Monthly Market Review

MARKET INSIGHTS

February 2020

The importance of investment principles in challenging times

The recent outbreak of the Novel Coronavirus (2019-nCoV) in China is posing a challenge for investors around the world. At the time of writing, over 20,000 cases have been confirmed in China, resulting in more than 420 deaths. Globally, 160 people have been infected in 22 other countries, with 1 death. This significantly changed market sentiment in January, which began on a more optimistic note with Phase One of the U.S.-China trade deal, as well as the UK finally making some progress in its departure from the European Union. We believe some investment principles, especially portfolio diversification and investing for the long term, can help investors to navigate through this difficult period.

More aggressive stimulus from Beijing to come?

Beijing’s current priority is to limit the spread of the virus. We expect more policy initiatives will be directed to limit the outbreak’s economic damage and facilitate recovery when the situation improves. The impact on industrial production could start to show in the coming weeks if workers are not able to return to work. The impact here could then extend to the broader Asian supply chain. Retail sectors, such as food and beverage, education and entertainment, have already taken a considerable hit with consumers staying home. Online shopping and services could provide some offsets. As the economic costs rise over time, small and medium-sized enterprises (SMEs) are the most vulnerable since many relied on the Lunar New Year festivities as their peak season for generating business and cash flow.

This implies that Chinese authorities will need to stand ready to provide liquidity to the economy and reduce borrowing costs more aggressively in the near term. In the past two years, the People’s Bank of China (PBoC) has been mindful not to oversupply the economy with liquidity. It does not want to raise corporate leverage further, or fuel speculations in financial markets or the property sector. However, given the current challenge to the economy, the PBoC could make an exception and allow more targeted support measures for the SME sector, as well as those industries hard hit by the outbreak. Fiscal policy could also have a role to play to reduce tax burden and social contribution payments. We could still see 1Q 2020 GDP take a hit, but proactive measures now should allow for a swifter rebound.

2

The Federal Reserve (Fed) is happy with the current policy stance

The U.S. economy expanded by 2.1% in 4Q 2019, and 2.3% for the full year. While 2019 growth was softer than 2018’s tax-cut fueled boom, its stability is encouraging. Consumption remains the foundation to economic growth, adding 1.2 percentage points to headline growth. Consistent with U.S. economic stability, the Fed kept policy rates unchanged in its January Federal Open Market Committee meeting. Fed Chairman Jerome Powell did cite the Coronavirus outbreak as a source of economic uncertainty, but the Fed is content with its current policy stance. While the Committee is not satisfied with inflation running below its 2% target, Chair Powell also noted that the Fed has less room to cut rates in order to leave more room for future downturns.

The bias to keep rates low, along with investors’ risk aversion from the virus outbreak, has pushed U.S. Treasury (UST) yields lower. The 10-year UST yield fell back toward 1.5%, last seen in September 2019. The 3-month T-bill yield briefly rose above the 10-year UST yield. This triggered concerns of curve inversion. As we explained previously when the curve inverted, years of quantitative easing has distorted the shape of the yield curve. This becomes a less clean-cut signal of investors’ recession expectations. In short, we see an inverted yield curve as a noteworthy, but not definitive, signal of a U.S. recession.

With falling UST yields, corporate credit spreads widened. The positive price effect from duration offset the negative impact from credit spread widening for high-grade corporate debt and hard currency emerging market fixed income. Hence, investors were still able to generate positive total return.

Although the global equity market is overshadowed by the 2019-nCoV outbreak, the 4Q 2019 U.S. corporate earnings report card has been solid. With 60% of the S&P 500 market cap, or 277 companies, having reported at the time of writing, earnings per share (EPS) growth has hit 9.5%. Revenue growth, profit margins and share buybacks all made positive contributions to earnings. 70% of reported companies were able to beat expectations, especially in technology and consumer staples. Looking ahead, steady economic growth should continue to support revenue expansion. With rising labor wages, one key driver of earnings performance will be whether companies are able to protect their profit margins.

Use investment principles as your compass during turbulent times

The outbreak of 2019-nCoV is clearly unsettling for many Asian investors, from the perspective of reaching their financial objectives as well as for their personal well-being. In terms of investment, the principle of a well-diversified portfolio was proven to work well in late January, given the rise in risk aversion has supported developed market government bonds and high-quality corporate credits. Geographic diversification has also helped equities investors to avoid taking the full force of correction in Asian markets.

In the weeks and months ahead, Asian investors should adhere to the principle of investing for the long term. The outbreak may change some long-term trends, such as how consumers in Asia consider health care, or how manufacturers need to diversify their production to avoid supply chain disruptions. There are still structural developments, such as the rise of the middle class and changing demand from consumers, that investors can invest in.

