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J Pp M Global Asset Allocation ee organ 09 November 2012 The J.P. Morgan View Do US elections change anything? Asset allocation — The equity market has priced out the Romney win scenario, but from these levels, our economic and market outlook and risks are unchanged. These keep us medium-term overweight equities and credit, despite the likely volatility as the fiscal cliff is negotiated. Within equities, we stay underweight the US, and move most of the overweight into EM Asia. We have moved some of our credit overweight from the US to Europe. Economics — The data flows continue to confirm that June/July was likely the bottom in global activity growth, and that we are gently lifting from those levels, even as it will take well into next year before growth returns to trend. Fixed Income — Look for yields to head higher, but focus more risk on spread compression trades. Equities — We focus our overweights on EM Asia, Cyclical stocks and US Home builders. Credit — We see the current dip as an opportunity to add risk. Currencies — Be long the dollar during the fiscal cliff negotiations. Commodities — A further set of better Chinese economic data keeps us long base metals. Equity markets are taking the Obama victory quite badly, with US stocks down some 4% on Wednesday and Thursday. This has pushed up global bond markets, and credit spreads are wider, but commodities are largely ignoring this turmoil. We don’t think an Obama victory truly changes the economic outlook, or risks, but it does eliminate the Romney hope that appeared to have been in market pricing. By definition, the Romney scenario is now priced out of the market. The US elections confirm the status quo in Washington, and to us, they do so also for the broad economic and market outlook, from current levels. Hence, we do not see much reason to change our investment allocations, and remain medium-term overweight both credit and equities against cash, government debt, and commodities. We do so on the basis of value — still high risk premia — fading risks on fiscal policy in the US into next year; an expected rebound in global growth; and super easy monetary policy, with more QE coming if growth were to disappoint. In recent weeks, we have switched out of our long-standing US risk overweight, into an underweight, on the argument that the US had the most committed central banker, its growth has been least disappointing, and its fiscal risks were further into the future. This relative risk has changed, with Chinese economic data confirming that its economy is rebounding, while the ECB now creating a period a relative financial “peace”. The US, in contrast, is at the start of intense negotiations on how to avoid a fiscal-cliff induced recession next year. Neither side of the aisle has an interest in being blamed for a recession. But markets will still be buffeted by a steady news flow on wide gaps between each side’s position. See page 7 for analyst certification and important disclosures. Global Asset Allocation Jan Loeys AC (1-212) 834-5874 jan.loeys@jpmorgan.com JPMorgan Chase Bank NA John Normand (44-20) 7134-1816 john.normand@jpmorgan.com J.P. Morgan Securities ple Nikolaos Panigirtzoglou (44-20) 7134-7815 nikolaos.panigirtzoglou@jpmorgan.com J.P. Morgan Securities ple Seamus Mac Gorain (44-20) 7134-7761 seamus.macgorain@jpmorgan.com J.P. Morgan Securities ple Matthew Lehmann (44-20) 7134-7813 matthew.m.lehmann@jpmorgan.com J.P. Morgan Securities ple Leo Evans (44-20) 7742-2537 leonard.a.evans@jpmorgan.com J.P. Morgan Securities ple YTD returns through Nov 8 %, equities are in lighter color. EMBIG EM $ Corp. US High Yield MSCI Europe* S&P500 MSCI EM* MSCI AC World® US High Grade Europe Fixed Inc* Gold EM Local Bonds** EM FX US Fixed Income Global Gov Bonds** Topix* US cash GSCI TR T 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 i i 5 5 0 10 15 20 Source: J.P. Morgan, Bloomberg. See blue box on page 2 for description. www.morganmarkets.com HOUSE_OVERSIGHT_026572