Q3 Quarterly Market Review

Market ReviewOctober 2015

Review of markets over the third quarterThis past quarter has been a tumultuous and volatile period for global markets. The early summer months, which saw Greece reach a deal with its creditors, feel like a distant memory. Though the fading of Greek-related concerns was followed by a continued stream of positive economic data from Europe, this was not enough to insulate the continent from successive rounds of market volatility, which have left nearly all major developed market indices significantly down on the quarter.

The initial trigger for the instability was China, where the authorities’ management of the bursting of the country’s stock market bubble and messy decision to devalue the currency in August left investors severely unimpressed. Fears over China’s slowdown and subsequent falling demand for raw materials, coupled with excess supply, meant a further step down for commodity prices, with commodities the worst performing asset class of the quarter. The US Federal Reserve’s (Fed’s) decision to leave US interest rates unchanged, despite reasonably strong domestic economic indicators, further riled investors and revived uncertainty about the timing and pace of US rate increases. The Fed pointed to downward pressures on inflation in the near term as well as concerns about growth in China and other emerging markets.

Exhibit 1: Asset class and style returns (local currency)2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD 3Q

REITS 30.4%

MSCI EM 35.8%

REITS 34.4%

MSCI EM 33.6%

Global Agg

4.8%

MSCI EM 62.8%

REITS 27.6%

REITS 7.3%

REITS 20.1%

Small cap 35.8%

REITS 27.1%

Global Agg

5.7%

Global Agg

0.9%

Small cap 20.9%

Small cap 23.3%

MSCI EM 28.8%

Comdty 16.2%

Comdty -35.6%

Small cap 40.8%

Small cap 24.4%

Global Agg

5.6%

Small cap 18.4%

Value 29.7%

Growth 11.5%

Growth -0.7%

REITs 0.8%

MSCI EM 16.4%

Comdty 21.4%

Value 21.2%

Growth 10.5%

REITS -37.3%

Growth 29.4%

Comdty 16.8%

Value -4.9%

MSCI EM 17.4%

MSCI World 29.6%

MSCI World 10.4%

Small cap -2.0%

Growth -6.8%

Value 15.7%

Value 16.7%

MSCI World 16.1%

Global Agg 9.5%

Value -37.7%

REITS 27.4%

MSCI EM 14.4%

MSCI World -5.0%

Growth 16.5%

Growth 29.5%

Value 9.2%

MSCI World -3.5%

MSCI World -7.6%

MSCI World 11.8%

MSCI World 16.3%

Small cap 13.6%

MSCI World 5.2%

MSCI World -38.3%

MSCI World 26.5%

Growth 12.7%

Growth -5.1%

MSCI World 16.4%

MSCI EM 3.8%

Small cap 6.7%

REITs -4.5%

Value -8.4%

Global Agg

9.3%

Growth 16.0%

Growth 11.2%

Value -0.0%

Growth -39.0%

Value 23.6%

MSCI World 10.6%

Small cap -8.7%

Value 16.3%

REITS 3.2%

MSCI EM 5.6%

Value -6.3%

Small cap -9.0%

Comdty 9.1%

REITS 8.3%

Global Agg

6.6%

Small cap -3.8%

Small cap -40.4%

Comdty 18.9%

Value 8.4%

MSCI EM -12.5%

Global Agg

4.3%

Global Agg

-2.6%

Global Agg

0.6%

MSCI EM -6.9%

MSCI EM -12.0%

Growth 7.9%

Global Agg

-4.5%

Comdty 2.1%

REITS -17.8%

MSCI EM -45.7%

Global Agg

6.9%

Global Agg 5.5%

Comdty -13.3%

Comdty -1.1%

Comdty -9.5%

Comdty -17.0%

Comdty -15.8%

Comdty -14.5%

Source: Barclays, Bloomberg, FactSet, FTSE, MSCI, J.P. Morgan Asset Management. REITs: FTSE NAREIT All REITs; Cmdty: Bloomberg UBS Commodity Index; Global Agg: Barclays Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSCI World Small Cap. All indices are total return in local currency. Data as of 30 September 2015.

AUTHOR

Michael Bell Global Market Strategist

MARKET BULLETIN | OCTOBER 2015

2 REVIEW OF MARKETS OVER THE THIRD QUARTER

The beginning of the quarter was dominated by headlines about Greece. After months of inconclusive negotiations, a missed payment to the International Monetary Fund, capital controls and a huge amount of collateral damage to the Greek economy, Greece reached a deal with its creditors. Following the deal for further financial support in return for a third economic adjustment programme, a significant number of MPs who rejected the deal left the party. In the near term, the likelihood of a “Grexit” has decreased, bringing additional stability to a region that has faced volatility in recent months.

Economic indicators from Europe have generally been positive, with business and consumer surveys providing reassurance about the euro area’s growth momentum in the face of the Chinese slowdown. It is notable that European growth is now being driven by a recovery in pent-up domestic demand and less by net trade. This was the ninth consecutive quarter of growth; the relative immunity of the European economy to the Greek crisis and the Chinese slowdown is encouraging. The market, however, was not immune to these concerns, with the MSCI Europe ex UK Index down 7.3%.