MONTHLY MARKET REVIEW

MONTHLY MARKET REVIEW | FEBRUARY 2020

3J.P. MORGAN ASSET MANAGEMENT

MONTHLY MARKET REVIEW | FEBRUARY 2020

Global economy:

• Optimism in global growth recovery took a major hit with the outbreak of the Novel Coronavirus (2019-nCoV) in China. As of February 3, over 17,000 cases were confirmed in China, with 361 deaths. 150 cases were identified in 22 other countries. A number of airlines have suspended flights to and from China. China’s retail sector has taken a considerable hit as residents are advised to stay home. (GTMA P. 7, 8)

• In response to the outbreak, the PBoC cut the reverse repo rate by 10bps on February 3. Although it conducted a reverse repo of RMB 1.2trillion on the same day, the net injection was only RMB 150billion. We expect more policy action to protect the economy and help small and medium enterprises to get through the negative impact. Meanwhile, the Fed kept policy rates unchanged, which reinforces our view that its policy rate is likely to stay put for an extended period of time. (GTMA P. 10, 33)

Equities:• Strong positive momentum in global equities took a sharp

turn for the worst in late January with the 2019-nCoV outbreak. The S&P 500 ended the month down 0.04% even as the NASDAQ was able to hold onto its gain of 2%. This is partly helped by strong 4Q corporate earnings. For the 30 (out of 70) tech companies in the S&P 500 that have reported earnings so far, 93% beat market expectations on earnings with 13.6% EPS growth. (GTMA P. 35, 36)

• China returned from the Lunar New Year holiday with an 8% correction with the CSI 300 index on February 3. The Hang Seng Index was another underperformer with a 7% decline in January. The rest of Asia corrected by 2.5% to 6% in the month despite a robust start. (GTMA P. 43, 44)

Fixed income:

• The return of risk aversion due to the 2019-nCoV outbreak has pushed the 10-year UST yield lower by almost 40bps toward 1.5%, approaching the lows seen in early September 2019. This has also pushed the 3-month - 10-year yield spread back into inversion (3-month yield higher than 10-year). We do not see this as a definitive forecast of recession returning to the U.S. considering steady economic data as well as corporate earnings. (GTMA P. 47, 50, 54)

• Risk aversion has widened corporate credit spreads for both emerging market fixed income and U.S. corporate credits. However, the decline in risk-free rates was able to offset the negative price impact from wider spreads and still delivered positive return for U.S.-dollar-denominated emerging market debt and U.S. high-grade credits in January. (GTMA P. 48, 49, 53)

Other assets:

• The U.S. dollar index (DXY) rose 1% in the month given risk aversion. The Indonesia rupiah was able to hold onto its gain given its resilience toward the outbreak and the fact that investors are attracted by its high yields. LATAM and EMEA currencies were under greater pressure due to global growth fear returning. Onshore Chinese yuan broke above 7 against the U.S. dollar once more. (GTMA P. 13, 64, 65)

• Growth concerns are driving commodity prices. Gold benefited from the drop in real interest rates in the U.S. and pushed back above USD 1,580/oz. The price of oil (West Texas intermediate) was down 15.6% given worries of weaker demand for jet fuel (air transportation) and general demand decline on the back of weaker global growth. (GTMA P. 67-69)

Market Bulletin - January:

• Cyclical tailwinds vs. secular headwinds in Asia ex-Japan equities

• 4Q19 Earnings: Lots of moving parts

• The Investment Implications of the 2020 Election

4

0.0%

1.5%

3.0%

4.5%

6.0%

7.5%

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

10%

12%

14%

16%

18%

20%

22%

'10 '12 '14 '16 '18 '20

Source: CEIC, People’s Bank of China (PBoC), J.P. Morgan Asset Management; (Bottom right) National Interbank Funding Center.*Open market operation (OMO) includes reverse repo, repo and central bank bill issuance by the People’s Bank of China. **Monetary policy tools include short-term liquidity operations (SLO), standing liquidity facility (SLF), medium-term liquidity facility (MLF) and pledged supplementary lending (PSL). ***Starting from August 20, the PBoC releases a monthly 1-year and 5-year loan prime rate (LPR) based on quotes from 18 banks. For this new monthly quote, banks are required to submit them in the form of open market operation rates (especially MLF) plus a margin to the national inter-bank lending center. The central bank requests all commercial banks to reference the finalized LPR to price their new lending and use LPR as the benchmark rate in floating rate loan contracts going forward.Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

Open market operation*Monetary policy tools**

Total, 6-month moving average

Liquidity injection by the PBoCRMB billions, net injection RMB billions, net injection

Reserve requirement ratio

Key policy ratesPer annum

Interbank repo (7-day)

Medium-term lending facility (1-year)

Lending rate (1-year)

Deposit rate (1-year)

Loan prime rate (1-year)***

Large banks

Small- and medium-sized banks

China: Monetary policy |GTM - Asia 10

-300

-200

-100

0

100

200

300

400

500

600

-1,200

-800

-400

0

400

800

1,200

1,600

2,000

2,400

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

5

China: Exchange rate and foreign reserves |GTM - Asia 13

'16 '17 '18 '19 '2088

90

92

94

96

98

100

102

104

106

Chinese yuan exchange rate: CFETS CNY* vs. USDIndex, Jan. 2016 = 100

USD / CNY and change in FX reserves

Source: FactSet, J.P. Morgan Asset Management; (Left) China Foreign Exchange Trade Center, J.P. Morgan Economic Research; (Right) People’s Bank of China.*CFETS RMB index is the China Foreign Exchange Trade System basket of 24 currencies traded against the Chinese renminbi. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

Weaker yuan

Stronger yuan

USD / CNY

Change in monthly FX reserves (USD billions)

USD / CNY (inverted)

CFETS CNY index

'13 '14 '15 '16 '17 '18 '19 '20-120

-90

-60

-30

0

30

60

90

120 6.0

6.2

6.4

6.6

6.8

7.0

7.2

6

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Jan '18 Apr '18 Jul '18 Oct '18 Jan '19 Apr '19 Jul '19 Oct '19$0

$20

$40

$60

$80

$100

$120

$140

$160

In effect Proposed

Source: Office of the U.S. Trade Representative (USTR), U.S. International Trade Commission, J.P. Morgan Asset Management; (Left) Peterson Institute for International Economics, U.S. Commerce Department, World Bank. *Imported value of products from trading partner appearing on either the USTR or China Ministry of Commerce lists as a percent of total imports from that trading partner over the same period. **Analysis classifies each individual product the U.S. imports from China to the HTS-8 level that either appears on the 2018 & 2019 tariff lists published in the U.S. Federal Register or has been threatened with higher tariffs into its appropriate System of National Accounts group and aggregates these categories by value of imports in 2017—the last year without increased tariffs for which data was available. Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

U.S. and China: Proposals and actions*% of annual imports from other covered by tariffs

Tariffed goods distribution across economic categories**USD billion

Tariffs by U.S. on imports from China

Tariffs by China on imports from U.S.

