just a few. Each can credibly be said to explain part of the dramatic slowing we have witnessed since the Great Recession. None promises salvation.

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-6

-4

-2

0

2

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'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16910111213141516

0.5

1.0

1.5

2.0

'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20

Global supply dynamics

Labour productivity% change year on year

Medium-term GDP growth projections% annual GDP growth for the next five years

Global population% change year on year (LHS); % of population (RHS)

Source: (Left) J.P. Morgan Economic Research, J.P. Morgan Asset Management. GDP-weighted average is used for global pre-and post- crisis levels. *Emerging markets productivity data excludes China and India due to data availability. (Top right) IMF, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Economic Research, United Nations, J.P. Morgan Asset Management. Forecasts from UN. Guide to the Markets - UK. Data as of 30 June 2016.

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14

Pre-crisis average: 1.4%

Post-crisis average: 0.3%

Emerging markets*

Developed marketsPopulation growth

Age 65+

Forecast

0

2

4

6

8

World Developed Markets Emerging Markets

2011 2013 2015

Source: Guide to the Markets – UK, page 14

OVERVIEW

• A combination of a structural deterioration in potential growth and the overhang from the global financial crisis have reduced growth rates and dragged down long-term yields.

• At the same time, many central banks have chosen to push policy rates into negative territory to encourage economic recovery and ensure inflation expectations rise towards their target.

• This action has led to flat, partially negative yield curves, which have made fixed income investing challenging. Investors may consider altering their investment strategy accordingly.

Less room for expansion from slower labour force growth was predicted; the collapse in productivity growth was not.

MARKET INSIGHTS

J.P. MORGAN ASSET MANAGEMENT | 7

8 | QUARTERLY PERSPECTIVES | Q3 2016

INVESTMENT IMPLICATIONS

With such little yield available in traditional government bonds and the risk of a sell-off ever present, investors may consider other options for anchoring their portfolios:

• Unconstrained fixed income: There are some countries in the developed world—and other categories of fixed income—with higher sovereign bond yields than in Europe. Allowing a fund manager a global unconstrained remit can assist in portfolio stability and yield generation.

• Long—short debt or equity funds: These funds aim to produce relatively stable returns that exceed cash. Their return streams are often uncorrelated with core fixed income and provide stability during times of bond turbulence.

• Hedge fund and synthetic fixed income replacements: A new breed of funds has been developed in recent years that aim to provide low-cost access to hedge funds themselves or to replicate their strategies. These funds target uncorrelated returns across market cycles.

Maturity extension might save you from negative yields, but it won’t get you much else.

MARKET INSIGHTS

And we all buy together: negative yields and flatter yields curves

• Slower growth and lower inflation are good for bond prices, as the fixed payments look more attractive and opportunity cost of not being exposed to a growth asset is lower. So it is not surprising that investors have piled in and pushed yields down. But their actions have been compounded by central banks buying, and negative policy rates.

• The result is that many government bond yield curves are negative at the front and flat enough to provide barely any yield at longer maturities. This not only reduces their usefulness as a source of income, but leaves them stretched in valuation terms and prone to rapid sells-offs, as we have periodically witnessed in recent years.

60

GTM – UK |Government bond yields

Yield to maturity of government bonds% yield

Source: (Left) FactSet, Tullet Prebon, J.P. Morgan Asset Management. (Top right) Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) Bloomberg, BofA/Merrill Lynch, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 30 June 2016.

Fix

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in

com

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Yield below 1%

Yield below 0%

Apr-16

Global government bond yields

Months Years

% of BofA/Merrill Lynch Global Government bond index

US yield curve%, 10-year yield minus 2-year yield

Recession

60

0

20

40

60

80

Jan-14 Jun-14 Dec-14 May-15 Nov-15

-1

0

1

2

3

'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16

-1

0

1

2

1 3 6 1 2 3 5 7 10 15 20

JapanGermany

USUK

Source: Guide to the Markets – UK, page 60

J .P. MORGAN ASSET MANAGEMENT | 9

4 Where next for commodities?

The outlook for commodities

• As highlighted in the left-hand chart, commodity prices have begun to tick up since the turn of the year. But does this rebound have further to run?