Exhibit 2: World stock market returns (local currency)2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD 3Q

MSCI EM

16.4%

Japan TOPIX 45.2%

MSCI EM

28.8%

MSCI Asia ex Japan

38.0%

UK FTSE 100

-28.3%

MSCI Asia ex Japan 67.2%


US S&P 500

2.1%

Japan TOPIX 20.9%

Japan TOPIX 54.4%

US S&P 500

13.7%

MSCI Europe ex UK 2.9%

UK FTSE 100

-6.1%


MSCI EM

35.8%


MSCI EM

33.6%

US S&P 500

-37.0%

MSCI EM

62.8%

US S&P 500

15.1%

UK FTSE 100

-2.2%

MSCI Europe ex UK

20.0%

US S&P 500

32.4%

Japan TOPIX 10.3%

Japan TOPIX 2.0%

US S&P 500

-6.4%


MSCI Europe ex UK

28.6%


UK FTSE 100

7.4%

Japan TOPIX

-40.6%

MSCI Europe ex UK

29.0%

MSCI EM

14.4%

MSCI Europe ex UK -12.1%


MSCI Europe ex UK

24.2%


UK FTSE 100

-4.9%

MSCI Europe ex UK -7.1%

Japan TOPIX 11.3%


US S&P 500

15.8%


MSCI Europe ex UK

-42.7%

UK FTSE 100

27.3%

UK FTSE 100

12.6%

MSCI EM

-12.5%

MSCI EM

17.4%

UK FTSE 100

18.7%


US S&P 500

-5.3%

MSCIEM

-12.0%

UK FTSE 100

11.2%

UK FTSE 100

20.8%

UK FTSE 100

14.4%

US S&P 500

5.5%

MSCI EM

-45.7%

US S&P 500

26.5%


MSCI Asia ex Japan -14.6%

US S&P 500

16.0%


MSCIEM

5.6%

MSCIEM

-6.9%

Japan TOPIX

-12.8%

US S&P 500

10.9%

US S&P 500

4.9%

Japan TOPIX 3.0%

Japan TOPIX -11.1%


Japan TOPIX 7.6%

Japan TOPIX 1.0%

Japan TOPIX -17.0%

UK FTSE 100

10.0%

MSCI EM

3.8%

UK FTSE 100

0.7%


MSCI Asia ex Japan

-13.8%

Source: FactSet, FTSE, MSCI, Standard & Poor’s, TOPIX, J.P. Morgan Asset Management. All indices are total return in local currency. Data as of 30 September 2015.

The quarter also saw weakness for Chinese equities, with a day (dubbed “Black Monday”) in which China suffered significant financial losses, with the Shanghai Composite Index closing down 8.49%. The chain of events began with the surprise devaluation of the yuan on 11 August, with instability compounded by unexpectedly weak economic indicators and concern over previous falls in the Chinese stock markets.

While disappointing economic data, such as consecutive falls in the manufacturing purchasing managers’ index, sparked fears around the slowdown in the Chinese economy, we note that the property market has stabilised and retail sales are still growing strongly. The Chinese slowdown is part of the process of the economy transitioning to a path of slower but more sustainable consumption- and service-based growth.

Inevitably, the slowdown in China, coupled with still-high supply, did not help falling commodity prices, which in turn continued to hurt commodity-exporting emerging markets. Commodities remain the worst performing asset class of the quarter, with emerging markets not far behind.


J.P. MORGAN ASSET MANAGEMENT 3

Exhibit 3: Fixed income sector returns2009 2010 2011 2012 2013 2014 YTD 3Q

Euro HY66.1%

US HY15.1%

IL10.2%

Euro HY23.3%

Euro HY8.8%

Euro Treas.13.1%

US Treas.1.8%

Euro Treas.2.6%

US HY58.1%

Euro HY14.3%

US Treas. 9.8%

EM Debt18.0%

US HY7.4%

EM Debt6.2%

Euro Treas.1.2%

US Treas.1.8%

EM Debt25.9%

EM Debt11.8%

EM Debt9.2%

US HY15.5%

Euro Treas.2.2%

Euro HY5.5%

EM Debt 0.1%

Global IG-0.1%

Global IG19.2%

US Treas. 5.9%

US HY4.4%

Global IG11.2%

Global IG0.3%

US Treas. 5.1%

Euro HY-1.1%

EM Debt-0.9%

IL13.6%

Global IG5.8%

Global IG4.3%

Euro Treas.11.0%

US Treas. -2.7%

IL3.4%

US HY-2.5%

IL-1.3%

Euro Treas.4.3%

IL3.0%

Euro Treas.3.4%

IL8.5%

IL -3.2%

Global IG3.1%

IL-2.6%

Euro HY-3.3%

US Treas. -3.6%

Euro Treas.1.1%

Euro HY -1.1%

US Treas. 2.0%

EM Debt -8.3%

US HY2.5%

Global IG-2.8%

US HY-4.9%

Source: Barclays, BofA/Merrill Lynch, FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. IL: Barclays Global Inflation-Linked; Euro Treas: Barclays Euro Aggregate Government - Treasury; US Treas: Barclays US Aggregate Government - Treasury; Global IG: Barclays Global Aggregate - Corporates; US HY: BofA/Merrill Lynch US HY Constrained; Euro HY: BofA/Merrill Lynch Euro Non-Financial HY Constrained; EM Debt: J.P. Morgan EMBI+. All indices are total return in local currency. Data as of 30 September 2015.

