JPMorgan Funds Audited Annual Report - JP Morgan Asset ...

JPMorgan Funds
Investment Managers’ Report
Market Review
The 12-month period to the end of June 2013 saw the cautious market sentiment and investors’ preference for ‘safe-haven’ assets, which had characterised
previous quarters, recede. The result was strong gains for equities, with the MSCI World Index up 16.4% in euro terms (gross dividends reinvested).
Government bonds fared less well, with the JP Morgan Global Government Bond Index down 4.4% in euro terms over the same period.
Risk appetite returned as investors became less worried about the three main problems which had stood in the way of global economic recovery, namely,
disappointing US economic growth, the sovereign debt crisis in the eurozone and a deteriorating outlook for Chinese growth. The European Central Bank’s
(ECB’s) promise in July to do ‘whatever it takes’ to preserve the euro, and September’s announcement of a bond-buying programme, were regarded by many
as pivotal, boosting sentiment and driving equities higher.
Although the eurozone debt crisis rumbled on, with negative developments reflected in occasional spikes in peripheral European government bond yields,
market participants seemed to take the periodic escalations in their stride. Among notable events were the bail-out of the Spanish banking system early in
the period, followed by the extension of financial assistance to Cyprus in March 2013, as well as the political paralysis in Italy brought about by the resignation
of prime minister Mario Monti.
In the US, the Federal Reserve (the Fed) continued to provide a life-line for the economy and financial markets in the form of its quantitative easing
programme, increasing the rate of its purchases of Treasury and mortgage-backed securities to USD 85 billion per month, while maintaining interest rates at
a record low. The US corporate sector seemed unshaken by the uncertainty about federal spending and taxation which ensued from the political wrangles
over the ‘fiscal cliff’ and ‘sequestration’, with the S&P 500 Index reaching a record high in May.
The outlook for the UK economy was boosted by improvements in both labour and housing market conditions. The Bank of England maintained its
programme of asset purchases, while keeping interest rates at a record low. However, Japan was the stand-out performer. Following December’s elections,
the Bank of Japan unveiled a monetary easing programme which is proportionately far larger than that of the US, leading to a (short-lived) surge in Japanese
equities. Japanese yen weakness benefited exporters, leading to growth in net exports and boosting earnings from overseas.
Investors faced an environment of ultra-low interest rates (and government bond yields) across the developed world. As a result, the review period was
characterised by a widespread search for yield, with investors turning to dividend-paying equities, corporate bonds, emerging market debt and other assets
for potentially higher returns. Among top performers for the review period were the US and European credit markets, as well as emerging market local
currency-denominated debt.
Emerging market equities underperformed relative to the global average, with many companies, particularly exporters, adversely affected by falling
demand from China and India. Investors became increasingly concerned about the world’s second-largest economy towards the end of the review period, as
Chinese growth over the first quarter, at an annualised 7.7%, fell short of expectations. It could be said that China is struggling to transition away from
investment-led growth to a more balanced and increasingly domestic-led model. Nevertheless, economic growth remains robust by almost any other
measure apart from comparisons with China’s own recent performance.
Outlook
Given the extent to which the actions of the major central banks have influenced the direction of global markets, investors are likely to keep a close eyeon
any monetary policy change and the effects that ensue. The Fed indicated towards the end of the review period that it could slow down the pace of its asset
purchases, which was viewed by some as a signal of a change in policy, leading to short-term market volatility. This was followed, however, by assurances
that interest rates would remain at record lows for some time to come, while economic conditions do not yet appear strong enough to begin scaling back
asset purchases.
Looking ahead, we expect the Fed’s policy trajectory to remain a significant, if not the dominant force driving markets. The greatest concern, particularly for
bond markets, would stem from an earlier-than-expected unwinding of quantitative easing in response to improving US growth and employment conditions,
leading to a potential sharp rise in Treasury yields. In Europe, where signs of a sustained recovery have yet to appear, monetary authorities have givenno
indication of a potential timeframe for withdrawal of stimulus. This should continue to support regional markets in coming months.
Investment Managers
15 October 2013
The information contained in this report is historical and not necessarily indicative of future performance.
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