Kate Moore Kate Moore is an Executive Director and Chief Investment Strategist for the U.S. J.P. Morgan Private Bank. She is a member of the Global Investment Committee. Before joining J.P. Morgan, Kate was a Senior Global Equity Strategist at Bank of America Merrill Lynch Global Research. In this role, she was responsible for macro equity strategy, asset allocation and thematic investment advice for both institutional and individual investors. Prior to Bank of America Merrill Lynch, Kate was an Emerging Markets Strategist for Moore Capital Management, where she conducted macro research and developed trade ideas in equity, credit and commodity markets. Prior to Moore Capital, Kate was a member of the Global Strategy team at Morgan Stanley Investment Management. Kate has been featured by major news outlets, including CNBC, The Wall Street Journal, the Financial Times, The New York Times and Bloomberg. Kate holds a B.A. from the University of Virginia, and an M.A. in Political Economy from the University of Chicago.

Kate Moore Chief Investment Strategist United States J.P. Morgan Private Bank

Michael VaKnin Chief Economist J.P. Morgan Private Bank

j u lY 2 0 14market thoughtsq U a r t E r l y

richard Madigan Chief Investment Officer and Head of Investment Strategy J.P. Morgan Private Bank

Page 3

a young cycle, largely unhindered

advanced economies have room to grow without imbalances aris-ing, which means the current expansion has a lot of life left.

Slow and steadya mid-year report cardWith markets initially off to a slow start, we wanted to revisit in this edition of Market

Thoughts what we thought would happen across markets, as well as what has—and hasn’t—worked in portfolios. For what hasn’t worked, we want to focus on what we’re doing about it, and if our view has changed.

We have three central investment themes that we believe are particularly important to our current portfolio positioning.

Stocks should beat bonds this year. although equity markets are no longer cheap, we continue to feel strongly that we remain in a bull market in which earnings will drive returns.

When it comes to bonds, the best offense is a good defense. We continue to play defense in our fixed income investments. In our view, interest rates aren’t high enough to warrant buying longer-maturity, fixed-rate bonds.

We expect a good year for manager alpha. With asset class and stock correlations lower, as well as stock dispersion reasonably broad, we expect 2014 to be another good year for manager alpha generation—particularly for hedge fund strategies.

let’s take a look in more detail by asset class at how we are incorporating these views into our portfolios.

Fi g u r e 1

Key equity statistics

2 M a r K e t t h o u g h t s u n i t e d s tat e s Q u a r t e r lY

eQuities Stocks should beat bonds again this year

Current portfolio positioning

We maintain our global equity market overweights from the beginning of the year across portfolios. In the United States, we remain overweight cyclical sectors and mid-cap stocks; we are overweight small- and mid-cap stocks in Japan, as well as overweight Asia, excluding Japan—including markets such as India, Indonesia, Korea, Singapore and Taiwan. That said, we think broader emerging markets (particularly outside of Asia) remain exposed to the risk of rising U.S. interest rates—they’re not out of the woods quite yet.

We are also overweight European equity markets. However, Europe has a great deal to prove regarding the sustainability of a still weak recovery; this is a region in which we are

watching earnings growth carefully. Recent easing actions by the European Central Bank (ECB) have been well received as constructive for European equity and credit markets, but for multiples to hold, we need to see more meaningful earnings growth.

It’s all about earnings growth

We came into this year saying equity market returns would be driven by earnings growth. last year, about 75% of world equity market returns were driven by multiple expansion as investors returned to equity markets and pushed valuations higher. In comparison, over the past 25 years, about 15% of the S&P 500 Index’s returns were generally driven by multiple expansion. By historical standards, then, last year’s strong multiple expansion was quite unusual. this year, investors are focused on earnings growth to validate continued upside in equity markets.

ntM P/e P/B P/cF roe

current 10Y aVerage current 10Y

aVerage current 10Y aVerage current 10Y

aVerage

S&P 500 15.6 13.8 2.6 2.4 11.5 10.2 15.7 15.7

MSCI Europe 14.3 11.8 1.9 1.9 9.2 8.2 10.5 13.6

MSCI Japan 13.6 15.8 1.3 1.4 7.6 7.8 8.5 6.6

MSCI EM 10.9 10.8 1.5 2.0 7.8 8.4 11.9 14.5

Source: Datastream, MSCI, S&P, IBES, Shiller, BCa analytics. Data as of June 2014.

3M I D -y E a r 2 0 1 4

although equity markets are no longer cheap, we believe valuations are in line with where we are in the investment cycle. We continue to hold to our original view that earnings will drive performance in 2014. However, in a low-inflation and low-growth world where equity valuations are not fundamentally over-bought, there is some potential for valuations to move higher.

