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Quarterly Perspectives UK | Q4 2016

THIS QUARTER’S THEMES

1 What the election may mean for US economic strength

2 Brexit’s effect on the UK economy and equities

3 Emerging markets: do we trust the recovery?

4 Fixed income options for our low yield reality

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, CFA 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 Markets

UK | |

MARKET INSIGHTS

Q4 2016 As of 30 September 2016

MARKET INSIGHTS

2 | QUARTERLY PERSPECTIVES | Q4 2016

1 What the election may mean for US economic strength

The US presidential campaign has been unusual from the start, most notably for the unexpected rise of non-establishment candidates Donald Trump and Senator Bernie Sanders:

• The pace of this recovery has been significantly slow—around half that of a typical cycle. Real income growth has been anaemic, and while wealthy households have enjoyed a boost from rising stock and home prices, middle-income households have been disproportionately penalised by ultra-low interest rates.

• While the odds of Hillary Clinton winning the presidency are currently 67.3%, it is not predicted that Congress will have a Democrat majority. (The presidential winner need not be from the same party as the Congress majority). With a Democratic president and Republican majority in Congress, major policy changes are unlikely to get passed.

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60

US politics

Real median income by quintileRebased to 100 in 1990

Composition of CongressNumber of seats held by each party

Odds of winning the general election% chance

Source: (Top left) New York Times, Real Clear Politics, United States Senate, United States House of Representatives, J.P. Morgan Asset Management. There are 44registered Democrats in the US Senate and two Independents who caucus with the Democrats. Percentage swing in votes needed to shift party control of each chamber of Congress is calculated as the vote spread in the last election for each individual seat plus the percentage change nationally required so that a new party would attain a majority. (Bottom left) Nate Silver and FiveThirtyEight.com, J.P. Morgan Asset Management. (Right) US Census Bureau, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 30 September 2016.

Gl

obal

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nom

y

Republican RepublicanDemocrat Democrat

Senate House of Representatives

5.0% swing needed

14.5% swing needed

90

95

100

105

110

115

120

125

130

135

'90 '93 '96 '99 '02 '05 '08 '11 '14

First

Second

Third

Fourth

Fifth

30

Jun ‘16 Aug ‘16 Oct ‘16

Trump

Clinton

Source: Guide to the Markets – UK, page 30

OVERVIEW

• The US is in the midst of an unusual election campaign. But for markets and the economy, the impact is likely to be more muted than the campaign hype might suggest.

• The US system of divided government helps to ensure that no leader can implement his or her policy ideas autonomously. A Trump victory would surprise investors and doubtless trigger some volatility in global markets. However, with our base case of a divided government, markets may well be facing a status quo outcome.

• Regardless of who wins the election, we believe investors should expect a US recession at some point during the next four years. Economic indicators currently suggest a strong economy, but we monitor several key indicators to assess when this may change.

Since 1990, the top fifth of the US population has achieved seven times the growth in real income than the bottom fifth of the population.

MARKET INSIGHTS

J .P. MORGAN ASSET MANAGEMENT | 3

Fundamentals—not elections—will be the more important drivers of asset prices in the coming years. Investors should focus on valuations, the health of corporate balance sheets, the level of interest rates, the path for the US dollar and the economic cycle— all of which tend to have a greater influence on portfolios:

• While corporate profits, employment, investment and top-line economic growth are all interconnected, it is actually corporate profits that contract first in the lead-up to a recession. The top chart below shows that while employment growth and investment growth fall during a recession, corporate profits tend to drop a few years before.

• The consumer is the backbone of the US economy; 69% of GDP is made up of consumption. When American consumers have jobs and are confident, they are more likely to spend: consumer confidence is currently at a multi-year high, while jobless claims are at record lows. Two other helpful indicators are housing starts and the Conference Board Leading indicator, both of which are at post-crisis highs. Until these data start to turn, we remain confident in our forecast for moderate US growth in the near-term.

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'84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16

% change year on year

US growth monitor

Corporate profits, business investment and employment growth

Initial jobless claims vs. consumer confidence Housing starts and Conference Board Leading Economic Index Index level (LHS); thousands (RHS)

Source: (All charts) Thomson Reuters Datastream, J.P. Morgan Asset Management. Light grey columns in all charts indicate recession. Guide to the Markets - UK. Data as of 30 September 2016.

