Immigration: Debates and Discussions Class Discussions Discussions.
Portfolio Discussions - J.P. Morgan Asset Management - Portfolio...Portfolio Discussions ... 0 123...
Transcript of Portfolio Discussions - J.P. Morgan Asset Management - Portfolio...Portfolio Discussions ... 0 123...
MARKET INSIGHTS UK | Q1 2018
Portfolio DiscussionsConsidering trends and opportunities for investors with Guide to the Markets
jpmorgan.am/portfolio-discussions
CONTENTS
Investing in the UK 2
Investing in emerging markets 8
Investing in Europe 14
Investing in the US 20
Global macro investing 26
INVESTING IN THE UK
Inve
stin
g
in th
e U
K
2 PORTFOLIO DISCUSSIONS – UK | Q1 2018
Investing in the UK
The Brexit negotiations continue to be a source of great economic uncertainty for the UK. The outcome of the negotiations
with the European Union will have a significant effect on the future of the UK, the value of the pound and the relative
performance of different sectors.
Domestic vs. international exposure, large vs. small?
• The large-cap FTSE 100 gets most of its revenues from abroad, whereas the mid-cap FTSE 250 has a larger exposure to the domestic UK economy. Therefore, a fall in the pound should favour internationally exposed large-cap stocks, whereas a rise in the pound should favour smaller, more domestically-focused stocks.
• Mid-cap stocks have strongly outperformed large-cap stocks since the financial crisis but could be more exposed were the UK economy to slow further.
• The average UK equity fund has far more exposure to mid and small cap stocks than the FTSE All-Share.
Investing in the U
K
J .P. MORGAN ASSET MANAGEMENT 3
43
GTM – UK |
0
10
20
30
40
50
60
70
'13 '14 '15 '16 '1775
80
85
90
95
100
105
85
90
95
100
105
'16 '17 '18
0
200
400
600
800
1,000
1,200
'87 '92 '97 '02 '07 '12 '17
UK equities: Large vs. mid/small capitalisation
Trade-weighted GBP and FTSE 250 / FTSE 100Index level, rebased to 100 in Jan 2016
FTSE 100 vs. FTSE 250Index level, rebased to 100 in Jan 1987
UK small & mid cap exposure*%
Source: (Left) Bank of England, FTSE, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) FTSE, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) Morningstar, J.P. Morgan Asset Management. *Exposure to small & mid cap companies is the exposure of all UK funds excluding small & mid cap only funds. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December 2017.
Equi
ties
43
% of revenues from overseas
FTSE 100 68.0%FTSE 250 42.7%
Average fund manager exposure*
Weight of small & mid cap in FTSE All-Share
FTSE 250 / FTSE 100
GBP trade weighted
25th - 75th percentile range
FTSE 250
FTSE 100
INVESTING IN THE UK
Inve
stin
g
in th
e U
K
4 PORTFOLIO DISCUSSIONS – UK | Q1 2018
Attractive income and commodity exposure
• In a world where income is still hard to come by, UK equities offer a very attractive dividend yield relative to other equity markets.
• UK listed companies have a higher proportion of commodity producers and refiners. For five years, the fall in commodity prices had depressed earnings expectations. As commodity prices have recovered from their lows, earnings expectations have also improved.
• UK equities stand to benefit more than most other developed markets from any further improvement in commodity prices.
Investing in the U
K
J .P. MORGAN ASSET MANAGEMENT 5
42
GTM – UK |
0 1 2 3 4 5
5
10
15
20
1,500
2,000
2,500
3,000
3,500
4,000
4,500
180
200
220
240
260
280
300
320
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17
UK equities
FTSE All-Share earnings and performanceNext 12 months’ earnings per share estimates (LHS); index level (RHS)
Commodities weights in global equity markets% of index
Dividend yield and ex-energy dividend yield% yield
Source: (Left) FTSE, IBES, Thomson Reuters Datastream, J.P. Morgan Asset Management. EPS is earnings per share. (Top right) FactSet, FTSE, MSCI, Standard & Poor’s, J.P. Morgan Asset Management. (Bottom right) IBES, MSCI, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December 2017.
FTSE All-Share index level
FTSE All-Share EPS
Equi
ties
Dividend yieldDividend yield ex-energy
42
FTSE All-Share MSCI Europe ex-UK
S&P 500 MSCI Japan
UK
Eurozone
EM
Japan
US
World
INVESTING IN THE UK
Inve
stin
g
in th
e U
K
6 PORTFOLIO DISCUSSIONS – UK | Q1 2018
UK valuations are relatively attractive
• UK equities are neither cheap nor expensive relative to their historical average price-to-earnings (P/E) ratio, but relative to government bonds, the dividend yield available on UK equities looks attractive.
• UK earnings have plenty of room for recovery after their poor performance in recent years. As a result, the cyclically-adjusted P/E, which takes into account our position in the earnings cycle, leaves UK equities looking cheap relative to their long-term average.