One thing we feel certain about: Broad equity markets do not currently warrant a bubble discussion. that doesn’t mean we shouldn’t expect pullbacks—there is a strong argument that we haven’t seen enough market pullbacks and consolidation over the past 18 months. as this equity bull market matures, we are staying invested, not overreaching for risk, and keeping a close eye on both earnings growth and valuations. Our overweight to global equity markets during the first half of 2014 has been the biggest driver of year-to-date portfolio performance.

In the United States, where large-cap equities reached new all-time highs in the first half of 2014, investors still seem skeptical. the recent strength of the bond market has added to a sense of unease. Conventional market wisdom is that bond markets tend to lead equity markets. But falling yields do not always predict a sell-off in stocks, and we believe the decline in treasury yields year-to-date should not be interpreted as a negative sign for risk assets in 2014.

a young cycle, largely unhindered

Michael VaKnin Chief Economist J.P. Morgan Private Bank

We came into the year arguing that the global recovery would be led higher by developed market (DM) economies. Indeed, after moving beyond the unusually cold U.S. winter, recent data confirm that DM growth continues to trend up at 2.25%— a rate only modestly below the pre-crisis trend. Cyclically, the growth impulse in DM is strong because economic imbalances in labor markets, household balance sheets and fiscal borrowing have been largely cleared. Structurally, industrial output in DM is becoming a tailwind to growth after decades of “growth outsourcing” to emerging markets (EM) made manufacturing a growth headwind. EM is finding a cyclical bottom as well, but the recovery will remain shallower, with trend growth staying at 5.5%, below the 8% trend pre-crisis. Most of the drag is coming from China and commodity-exporting economies, which remain secularly challenged by the end of outsourcing and reduced competitiveness. On the other hand, the rest of EM has room to grow before labor markets tighten to the point where growth is restrained and cost inflation hinders corporate profitability. We cannot overemphasize the importance of economic slack, which is most pronounced in DM, and to a lesser extent in asia ex-China and Eastern Europe; it commands interest rates that are unusually low relative to where we are at this stage of the business cycle.

J.P. Morgan Private Bank Economics Forecast Summary

gdP growth inFlation

2012 2013 2014 2012 2013 2014

World 3.1 2.9 3.3 3.2 3.1 3.5

Developed markets 1.4 1.3 1.6 2.0 1.3 1.7

Eurozone -0.6 -0.4 1.2 2.5 1.4 1.0

Core 0.3 0.2 1.4 2.1 1.4 1.2

Periphery -2.4 -1.6 0.8 2.6 1.0 0.5

United States 2.8 1.9 1.7* 2.1 1.5 1.9

Japan 1.4 1.5 1.5 0.0 0.4 2.6

Emerging Markets 5.5 5.1 4.9 4.9 5.4 6.0

China 7.7 7.7 7.0 2.6 2.6 2.8

EM asia ex-China 5.8 4.8 5.1 7.0 8.4 7.7

EM EMEa 3.0 2.2 1.7 5.9 6.5 6.2

latam 2.9 2.7 2.5 6.0 7.0 10.4

Source: J.P. Morgan Private Bank Economics. Note: aggregates are PPP-weighted. *U.S. GDP contracted 2.9% in q1 2014, largely attributable to an inventory adjustment and the effects of an unusually harsh winter. the 1.7% forecast for 2014 masks our view that growth will accelerate to 3%+ for the rest of the year.

4 M a r K e t t h o u g h t s u n i t e d s tat e s Q u a r t e r lY

Over the last few years, the market has rewarded companies that have engaged in stock buybacks or have raised their dividends. as we highlighted last year, we continue to see follow-through in global merger and acquisition activity with $1.7 trillion through June. While this has been supportive of share prices and valuations, U.S. companies continue to sit on a record $1.8 trillion in cash, amounting to over 10% of gross domestic product (GDP). How companies continue to deploy this cash will be critical to equity markets as well as future economic growth. We are looking for firms to direct some cash away from buybacks and dividends toward capital expenditures this year, which should bode well for equities.

In Europe, the absolute level of earnings growth has started to improve.

Due to persistently below target inflation, the ECB eased monetary policy in June, with a focus on targeting increased bank lending. this should allow credit growth in Europe to improve. Depressed credit growth has been one of the key factors holding back a stronger European recovery, and we are optimistic that these extraordinary programs will help to address this issue.

Japan’s equity markets got off to a weak start this year, after a significant rally in 2013. Investors are watching for assurance about the government’s commitment to structural reforms. Bank of Japan (BoJ) Governor Haruhiko Kuroda’s recent warning that a lack of reform would be a risk to Japan’s reflation pursuit echoed our long-held belief that monetary policy is, by itself, not enough to support Japan’s economic expansion or

0

20

40

60

80

100

120

140

160

180

200 Buybacks

Dividends $159

$82

$ billion

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Fi g u r e 2

S&P 500 firms used cash for buybacks

Source: S&P. Data as of q1 2014.

