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Market Outlook and Key Themes
October 2012
2. Investment Themes
• What are current investment themes?
• What are current market conditions?
• Are equities fairly valued?
• What are the risk in fixed income?
• Where are current yields on bonds?
• Where do we go from here?
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3. Investment Themes
Theme Why? Current Environment Portfolio Positioning
Uncertain Global Fiscal • Sovereign Health • Eurozone Mess • Diversify Holdings Around the
Concerns • Political Transitions • Global Central Banks’ Globe
• Austerity & Tax Policy Stimulus Policies • Invest in Managers That Can
• US Elections Allocate By Country
• EM Markets = Fiscal Health • Manage Volatility
Divergent Economic Growth • US Finding Its Way • US GDP 2%, but Below Ave. • Country Exposure to Growing
• Weak Japan & Europe • Eurozone Recession Regions
• EM Showing Strength • Japan – Three Decades and • EM Exposure
Going • Global, Large Cap Holdings
• BRIC – 6-8% GDP Growth
Historically Low Interest Rates • Hurts Income Generation • US Treasury @ 1.8% • Focus on real yields
• Dampened Global Growth • Monetary Policies to Stimulate • Managers with Multi Sector,
Likely to Keep Rates Low Growth & Provide Liquidity Multi Region Approach
Inflation & Interest Rates • Continued Monetary Policies • Surging Money Supply • Long term view of when, not
Continue to Push Odds • Stable Wage Inflation if.
• Commodity Prices Moderating
Risk Premium vs. Equity • Negative Real Interest Rates • Continued US earnings • “Be Greedy When Others Are
Valuations Support Corp. Investment growth @ 8%+ Fearful”
• Global Valuation Trends • Global Valuations Well Below
LT Averages
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11. Equity Market - Valuation
S&P 500 Index: Forward P/E Ratio Current P/E vs. 20-year avg. P/E
28x
Value Blend Growth
11.6 13.2 15.2
Large
24x
14.0 16.7 21.0
20x
12.3 14.1 16.6
Mid
Average: 16.2x
16x
14.0 16.3 21.9
13.0 14.4 16.2
Small
12x
Aug. 2012: 12.7x 14.2 17.1 21.3
8x
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12
Current P/E as % of 20-year avg. P/E
S&P 500 Operating Earnings Estimates E.g.: Large Cap Blend stocks are 21.3%
Consensus estimates of the next twelve months’ rolling earnings cheaper than their historical average.
$120 2Q12: $110.91
Value Blend Growth
Large
$100
82.6% 78.7% 72.2%
$80
Mid
$60
87.7% 86.2% 75.8%
$40
Small
$20
91.2% 84.6% 75.8%
$0
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Source: (Top and bottom left) Standard & Poor’s , FactSet, J.P. Morgan Asset Management. (Right) Russell Investment Group, IBES, FactSet.
Earnings estimates are for calendar years and taken at quarter end dates throughout the year. Forward Price to Earnings is price divided by
consensus analyst estimates of earnings per share for the next 12 months. P/E ratios are calculated and provided by Russell based on IBES
consensus estimates of earnings over the next 12 months.
Data are as of 9/14/12.
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14. Equity Market Update - Valuations
9.90%
Merck 4.05%
(Pharm/medtech) 2.16%
10.50%
Microsoft 2.61%
(Software & Services) 1.87%
7.00%
Time Warner 2.71%
(Media) 3.16%
7.20%
United Technologies 2.84% 2012 Estimated FreeCashflow Yield
(Industrial Cyclical) 2.38% Current Dividend Yield
10 Year Debt Yield to Maturity
0% 2% 4% 6% 8% 10% 12%
Source: J.P. Morgan Asset Management; Bloomberg. The securities highlighted above have been selected based on their significance and are shown for illustrative purposes only. Data as of July 4, 2012.
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