Investment implications
• Undemanding cyclically-adjusted valuations and a high dividend yield, could provide support for UK equities.
• Large-cap equities are less exposed to potential domestic economic weakness than mid- and small-cap companies.
• That said, the uncertainty created by the Brexit negotiations argues for taking relatively small active sector and size bets relative to the benchmark.
Investing in the U
K
J .P. MORGAN ASSET MANAGEMENT 7
44
GTM – UK |
5
10
15
20
25
30
'83 '87 '91 '95 '99 '03 '07 '11 '15 0
1
2
3
4
5
6
7
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18
68
1012141618202224
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18
UK equities: Valuations
FTSE All-Share dividend yield and 10-year Gilt yield% yield
FTSE All-Share forward P/E ratiox, multiple
FTSE 100 Shiller CAPEx, adjusted using trailing 10-year average inflation-adjusted earnings
Source: (Top left) FTSE, IBES, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom left) FTSE, Goldman Sachs, J.P. Morgan Asset Management. Index is FTSE 100 due to availability of P/E data. (Right) FTSE ,Thomson Reuters Datastream, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December 2017.
31 December 2017:14.4x
Average: 14.1x
Average: 16.9x
31 December 2017:15.7x
Equi
ties
Dividend yield
10-year Gilt yield
31 December 2017:3.6%
31 December 2017:1.2%
44
INVESTING IN EMERGING MARKETS
Inve
stin
g in
em
ergi
ng m
arke
ts
8 PORTFOLIO DISCUSSIONS – UK | Q1 2018
Investing in emerging markets
Emerging market (EM) equities performed very strongly in 2017, but earnings remain below their prior peaks with room to
recover further. Emerging markets have the potential to grow much faster than developed economies, supporting further
earnings growth.
The long-term growth outlook is positive for EM
• Emerging economies have the potential to grow faster than developed economies with economic development and urbanisation starting from a much lower base. Rising urbanisation tends to coincide with rising productivity and hence rising income per capita.
• Rising incomes help boost local consumption and demand for more goods and services, further supporting stronger economic growth.
• Emerging markets have contributed the majority of global GDP growth since 2000, and this is likely to remain the case in the coming years.
Investing in em
erging markets
J .P. MORGAN ASSET MANAGEMENT 9
32
GTM – UK |
-2
-1
0
1
2
3
4
5
6
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
0 20 40 60 80 100
Emerging markets structural dynamics
Urbanisation and economic growth Contribution to global real GDP growthUrbanisation rates, % and GDP per capita, USD, 1960-2016 % of overall growth
Source: (Left) IMF, J.P. Morgan Asset Management. Urbanisation ratio refers to the proportion of the total population living within an urban area defined by national statistical offices. (Right) IMF World Economic Outlook October 2017, J.P. Morgan Asset Management. 2017 and 2018 are forecasts from the IMF World Economic Outlook October 2017. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December 2017.
US
China
South Korea
India
Global economic growthEM growthDM growth
GD
P pe
r cap
ita
Urbanisation rate
Glob
al e
cono
my
32
INVESTING IN EMERGING MARKETS
Inve
stin
g in
em
ergi
ng m
arke
ts
10 PORTFOLIO DISCUSSIONS – UK | Q1 2018
Prior headwinds for EM have become tailwinds
• Even though emerging markets tend to grow faster than developed markets, they do not always outperform developed market equities. However, when the gap between the growth rate of emerging markets and developed markets increases, emerging markets tend to outperform and vice versa.
• Historically, a weakening US dollar has also been beneficial for the relative performance of EM equities.
• Commodity prices are also important for some commodity-exporting emerging markets, and historically rising commodity prices helped emerging markets outperform.
Investing in em
erging markets
J .P. MORGAN ASSET MANAGEMENT 11
56
GTM – UK |
10
40
70
100
130
160
-1
0
1
2
3
4
5
'97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17
170
330
490
650
406080
100120140160180
'97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17
85
95
105
115
125
13520406080
100120140160180
'97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17
Emerging markets: Macro correlations
EM vs. DM growth and equity performance%, next 12 months’ growth estimates (LHS); index level (RHS)
EM equity relative performance and commoditiesRelative index level rebased to 100 at 1997 (LHS); index level (RHS)
Relative EM / DM equity performance and USD REERRelative index level rebased to 100 at 1997 (LHS); index level (RHS)
Source: (Left) Consensus Economics, J.P. Morgan Asset Management. “EM – DM GDP growth” is consensus estimates for emerging markets growth in the next 12 months minus consensus estimates for developed markets growth in the next 12 months, provided by Consensus Economics. Index level is a relative index level rebased to 100 at 1997. (Top right) Bloomberg, Commodity Research Bureau, MSCI, J.P. Morgan Asset Management. (Bottom right) BIS, Bloomberg, MSCI, J.P. Morgan Asset Management. For all charts, MSCI EM and MSCI DM returns are in USD. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December 2017.