5M I D -y E a r 2 0 1 4

equity market normalization. For that to happen, we need to see earnings growth, fueled by broad and deep reforms that make Japanese corporations more adaptive and flexible. recently, we’ve seen signs that things are moving in the right direction, and we continue to be constructive, but cautious, on the long-term outlook for Japan. We expect that low double-digit earnings growth this year will be enough to drive Japanese equity markets higher ahead.

Emerging markets equities have posted solid returns so far this year. this has been largely due to the respite brought on by stable to lower risk-free rates and to a repositioning by investors, which together have brought investment inflows back into emerging markets (EM).

across the EM regions, latin america generally represents a case of missed opportunities and subpar policy diagnosis. With the exception of Colombia and Mexico, countries made little structural use of the windfall brought about by the China and commodities boom of the past decade, and by the large inflows of capital that followed the asian financial crisis of 15 years ago.

Only in EM asia do we find a region that continues to grow with few inflation pressures, and where current accounts, in aggregate, are in surplus. Moreover, the election of Narendra Modi in India this past May marks an important inflection point for the country and is indicative of a society that wishes to move forward. that does not appear to be the case with Brazil or turkey, both of which are undergoing important elections in 2014.

-50%-40%-30%-20%-10%

0%10%20%30%40%50%60%

1999 2001 2003 2005 2007

MSCI EMU 12m Trailing EPSYOY % Change

Model Estimates

2009 2011 2013 2015

Fi g u r e 3

Euro area EPS growth vs. proprietary model estimates

Source: Haver, Datastream, J.P. Morgan Private Bank. Data as of June 2014.

6

should we be worried about inflation?

Inflation is perhaps the single biggest driver of future monetary policy decisions. While inflation is rising gradually in the United States and Japan, deleveraging and low wage growth have led to significant disinflationary pressure in Europe. We believe developed market inflationary pressures remain benign and should provide a constructive backdrop for equity market valuations over the next 12 to 18 months.

Quantitative easing (QE) has not created “too much” liquidity. After three rounds of QE and a significant increase in the size of the Fed balance sheet, investors are wondering whether a sharp pickup in inflation is imminent. While Fed asset purchases in theory encourage banks to take more risk, QE has coincided with a structural change (part higher capital requirements, part risk aversion) in the banking system. Because of this, we expect any inflationary impulse to remain contained until credit demand expands more aggressively.

Price and wage pressures in the United States are contained. Over the last 20 years, the two major components of core consumer prices in the United States have shown very different patterns. Recently, prices for goods—particularly those sourced outside of the United States—have been weaker. A stronger dollar and weaker currencies for U.S. trade partners have been disinflationary. But prices for core services (which are more domestically sensitive) have trended higher than the Fed’s 2.0% target for overall inflation. Further, wage growth has been

anemic—growing at just 2.0% per year, well below the 3.0% to 4.0% Fed Chair Yellen is looking for—and we do not see significant upward pressure in the near term.

Inflation in Europe and Japan is moving in different directions. In Europe, consumer prices continue to soften, spurring the ECB to ease policy at its recent June meeting, and to cut future inflation guidance as well. The ECB is also aiming to free up the blocked credit channel as banks continue to deleverage and improve capital ratios ahead of the release of the results of the Asset Quality Review later this fall. Draghi’s promise in July 2012 to do whatever it takes to promote European growth provided a critical level of support for risk assets in the region. We believe further central bank support will continue to be a market-positive.

While the BoJ has disappointed some investors by failing to announce additional QE in 2014, we believe the central bank remains committed to reflating its economy. In fact, the BoJ has had good reason to hold off on increasing asset purchases: Stimulus has seemingly broken Japan out of its deflationary rut as price levels and wages have begun to gradually move higher.

A little inflation is good for equities. The low and improving inflation picture around the world should be good news for the global economy, and supportive for risk assets as well. For now, we still believe we are in the sweet spot for equities in terms of inflation: Price pressure is not rising fast enough to induce tightening, but is nevertheless moving higher, in line with growth.

M a r K e t t h o u g h t s u n i t e d s tat e s Q u a r t e r lY

FiXed incoMe The best offense remains a good defense

Current portfolio positioning

Given the slow economic start to the year because of weather, we have revised down our U.S. economic growth target, along with our year-end target for 10-year U.S. Treasury yields. While we continue to believe the U.S. economy is accelerating to above +3.00% in the second half of this year given the first-quarter contraction, full year growth will now be close to 1.5% to 2.00% for 2014. Accordingly, we’ve taken down our mid-point year-end target for 10-year Treasury yields to 3.25% (+/- 25 basis points).