• Eight years of falling prices have triggered significant production cuts in many commodities. From the summer of 2014 to the end of 2015, oil firms cut capital expenditure by USD 385 billion—equivalent to 3 million barrels a day of production being delayed until after 2020.

• While supply cuts have supported prices for some commodities, this is not a universal story. The outlook for industrial metals remains fairly bleak due to significant supply overhangs from China and other markets. This raises the prospect of increased divergence in price performance across different commodities in the months ahead.

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'95 '00 '05 '10 '15

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2000 2005 2010 2015

Commodities

Commodity pricesIndex level, rebased to 100 at December 2012

Chinaʼs imports of key commoditiesThousand metric tonnes

Gross fixed capital formation in commodity industryIndex level, rebased to 100 at January 1995

Source: (Left) Bloomberg, FactSet, J.P. Morgan Asset Management. (Top right) Thomson Reuters Datastream, China Customs, J.P. Morgan Asset Management. (Bottom right) Australia Bureau of Statistics, Worldscope, Thomson Reuters Datastream, J.P. Morgan Asset Management. *Global data defined as global listed integrated oil and gas. Guide to the Markets - UK. Data as of 30 June 2016.

'13 '14 '15 '1620

40

60

80

100

120

140

66

Bloomberg Commodity Index weightsLivestock 6% Industrial metals 17%Energy 31% Precious metals 15%Crops 31%

Global oil and gas*

Australian mining

Oth

er

ass

ets

Iron ore (LHS)

Copper (RHS)Crude oil (LHS)

Source: Guide to the Markets – UK, page 66

The bear market in commodities is showing signs of coming to an end as commodity prices across the board have begun to rally in 2016.

MARKET INSIGHTS

OVERVIEW

• Falling commodity prices over the last few years have been viewed as symptomatic of broader economic malaise and a shaky outlook for Chinese growth and demand.

• Since its peak in February 2008, the Bloomberg Commodity Index, which measures a broad basket of commodities, has fallen 62%. However, there are signs that this bear market is beginning to come to an end, with prices rallying 14% so far this year.

• There is limited reason to expect a dramatic rebound in commodity prices from here. But if the market is now past the worse, this would have important implications for commodity producers, emerging markets and the medium-term inflation outlook.

10 | QUARTERLY PERSPECTIVES | Q3 2016

The rebound in commodities has resulted in inflation forecasts rising sharply. Most are still below the 2% target major developed countries have.

MARKET INSIGHTS

Inflation could pick up

• As highlighted in the left-hand chart, falling commodity prices have acted as a disinflationary force in recent years. Inflation since the financial crisis has averaged just 1.2%, vs. 2.0% in the years leading up to the crisis.

• With commodity prices beginning to rise again, these disinflationary forces are likely to become inflationary pressures. If the oil price were to end 2016 at USD 50 a barrel, this would represent a 37% increase since the end of 2015.

• This has begun to feed through into inflation forecasts. The right-hand chart shows that inflation for the major developed economies is expected to pick up sharply over the course of the year.

• The prospect of higher inflation is unlikely to trigger a response from interest-rate setters in the near term. A little inflation—after years of inflation undershooting—may in fact be welcomed by central banks as a providing a boost to nominal growth.

11

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-1

0

1

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'13 '14 '15 '16 '17-2

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'93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15

Global inflation dynamics

Developed economy inflation Inflation and inflation forecasts% change year on year % change year on year

Average Jan 1993 to Dec 2008: 2.0%

Average Jan 2009 to May 2016: 1.2%

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Source: (Left) Haver Analytics, J.P. Morgan Asset Management. (Right) Bank of Japan, European Central Bank, J.P. Morgan Economic Research, ONS, Thomson Reuters Datastream, US Federal Reserve, J.P. Morgan Asset Management. *Inflation projections are J.P. Morgan Economic Research forecasts. Guide to the Markets - UK. Data as of 30 June 2016.