Jobless claims in thousands (LHS); index level (RHS)

Recession

Consumer confidenceJobless claims

Gl

obal

eco

nom

y

Housing starts

Leading indicator

28

Business investment

Profits

Payrolls

0

40

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120

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700

'84 '94 '04 '14


INVESTMENT IMPLICATIONS

• While the November election is expected to cause some short-term market volatility in US assets, we continue to favour the US for its status as a high-quality, safe-harbour market.

• Prudence is not to be confused with panic. Neither the prospects for a recession in the coming years, nor the impact of the upcoming election, justify drastic action. Instead, investors should take a disciplined, balanced approach that enables them to stay invested so that they can participate in any upside offered in the late stages of the expansion, while feeling more confident that a market downturn won’t up-end their return goals.

MARKET INSIGHTS

Falling corporate profits can be a leading indicator of economic slowdown.


2 Brexit’s effect on the UK economy and equities

Mixed data and ongoing risks

• Retail sales have held up well over the summer, perhaps helped by the good weather. Consumer confidence fell after the referendum, but has since rebounded.

• Business investment was always most at risk from the initial post-referendum uncertainty and the Bank of England agent surveys show a sharp fall in investment intentions, particularly in the services sector.

• The CBI’s quarterly business optimism survey also plunged dramatically after the vote, but so far industrial production has held up quite well.

• Reflecting the mixed message in the data, the OECD recently nudged up its UK growth forecast for 2016 from 1.7% to 1.8%, but halved the 2017 forecast from 2% to 1%.

6

GTM – UK |

-10

-5

0

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15

-60

-40

-20

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'86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16

Retail sales vs. consumer confidence

UK growth monitor

Source: (Top left) GFK, ONS, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom left) CBI, Thomson Reuters Datastream,J.P. Morgan Asset Management. (Top right) Bank of England, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) ONS, Thomson Reuters Datastream, J.P. Morgan Asset Management. Light grey columns in all charts indicate recession. Guide to the Markets - UK. Data as of 30 September 2016.

Index level (LHS); % change year on year (RHS)Manufacturing and services investment intentionsIndex level

CBI Business optimismIndex

Industrial productionIndex level, 1990=100

6

UK

eco

nom

y

ServicesManufacturing-6

-4

-2

0

2

4

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

75

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115

'86 '91 '96 '01 '06 '11 '16

-80-60-40-20

0204060

'86 '91 '96 '01 '06 '11 '16

Recession

Consumer confidence

Retail sales


OVERVIEW

• It will be a long time before we can gauge the true impact of Britain’s vote to leave the European Union (EU). Evidence has been mixed so far, with hard data remaining resilient despite weaker survey-based data.

• Risks to the outlook will remain elevated as long as the UK’s long-term relationship with the EU remains in flux. But UK equities could still deliver attractive returns due to the very large proportion of UK company revenues earned overseas and the recent stabilisation of key commodity markets.

Falling corporate investment intentions suggest risks remain for the UK economy.

MARKET INSIGHTS


9

GTM – UK |

-100

-80

-60

-40

-20

0

20

40

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

Source: (Top left) IMF Direction of Trade statistics, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom left) Haver Analytics, J.P. Morgan Asset Management. . *FDI is foreign direct investment and as measured in 2013. (Right) J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 30 September 2016.

Brexit: The UK and the EU

Tradeoffs for the UK post EU exitExports of goods to the UK% of GDP, 2015

UK trade balance with the EUGBP billions

UK

eco

nom

y

GoodsServices

FDI* in the UK (£bn)From EU 453From US 262Rest of world 260

| 9

7.7 7.1 7.1

2.91.9 1.7 1.5 1.3 1.4 1.3

2.20.9 0.3

0

2

4

6

8

10MARKET ACCESS TO THE EU

Participation in EU legislation process

Full market access

Market access by negotiation

Goods market access butnot services

Free movement of labour

No financial contribution EU member

Some financial contribution


Time to choose

• Various key European voices have emphasised that the UK will have to choose between limiting free movement of people and having continued access to the EU’s single market.

• In theory, it is in the rest of Europe’s interest to do a free trade deal on goods with the UK, even if the UK limits free movement of people, because the UK buys more goods from the rest of Europe than it sells. However, the UK as a nation is much more reliant on EU trade than the EU is on the UK. Some 50% of UK goods exports are destined for Europe, whereas only 16% of the EU’s total exports of goods go to the UK.

• Turkey and Canada are able to freely trade most goods with the EU, without freedom of movement or paying into the EU budget. However, no country has a free trade deal in services with the EU without making these concessions, and it is services exports that contribute most positively to Britain’s trade balance.