In September, the Federal Open Market Committee decided not to raise interest rates, despite unemployment falling from 5.6% at the start of the year to 5.1% in August. Weak domestic inflation on the Fed’s preferred measure was part of the story, but the Fed also pointed to “recent global economic and financial developments” that may have the potential to restrain economic activity and “put further downward pressure on inflation in the near term.” Fed chair Janet Yellen highlighted concerns about the slowdown in China and other emerging markets as well as the disinflationary influence of some further appreciation in the US dollar. We still expect the Fed to lift rates this year, but the speed at which rates rise could be slower than previously expected.

Exhibit 4: Fixed income government bond returns2009 2010 2011 2012 2013 2014 YTD 3Q

Italy 8.3%

UK 7.5%

UK 16.8%

Italy 21.3%

Spain 11.3%

Spain 17.0%

Italy3.1%

Italy4.1%

Spain 3.6%

Germany 6.4%

US 9.9%

Spain 6.0%

Italy 7.4%

Italy 15.7%

UK2.5%

UK3.3%

Germany 1.8%

US 6.1%

Germany 9.8%

Germany 4.5%

Japan 2.2%

UK 14.1%

US1.8%

Spain2.9%

Japan 0.9%

Global 4.2%

Spain 6.6%

Global 4.1%

Global -0.4%

Germany 10.5%

Global1.4%

Global2.0%

Global 0.7%

Japan 2.5%

Global 6.3%

UK 2.6%

Germany -2.3%

Global 8.5%

Germany0.8%

US1.9%

UK -1.0%

Italy -0.6%

Japan 2.3%

US 2.2%

US -3.4%

US 6.1%

Spain0.4%

Germany1.8%

US -3.8%

Spain -4.2%

Italy -5.9%

Japan 1.8%

UK -4.2%

Japan 4.8%

Japan 0.1%

Japan0.9%

Source: FactSet, J.P. Morgan Economic Research Morgan Economic Research, J.P. Morgan Asset Management. All indices are J.P. Morgan GBIs (Government Bond Indices). All indices are total return in local currency. Data as of 30 September 2015.


4 REVIEW OF MARKETS OVER THE THIRD QUARTER

Investment outlook for the rest of the year

We think that the summer sell off in equities has left developed market equities looking attractive with the potential for upside from here. Continued weakness in emerging market economies and commodities mean we prefer developed market to emerging market equities. We think a continued developed market economic recovery will keep default rates low, while weakness in emerging markets may delay the pace of rate rises. In this environment, corporate credit, especially high yield, could benefit relative to government bonds.

Exhibit 5: Total returns from markets in September (%)

INDEX GBP USD JPY EUR LOCAL

Equities (MSCI)

MSCI The World Index -4.8 -8.3 -10.3 -8.5 -7.6

MSCI USA -3.2 -6.7 -8.7 -6.9 -6.7

MSCI Europe ex UK -4.5 -8.0 -10.0 -8.2 -7.1

MSCI United Kingdom -6.6 -10.0 -11.9 -10.2 -6.6

MSCI Japan -8.3 -11.7 -13.6 -11.9 -13.6

MSCI AC Asia ex JP -13.8 -16.9 -18.7 -17.1 -13.8

MSCI EM Latin America -21.4 -24.3 -25.9 -24.4 -10.7

MSCI EM (Emerging Markets) -14.6 -17.8 -19.5 -17.9 -12.0

Bonds

JP Morgan GBI Global (Traded) 5.9 2.0 -0.1 1.8 2.0

JP Morgan GBI United States (Traded) 5.9 1.9 -0.2 1.8 1.9

JP Morgan GBI Japan (Traded) 7.0 3.1 0.9 2.9 0.9

JP Morgan GBI United Kingdom (Traded) 3.3 -0.5 -2.6 -0.7 3.3

JP Morgan EMU 6.7 2.8 0.6 2.6 2.6

Currencies

Sterling na -3.7 -5.7 -3.9 na

US dollar 3.8 na -2.1 -0.2 na

Yen 6.1 2.2 na 2.0 na

Euro 4.0 0.2 -1.9 na na

Source: MSCI, FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. J.P. Morgan Government Bond Indices. Data as of 30 September 2015.

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CONTACTFor any enquiries about this document, please contact: Michael Bell – [email protected]

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Q3 Quarterly Market Review