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Financial Market Outlook (2013) ASU&JPMorgan

Financial Market Outlook (2013) ASU&JPMorgan

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ASU – Financial Market Outlook (2013

)

Anthony Chan, Ph.D Managing Director & Chief Economist Chase Private Client

Investment products: Not FDIC insured • No bank guarantee • May lose value
Please see important information at the end of this presentation.

US Corporations Remain Flush With Cash
Corporations have high cash balances in order to deal with uncertainty Cash and Equivalents/Tangible Assets
12%

Global merger and acquisition activity remains at low levels relative to the size of corporation’s cash balances M&A Volume in trillions of USD
1.6

11%

1.4

10%

1.2

9% 1.0 8% 0.8 7% 0.6 6% 0.4 5% 0.2

4%

3% 1970 1973 1977 1980 1984 1987 1991 1995 1998 2002 2005 2009

0.0 2007

2008

2009

2010

2011

2012

Source: Federal Reserve

Source: S&P, Federal Reserve, Bloomberg, FactSet, J.P. Morgan Securities LLC

Past performance is not indicative of future returns. It is not possible to invest directly in an index. Please see appendix for index definitions.

1

Share of Corporate Profits Remain Near-Record Highs
Adjusted After-Tax Corporate Profits (% of GDP)
Includes inventory and capital consumption adjustments 12

10

8 50-yr. avg. : 6.2% 6

4

2

0 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10

Source: The Bureau of Economic Analysis, Haver Analytics

2

Bullish Signal: The Equity Risk Premium Remains Attractive
Equity risk premium shows the dislocation in Europe Next 12 months earnings yield less regional Investment Grade Corporate Bond Yields 8.00%

7.00%

6.00%

5.00%

4.00%

3.00%

2.00% S&P 500 1.00% MSCI Europe MSCI EM (Emerging Markets)

0.00% 1/1/2010

7/1/2010

1/1/2011

7/1/2011

1/1/2012

7/1/2012

Source: S&P, FactSet, Bloomberg

3

History Suggests Attractive U.S. Equity Returns At Current Valuations
P/E and Total Return Over 5-yr. Annualized Periods
Quarterly, 1Q 1952 to 2Q 2007
60%

P/E = 13.0

40%
Implied Annual Return Standard Error 13.3% 5.7%

20%

0% 5x 10x 15x 20x 25x 30x

-20%

-40%

Source: BEA, FRB, J.P. Morgan Asset Management. Prices are based on the market value of all U.S. corporations and include quarterly dividends. Valuation based on long-term PE ratio. Note: Orange line denote results of linear regression with R-squared of 0.35 for 5-yr. Returns. Data are as of 11/2/12.

4

Higher Consumer Sentiment Signals Multiple Expansion in Equities
Multiple Expansion and Contraction
S&P 500 forward P/E based on consensus EPS estimates
120 26

Est. impact of a 10pt. Rise in sentiment: +2.3 multiple points*
110 24

22 100 20 90 18 80 16 70 14

Correlation Coefficient: 0.85
60 12

50 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Consumer Sentiment (LHS) Forward P/E (RHS)

10

Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management. Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next twelve months. *Estimated impact based on coefficients from regression analysis. Data are as of 11/2/12.

5

Average (U.S.) 12-Month Returns When Investor Sentiment (Bullish Percentage Minus Bearish) Spread is 1.5 and 2 standard deviations Below its Average

30.0% 1988 - 1992 [18.6%] 1998 - 2002 [13.9%]

2003 - 2006 [22.8%]

25.0%

2010 - 2011 [16.3%]

20.0%

15.0% Average Return [25] 10.0% 1993 - 1994 [6.4%]

[5]

[5] [7]

5.0% [5] 0.0% 2007 - 2009 [-9.4%]

-5.0%

-10.0% [16]

-15.0%
Source: AAII Sentiment Survey, Bloomberg

Past performance is not indicative of future returns. It is not possible to invest directly in an index. Please see appendix for index definitions.