We continue to believe that a cautious stance on interest rate duration is a prudent investment strategy, and we maintain a 2.5-year duration target for portfolios.

With risk-free rates at current low levels and limited scope for credit spreads to compress much further, a coupon-type return is arguably the best-case scenario ahead. However, given the bond rally we’ve seen so far this year—we reached what we believed were almost full-year returns in the first half of the year–it’s important not to lose sight of the fundamentals, as current market pricing leaves little room for error.

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2003 2004 2005 2006 2007

U.S. Investment Grade

U.S. High Yield

2008 2009 2010 20122011 2013 2014

Emerging Markets Debt

Source: Bloomberg. Data as of June 2014.

Fi g u r e 4

Credit is trading tight relative to history Spread in basis points

7M I D -y E a r 2 0 1 4

From a portfolio positioning perspective, we recently reduced investment positions we held in extended credit, and we are being disciplined in taking gains and trimming back overweight positions. We still like the fundamentals around credit markets—just not as much as we did when we held larger overweights at the start of this year.

The impact of not owning more bonds in

portfolios this year

Coming into the year, we held a clear preference for credit over interest rate duration, with the view that corporate fundamentals were strong but that rising interest rates would hurt long-duration, fixed income investments. Consequently, we were more cautious about U.S. treasuries, and even investment grade credit, given the limited yield available to offset potential

losses from rising rates. We favored extended credit, where we found attractive yields and an environment where default risk is currently low.

However, through mid-year, we have seen robust total returns across the fixed income landscape, primarily due to the tailwind from falling risk-free rates and the associated liquidity benefits. the U.S. 10-year treasury yield has fallen, driven by disinflationary pressures in Europe, the limited supply of treasury and high-quality bonds available to invest in, and an abundance of short treasury positions that were forced to capitulate as rates fell. the weather-induced slowdown in first-quarter U.S. economic activity and a flare-up in geopolitical tensions additionally helped keep bond yields lower.

-0.2

-0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Mar 11 Jun 11 Sep 11 Dec 11 Mar 12

Benchmark-Aware Fund

Benchnark-Agnostic Fund

Jun 12 Sep 12 Dec 12 Jun 13Mar 13 Sep 13 Dec 13 Mar 14 Jun 14

Fi g u r e 5

Beta comparison of Benchmark-aware vs. Benchmark-agnostic Fundsrolling 60-day beta

Source: J.P. Morgan Private Bank. as of June 2014. Benchmark-aware Fund proxy by JPM High yield Fund (OHyFX) and Benchmark- agnostic Fund proxy by JPM Multi-Sector Income Fund (JSISX). Fund betas are calculated with respect to the Merril lynch U.S. High yield Index.

8 M a r K e t t h o u g h t s u n i t e d s tat e s Q u a r t e r lY

We recognize the negative impact of not owning long-maturity government bonds on portfolio performance this year. However, we continue to play defense in our fixed income investments, holding to the view, as already noted, that we see little evidence that warrants buying core fixed income in portfolios.

None of this is meant to be taken as a bearish view on bonds, since we continue to hold fixed income investments across portfolios. However, it is meant to be a clear observation that we believe it isn’t time yet to add to core bond positions. Given where yields are currently, we believe the downside of owning long-maturity, fixed-rate government bonds is equal to, if not greater than, the upside return over the next 12 months. We are simply being pragmatic as bonds yields slowly move higher.

actiVe ManageMent Favoring alpha strategies

Current portfolio positioning

We continue to favor equity long/short, event driven and relative value strategies, and have high conviction in the ability of our managers to potentially generate returns in line with their risk taking.

With asset class and stock correlations lower, as well as stock dispersion reasonably broad, we came into 2014 expecting it to be another good year for stock picking and alpha generation across long-only active equity managers and hedge fund strategies.

In the long-only active manager equity space, we held a significant amount of our equity allocation across portfolios in active managers last year, and were rewarded for it. this year, we’ve been slowly rebalancing our active manager overweights back into passive equity strategies. Having had as much as +70% in active equity managers last year, we are working our way toward a +50% target allocation this year. We are doing this rebalancing where there are specific market sectors we like tactically, as well as for overall equity market overweights—where the liquidity of passive vehicles allows us the flexibility to be nimble.

Hedge funds, where it’s suitable for clients to own them, remain a significant overweight across our portfolios. We continue to fund that overweight from core bonds. Having seen hedge fund allocations return 8.0% to 10.0% above core bonds last year, we expect to see our tactical tilts in hedge funds again outperform bonds.

We have been reducing our allocation to long-only

equity active managers, but continue to favor

hedge funds in our search for alpha.