Equi
ties
EM growth & equity outperformance
EM growth & equity underperformance
EM minus DM GDP growth
MSCI EM / MSCI DM
MSCI EM / MSCI DM
CRB Commodity Index
56
USD REER (inverted)
MSCI EM / MSCI DM
INVESTING IN EMERGING MARKETS
Inve
stin
g in
em
ergi
ng m
arke
ts
12 PORTFOLIO DISCUSSIONS – UK | Q1 2018
Valuations are not stretched and earnings remain below prior peaks
• Despite a strong rebound in 2017, EM earnings remain below prior peaks, having experienced a very weak period from 2011 to 2015, as commodity prices depressed revenues.
• Rising GDP growth should continue to boost corporate earnings if commodities are no longer the drag they were in prior years.
• Despite the very strong performance of EM equities, the strong rebound in earnings has meant that valuations still do not look stretched relative to their long-term average.
Investment implications
• Strong GDP growth, as incomes rise, should boost EM earnings over the long run.
• Valuations don’t look expensive compared with their long-run average or with other equity markets.
• A weaker dollar, rising commodity prices and rising EM growth provide a good backdrop for EM equities.
Investing in em
erging markets
J .P. MORGAN ASSET MANAGEMENT 13
36
GTM – UK |
0.0x
0.4x
0.8x
1.2x
1.6x
2.0x
2.4x
2.8x
3.2x
3.6x
4.0x
4.4x
4.8x
5.2x
0x
5x
10x
15x
20x
25x
30x
35x
40x
Price-to-book
Pric
e-to
-ear
ning
s40
60
80
100
120
140
160
180
200
220
'09 '10 '11 '12 '13 '14 '15 '16 '17 '18
Relative equity earnings and valuations
Global earnings Global valuations NTM USD earnings per share estimates, rebased to 100 in Jan 2009 Current and 25-year historical valuations
Source: (Left) FTSE, IBES, MSCI, Standard & Poor’s, Thomson Reuters Datastream, J.P. Morgan Asset Management. NTM is next twelve months. (Right) MSCI, Standard & Poor’s, Thomson Reuters Datastream, J.P. Morgan Asset Management. Valuations refer to NTM aggregate P/E for Europe ex-UK, US, Japan, UK and P/B for emerging markets. Valuation and earnings charts use MSCI indices for all regions/countries, except for the US, which is the S&P 500. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December 2017.
Equi
ties
Japan
Europe ex-UK
US
EM
UK
36
US UKEuropeex-UK
Japan EM
25-year range25-year average
Current
31 Dec ’16
Axis
75x
INVESTING IN EUROPE
Inve
stin
g in
Eur
ope
14 PORTFOLIO DISCUSSIONS – UK | Q1 2018
Investing in Europe
While Europe is growing strongly, company earnings are coming off of a low base and have plenty of room to rise as the
economic recovery continues. We do not expect a recession in Europe and, if political risks continue to subside, investors
could start to focus more on the improving economic and corporate fundamentals.
The European economy is recovering, with recession risk low
• Unemployment in Europe is falling, but given it is still high, there is still plenty of room for the jobless rate to fall further. As falling unemployment is both a sign of corporate optimism and supportive of consumer spending, unemployment continuing to fall should support both the economy and markets.
• Retail sales and industrial production are also recovering, showing that the recovery is broad based.
• Business sentiment surveys suggest growth should remain healthy.
Investing in Europe
J .P. MORGAN ASSET MANAGEMENT 15
16
GTM – UK |
7
8
9
10
11
12
13
'00 '02 '04 '06 '08 '10 '12 '14 '16
Eurozone growth monitor
Unemployment rate%
Retail sales and industrial productionIndex level
Composite PMI and GDPIndex level (LHS); % change year on year (RHS)
Source: (Left and top right) Eurostat, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) Bloomberg, Eurostat, Markit, J.P. Morgan Asset Management. Light grey columns in all charts indicate recession. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December 2017.
Glob
al e
cono
my
GDPPMI
16
Industrial production (LHS)Retail sales (RHS)Recession
90
95
100
105
110
115
120
859095
100105110115120
'00 '02 '04 '06 '08 '10 '12 '14 '16
-6
-4
-2
0
2
4
6
35
40
45
50
55
60
65
'00 '02 '04 '06 '08 '10 '12 '14 '16
INVESTING IN EUROPE
Inve
stin
g in
Eur
ope
16 PORTFOLIO DISCUSSIONS – UK | Q1 2018
Room for recovery in European earnings
• Companies had struggled to grow earnings since 2011, thanks to a combination of slow growth and little corporate pricing power.