Proposed

Proposed

In effect

In effect

Capital goodsConsumption goodsIntermediate goods

U.S. trade policy |GTM - Asia 19

7

'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20-1%

0%

1%

2%

3%

4%

5%

6%

7%

Source: J.P. Morgan Asset Management; (Left) FactSet; (Right) BIS. G4 are the Bank of England, the Bank of Japan (BoJ), the European Central Bank and the U.S. Federal Reserve. *Key deposit rates that central banks charge commercial banks on their excess reserves. **The BoJ has adopted a three-tier system in which a negative interest rate of -0.1% will be applied to the policy rate balance of the aggregate amount of all financial institutions that hold current accounts at the BoJ. The UK deposit rate has not been actively used as a monetary policy tool since late 2017. ***Count covers the 38 central banks included in the Bank for International Settlements’ central bank policy monitor. Year-to-date data reflect most recently available as of 30/11/19. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

Policy rate Deposit rate*

Eurozone 0.0% -0.5%Japan** -0.1 to 0.0% -0.1%UK 0.75% 0.5%U.S. 1.50 to 1.75% 1.6%

Changes in central bank policy ratesNumber of hikes or cuts***

G4 central bank key policy ratesPer annum

Developed markets

Emerging marketsRate hikes

Rate cutsDeveloped markets

Emerging markets

Central bank policy rates |GTM - Asia 22

-200

-150

-100

-50

0

50

100

150

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

8

Developed markets political timeline

Emerging markets political timeline

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

Source: Bloomberg Finance L.P., J.P. Morgan Asset Management.Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

March ChinaNational People’s Congress

2021

2021

June GlobalWTO Ministerial meeting

December UKBrexit transition period ends

15 April South KoreaLegislative election

September Hong KongLegislative Council election

13-16 July U.S.U.S. Democratic candidate is selected

24-27 August U.S.U.S. Republican candidate is selected

3 November U.S.U.S. General election

3 March U.S. “Super Tuesday” primaries

October ASEANASEAN Summit

October/November ChinaFifth Plenum of the 19th CPC Central Committee

6-9 Apr ASEANASEAN Summit

Political calendar |GTM - Asia 26

9

Source: FactSet, MSCI, Standard & Poor’s, J.P. Morgan Asset Management.Returns are total returns based on MSCI indices, except the U.S., which is the S&P 500, and China A, which is the CSI 300 index in U.S. dollar terms. China return is based on the MSCI China index. 10-yr total (gross) return data is used to calculate annualized returns (Ann. Ret.) and annualized volatility (Ann. Vol.) and reflect the period 31/01/10 – 31/01/20. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

Global and Asia equity market returns |GTM - Asia 35

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 4Q '19 YTD '20 Ann. Ret. Ann. Vol.

ASEAN U.S. India U.S. China A Japan Taiwan China U.S. Taiwan Taiwan U.S. U.S. China A

32.4% 2.1% 26.0% 32.4% 52.1% 9.9% 19.6% 54.3% -4.4% 37.7% 18.0% 0.0% 14.0% 24.4%

Korea ASEAN China Japan India China A U.S. Korea India China A China India Taiwan India

27.2% -6.1% 23.1% 27.3% 23.9% 2.4% 12.0% 47.8% -7.3% 37.2% 14.7% -0.8% 9.4% 21.3%

Taiwan Europe ASEAN Europe U.S. U.S. Korea India Taiwan U.S. Korea Japan Japan Korea

22.7% -10.5% 22.8% 26.0% 13.7% 1.4% 9.2% 38.8% -8.2% 31.5% 13.7% -1.4% 6.5% 20.3%

India Korea APAC ex-JP

Taiwan Taiwan Europe APAC ex-JP

APAC ex-JP

ASEAN Europe APAC ex-JP

China A APAC ex-JP

China

20.9% -11.8% 22.6% 9.8% 10.1% -2.3% 7.1% 37.3% -8.4% 24.6% 10.6% -1.8% 6.4% 20.3%APAC ex-JP

Japan Korea Korea China India ASEAN China A Japan China China A Europe Europe Taiwan

18.4% -14.2% 21.5% 4.2% 8.3% -6.1% 6.2% 32.6% -12.6% 23.7% 10.1% -2.5% 6.2% 16.5%