9M I D -y E a r 2 0 1 4

there has been a great deal of focus on the fact that hedge funds have generated low returns so far in 2014. In a year where equity markets went almost nowhere through the end of april, we still need to see the alpha cycle play out—it’s too early to rush to judgment on this year’s performance. We’re not reducing our overweight to hedge fund strategies currently.

coMModities Supply-demand imbalances present opportunity

Current portfolio positioning

For the balance of 2014, we remain focused on idiosyncratic opportunities within commodity markets—notably those with apparent supply-demand imbalances. For example, U.S. natural gas inventories are well below normal levels following a harsh winter, which

should result in ongoing price support during the low demand injection season (when natural gas storage supplies are replenished) that runs from April to October. We also see supply constraints in palladium (long term) and platinum (short term), given the long-lasting miners’ strike in South Africa and the potential for escalating sanctions with Russia. Finally, the shape of the curve in oil futures provides compelling yield opportunities.

Commodities tend to be a very volatile space, and in 2014 this has proven to be no exception. a particularly long and cold winter in the United States, heightened geopolitical risks and supply-side disruptions caused unexpected price swings across a number of commodity markets.

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

12/31/2013 1/31/2014 2/28/2014

Commodity Spot Prices

Backwardation Note

3/31/2014 4/30/2014 5/31/2014

Fi g u r e 6

targeting backwardation has delivered consistent performanceyear-to-date cumulative change

Source: Dow Jones-UBS, Bloomberg, J.P. Morgan. Data as of June 2014.

10 M a r K e t t h o u g h t s u n i t e d s tat e s Q u a r t e r lY

Coming into this year, our view was that commodity prices would not generate strong directional returns. Our preferred approach has been to target backwardation along commodity curves, which we would characterize as collecting premiums from commodity producers for taking on the price risk of their goods. this has proven to be a more consistent way to generate returns this year. Notably, since the run-up in spot prices we saw over the first few months of the year, this backwardation strategy has continued to accrue gains from roll yield, even as spot prices themselves have fallen over this time.

PriVate eQuitY A positive view on global buyout activity

leveraged buyout activity continues to remain strong, driven in part by low financing rates and favorable loan terms. While traditional leveraged buyouts are still attractive, our managers are also pursuing strategies such as corporate carve-outs and growth equity investments in certain sectors. In addition, several of our managers have acquired platform companies with the intention of rapidly expanding these businesses through

add-on acquisitions. the acquisitions can bring important operating synergies, which help to reduce the effective acquisition multiple of the combined business.

In general, we remain positive on the global private equity opportunity, and anticipate seeing steady capital deployment from our managers of 2011–2013 vintage years, with an exposure-tilt toward energy, technology, media and telecommunications, and industrials. Other areas where we are optimistic include middle-market buyouts of growing private businesses, corporate carve-outs and platform companies; energy investments—both upstream and midstream where operators are faced with greater requirements for infrastructure and expansion capital; and growth equity in late-stage technology companies benefiting from secular shifts in consumer adoption. In the credit space, despite the continued low borrowing rates and low default environment, our private credit managers have been able to selectively source their investments and underwrite to their target returns.

11M I D -y E a r 2 0 1 4

what are we watching ahead?

While there are many risks in the marketplace today, there are two in particular that we are watching very closely.

Central bank policy

In the United States, we believe Fed tightening will provide the next inflection point, signaling the direction not only of the recovery, but the investment cycle ahead. In Europe, there is still some doubt the ECB has done enough to put the region back on track to sustainable and more balanced growth. In Japan, the key question is how fast the BoJ is willing to accelerate its program of extraordinary measures. additionally, there is some concern of secular stagnation creeping into the global economy—that is, growth in real per capita income simply stalling out (or modestly contracting) over a protracted period. We put a low probability on this risk, but, as we noted in our January outlook, we are watching real wages, capital spending

and credit growth in Japan, Europe and some pockets across EM economies to validate our base case for slow-but-improving global growth.

Geopolitical risk Geopolitical risk is rising and is something we have continued to highlight. We were even-handed in arguing earlier this year not to exaggerate the risks we saw in russia’s annexation of Crimea. However, improving Sino-russian relations may add to geopolitical tension—potentially in headline hotspots like greater Syria, Iran, Iraq and Southeast asia.

We’re being balanced as we watch new and more nationalistic governments take charge in Japan, the Koreas and China. Each is positioning for center stage geopolitical relevance, but we continue to believe mutually aligned interests will prevail (with the exception perhaps of North Korea). that said, regional tension remains high, and we expect headlines to stay inflammatory.

risks in global housing

Residential investment was a positive driver of GDP growth last year, but significantly less so than before the crisis. Nevertheless, a significant slowdown in the housing market could threaten the economic recovery and may shake fragile consumer sentiment. Further, as the Fed continues the process of slowly normalizing policy rates over the next few years, mortgage rates will rise from

historically low levels and continue to weigh on housing activity.