• Economic recovery should normally be expected to lead to an improvement in earnings growth. For years, earnings expectations for Europe have started the year high and then been downgraded throughout the year. In 2017, however, earnings expectations were not revised down.
• It is not only expectations that are improving - actual delivered earnings are growing as well and the growth is broad based across most sectors.
Investing in Europe
J .P. MORGAN ASSET MANAGEMENT 17
39
GTM – UK |
-10
-6
-2
2
6
10
14
18
'11 '12 '13 '14 '15 '16 '17 '18
62 23 20 14 10 7 4 3 1-3
-8
-10-505
10152025
500
600
700
800
900
1,000
1,100
1,200
1,300
1,400
80
90
100
110
120
130
140
'08 '09 '10 '11 '12 '13 '14 '15 '16 '17
Europe ex-UK equities: Earnings
MSCI Europe ex-UK earnings and performanceNext 12 months’ earnings per share estimates (LHS); index level (RHS)
Eurozone yearly earningsEPS, % change year on year
Eurozone Q317 earnings by sectorEPS, % change year on year
Source: (Left) IBES, MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. EPS is earnings per share. (Top right) IBES, MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. Expected earnings growth and delivered earnings growth are calculated using IBES consensus estimates for next 12 months’ EPS and last 12 months’ EPS respectively. Year on year growth rates are calculated using year end data. (Bottom right) J.P. Morgan Securities Research, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December 2017.
MSCI Europe ex-UK index levelMSCI Europe ex-UK EPS
Equi
ties
39
Expected earnings growthDelivered earnings growth
INVESTING IN EUROPE
Inve
stin
g in
Eur
ope
18 PORTFOLIO DISCUSSIONS – UK | Q1 2018
The end of European equity underperformance?
• Earnings growth really matters for the performance of European equities. A stronger euro does not mean that European earnings cannot grow strongly, as shown by the period prior to the 2008 financial crisis.
• Margins in Europe are depressed but are starting to rise as stronger nominal growth boosts sales and operating leverage amplifies that into even stronger earnings growth. As European margins are coming off of a low base, they should be able to rise further.
• Some investors fear they are too late to the party in European equities but flow data suggests that not all of the money that came out of European equities is yet to return.
Investment implications
• European equities could benefit from continued economic recovery feeding through into corporate earnings growth.
• The European Central Bank has noted that “political winds are becoming tailwinds.” If concerns around the Italian election in March prove to be overdone, as they did were in France, this could provide a boost for European equities given the improving economic backdrop.
• A stronger euro does not necessarily prevent European companies’ earnings from growing.
Investing in Europe
J .P. MORGAN ASSET MANAGEMENT 19
38
GTM – UK |
-70
-50
-30
-10
10
30
50
-6
-4
-2
0
2
4
6
8
'97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19
Europe ex-UK equities: Earnings fundamentals
Eurozone earnings per share (EPS) and nominal GDP% change year on year
Europe vs. US operating profit margins%, earnings per share / sales per share
European earnings vs. the euroLast 12 months’ earnings per share, euros (LHS); US dollars per euro (RHS)
Source: (Left) Eurostat, IBES, IMF World Economic Outlook, MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. Trailing EPS is last 12 months’ earnings per share. Nominal GDP forecast is from the IMF World Economic Outlook October 2017. (Top right) MSCI, Standard & Poor’s, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December 2017.
Equi
ties
38
MSCI Europe ex-UK
S&P 500
EURUSD
MSCI Europe ex-UK EPS
MSCI EMU trailing EPS
Eurozone nominal GDP
6
7
8
9
10
11
12
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
0.7
0.9
1.1
1.3
1.5
1.7
30
50
70
90
110
130
'98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
2018 GDP forecast: 3.3%
INVESTING IN THE US
Inve
stin
g
in th
e U
S
20 PORTFOLIO DISCUSSIONS – UK | Q1 2018
Investing in the US
US equities have had a fantastic run since 2009. We believe we are now in the late stage of the economic cycle. In the final stages of an economic cycle equity returns have historically been very strong.
The US economy is late cycle but a recession does not seem imminent
• US unemployment has fallen to very low levels. Historically, such low levels of unemployment have been a warning sign that we are late in the economic cycle.
• However, wage growth has tended to accelerate at the end of a cycle, causing a more aggressive monetary policy tightening than we have seen so far this cycle. The recovery could well continue until wages accelerate, causing the Fed to tighten too much.
• We expect unemployment to keep falling, wage growth to start rising and interest rates to keep rising in 2018, but at a very gradual pace.
Investing in the U
S
J .P. MORGAN ASSET MANAGEMENT 21
22
GTM – UK |
0
2
4
6
8
10
12
'67 '72 '77 '82 '87 '92 '97 '02 '07 '12 '17
US labour market
US unemployment rate and wage growth%, wage growth is year on year
Source: BEA, Thomson Reuters Datastream, J.P. Morgan Asset Management. Wage growth is average hourly earnings of total private production and non-supervisory employees. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December 2017.