6

Cumulative Equity Market Returns During the Current Expansion Remain Moderate Considering all the Monetary and Fiscal Stimulus that has been Supplied.

S&P 500 returns during economic expansions

S&P 500 returns during economic contractions

309.6 9.6 241.5

14.2 8.0

-0.9

62.0 43.4 11.6 Aug-80 Jun-81 Dec-82 May-90 Apr-91 Feb-01 Dec-01 Nov-07 Jun-09 Present Jan-80 Jul-80 Jul-81 Nov-82 Jul-90 Mar-91 Mar-01 Nov-01 -35.0 Dec-07 Jun-09

Source: Bloomberg, National Bureau of Economic Research

Note: Returns are total returns during the specified time periods.

7

Corporate High Yield Investments Remain Attractive
As Returns Continue To Price-In Higher than Expected Defaults
Default rate, percentage
25%

Implied Default Rate
20%

15%

Actual Default Rate

10%

5%

0% 1988

1992

1996

2000

2004

2008

2012

Source: J.P. Morgan Securities LLC Past performance is not indicative of future returns. It is not possible to invest directly in an index. Please see appendix for index definitions. High yield bonds are speculative non-investment grade bonds that have higher risk of default or other adverse credit events which are appropriate for high-risk investors only.

8

U.S. Currency Outlook:
The cumulative current account balance of the United States has been in a secular decline
Current Account Balance, percent of GDP
2%

1%

0%

-1%

-2%

-3%

-4%

-5%

-6%

-7% 1970

1975

1980

1985

1990

1995

2000

2005

2010

Source: Bureau of Economic Analysis
Past performance is not indicative of future returns. It is not possible to invest directly in an index. Please see appendix for index definitions.

9

As the US Dollar $ has Weakened, Emerging Market Currencies Have Strengthened
The decline in the USD has been matched by appreciation in Emerging Market currencies
Cumulative total return
0.40

0.30

0.20

J.P. Morgan Asia Dollar Index

0.10

0.00

J.P. Morgan Emerging Market Currency Index
-0.10

-0.20

-0.30

US Trade Weighted Dollar

-0.40

-0.50 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: J.P. Morgan Securities LLC, Bloomberg Past performance is not indicative of future returns. It is not possible to invest directly in an index. Please see appendix for index definitions.

10

Outlook for Precious Metals:

Gold prices have generally reacted positively to Expansionary Monetary Policy
The Gold Spot price (XAU) is quoted as US Dollars per Troy Ounce
2,000 1,900 1,800 B 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 600 2008 Fed extends Operation Twist Fed announces QE-3 QE-1 QE-2 Operation Twist

2009

2010

2011

2012

2013

B = Ben Bernanke's August 27, 2010 speech at Jackson Hole. Source: Bloomberg

11

Emerging Market Outlook: Liquidity in China is Much Greater than Signaled by Conventional Metrics
Yields on high yield credit imply higher defaults than expected