As real estate is often the single largest asset on most consumer balance sheets, home values can have a significant impact on risk appetite. This phenomenon is not limited to the United States: Low global rates and high liquidity have led to significant increases in

house prices around the world. According to recent analysis released by the IMF, house prices remain well above the historical averages for many countries (relative to incomes and rents), including: Canada, Belgium, New Zealand, the United Kingdom, Norway, the Netherlands, France and Australia.

12 M a r K e t t h o u g h t s u n i t e d s tat e s Q u a r t e r lY

Perhaps of greatest concern geopolitically is how markets remain, for the moment, somewhat indifferent about escalating fundamentalism across the Middle East—something we also see creeping into China, Malaysia and Indonesia. We continue to carefully watch rising engagement in Iraq, Pakistan, Syria and afghanistan. things are getting worse in a region that has the potential to create a significant commodity price shock for global markets.

what do we eXPect ahead?

We really haven’t changed our view— though we’ve adjusted macro forecasts lower to recognize that the first quarter was somewhat of a lost quarter for U.S. growth. It was also an exaggerated quarter for growth in Japan because of economic activity that was pulled forward ahead of april’s consumption tax increase. Europe remains on track to recovery, but it’s a tepid recovery. across EM, we continue to see growth slowing.

Inflation across developed markets isn’t a policy challenge this year. that’s true even in Japan, where reflation is the policy goal. In Japan, we are watching that it doesn’t err by doing less when more is needed, or declaring policy victory too soon.

the ECB’s June policy easing was notable. However, where markets have again taken solace is in the promise that there is more to come, if needed. We’ve said for the past year that the ECB has been the most efficient of developed market central banks—getting the most out of doing the least. as we watch the Fed exit qE and address raising policy rates next year, the ECB may look prescient for having done less, in case it needs to do more.

Given the tentative start to this year, market hesitancy is understandable. Since 2010, there has been $1 trillion reinvested in global equity and bond markets funded from cash. the strongest inflows into equity markets happened last year, with about 70% of all equity inflows since 2010 occurring in 2013. We believe this is long-term money being reinvested after the Great recession—but it was late reinvesting and wants validation.

Markets have been stuck in a low volume and low volatility trading environment. We believe that reflects investor hesitancy for where we go next in the investment cycle. the key is to recognize that markets are waiting for the next inflection point. We mentioned in our January outlook that equity markets would be less exuberant this year. they have been, for the right

13M I D -y E a r 2 0 1 4

reasons. the balancing act ahead rests on the ability of consumer and corporate confidence to sustain investment, earnings, consumption and growth.

We continue to believe equity markets are fully valued. that is why we are so focused on our earnings outlook. We continue to believe return expectations need to be managed down to earnings growth and dividends this year—but we feel that creates an environment where equity markets are still the asset class that drives portfolio returns over the next year. that’s why we are overweight. We have a pro-cyclical view of the world that it is clearly reflected in our investment positioning.

Markets got off to a false start this year. Macro data and earnings are getting markets back on track. We’ve certainly seen re-engagement with recent equity market strength. Perhaps the most important point to make is that the pace of inflows into all risk assets is more balanced. We’ve seen over $150 billion invested in global equity and bond markets so far this year, with flows into bond markets outpacing equity market inflows by 2:1. last year, effectively all net flows went into equity markets. Flows are a poor leading indicator for markets, but they are an important validation for who is investing and how.

More balanced flows between stocks and bonds show investors are focused on fundamentals. that is very good news.

We believe the next inflection point for markets will come as the Fed begins to raise short-term policy rates next year. regardless of how clear its messaging is, higher U.S. interest rates will begin a process of re-pricing risk assets that markets will try to anticipate. If you believe the world is getting better, you believe interest rates are also moving higher. Interest rates are moving higher because of stronger global growth, which in turn supports our current pro-cyclical outlook. Slow and steady.

14 M a r K e t t h o u g h t s u n i t e d s tat e s Q u a r t e r lY

large underweight

underweight

neutral

oVerweight

large oVerweight

PortFolio theMes

EQUITy

U.S. Midcap

Tech, Industrials, Financials

Healthcare

EM Asia

Europe

Japan

HEDGE FUNDS

Event Driven

Equity Long/Short

Relative Value

Opportunistic Macro

HARD ASSETS

FIxED INCOME

Core Bonds

Extended Credit

Cash

Portfolio tilts vs. benchmark

Benchmark consists of MSCI World (40%), HFRI FOF Diversified (20%), DJ/UBS Commodities (5%), Barclays Global Aggregate (35%), Cash (5%).