Glob
al e
cono
my
Unemployment
Wage growth
November 2017: 4.1%
November 2017: 2.3%
22
INVESTING IN THE US
Inve
stin
g
in th
e U
S
22 PORTFOLIO DISCUSSIONS – UK | Q1 2018
Warning signs are not yet flashing red
• While we are probably getting closer to the end of this economic cycle, we do not think we are there yet. Historically, the number of people claiming benefits in the US has started to rise before a bear market, and that hasn’t happened yet.
• Business surveys, such as the ISM manufacturing survey, are likely to fall in 2018, if history is any guide. However, while this means the pace of economic growth may slow, bear markets have tended to require the ISM business survey to fall below 50, indicating economic contraction rather than just slower growth.
• The conference board’s leading economic indicator has fallen before every recession in the last 50 years and has acted as a helpful canary in the coal mine for US equities. Currently, this leading indicator paints a positive picture for the US outlook.
Investing in the U
S
J .P. MORGAN ASSET MANAGEMENT 23
46
GTM – UK |
0
500
1,000
1,500
2,000
2,500
3,000
30
35
40
45
50
55
60
65
'97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17
0
500
1,000
1,500
2,000
2,500
3,000
200
300
400
500
600
700
'97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17
US equities: Macro correlations
ISM manufacturing and S&P 500 performanceIndex level
Initial jobless claims vs. S&P 500 performanceThousands, three-month moving average (LHS); index level (RHS)
Leading economic indicator vs. S&P 500 performanceIndex level
Source: (Left) ISM, Standard & Poor’s, J.P. Morgan Asset Management. The Institute for Supply Management (ISM) survey assesses the economic health of the manufacturing sector by surveying output and employment intentions. Dashed line at 50 indicates the level of the ISM survey where economic conditions are neither accelerating nor deteriorating. (Top right) BLS, Standard & Poor’s, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) Conference Board, Standard & Poor’s, Thomson Reuters Datastream, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results.Guide to the Markets - UK. Data as of 31 December 2017.
ISM manufacturing S&P 500 index level
Leading economicindicator S&P 500 index level
Equi
ties
46
Initial jobless claims S&P 500 index level
0
500
1,000
1,500
2,000
2,500
3,000
80
90
100
110
120
130
'97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17
INVESTING IN THE US
Inve
stin
g
in th
e U
S
24 PORTFOLIO DISCUSSIONS – UK | Q1 2018
Historically, investors have benefitted from the strength of late-cycle returns
• Many investors have been surprised by the strength of US equity returns in 2017. However, strong returns in the last few years of an economic cycle are the norm, not the exception.
• The columns on the right of the table show that in the final year of a bull market, equity returns have never been less than 15%.
• In the final two years of a bull market, the median return has been nearly 40%.
Investment implications
• We believe we are in the late stages of the US economic cycle but not yet at the end.
• Historically, equity returns in the late stage of the economic cycle have always been very strong.
• Equity markets have tended to peak only once the economic data start to indicate the economy is heading into recession; warning signs that warned of past recessions and bear markets are not yet flashing red.
Investing in the U
S
J .P. MORGAN ASSET MANAGEMENT 25
50
GTM – UK |
-100-90-80-70-60-50-40-30-20-10
0
'28 '33 '38 '43 '48 '53 '58 '63 '68 '73 '78 '83 '88 '93 '98 '03 '08 '13
Market correctionsBear markets Macro
environment Bull markets Return before peak
Market Bear DurationRecession
Bull Bull Duration 12 24peak return (months) start date return (months) months months
1 Crash of 1929 – excessive leverage, irrational exuberance Sep 1929 -86% 33 - - -2 1937 Fed Tightening – premature policy tightening Mar 1937 -60 63 Jun 1932 324% 58 27% 119%3 Post WWII crash – post-war demobilisation, recession fears May 1946 -30 37 Apr 1942 158 50 27 574 Flash crash of 1962 – flash crash, Cuban Missile Crisis Dec 1961 -28 7 Jun 1949 436 152 28 235 Tech crash of 1970 – economic overheating, civil unrest Nov 1968 -36 18 Jun 1962 107 78 15 356 Stagflation – OPEC oil embargo Jan 1973 -48 21 May 1970 74 32 16 317 Volcker Tightening – campaign against inflation Nov 1980 -27 21 Oct 1974 126 75 32 488 1987 crash – programme trading, overheating markets Aug 1987 -34 3 Aug 1982 229 61 36 809 Tech bubble – extreme valuations, “dot com” boom/bust Mar 2000 -49 31 Dec 1987 582 150 19 3910 Global Financial Crisis – leverage/housing, Lehman collapse Oct 2007 -57 17 Oct 2002 101 61 16 31
Current cycle – – – Mar 2009 295 106MEDIAN – - 42% 21 158% 68 27% 39%
US bull and bear markets
S&P 500 declines from all-time highs, %
Characteristics of past bear and bull markets*
Source: Bloomberg, NBER, Robert Shiller, Standard & Poor’s, J.P. Morgan Asset Management. *A bear market represents a 20% or more decline from the previous market high using a monthly frequency; a bull market represents a 20% increase from a market trough. Periods of “recession” are defined using US National Bureau of Economic Research (NBER) business cycle dates. Chart and table shows price return. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December 2017.