Japan APAC ex-JP

Europe China ASEAN Korea Japan ASEAN APAC ex-JP

Japan U.S. APAC ex-JP

China APAC ex-JP

15.6% -15.4% 19.9% 4.0% 6.4% -6.3% 2.7% 30.1% -13.7% 20.1% 9.1% -3.7% 6.0% 16.4%

U.S. China Taiwan APAC ex-JP

APAC ex-JP

China China Taiwan Europe APAC ex-JP

Europe Taiwan ASEAN Europe

15.1% -18.2% 17.7% 3.7% 3.1% -7.6% 1.1% 28.5% -14.3% 19.5% 8.9% -4.7% 5.5% 16.2%

China Taiwan U.S. China A Japan APAC ex-JP

Europe Europe China Korea Japan China Korea ASEAN

4.8% -20.2% 16.0% -2.6% -3.7% -9.1% 0.2% 26.2% -18.7% 13.1% 7.7% -4.8% 5.5% 14.9%

Europe China A China A India Europe Taiwan India Japan Korea ASEAN India ASEAN India Japan

4.5% -20.5% 10.9% -3.8% -5.7% -11.0% -1.4% 24.4% -20.5% 8.8% 5.3% -5.1% 4.3% 12.9%

China A India Japan ASEAN Korea ASEAN China A U.S. China A India ASEAN Korea China A U.S.

-8.4% -37.2% 8.4% -4.5% -10.7% -18.4% -15.2% 21.8% -27.6% 7.6% 4.0% -5.3% 4.2% 12.4%

10-yrs ('10 - '20)

10

Earnings growthEarnings per share, year-over-year change, consensus estimates

Source: IBES, MSCI, Standard & Poor’s, Thomson Reuters Datastream, J.P. Morgan Asset Management. Asia Pacific ex-Japan, EM, Europe and U.S. equity indices used are the MSCI Asia Pacific ex-Japan, MSCI Emerging Markets, MSCI Europe and S&P 500, respectively. Consensus estimates used are calendar year estimates from IBES. Revisions are based on the current unreported year. Net earnings revisions is (number of companies with upward earnings revisions – number of companies with downward earnings revisions) / number of total companies. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

Earnings revisions ratiosNet earnings revisions to consensus estimates, 13-week moving average

2018

2017

2019

U.S.

Europe

Asia Pacific ex-Japan

Japan2020

12%

24% 24%

16%

24%

8%

5%6%

1% 1% 1%-1%

9%

15%

13%

9%

-5%

0%

5%

10%

15%

20%

25%

30%

U.S. EM Asia Pacific ex-Japan

Europe

Global equities: Earnings expectations |GTM - Asia 37

-60%

-40%

-20%

0%

20%

40%

60%

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

11

'98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '200

50

100

150

200

250 90

100

110

120

130

'98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '2040

80

120

160

200

240

280

50

150

250

350

450

550

EM equity relative performance and commoditiesRelative index level, Dec. 1997 = 100 Index level

Source: FactSet, MSCI, J.P. Morgan Asset Management; (Left) J.P. Morgan Economic Research; (Top right) Bloomberg Finance L.P.EM = Emerging markets; DM = Developed markets.*REER is the real effective exchange rate. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

EM vs. DM growth and equity performance%, next 12 months’ growth estimates Index level

Relative EM / DM equity performance and USD REERRelative index level, Dec. 1997 = 100 Index levelEq

uitie

s

EM growth & equity outperformance

EM growth & equity underperformance

EM minus DM GDP growth

MSCI EM / MSCI DM

MSCI EM / MSCI DM

Bloomberg Commodity Index

USD REER (inverted)*

MSCI EM / MSCI DM

Emerging market equities: Performance drivers |GTM - Asia 42

0

20

40

60

80

100

120

140

160

-1%

0%

1%

2%

3%

4%

5%

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

12

Source: FactSet, MSCI, J.P. Morgan Asset Management; (Right) CEIC, national statistics agencies. Earnings per share (EPS) used is next 12 months’ aggregate estimate. *Universe of stocks within the MSCI AC Asia Pacific ex-Japan index are split into three buckets depending on their revenue exposure to their domestic market. Over the time period examined (01/01/09 – 31/12/19), monthly adjustments are made to the buckets to reflect changes in a company's operations over time. Subsequently, earnings-per-share (EPS) for each bucket is calculated by summing the market-value weighted EPS for each company on a monthly basis over the examined period. Each EPS series is then indexed to 100 on 01/01/09. **EM Asia ex-China includes Hong Kong, Korea, Malaysia, Singapore, Taiwan, Thailand and Vietnam. Overall exports aggregate is gross domestic product (GDP)-weighted. Past performance is not a reliable indicator of current and future results. For illustrative purposes only.Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

Domestic vs. exports-oriented Asian companies*MSCI AC Asia Pacific ex-Japan, earnings per share, Jan. 2009 = 100

Growth in nominal exports and earnings per shareUSD, year-over-year change

MSCI AC Asia Pacific ex-Japan EPS

EM Asia ex-China exports**

Less than 70% of revenue derived domestically

Between 70% and 95% of revenue derived domesticallyMore than 95% of

revenue derived domestically

0

100

200

300

400

500

600

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

APAC ex-Japan equities: Exports & earnings |GTM - Asia 43

-60%

-40%

-20%

0%

20%

40%

60%

80%

'01 '03 '05 '07 '09 '11 '13 '15 '17 '19

13

15%

-6%

-40%

15%

47%

15%

0%

11%5%

-11%

6%

17%22%

4% 4%

-4%

12%

-60%

-40%

-20%

0%

20%

40%

60%

'06 '08 '10 '12 '14 '16 '18 2Q '19 4Q '19

S&P 500 sector earnings contributions3Q 2019 year-over-year earnings contributions by sector, USD

Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management; (Left) Compustat.Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

S&P 500 year-over-year operating EPS growthAnnual growth contribution

Share of EPS growth 4Q ’19 Avg. '06-'18Margin 6.4% 3.9%Revenue 4.1% 3.0%Share count 1.3% 0.5%Total EPS growth 11.8% 7.4%

2019(Quarterly)

S&P 500 aggregate

Negative contributionPositive contribution

United States: Earnings and returns |GTM - Asia 45

$32.00 $33.00 $34.00 $35.00 $36.00 $37.00 $38.00 $39.00

4Q 2018

Energy

Industrials

Real Estate

Cons. Disc.