PortFolio Positioning (Vs. BenchMarK)

Large Underweight Underweight Neutral Overweight Large Overweight

15M I D -y E a r 2 0 1 4

Contributors

16 M a r K e t t h o u g h t s u n i t e d s tat e s Q u a r t e r lY

césar Pérez Chief Investment Strategist—Europe, Middle East and africa J.P. Morgan Private Bank

richard Madigan Chief Investment Officer and Head of Investment Strategy J.P. Morgan Private Bank

Michael VaKnin Chief Economist J.P. Morgan Private Bank

Fan jiang Chief Investment Strategist—asia J.P. Morgan Private Bank

Kate Moore Chief Investment Strategist—United States J.P. Morgan Private Bank

Fan Jiang Fan Jiang is a Managing Director and Chief Investment Strategist of J.P. Morgan Private Bank in Asia. Based in Hong Kong, he is responsible for developing and implementing the investment strategy for Asia as well as tailoring it for client portfolios in the region. As a member of the firm’s Global Investment Committee, he is also responsible for generating alpha across all discretionary multi-asset portfolios. Prior to joining J.P. Morgan, Mr. Jiang spent nearly 20 years at Goldman Sachs and was most recently Chief Market Strategist for its Private Wealth Management business across the Asia Pacific region. Before that, he worked in its Fixed Income Division, where he started the group’s Asia credit strategy and trading team. Fan holds an undergraduate and a graduate degree from the University of Notre Dame where he majored in economics and a Ph.D. in finance from the Kellogg School of Management. A native Shanghainese, he lived and worked in the U.S. before relocating to Hong Kong in 1996.

Kate Moore Kate Moore is an Executive Director and Chief Investment Strategist for the U.S. J.P. Morgan Private Bank. She is a member of the Global Investment Committee. Before joining J.P. Morgan, Kate was a Senior Global Equity Strategist at Bank of America Merrill Lynch Global Research. In this role, she was responsible for macro equity strategy, asset allocation and thematic investment advice for both institutional and individual investors. Prior to Bank of America Merrill Lynch, Kate was an Emerging Markets Strategist for Moore Capital Management, where she conducted macro research and developed trade ideas in equity, credit and commodity markets. Prior to Moore Capital, Kate was a member of the Global Strategy team at Morgan Stanley Investment Management. Kate has been featured by major news outlets, including CNBC, The Wall Street Journal, the Financial Times, The New York Times and Bloomberg. Kate holds a B.A. from the University of Virginia, and an M.A. in Political Economy from the University of Chicago.

tulio Vera Chief Investment Strategist—latin america J.P. Morgan Private Bank

georgiY zhiKhareV U.S. Head of Portfolio Construction J.P. Morgan Private Bank

Michael stohler International Head of Portfolio Construction J.P. Morgan Private Bank

Michael Stohler Michael is the International Head of Portfolio Construction, for J.P. Morgan Private Bank and is responsible for delivering our the firm’s investment insights across $100 Billion billion of discretionary client assets across Europe, Latin America and Asia. Previously at J.P. Morgan, Michael was the Chief Risk Officer of the Alternatives Platform at JPMorgan. In this role, he was charged with manager selection, market risk and operational due diligence for all hedge fund strategies at theJ.P. Morgan’s Private Bank. In addition, he monitored portfolio-level and fund-specific risk across client accounts and proprietary fund of hedge funds. Michael joined the Private Bank in 2005 working on hedge fund portfolio construction. He has also specialized in quantitative risk modeling, front and back office due diligence and market research across various asset classes.

Michael has a B.A. in Physics from St. Olaf College (summa cum laude, Physics Department academic distinction), an M.B.A. specializing in quantitative Quantitative finance Finance from NYU Stern and a Ph.D. in Physics from Purdue University. His dissertation and research focus was were on quantum Quantum information Information theoryTheory. Prior to joining J.P. Morgan, he was an Assistant Professor of Physics at Wabash College from 2002 to -2004. Michael joined J.P. Morgan’s Private Bank in 2005 working on hedge fund portfolio construction. He has also specialized in quantitative risk modeling, front and back office due diligence and market research across various asset classes.

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all index performance information has been obtained from third parties and should not be relied on as being complete or accurate. Indices are shown for comparison purposes only. While an investor may invest in vehicles designed to track certain indices, an investor cannot invest directly in an index.

Barclays 10-year Municipal Bond Indexto be included in the Barclays 10-year Municipal Bond Index, bonds must be rated investment grade (Baa3/BBB- or higher) by at least two of the following ratings agencies: Moody’s, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment grade. they must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. the bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date. remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives are excluded from the benchmark.