Equi
ties
Recession
20% market decline
50
7
9
8
6
5
4
3
2
1
10
GLOBAL MACRO INVESTING
Glob
al m
acro
inve
stin
g
26 PORTFOLIO DISCUSSIONS – UK | Q1 2018
Global macro investing
Themes and trends in the global economy are the biggest driver of asset price returns. Global macro investing seeks to take
advantage of these changes by delineating macroeconomic thinking into a set of themes or trends and assigning certain levels
of probability as to how these will evolve through time. To efficiently reflect macro themes in a portfolio, investors must draw on
a broad set of asset classes. Macro investing typically aims to generate positive returns in different market environments, with a
lower level of volatility than equities to limit falls in periods of market stress and achieve a smoother path of portfolio growth.
Aim for positive risk-adjusted returns
• Risk-adjusted returns for a traditional balanced equity and bond portfolio have been very strong over the last few years.
• As we get closer to the end of this economic cycle, returns from traditional assets are likely to fall and volatility is likely to rise, meaning risk-adjusted returns could be lower. In this environment, it probably makes sense to seek exposure to a mix of assets that can provide a lower volatility than equities but that can still deliver attractive positive returns.
• Investors should not rely solely on a negative correlation between stocks and bonds for diversification as this relationship cannot always be relied on when it is needed most, such as in August 2015.
• Funds that can use sophisticated strategies, such as options and shorting, have the potential to protect against portfolio downside and can aim to make money without simply relying on equities or bonds rising in value.
Global macro
investing
J .P. MORGAN ASSET MANAGEMENT 27
73
GTM – UK |
-1
0
1
'91 '96 '01 '06 '11 '16
1.3
-1.1
0.5 0.4
2.9
-3.8
1.0
-0.7
-4
-2
0
2
4
Risk-adjusted returns and downside protection
Risk-adjusted returns of a 50/50 portfolioSharpe ratio of a portfolio of 50% global equities and 50% global bonds*
Six-month stock and bond correlationsOf total return on US equities (S&P 500) and US Treasuries (10-yr)
Hedge fund returns in different market environments%, average total return in up and down months, 2001-2017
Source: (Left) MSCI, J.P. Morgan Multi-Asset Solutions, J.P. Morgan Asset Management. *The equity index is the MSCI World (GBP hedged) and the bond index is the JP Morgan Global Bond Index (GBP hedged). The portfolio is rebalanced monthly. Sharpe ratio is calculated as (Return - Risk free rate) / Volatility. (Top right) Bloomberg, J.P. Morgan Asset Management. (Bottom right) Barclays, Hedge Fund Research, Standard & Poor’s, Thomson Reuters Datastream, J.P. Morgan Asset Management. **HFRI FW is Hedge Fund Research Index Fund Weighted. ***US bonds is the Bloomberg Barclays US Aggregate Bond Index. Downside protection refers to attempting to minimise the impact of any falls in the underlying investments. Past performance is not a reliable indicator of current and future results.Guide to the Markets - UK. Data as of 31 December 2017.
HFRI FW**US bonds***
HFRI FW**S&P 500
5-year Sharpe ratio
3-year Sharpe ratio
S&P 500 up S&P 500 down Bond downBond up
Oth
er a
sset
s73
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
'04 '06 '08 '10 '12 '14 '16 '18
GLOBAL MACRO INVESTING
Glob
al m
acro
inve
stin
g
28 PORTFOLIO DISCUSSIONS – UK | Q1 2018
Go beyond traditional multi-asset investing
• Global macro investing is about assigning probabilities to potential outcomes of trends as they evolve, and understanding the implications for asset classes.
• Macro investing should be highly dynamic, with the ability to move exposures quickly as trends change or surprise events unfold. Macro-driven portfolios often draw on a very broad opportunity set across many asset classes.
• This multi-asset, unconstrained investment style moves away from traditional equity funds that tend to underweight their least preferred regions or sectors. Instead, a macro portfolio only has exposure to investments and strategies that it expects to make positive returns.
• As well as having the ability to use long equity and fixed income strategies to generate positive returns, macro investing can also exploit relative value opportunities. For example, global macro investing can benefit from the expectation that one currency will outperform another based on a prevailing economic theme.