• There appears to be little desire among EU leaders to give the UK a special deal allowing it to limit immigration, but maintain full access to the single market—out of fear that other members might then seek the same deal.

• All of this suggests that if the UK limits freedom of movement, it will be an uphill struggle to get a good deal on trade in services, putting jobs and investment in these sectors at risk.

MARKET INSIGHTS

The UK probably has to choose between free trade in services within Europe and limiting immigration.

UK equities, global exposure and high dividends

• Despite the continued risks to the UK economic outlook, UK equities could still deliver attractive returns. That’s because over 70% of UK-listed company revenues come from outside the UK. Some sectors have hardly any UK exposure.

• Over the last few years the collapse in commodity prices proved a major drag on company earnings. This headwind may now be over.

• With interest rates still extremely low, UK equities offer an attractive source of income with a dividend yield that is favourable relative to most other markets.

• There is also a valuation aspect that investors should consider. The long rally in the FTSE 250 has driven up their relative valuation, making the UK mid-cap space look expensive relative to large-cap firms. Since Brexit, we have seen signs of this correcting. But there is some way to go before these relative valuations are close to their long-run average.

• Since the referendum, the FTSE 100 has outperformed the FTSE 250. International diversification, a falling pound and recovering commodity markets should all help drive FTSE 100 outperformance vs. the FTSE 250 for the foreseeable future.

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GTM – UK |

1,500

2,000

2,500

3,000

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4,000

170

190

210

230

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270

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'07 '08 '09 '10 '11 '12 '13 '14 '15 '16

UK equities

FTSE All-Share earnings and performanceIndex level, next 12 months’ earnings estimates (LHS); index level (RHS)

Dividend yield and ex-energy dividend yield% yield

Source: (Left) Thomson Reuters Datastream, FTSE, J.P. Morgan Asset Management. EPS is earnings per share. (Top right) Citi, MSCI, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Economic Research, J.P. Morgan Asset Management. Japan is Nikkei 225, eurozone is Euro Stoxx 50, US is S&P 500. Guide to the Markets - Europe. Data as of 30 September 2016.

FTSE All-Share index level

FTSE All-Share EPS

Eq

uitie

s

Dividend yieldDividend yield ex-energy

Source of UK company revenues% of revenues

InternationalUK

0

25

50

75

100

43

0 1 2 3 4 5

UK

Eurozone

MSCI World

MSCI EM

Japan

US



MARKET INSIGHTS

Many UK listed equities have very little exposure to the domestic economic uncertainty.


• UK equities could continue to deliver attractive returns despite the risks to the domestic economic outlook.

• Large-cap equities are the least exposed to the UK economy and the least expensive part of the market.

• The attractive dividend yield in a low-income world provides another reason why UK equities could still play an important role in portfolios.

3 Emerging markets: Do we trust the recovery?

EM challenges: The good, the bad and the ugly

• The charts below highlight three challenges facing the emerging markets today. Some, but not all of these challenges are fading.

• Capital flows in emerging markets are dependent on the growth—or growth prospects—of the region. Stronger growth momentum usually leads to more inflows and to an appreciation of the currency, and vice versa. This relationship makes emerging markets very cyclical. In the last five years, GDP growth slowed from 8% to 4% and investors grew increasingly disillusioned and eventually withdrew their capital. However, a recent stabilisation in real GDP and the growth differential with the developed world have led to a cautious turnaround in flows and a recovery for several EM currencies (ex. China). A modest reacceleration in manufacturing and service PMIs indicate that this process has the potential to continue.

• Emerging markets have certainly benefitted from rapid globalisation and strong growth in world trade over the last decades. After the setback of the financial crisis, trade growth initially recovered, but was never able to reattain the trend growth path of the past 18 years. In recent years, trade growth has stalled in value terms, although this can mostly be attributed to declining commodity and manufactured good prices. Until global trade recovers, a return of dynamic GDP growth in emerging markets is unlikely.

• Total debt in the world is currently higher than before the financial crisis. This development cannot be attributed to the developed world, where we saw a deleveraging of the private sector, but to private non-financial credit in emerging markets, which has risen by more than 50% of GDP since the end of 2007. In the short term, emerging markets are not at significant risk of a crisis, especially given that broad private non-financial credit as a percentage of GDP is 30% higher in developed markets than in emerging markets; but the recent trend is worrying and increases the medium-term risk for these economies.