Materials

Comm. Svcs

Utilities

Cons. Staples

Health Care

Info Tech

Financials

4Q 2019

14

Source: Barclays, Bloomberg, FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Based on Bloomberg Barclays U.S. Aggregate Credit – Corporate High Yield Index (U.S. Corporate HY), Bloomberg Barclays U.S. Aggregate Credit – Corporate Investment Grade Index (U.S. Corporate IG), J.P. Morgan Government Bond Index – EM Global (GBI-EM) (Local EMD), J.P. Morgan Emerging Market Bond Index Global (EMBIG) (USD EMD), J.P. Morgan Asia Credit Index (JACI) (USD Asian Bond), Bloomberg Barclays Pan European High Yield (Europe HY), J.P. Morgan Government Bond Index – Global Traded (DM Government Bond), J.P. Morgan Asia Credit High Yield Index (Asia HY), Bloomberg Barclays Global U.S. Treasury –Bills (3-5 years) (U.S. Treasury) and Bloomberg Barclays U.S. Treasury – Bills (1-3 months) (Cash). 5-year data is used to calculate annualized returns (Ann. Ret.). Returns are in U.S. dollars and reflect the period from 31/01/15 – 31/01/20. *Duration is a measure of the sensitivity of the price (the value of the principal) of a fixed income investment to a change in interest rates and is expressed as number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. **Correlation to the MSCI AC World Index is a measure over 10 years of data. Positive yield does not imply positive return. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

Global bond opportunities Fixed income sector returns

Global fixed income: Yields and returns |GTM - Asia 47

5-yrs2015 2016 2017 2018 2019 4Q '19 YTD '20 Ann. Ret.

Asia HY U.S. HYEurope

HY Cash U.S. IGLocal EMD

U.S.Treas Asia HY

5.2% 17.1% 21.0% 1.8% 14.5% 6.2% 2.4% 6.5%USD

AsianLocal EMD

Local EMD

U.S.Treas

USDEMD

Europe HY U.S. IG

USDEMD

2.8% 11.4% 15.4% 0.9% 14.4% 5.5% 2.3% 6.2%USDEMD Asia HY

USDEMD

DM Gov't U.S. HY U.S. HY

DM Gov't U.S. HY

1.2% 11.2% 9.3% -0.7% 14.3% 2.6% 1.8% 6.0%U.S.

TreasUSDEMD U.S. HY

USD Asian

Local EMD Asia HY

USDEMD

USD Asian

0.8% 10.2% 7.5% -0.8% 13.1% 2.4% 1.7% 4.9%

Cash U.S. IG Asia HY U.S. HY Asia HYUSDEMD

USD Asian U.S. IG

0.0% 6.1% 6.9% -2.1% 12.8% 2.1% 1.4% 4.5%

U.S. IGUSD

AsianDM

Gov't U.S. IGUSD

Asian U.S. IG Asia HYEurope

HY-0.7% 5.8% 6.8% -2.5% 11.3% 1.2% 0.8% 4.0%

DM Gov't

Europe HY U.S. IG Asia HY

Europe HY

USD Asian Cash

DM Gov't

-2.6% 3.4% 6.4% -3.2% 10.3% 1.1% 0.1% 2.5%

U.S. HYDM

Gov'tUSD

AsianUSDEMD

U.S.Treas Cash U.S. HY

U.S.Treas

-4.5% 1.6% 5.8% -4.6% 6.9% 0.4% 0.0% 2.3%Europe

HYU.S.

TreasU.S.

TreasLocal EMD

DM Gov't

DM Gov't

Europe HY

Local EMD

-7.6% 1.0% 2.3% -6.7% 6.0% -0.5% -0.9% 1.7%Local EMD Cash Cash

Europe HY Cash

U.S.Treas

Local EMD Cash

-18.0% 0.3% 0.8% -8.2% 2.2% -0.8% -1.6% 1.0%

Sector YTM Duration*(years)

Correl. to MSCI AC World**

Correl. to 10-year

UST

Asia HY 7.0% 4.3 0.65 0.02

U.S. HY 6.1% 3.1 0.82 -0.18

Local EMD 5.6% 4.9 0.65 -0.04

USD EMD 4.6% 7.8 0.56 0.26

USD Asian 4.2% 5.4 0.50 0.35

Europe HY 3.4% 3.3 0.80 -0.31

U.S. IG 2.6% 8.1 0.20 0.68

Cash 1.5% 0.2 0.00 0.06

U.S. Treasury 1.5% 6.7 -0.41 0.98

DM Gov't 0.8% 8.6 0.13 0.58

15

0

10

20

30

40

50

60

70

80

90

100

110

'89 '94 '99 '04 '09 '14

Global bond marketUSD trillions

10-year government bond yields

Share of global market*31/12/89 30/06/19

U.S. 60.6% 35.9%Dev. ex-U.S. 38.5% 41.4%EM 0.8% 22.7%

EM: $25tn

Developed ex-U.S.: $46tn

U.S.: $40tn

Source: FactSet, U.S. Federal Reserve, J.P. Morgan Asset Management; (Left) BIS; (Right) Tullett Prebon Information.*Sum may not add up to 100% due to rounding. **Data begins, and averages calculated from, 01/01/70 for U.S. Treasuries, 02/10/72 for German Bunds and 03/02/86 for Japanese Government Bonds. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