Global macro
investing
J .P. MORGAN ASSET MANAGEMENT 29
83
Govt bonds 52.6%
EME 59.4%
REITS 31.6%
EMD 10.0%
REITS 14.9%
DM Equities 25.0%
REITS 35.1%
REITS 8.2%
HY bonds 36.3%
EME 25.8%
EME 6.6%
HY bonds 12.3%
EME 26.1%
IG bonds 26.5%
HY bonds 41.9%
EME 22.9%
REITS 8.1%
HY bonds 14.4%
Hedge Funds 9.6%
EMD 12.8%
EMD 7.7%
Cmdty 33.4%
DM Equities 12.4%
DM Equities 4.8%
REITS 12.0%
Govt bonds 17.0%
EMD 25.0%
Hedge Funds 18.4%
Cmdty 20.5%
Govt bonds 7.1%
EME 13.4%
Portfolio 6.0%
DM Equities 12.1%
DM Equities 5.5%
EME 33.1%
Hedge Funds 6.0%
Cmdty 3.8%
EMD 11.0%
Cmdty 16.2%
Cash 6.9%
Portfolio 16.5%
HY bonds 18.4%
IG bonds 5.1%
EMD 12.9%
HY bonds 5.3%
IG bonds 9.6%
HY bonds 2.9%
EMD 30.8%
Portfolio 6.0%
Portfolio 2.5%
DM Equities 9.8%
REITS 14.8%
Portfolio 1.3%
DM Equities 16.4%
DM Equities 15.9%
HY bonds 3.9%
DM Equities 11.4%
REITS 1.3%
Portfolio 8.7%
Govt bonds 2.3%
REITS 30.4%
HY bonds 0.9%
REITS 1.5%
Portfolio 8.5%
HY bonds 14.1%
HY bonds 1.2%
REITS 13.5%
EMD 15.3%
Cash 1.2%
Portfolio 8.0%
Cash 0.5%
HY bonds 6.2%
IG bonds 2.0%
DM Equities 29.0%
Cash 0.4%
Hedge Funds 0.9%
IG bonds 8.4%
DM Equities 12.8%
Cmdty -12.5%
EMD 12.1%
Portfolio 14.9%
Portfolio -0.9%
Hedge Funds 7.5%
IG bonds -1.5%
Govt bonds 5.4%
Portfolio 1.3%
Portfolio 25.8%
REITS -0.2%
IG bonds 0.6%
Govt bonds 6.7%
EMD 11.0%
REITS -13.2%
Cmdty 7.3%
Hedge Funds 10.6%
Hedge Funds -2.9%
IG bonds 6.3%
EME -4.1%
EME 4.3%
Cash 0.7%
IG bonds 24.4%
IG bonds -0.4%
Govt bonds 0.3%
EME 6.0%
Hedge Funds 9.4%
DM Equities -17.4%
IG bonds 6.1%
Govt bonds 9.2%
DM Equities -4.3%
Cash 1.4%
Govt bonds -6.1%
Hedge Funds 4.1%
Hedge Funds -0.8%
Govt bonds 21.3%
EMD -1.1%
Cash 0.1%
Hedge Funds 2.9%
IG bonds 9.1%
Hedge Funds -18.3%
Cash 2.2%
IG bonds 9.2%
Cmdty -12.7%
Govt bonds -2.6%
EMD -10.0%
Cash 0.6%
EME -9.7%
Cash 0.7%
Govt bonds -2.0%
HY bonds 0.0%
Cash 1.5%
Portfolio 7.8%
EME -35.2%
Govt bonds -8.6%
Cash 1.0%
EME -17.6%
Cmdty -5.4%
Cmdty -11.2%
Cmdty -11.8%
Cmdty -20.3%
Hedge Funds -1.1%
Cmdty -7.1%
EMD -1.1%
Cmdty -3.2%
Cash 1.8%
Asset class returns (GBP)
Source: Barclays, Bloomberg, FactSet, FTSE, MSCI, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Annualised return covers the period from 2008 to 2017. Vol. is the standard deviation of annual returns. Govt bonds: Bloomberg Barclays Global Aggregate Government Treasuries; HY bonds: Bloomberg Barclays Global High Yield; EMD: J.P. Morgan EMBI+; IG bonds: Bloomberg Barclays Global Aggregate – Corporates; Cmdty: Bloomberg Commodity; REITS: FTSE NAREIT All REITS; DM Equities: MSCI World; EME: MSCI EM; Hedge funds: Credit Suisse/Tremont Hedge Fund; Cash: JP Morgan Cash United Kingdom (3M). Hypothetical portfolio (for illustrative purposes only and should not be taken as a recommendation): 30% DM equities; 10% EM equities; 15% IG bonds; 12.5% government bonds; 7.5% HY bonds; 5% EMD; 5% commodities; 5% cash; 5% REITS and 5% hedge funds. All returns except Hedge Funds are unhedged. All returns are total return, in GBP. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December 2017.