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Emerging market challenges

Net capital flows and GDPUSD billions (LHS); % change year on year (RHS)

Broad private non-financial credit % of GDP

World trade growthIndex level, 2005 = 100

Source: (Left) Institute of International Finance, IMF World Economic Outlook April 2016, J.P. Morgan Asset Management. (Top right) BIS, IMF World Economic Outlook October 2015, J.P. Morgan Asset Management. (Bottom right) Netherlands Bureau for Economic Policy Analysis, Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 30 September 2016.

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GDP

Capital flowsEmerging markets (RHS)

Developed markets (LHS)

Emerging markets ex-China (RHS)

1991 – Aug 2008 trend

Actual

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36


OVERVIEW

• GDP growth in emerging markets is stabilising and is supported by the recovery in recent purchasing managers’ index (PMI) data. While this fulfils one of the criteria for continued emerging market (EM) outperformance, some structural headwinds persist.

• The outlook for China is crucial when it comes to evaluating the growth potential of the emerging markets. While fears of a hard landing linger in the markets, monetary and fiscal stimulus measures by Chinese authorities helped to stabilise the slowdown in growth. However, increasing debt levels, falling private investment growth and inefficiencies in sectors dominated by state-owned enterprises (SOEs) all raise question marks about the medium term.

• EM equities are one of the last risky assets trading on a discount vs. the long-term average. This has been caused by negative sentiment among investors due to relatively poor earnings momentum and a strengthening US dollar. Any change in that perception should lead to a re-pricing of the asset class.

The increase in credit to Chinese corporates made a significant contribution to the credit growth in emerging markets.

MARKET INSIGHTS

J.P. MORGAN ASSET MANAGEMENT | 7


There is a rising gap between public and private investment.

Positive home price momentum in tier-1 cities Beijing, Shanghai, Guangzhou, Shenzhen is starting to turn.

MARKET INSIGHTS

Private fixed asset investment (FAI): The bull in a China shop

• A sustainable recovery of the emerging markets without China, the largest economy in emerging markets, is unlikely. At the beginning of the year, markets were very concerned about the country’s growth prospects. China’s transition from an investment- and export-driven economy to a consumption-led one has not been as smooth as many had hoped. However, the continued slump in industrial production and weak manufacturing PMIs in 2015 were countered by a massive credit expansion. Meanwhile, additional infrastructure spending, combined with a recovery in the real estate market, helped to stabilise growth.

• The government’s policy stimulus and additional financing measures have been aimed at SOEs, mainly in the manufacturing, real estate and infrastructure sectors. While the short-term effects on growth are positive, the medium-term impact is less clear cut. Many SOE-dominated sectors are still facing overcapacity issues, with very low profitability and low returns on capital. However, by postponing the rebalancing that is still needed, this additional financing risks further depressing prices and returns, crowding out private investments in the process.

• Despite these concerns, a relatively low level of government debt and a large current account surplus give Chinese policymakers enough room for bailouts in the corporate sector and additional stimulus. This makes a hard-landing scenario for China a low probability for the time being.

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-4.0

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China economic indicators

Source: (Top left) FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management. (Bottom left) National Bureau of Statistics of China, J.P. Morgan Asset Management. (Top right) CEIC, FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management. (Bottom right) BofA/Merrill Lynch, CEIC,J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 30 September 2016.

China industrial production and retail sales% change year on year, three-month moving average

Central government fiscal deficit% of GDP

Fixed asset investment (FAI)% change year on year

China home prices% change year on year

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nom

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2016 target: -3.0%

Tier-2 cities

Tier-1 cities

Tier-3 cities0

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Industrial productionRetail sales



• Being underweight emerging markets was a successful strategy for several years. However, an underweight position now looks increasingly risky thanks to stabilising growth, relatively cheap currencies and commodities that appear to have found a bottom.

• Chinese challenges are well reflected in cheap equity valuations, but China shouldn’t be viewed as a basket case. Profitability in SOE-dominated industries remains under pressure. Nevertheless, companies in “new” industries like information technology, healthcare and consumption should continue to benefit from the ongoing transition.

• EM equities have been in an interesting position, with below-average valuations in a world where easy monetary policy has driven absolute valuations of most asset classes to above average levels. Any improvement in the risk perception of investors should close the valuation gap and open up the region to the hunt for yield that we’ve seen already in developed countries.


EM equities: One of the last cheap, risky asset classes

• After five years of disappointing performance, investors still take a pessimistic view of emerging markets which is reflected in below-average valuations. In 2015, in particular, sharply falling commodity prices saw the region suffer significant outflows. Since the beginning of the year, confidence has been slowly coming back and portfolio flows are turning positive again.