'70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%Average

since 1970** Latest

U.S. 6.3% 1.5%Germany 5.4% -0.4%Japan 2.3% -0.1%

Global fixed income: Market size and government bond yields |GTM - Asia 50

16

Source: Barclays, Bloomberg, FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Based on Bloomberg Barclays U.S. Treasury Bellwethers Index (2, 5, 10, 30-year U.S. Treasuries), Bloomberg Barclays U.S. Treasury Inflation-Protected Notes Index (TIPS), Bloomberg Barclays U.S. Floating Rate Notes Index (U.S. Floating Rate), Bloomberg Barclays U.S. Aggregate Securitized – MBS Index (U.S. MBS), Bloomberg Barclays U.S. Aggregate Credit – Corporate – Investment Grade Index (U.S. Corporates), Bloomberg Barclays U.S. Aggregate Credit – Corporate – High Yield Index (U.S. High Yield), J.P. Morgan Emerging Market Bond Index Global (EMBIG) (USD EMD), J.P. Morgan Asia Credit Index (USD Asia Credit), J.P. Morgan Government Bond Index – EM Global (GBI-EM) (Local EMD). *Duration is a measure of the sensitivity of the price (the value of the principal) of a fixed income investment to a change in interest rates and is expressed as number of years. **Correlation measured over past 10 years of monthly total returns. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. Change in bond price is calculated using both duration and convexity, assuming a 1% fall in relevant local interest rate. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

Illustrative impact of a 100bps fall in interest ratesAssumes a parallel shift in the yield curve and steady spreads

Price return

Total return

Global fixed income: Interest rate sensitivity |GTM - Asia 53

U.S. Treasuries 31/01/20 31/12/19 Duration* (years)

Correlation** to 10-year UST

2-Year 1.33% 1.58% 1.96 0.75

5-Year 1.32% 1.69% 4.81 0.93

TIPS -0.14% 0.15% 5.24 0.70

10-Year 1.51% 1.92% 8.99 1.00

30-Year 1.99% 2.39% 22.08 0.93

Sector

U.S. Floating Rate 2.07% 2.30% 0.13 -0.34

U.S. MBS 2.26% 2.54% 2.62 0.81

U.S. Investment Grade 2.58% 2.84% 8.05 0.68

U.S. High Yield 5.52% 5.19% 3.07 -0.18

USD EMD 4.62% 4.78% 7.81 0.26

USD Asia Credit 3.52% 3.73% 5.40 0.35

Local EMD 5.65% 5.91% 4.93 -0.04

Yield / Yield to worst

0.1%

1.8%

2.9%

4.9%

5.2%

8.7%

8.5%

2.0%

4.9%

5.5%

9.4%

25.1%

2.1%

4.0%

8.3%

8.4%

10.8%

11.3%

13.1%

3.3%

6.3%

7.2%

11.0%

27.1%

0% 4% 8% 12% 16% 20% 24% 28% 32%

U.S. Floating Rate

U.S. MBS

U.S. HY

USD Asia Credit

Local EMD

U.S. IG

USD EMD

2y UST

5y UST

TIPS

10y UST

30y UST

17

0.0

0.5

1.0

1.5

2.0

2.5

3.0

8

9

10

11

12

13

14

15

16

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

Investment grade leverageEBITDA** / interest expense Debt / EBITDA

Source: J.P. Morgan Asset Management; (Left and bottom right) Barclays, Bloomberg, FactSet; (Left and top right) J.P. Morgan Economic Research; *Investment grade is Bloomberg Barclays U.S. Aggregate Credit – Corporate Investment Grade Index. **EBITDA is earnings before interest, tax, depreciation and amortisation. Spreads indicated are benchmark yield-to-worst less comparable maturity Treasury yields. Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

Corporate bond spreadSpread over comparable government bond, basis points*

Credit rating and duration

Average LatestInvestment grade 132bps 102bps

Interest coverage Leverage

Share of BBB in index

Duration (years)

Recessions

U.S. investment grade bonds |GTM - Asia 56

10%

20%

30%

40%

50%

60%

5

6

7

8

9

'89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '190

100

200

300

400

500

600

700

'89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19

18

0

400

800

1,200

1,600

2,000

0%

4%

8%

12%

16%

20%

'90 '95 '00 '05 '10 '15 '20

Last twelve month sector default ratesSectors with highest default rates

Source: J.P. Morgan Economics Research, J.P. Morgan Asset Management.*Default rate is defined as the percentage of the total market trading at or below 50% of par value and includes any Chapter 11 filing, pre-packaged filing or missed interest payments. Spreads indicated are benchmark yield-to-worst less comparable maturity Treasury yields. **EBITDA is earnings before interest, tax, depreciation and amortisation. U.S. corporate high yield is represented by the J.P. Morgan Domestic High Yield Index.Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

High yield leverageEBITDA** / interest expense Debt/EBITDA

High yield spread and default rate*Default rate Spread to worst (basis points)

10-yr average Latest

HY spread to worst 539bps 474bpsHY default rate 2.0% 2.6%HY ex-energy default 1.2%