GTM – UK |In
vest
ing
prin
cipl
es83
2010 20122008 2011 20162009 2013 2014 2015 10-yr ann. Vol.Q4172017
GLOBAL MACRO INVESTING
Glob
al m
acro
inve
stin
g
30 PORTFOLIO DISCUSSIONS – UK | Q1 2018
Focus on diversification and correlation
• Diversification is key to macro investing. Generating positive returns in varying market environments requires a diversified return stream. It is therefore critical to understand the relationship between asset classes in normalised market conditions and in periods of market stress.
• As well as seeking diversification within the portfolio, macro investing may seek to have a low correlation to equity and/or fixed income markets when they look less attractive, or when the traditional negative correlation between them comes under stress and is no longer a good source of diversification.
Investment implications
• Global macro is an attractive investment approach, taking advantage of the longer-term trends and rapid changes in the economic environment that have been the principal drivers of asset price returns in recent years.
• A macro strategy is typically complementary to core equity and fixed income funds as it has the ability to be more lowly correlated to traditional markets when they look less attractive and increase exposure when there are greater opportunities.
Global macro
investing
J .P. MORGAN ASSET MANAGEMENT 31
75
1.00 0.80 0.91 0.58 0.83 0.86 -0.25 0.05 0.71 -0.18 0.47 0.71 -0.33
0.84 1.00 0.74 0.65 0.66 0.64 -0.09 0.18 0.35 0.05 0.34 0.43 -0.13
0.78 0.67 1.00 0.58 0.80 0.80 -0.24 -0.06 0.61 -0.06 0.31 0.61 -0.27
0.85 0.75 0.80 1.00 0.57 0.50 -0.07 0.08 0.11 0.19 0.19 0.20 -0.14
0.87 0.62 0.79 0.75 1.00 0.96 -0.14 0.27 0.70 -0.11 0.31 0.66 -0.44
0.86 0.63 0.71 0.64 0.96 1.00 -0.25 0.22 0.79 -0.20 0.48 0.75 -0.44
0.17 0.28 0.11 0.06 0.29 0.33 1.00 0.29 -0.42 0.76 -0.25 -0.55 0.05
0.56 0.66 0.70 0.76 0.53 0.46 0.38 1.00 0.13 0.04 0.03 0.12 -0.26
0.55 0.21 0.39 0.19 0.66 0.77 0.25 0.02 1.00 -0.54 0.42 0.86 -0.52
0.21 0.47 0.20 0.13 0.24 0.29 0.91 0.45 0.18 1.00 -0.11 -0.65 -0.02
0.53 0.55 0.13 0.28 0.29 0.43 0.36 0.35 0.47 0.43 1.00 0.46 -0.09
0.53 0.23 0.80 0.61 0.61 0.46 -0.03 0.51 0.33 -0.11 -0.05 1.00 -0.27
-0.54 -0.19 -0.34 -0.18 -0.45 -0.50 0.07 0.19 -0.66 0.17 -0.33 -0.39 1.00
Correlation of returns (GBP)
Source: Barclays, Bloomberg, Citigroup, FTSE, J.P. Morgan Economic Research, MSCI, NCREIF, Standard & Poor’s, US Federal Reserve,J.P. Morgan Asset Management. UK Gilts: FTSE Actuaries Government Securities UK Gilts All Stocks; EM debt: JP Morgan EMBI Global; High yield bonds: JP Morgan Domestic High Yield; Global bonds: Bloomberg Barclays Global Aggregate; Commodities: Bloomberg Commodity; Hedge Funds: CS/Tremont Multi-Strategy; Real estate: blended index, which includes NCREIF Property Index data and Federal Reserve estimates of changes in capital value. All indices are total returns based on quarterly return data in GBP, real estate correlations are lagged by one quarter. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 December 2017.
GTM – UK |10-year correlations
3-year correlations
FTSE 100 S&P 500
MSCI Europe ex-UK
MSCI Asia
ex-JapanMSCI EM UK Gilts EM debt High yield
bonds Cmdty Hedgefunds
Realestate
Global bonds
MSCI Japan
FTSE 100
S&P 500
MSCI Asiaex-Japan
MSCI EM
UK Gilts
EM debt
High yield bonds
Commodities
Realestate
Global bonds
Hedge funds
MSCI Europe ex-UK
MSCI Japan
Oth
er a
sset
s75
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.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose 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 examples used are generic, hypothetical and for illustration purposes only. 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. 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. 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 are not a reliable indicator of current and future results.
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 European 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 Singapore by JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), or JPMorgan Asset Management Real Assets (Singapore) Pte Ltd (Co. Reg. No. 201120355E); 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 2018 JPMorgan Chase & Co. All rights reserved.
0903c02a81fb9232
LV–JPM50748 | 01/18