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MARKETINSIGHTSQuarterly Perspectives4 The Search for Yield: Will the party go on?Strategic demand for incomeThe Fed tapering did not stop the robust demand for income. Contrary to the marketconsensus in early 2014 that yields and spreads would rise, long-end U.S. Treasury yieldsand the spreads of EMD declined throughout the year.As illustrated on page 47 of the Guide to the Markets - Asia, despite less G4 central bankbuying in 2014 vs. 2013, flows from retail bond funds were surprisingly strong. Also,demand for fixed income from foreign official institutions, i.e. Forex Reserve Managersand Sovereign Wealth Managers, as well as G4 pension funds and insurance companies,have remained very steady in recent years.Compared to 2014, J.P. Morgan Securities estimates a slightly bigger global bonddemand of USD 2.4 trillion for 2015, with more G4 central bank buying offsetting thesmaller retail bond fund demand. However, in spite of an estimated larger global bondsupply of USD 2 trillion for 2015, the total supply would still fall short by USD 400 billion.It appears the “search for yield” is set to continue, thanks in part to the agingdemographic trend. Surveys have shown that strategic asset allocation to higher yieldingfixed income investments to meet pension, insurance and retirement funding needs is onthe rise.The top right chart shows that the percentage of European pension plans havingexposure to EMD and high yield bonds has jumped from 2% in 2008 to 15-18% in 2014,while their average allocation has risen from 2% to 5% for EMD and is anchored at 5%for high yield bonds.Also, the bottom right chart shows that global survey respondents on average haveperceived 8 years of savings shortfall after their retirement. This could imply moreproactive retirement planning is needed to make up for the shortfalls and incomeinvesting can be one solution to bridge this gap.OVERVIEWDespite expectations that the FederalReserve (Fed) will raise interest ratesin 2015, the good performance of longtermU.S. Treasuries as well as highyielding investments, such as REITsand emerging market debt (EMD), hassurprised many investors in 2014.So the next question is “After a stellarrally in 2014, will the search for yieldparty go on in 2015?”Anecdotal evidence shows that therehas been strong strategic demandfor income to meet cash flow needsfrom pension funds and insurancecompanies as well as retirementplans, thanks to the ever-growingaging population.Therefore, we believe the “searchfor yield” is likely to be a long-terminvestment theme for many years tocome.ixed IncomeFGlobal Fixed Income: Supply and Demand DynamicsEstimated Annual Global Bond DemandUSD TrillionsPension and Insurance Foreign Officials5 Retail Bond Funds G4 Central Banks4.1 G4 Commercial Banks Total4 Forecast2.932.7 2.52.32.21.92.3 2.4210-1'07 '08 '09 '10 '11 '12 '13 '14 '15Estimated Annual Global Bond SupplyUSD TrillionsOther5 GovernmentTotal43.2Forecast2.83 2.52.1 2.5 2.31.821.320 2.010-1'07 '08 '09 '10 '11 '12 '13 '14 '15Pension Investors’ Allocation Clickin EMD and HY20%18%15% EMD HY47GTM - Asia% of Pension Plans with anAllocation to EMD or HYAverage Allocation (%)15%10%6%5% 5% 5% 5%5%4%4%2% 2%2%0%2008 2011 2014 2008 2011 2014Perceived Retirement Savings Shortfall# of Years Years of Savings Expected toLast After Retirement25Years of Perceived SavingsShortfall After Retirement2015 1710 10 9 9 9 9 8 5 5 510579 9 9 9 9 9 10 12 12 120Source: ICI, Bloomberg, J.P. Morgan Estimates, IMF, Mercer, HSBC Insurance, Cicero Consulting, J.P. Morgan Asset Management “Guide to the Markets – Asia 1Q 2015.”(Top Right) Based on Mercer’s 2008, 2011 and 2014 European Institutional Market Place Overview Asset Allocation Survey with more than 1,200 institutional respondentsacross 14 European countries. (Bottom Right) Based on HSBC’s “The Future of Retirement: A New Reality,” with respondents from Australia, Brazil, Canada, China, Egypt,France, Hong Kong, India, Malaysia, Mexico, Singapore, Taiwan, UAE, United Kingdom and United States. It is based on the number of years people expect their savings torun out after retirement and how many years of perceived savings shortfall is needed after their savings are all consumed. Data reflect most recently available as of 31/12/14.Global bond supply is estimatedto fall short by $400 billion in2015.Increasingly more pension planshave exposure to EMD and highyield bonds nowadays.Global survey respondents onaverage perceive 8 years ofsavings shortfall after theirretirement.Source: Guide to the Markets - Asia, page 4710 | Quarterly Perspectives: 1Q 2015