China: Total Amount of Social Financing SA, 100 Mil.Yuan
%

China: Total RMB Loan: 12-Month Percent Change
25000 35

20000

30

15000 25 10000 20 5000 15

0

-5000 02 03
Source: J.P. Morgan Securities LLC Source: People's

10 04 05 Bank of China 06 07 08 09 10 11 12

12

Index Definitions
All index performance information has been obtained from third parties and should not be relied upon as being complete or accurate.  Indices are shown for comparison  purpose only. While an investor may invest in vehicles designed to track certain indices, an investor cannot invest directly in an index.   Barclays US Aggregate Total Return Index ‐ The Lehman Aggregate Index covers the U.S. investment grade bond market, with index components for government and  corporate securities, mortgage pass‐through securities, and asset‐backed securities. S&P 500 Index – The S&P 500 is a capitalization‐weighted index of 500 stocks from a broad range of industries. The component stocks are weighted according to the total  market value of their outstanding shares. The impact of a component’s price change is proportional to the issue’s total market value, which is the share price times the  number of shares outstanding. “S&P 500” is a trademark of Standard and Poor’s Corporation. MSCI EAFE Index – The MSCI EAFE Total Return Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure  developed market equity performance, excluding the US & Canada. MSCI Emerging Markets Index – The MSCI Emerging Markets Index is a free float‐adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets MSCI Europe Index – The MSCI Europe Index is a capitalization weighted index that monitors the performance of stocks listed in the continent of Europe. MSCI World Index – The MSCI World Index is a capitalization weighted index that monitors the performance of stocks from around the world.  Dow Jones/UBS Commodity Index (DJUBS) – The Dow Jones/UBS Commodity index is composed of futures contracts on 19 physical commodities. J.P. Morgan Domestic High Yield Index – The J.P.Morgan Domestic High Yield Index is an index designed to track the performance of the investible universe of the U.S.  dollar domestic high yield corporate debt market. Dollar Index – indicates the general international value of the U.S. Dollar. The index does this by averaging the exchange rates between the USD and major world  currencies, using the rates provided by approximately 500 banks. J.P. Morgan Developed Market High Yield Index (JPM Global High Yield) ‐ An index of developed market high yield bonds Chicago Board Options Exchange Volatility Index (VIX) ‐ The VIX index is a measure of the implied volatility of the U.S. equity market which is calculated using a weighted  blend of prices for a range of options on the S&P 500 index. US Trade Weighted Dollar Index – indicates the general international value of the U.S. Dollar by weighting each exchange rate by the US trade with the relevant country or  region Moody’s/REAL CPPI Index – A monthly index that is a composite commercial real estate price index S&P Case‐Shiller Home Price Index – The Case‐Shiller Index measures the value of residential real estate prices in the United States National Association of Home Builders US Housing Market Survey – derived from a survey of builder expectations, rating the outlook for the next 6 months of sales   Citigroup Economic Surprise Index – these indices are quantitative measures of economic news, measuring the historical standard deviations of data surprises AAII Bulls/Bears – these indices show the sentiment of individual investors towards the stock market over the next 6 months J.P. Morgan Emerging Markets Currency Index – this index shows the performance of emerging market exchange rates J.P. Morgan Asia Dollar Index – This index shows the performance of Asian exchange rates against the U.S. Dollar using composite spot rates

13

Important information
IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax  advice. Accordingly, any discussion of U.S. tax matters contained herein (including any  attachments) is not intended or written to be used, and cannot be used, in connection  with the promotion, marketing or recommendation by anyone unaffiliated with  JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of  avoiding U.S. tax‐related penalties.  Each recipient of this presentation, and each agent thereof, may disclose to any  person, without limitation, the U.S. income and franchise tax treatment and tax  structure of the transactions described herein and may disclose all materials of any  kind (including opinions or other tax analyses) provided to each recipient insofar as  the materials relate to a U.S. income or franchise tax strategy provided to such  recipient by JPMorgan Chase & Co. and its subsidiaries. Bank products and services are offered through JPMorgan Chase Bank, N.A. and its  affiliates. Securities and advisory services are offered by J.P. Morgan Securities LLC,  member NYSE, FINRA and SIPC. 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As applicable, portions of mutual fund performance information may be provided by Lipper, a  Reuters company, subject to the following: © 2012 Reuters. All rights reserved. Any copying,  republication or redistribution of Lipper content, including by caching, framing or similar  means, is expressly prohibited without the prior written consent of Lipper. Lipper shall not be  liable for any errors or delays in the content, or for any actions taken in reliance thereon. For illustrative purposes only. Although information in these documents has been obtained  from sources believed to be reliable, JPMorgan Chase and its affiliates do not guarantee its  accuracy or completeness and accept no liability for any direct or consequential losses arising  from its use. All dates followed by an ‘E’ are estimated by the cited source. Past performance is no guarantee of future results. Additional information is available upon request. © 2012 JPMorgan Chase & Co.

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