• Falling commodity prices and depreciating currencies took their toll on emerging markets earnings. Profits declined by 62% in dollar terms from their peak in Latin America and by 55% in emerging Europe. Conversely, Asian earnings were more resilient thanks to their lower exposure to the commodity cycle.

• We are still waiting to see a significant turnaround in EM earnings, but, no region in the MSCI AC World Index is home to more companies yielding more than 2% than the emerging markets.

56

GTM – UK | Emerging markets: Flows, earnings and income

Total non-resident flows into EM assetsUSD billion

EM earnings expectations by regionConsensus EPS for next 12 months, local currency, rebased to 100 in 2006

Number of companies yielding greater than 2% by regionConstituents of the MSCI All Country World Index

Source: (Left) IIF, J.P. Morgan Asset Management. (Top right and bottom right) FactSet, MSCI, J.P. Morgan Asset Management. EPS is earnings per share. Guide to the Markets - UK. Data as of 30 September 2016.

Eq

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40

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Aug '14 Feb '15 Aug '15 Feb '16 Aug '16

EM AsiaEM Latin America

EM Europe

EM Africa & Middle East

2010-14 average $23bn

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '1650

100

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250

EM Latin America

EM AsiaEM Europe

504

325276

160

0

200

400

600

Emergingmarkets

Europe US Japan

56


EM earnings started to improve recently, helped by better earnings in the materials and industrials sectors.

MARKET INSIGHTS


OVERVIEW

• Today’s low yields may be exaggerated by central bank action, but the bigger story lies in the structural forces that have driven them lower over the past few decades.

• A sustained reversal is unlikely, but core fixed income investors still face risks. Diversification into bonds issued by other governments is the first step in risk management and return enhancement. However, many other sub-sectors of fixed income are also worth considering.

• Given the different characteristics and drivers amongst the universe of fixed income options, investors may be able to generate added returns by tactically changing allocations within an unconstrained portfolio.

Central bank buying has been simply the last leg of a yield-compression marathon.

MARKET INSIGHTS

4 Fixed income options for our low-yield reality• Yields in developed country government bond markets remain at levels that rightly

worry investors. High-profile central bank bond-buying programmes are clearly part of the story, but the trend to lower rates started decades before central bank asset purchases went from unthinkable to mainstream.

• The forces of globalisation have played a central role in delivering lower borrowing costs to consumers and businesses across advanced countries through two main channels. First, trade liberalisation has helped contain margins and restrained price increases. Second, competition between business locations has robbed labour of the bargaining power to drive up wages. Both have contained inflation and helped justify lower interest rates.

• At the same time, monetary policy has gained true credibility, reducing the uncertainty premium embedded in longer-maturity bond yields and so flattening the yield curve. Along with these drivers, investment demand for fixed income has risen strongly as investors have become older and more sceptical about equities. Even if central bank asset purchases were to cease in coming years, the forces described above will not reverse, making it likely that yields will remain anchored.

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Historical yields of government bonds

10-year bond yields%

Source: FactSet, Tullett Prebon, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 30 September 2016.

Fi

xed

inco

me

Fed QE32012

Fed QE22010

Fed QE2008

Oil shock1981

Black Friday1987

Asian currency crisis1997

9/11 attacks2001

Dot com bubbleFeb 2000

Fall of Berlin Wall1989

ECB QE2015

BoE QE2009

UK

Germany

US

JapanBritain leaves European Exchange

Rate Mechanism1992

Brexit vote2016

62




• Today’s low-yield environment means a more restrained outlook for returns from core fixed income over the coming years.

• Although a return to higher yields seems unlikely, risks remain. Diversification by country and type of fixed income can help mitigate some of those risks.

• Alongside the added portfolio benefits of different fixed income sectors, investors could also increase their returns by investment by tactically switching between them.

Investors can choose from a large variety of fixed income options, with very different characteristics.

MARKET INSIGHTS

• A rapid or imminent return to the interest rates of previous decades seems unlikely, but risk still remains in this market. Liquidity conditions are a concern, and unsettling monetary policies give even the hardiest investor pause for thought. With markets currently skittish, seeking protection though diversification is the first order of the day.

• Investors in Europe can take solace that in other parts of the world, government bonds do offer higher yields than those issued in their domestic markets, whilst behaving in a similar manner. New Zealand, Australia and the US, in that order, have the highest yields at the 10-year maturity.