Recessions

Interest coverage Leverage

Default rateIndex weight

3.5

4.0

4.5

5.0

5.5

3.0

3.5

4.0

4.5

5.0

5.5

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

U.S. high yield bonds |GTM - Asia 58

13.1%

3.2%1.8%

3.9% 3.8%

7.0%

11.0% 10.6%

7.7%

3.6% 3.4%1.8%

0%

2%

4%

6%

8%

10%

12%

14%

Energy Chemicals DiversifiedMedia

Telecomms Metals andMining

Services

19

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

100 200 300 400 500 600 700 800 900

Source: Barclays, Bloomberg, J.P. Morgan Asset Management; (Left) J.P. Morgan Economics Research.*J.P. Morgan GBI-EM Broad Diversified Index sub-component used for each country. Spread is the difference between the yield on each country’s local 3-5 year government bond and the yield on the Bloomberg Barclays U.S. Aggregate Government - Treasury (3-5 Year). **EM debt is represented by the J.P. Morgan Emerging Market Equal Weight Blended Index, which is an equal-weighted composite index of the J.P. Morgan GBI-EM Global Diversified, J.P. Morgan EMBI Global Diversified and J.P. Morgan CEMBI Broad Diversified indices. Spreads are the difference between the yield on EM debt securities and an equivalent maturity U.S. Treasury bond in basis points. Returns are calculated using monthly data from 31/01/03 – 31/01/20.Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

Spread between local rates and U.S. Treasuries3-5 year local currency government bond index*, basis points

EM debt spreads to U.S. Treasuries and returns12-month forward total return, spread in basis points**

Current spread range: 310-320

5-year averageCurrent

Emerging market debt |GTM - Asia 59

-200 0 200 400 600 800 1000

S. Africa

Mexico

India

Brazil

Indonesia

Russia

Colombia

Malaysia

China

Poland

Thailand

20

'74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '2060

70

80

90

100

110

120

130

140

Source: Bloomberg Finance L.P., FactSet, U.S. Federal Reserve, J.P. Morgan Asset Management.*The real broad trade-weighted exchange rate index is the weighted average of a market’s currency relative to a basket of trading partners’ currencies adjusted for the effects of inflation. The weights are determined by comparing the relative trade balances, in terms of one market’s currency, with other markets within the basket. **The U.S. dollar index shown here is a nominal trade-weighted index of major trading partners’ currencies. Major currencies are: British pound, Canadian dollar, euro, Japanese yen, Swedish kroner and Swiss franc. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

U.S. dollar performanceIndex, Jan. 2006 =100 U.S. dollar index**

Real trade-weighted exchange rate index (REER)*

1/2020: 97.39 12/2019: 103.06

Recession periods

U.S. dollar |GTM - Asia 64

21

Source: FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management.*The real trade-weighted exchange rate index is the weighted average of a market’s currency relative to a basket of other major currencies adjusted for the effects of inflation. The weights are determined by comparing the relative trade balances, in terms of one market’s currency, with other markets within the basket. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

Currency deviation from 10-year average in real effective exchange rate* termsNumber of standard deviations away from average

FX above long-term average

FX belowlong-term average

Current

Max

Min

Currencies |GTM - Asia 65

-1.6 -1.5-1.2 -1.1 -1.0 -0.8

-0.6 -0.5 -0.5 -0.3 -0.3-0.1

0.20.7

1.1 1.3 1.4

2.1

1.0

-4

-2

0

2

4

22

-4 -2 0 2 4

Commodity Index

Natural Gas

Agriculture

Industrial Metals

Oil

Precious Metals

Gold

Example

Source: Bloomberg Finance L.P., FactSet, J.P. Morgan Asset Management; (Left) CME; (Right) Barclays, J.P. Morgan Economic Research, MSCI. Commodities are represented by the appropriate Bloomberg Commodity sub-index priced in U.S. dollars. Crude oil shown is West Texas Intermediate (WTI) crude. Other commodity prices are represented by futures contracts. Z-scores are calculated using daily prices over the past five years. Based on Bloomberg Commodity Index (Comdty.); MSCI ACWI Select – Energy Producers IMI, Metals & Mining Producers ex Gold & Silver IMI, Gold Miners IMI, Agriculture Producers IMI (Energy (E), M&M (E), Gold (E), Agri. (E)); Bloomberg Barclays Global Aggregate Credit – Corporate Energy Index (Energy (FI)); Bloomberg Barclays U.S. Aggregate Credit – Corporate High Yield Metals & Mining Index (U.S. M&M (FI)); Bloomberg Barclays Euro Aggregate Credit – Corporate Metals & Mining Index (Euro M&M (FI)); J.P. Morgan Emerging Market Corporate Credit – Corporate Metals & Mining Index (EM M&M (FI)).5-year total return data is used to calculate annualized returns (Ann. Ret.) and 5-year price return data is used to calculate annualized volatility (Ann. Vol.) and reflects the period 31/12/14 – 31/12/19. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

Commodity pricesCommodity price z-scores for the past five years, USD per unit

Returns

High levelCurrent

Low level

$39

$1.8

$1,588

$106

$37 $64

$4.8

$1,588

$144$84

$1,050

$1.6

$76$26$52

$195$144$192

$105$73$75

2014 2015 2016 2017 2018 2019 Ann. Ret. Ann. Vol.Euro M&M

(FI)Energy

(FI)Gold (E) M&M (E) Euro M&M

(FI)Gold (E) Gold (E) Gold (E)

8.6% -7.3% 62.9% 37.5% -0.9% 51.1% 11.5% 34.9%

Energy (FI)

EM M&M (FI)

M&M (E) Agri. (E) US M&M (FI)

M&M (E) EM M&M (FI)

M&M (E)

2.1% -10.9% 57.8% 20.3% -3.5% 17.1% 8.6% 24.8%

Agri. (E) Agri. (E) US M&M (FI)

EM M&M (FI)

Energy (FI)

EM M&M (FI)

US M&M (FI)

Energy (E)

-0.2% -13.7% 45.5% 14.7% -3.7% 16.5% 6.0% 19.1%

EM M&M (FI)

Euro M&M (FI)

EM M&M (FI)

US M&M (FI)

EM M&M (FI)

US M&M (FI)

M&M (E) Comdty.