UKEurozone

US

Japan

Projection*

11

Policy target

Source: Guide to the Markets – UK, page 11

J .P. MORGAN ASSET MANAGEMENT | 11

INVESTMENT IMPLICATIONS

• Some parts of the commodity market are rebalancing faster than others. This is likely to produce increased divergence in performance, with commodities unlikely to move as one homogenous block.

• Higher commodity prices spell higher inflation, but stronger price pressure could come as a welcome surprise for many investors after so many years of disinflation. Central bankers are also likely to tolerate some above-target inflation in the near term.

• It is early days. But a bottoming-out—and potential recovery—in at least some key commodity markets could allow some unloved resource companies and asset classes, such as EM equities, to begin to return to favour as earnings expectations improve.

In a world of relatively expensive valuations emerging markets equities look especially attractive.

MARKET INSIGHTS

A brighter commodities outlook could help emerging markets

• Emerging market (EM) assets have been particularly vulnerable to the slowdown in commodities due to the high weighting of commodity exports in EM indices. Approximately 28% of EM equities and 58% of EM debt is exposed to commodity-exporting nations, such as Brazil and Russia.1

• As we highlight in the left-hand chart, the valuations of EM equities are close to historic lows, with the price/book (P/B) ratio for the index at 1.4x, one of the lowest levels since 2009. The right-hand chart shows that P/Bs of this level have historically often resulted in double-digit returns over the subsequent 12 months.

• Coupled with these low valuations and the heavy sell-offs in many EM currencies, the potential end to the commodity bear market has increased the attractiveness of EM assets in recent months.

51

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0.75

1.00

1.25

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1.75

2.00

2.25

2.50

2.75

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

Emerging markets: Valuations and returns

MSCI Emerging Markets Index: Price-to-book ratio MSCI Emerging Markets Index: Price-to-book and returnsx, multiple Price-to-book ratio and next 12 monthsʼ % price return*

Source: (All charts) FactSet, MSCI, J.P. Morgan Asset Management. *Dots represent monthly data points between December 1995 and June 2016.Guide to the Markets - UK. Data as of 30 June 2016.

-2.0 std. dev.

+2.0 std. dev.

Average: 1.78x

30 June 2016:1.39x

Eq

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Current level

51

-60

-40

-20

0

20

40

60

80

0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.25

Source: Guide to the Markets – UK, page 51

1 Index used for EM bonds is the JP Morgan GBI. Index used for EM equities is the MSCI EM.

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The Market Insights programme provides comprehensive data and commentary on global markets without reference to products. Designed as a tool to help clients understand the markets and support investment decision-making, the programme explores the implications of current economic data and changing market conditions.

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 production, 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 investment involves risks, 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.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other EU jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited; in India by JPMorgan Asset Management India Private Limited; in Singapore by JPMorgan Asset Management (Singapore) Limited, or JPMorgan Asset Management Real Assets (Singapore) Pte Ltd; in Taiwan by JPMorgan Asset Management (Taiwan) Limited; in Japan by JPMorgan Asset Management (Japan) Limited which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Korea by JPMorgan Asset Management (Korea) Company Limited; in Australia to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Cth) by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919); in Brazil by Banco J.P. Morgan S.A.; in Canada for institutional clients’ use only by JPMorgan Asset Management (Canada) Inc., and in the United States by JPMorgan Distribution Services Inc. and J.P. Morgan Institutional Investments, Inc., both members of FINRA/SIPC.; and J.P. Morgan Investment Management Inc.

In APAC, distribution is for Hong Kong, Taiwan, Japan and Singapore. For all other countries in APAC, to intended recipients only.

Copyright 2016 JPMorgan Chase & Co. All rights reserved.

Activity ID: 4d03c02a800327f0

Material ID: 0903c02a814f833a

LV–JPM31704 | 07/16

MARKET INSIGHTS