59

GTM – UK |

11.6% Euro HY

8.8%

18.9% Infl Linked

18.9%

7.7% EM Debt

1.8%

31.4% EM Debt 15.8%

10.0% Infl Linked

10.0%

8.5% US HY 6.8%

5.4% US HY 7.4%

14.1% US IG 7.5%

6.7% US Treas.

0.8%

30.8% US HY 15.3%

8.6% US HY 5.5%

8.3% EM Debt

6.7%

1.6% UK IG 1.6%

14.1% UK Gilts 14.1%

5.1% US IG -0.7%

27.7% Infl Linked

27.7%

8.1% Euro HY

3.9%

7.5% Euro HY

6.8%

-0.1% Infl Linked

-0.1%

12.8% EM Debt

6.2%

3.0% Portfolio

0.1%

26.8% Euro HY

8.0%

6.4% UK IG 6.4%

7.0% Portfolio

6.0%

-2.2% Portfolio

-1.4%

12.5% Portfolio

9.3%

1.2% UK Gilts

1.2%

23.9% US IG 9.2%

6.1% EM Debt

3.1%

6.9% US IG 5.3%

-3.4% US IG -1.5%

12.5% UK IG 12.5%

0.9% US HY -4.6%

22.8% Portfolio

13.6%

5.3% Portfolio

3.5%

6.7% Infl Linked

6.7%

-4.2% UK Gilts -4.2%

11.6% US Treas.

5.1%

0.7% UK IG 0.7%

19.2% US Treas.

5.1%

4.4% US IG 1.4%

5.8% US Treas.

4.2%

-4.6% US Treas.

-2.7%

8.9% US HY 2.5%

-0.9% Infl Linked

-0.9%

15.0% UK IG 15.0%

2.6% US Treas.

-0.3%

5.4% UK Gilts

5.4%

-10.0% EM Debt

-8.3%

-1.6% Euro HY

5.5%

-4.6% Euro HY

0.5%

14.7% UK Gilts 14.7%

2.3% UK Gilts

2.3%

4.9% UK IG 4.9%

YTD2013 2015 10-yr ann.

Global fixed income: Yields and returns

Fixed income sector returns

Source: Barclays, BofA/Merrill Lynch, FactSet, FTSE, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Annualised return covers period 2006 to 2015. UK Gilts: J.P. Morgan UK Global Bond; US Treasuries: Barclays US Agg. Gov. – Treasury; Infl Linked: BofA Merrill Lynch UK Gilt Inflation-Linked Government;US IG: Barclays US Agg. Corporate – Investment Grade; UK IG: Barclays Sterling Agg. Non-Gilts – Corporate; US HY: BofA/Merrill Lynch US High Yield Constrained; Euro HY: BofA/Merrill Lynch Euro Non-Financial High Yield Constrained; EM Debt: J.P. Morgan EMBI+. Hypothetical portfolio (for illustrative purposes only and should not be taken as a recommendation): 20% UK Gilts; 15% US Treasuries; 10% Linkers; 15% US IG; 10% UK IG; 10% US HY; 5% Euro HY; 15% EM Debt. Returns are unhedged in sterling and local currencies. 10 years worth of weekly data is used to calculate the correlation to UST and Gilts.Guide to the Markets - UK. Data as of 30 September 2016.

|

£:

Lcl:

Fi

xed

inco

me

Q316

UK IG

US Treasury

US Corporate IG

Euro HY

Infl Linked

UK GIlts

EM Debt

Portfolio

US HY

YTM

Market valueGBP bns

Duration(years)

Correl. to10-year

Gilt

Correl. to10-year

UST

6.6

1,020 3.9 -0.11 -0.05

5.2

278 7.1 0.00 0.08

4.0

212 3.6 -0.14 -0.08

2.8

3,915 7.5 0.37 0.54

2.5 - 9.3 0.44 0.46

2.2

373 8.9 0.46 0.40

1.3

5,467 6.3 0.50 0.67

1.2

1,222 11.9 0.61 0.47

-1.9

642 23.4 0.48 0.36

59

2014


• Beyond other developed government bond markets lies an ever-expanding array of fixed income sub-sectors from investment-grade bonds to emerging market debt. These offer a variety of yield, maturity and duration characteristics that can enhance overall portfolio returns when combined with government bonds. Not only are there opportunities in allocating to these sectors, but there is also the opportunity to tactically switch between them, in order to enhance returns.

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