-0.8% -16.1% 32.4% 9.9% -4.1% 14.0% 4.6% 13.2%

US M&M (FI)

Energy (E) Energy (E) Gold (E) Agri. (E) Agri. (E) Agri. (E) US M&M (FI)

-4.4% -20.6% 29.2% 9.4% -8.9% 13.8% 4.5% 13.1%

Energy (E) US M&M (FI)

Euro M&M (FI)

Energy (E) Comdty. Energy (FI)

Energy (FI)

Agri. (E)

-15.1% -23.7% 21.9% 9.1% -11.2% 13.4% 4.2% 11.8%

Gold (E) Comdty. Agri. (E) Energy (FI)

Energy (E) Energy (E) Euro M&M (FI)

EM M&M (FI)

-16.4% -24.7% 15.7% 9.0% -11.4% 9.5% 2.1% 10.7%

Comdty. Gold (E) Comdty. Euro M&M (FI)

Gold (E) Comdty. Energy (E) Euro M&M (FI)

-17.0% -26.3% 11.8% 3.9% -13.0% 7.7% 1.7% 8.2%

M&M (E) M&M (E) Energy (FI)

Comdty. M&M (E) Euro M&M (FI)

Comdty. Energy (FI)

-19.0% -40.1% 11.1% 1.7% -17.8% 5.2% -3.9% 5.7%

2014 - 2019

Commodities |GTM - Asia 67

23

'09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20800

1,000

1,200

1,400

1,600

1,800

2,000 -1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Source: FactSet, U.S. Federal Reserve, J.P. Morgan Asset Management.Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

Gold and real rates USD / Troy oz U.S. 10-year Treasury inflation-protected security

Gold price TIPS yield (inverted)

Gold |GTM - Asia 68

24

U.S. oil inventory and rig count* Number of rigs Billion barrels

'09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '200

400

800

1,200

1,600

2,000

2,400

0.95

1.00

1.05

1.10

1.15

1.20

1.25

Source: FactSet, J.P. Morgan Asset Management; (Top right) Baker Hughes, U.S. Department of Energy; (Left) U.S. Energy Information Administration.*Weekly U.S. crude oil and petroleum ending inventory includes strategic petroleum reserve, and active rig count represents both natural gas and oil rigs. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.

Crude oil production growthMonthly change, thousand barrels per day Total, million barrels per day

Brent crude and USD real effective exchange rate (REER)USD / bbl Index

USD depreciation

USD appreciation

Brent crude oil USD REER (inverted)

Rig count U.S. oil inventory

Change from Iran, Libya & Venezuela

Change from OPEC (Less Iran, Libya & Venezuela) & RussiaChange from U.S.

Global

77

78

79

80

81

82

83

84

85

86

-1,800

-1,500

-1,200

-900

-600

-300

0

300

600

900

1,200

Jan '17 Jul '17 Jan '18 Jul '18 Jan '19 Jul '19

Oil: Short-term market dynamics |GTM - Asia 69

80

85

90

95

100

10520

40

60

80

100

120

140

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

Monthly Market ReviewThe Market Insights program 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 program explores the implications of current economic data and changing market conditions.

For the purposes of MiFID II, the JPM Market Insights and Portfolio Insights programs are marketing communications and are not in scope for any MiFID II / MiFIR requirements specifically related toinvestment research. Furthermore, the J.P. Morgan Asset Management Market Insights and Portfolio Insights programs, as non-independent research, have not been prepared in accordance with legalrequirements designed to promote the independence of investment research, nor are they subject to any prohibition on dealing ahead of the dissemination of investment research.

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 specificinvestment 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 thetransactions 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 andit 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, andaccounting 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 thatthey 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 oncertain 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 warrantyof 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 inaccordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and futureresults.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide.

To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies at https://am.jpmorgan.com/global/privacy.

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; inother European jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.; in Hong Kong by JPMorgan Asset Management (Asia Pacific) Limited, or JPMorgan Funds (Asia) Limited, or JPMorganAsset Management Real Assets (Asia) Limited; in Singapore by JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), this advertisement or publication has not been reviewedby the Monetary Authority of Singapore; in Taiwan by JPMorgan Asset Management (Taiwan) Limited; in Japan by JPMorgan Asset Management (Japan) Limited which is a member of the InvestmentTrusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the FinancialServices Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia to wholesale clients only as defined in section 761A and 761G of the CorporationsAct 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 JPMorganAsset Management (Canada) Inc., and in the United States by J.P. Morgan Institutional Investments, Inc., member of FINRA; J.P. Morgan Investment Management, Inc. or J.P. Morgan Alternative AssetManagement, Inc.

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

Copyright 2020 JPMorgan Chase & Co. All rights reserved.

Material ID: 0903c02a8262e8b6

Asia Pacific | February 2020

MARKET INSIGHTS