J.P. Morgan Corporate EMBI Global Indexthe J.P. Morgan Corporate EMBI Global Index includes U.S. dollar-denominated Brady bonds, Eurobonds, traded loans and local market debt instruments issued by sovereign and quasi-sovereign entities.

J.P. Morgan Domestic High yield Indexthe J.P. Morgan Domestic High yield Index is an index designed to track the performance of the investable universe of the U.S. dollar domestic high yield corporate debt market.

J.P. Morgan U.S. High Grade Index (U.S. Investment Grade)the J.P. Morgan Domestic High yield Index is an index designed to track the performance of the investable universe of the U.S. dollar domestic high yield corporate debt market.

MSCI Emerging Markets Indexthe MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

MSCI Europe Indexthe MSCI Europe Index is a capitalization-weighted index that monitors the performance of stocks listed in the continent of Europe.

MSCI Japan Indexthe MSCI Japan Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in Japan.

MSCI World IndexMSCI World Index is a capitalization-weighted index that monitors the performance of developed market stocks from around the world.

S&P 500 Indexthe S&P 500 is a capitalization-weighted index of 500 stocks from a broad range of industries. the component stocks are weighted according to the total market value of their outstanding shares. the impact of a component’s price change is proportional to the issue’s total market value, which is the share price times the number of shares outstanding. “S&P 500” is a trademark of Standard and Poor’s Corporation.

Dow Jones/UBS Commodity Indexa broadly diversified index that allows investors to track commodity futures contracts on physical commodities.

indeX deFinitions

iMPortant inForMationIrS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties. Each recipient of this presentation, and each agent thereof, may disclose to any person, without limitation, the U.S. income and franchise tax treatment and tax structure of the transactions described herein, and may disclose all materials of any kind (including opinions or other tax analyses) provided to each recipient insofar as the materials relate to a U.S. income or franchise tax strategy provided to such recipient by JPMorgan Chase & Co. and its subsidiaries.Economic and market statistics in the text were sourced from Bloomberg. the material contained herein is intended as a general market commentary. Opinions expressed herein are those of richard Madigan, Michael Vaknin, Fan Jiang, Kate Moore, César Pérez, tulio Vera, Georgiy Zhikharev and Michael Stohler and may differ from those of other J.P. Morgan employees and affiliates. We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. any investment, products, services or strategies may not be suitable for all clients. Opinions, estimates, investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice. this information in no way constitutes J.P. Morgan research and should not be treated as such. Further, the views expressed herein may differ from that contained in J.P. Morgan research reports. the above summary/prices/quotes/statistics have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness; any yield referenced is indicative and subject to change. references to the performance or character of our portfolios generally refer to our Balanced Model Portfolio constructed by J.P. Morgan. It is a proxy for client performance and may not represent actual transactions or investments in client accounts. the model portfolio can be implemented across brokerage or managed accounts, depending on the unique objectives of each client, and is serviced through distinct legal entities licensed for specific activities. Bank, trust and investment management services are provided by JPMorgan Chase Bank, N.a. and its affiliates. Securities are offered through J.P. Morgan Securities llC (JPMS), member NySE, FINra and SIPC, and its affiliates globally as local legislation permits. Securities products purchased or sold through JPMS are not insured by the Federal Deposit Insurance Corporation (FDIC); are not deposits or other obligations of its bank or thrift affiliates and are not guaranteed by its bank or thrift affiliates; and are subject to investment risks, including possible loss of the principal invested. Not all investment ideas referenced are suitable for all investors. Speak with your J.P. Morgan representative concerning your personal situation. this material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Private investments may engage in leveraging and other speculative practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuations to investors, and may involve complex tax structures and delays in distributing important tax information. typically, such investment ideas can only be offered to suitable investors through a confidential offering memorandum, which fully describes all terms, conditions and risks. Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise. Investing in fixed income products are subject to certain risks, including; interest rates, credit, inflation, call, prepayment and reinvestment risk. asset allocation and diversification does not guarantee investment returns and does not eliminate the risk of loss. High yield bonds are speculative non-investment grade bonds that have higher risk of default or other adverse credit events and which are appropriate for high-risk investors only. Investments in commodities carry greater volatility than investments in traditional securities. The value of commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss. there are additional risks associated with international investing and thus it may not be suitable for all investors. this material is distributed with the understanding that J.P. Morgan is not rendering accounting, legal or tax advice. you should consult with your independent advisors concerning such matters.this presentation has been prepared by personnel of J.P. Morgan Private Bank, a line of business within one or more affiliates of JPMorgan Chase & Co., and is not the product of J.P. Morgan’s research Department. It is not a research report and is not intended as such. this material is for the general information of our clients and is a “solicitation” only as that term is used within CFtC rule 1.71(a)(9)(v) and 23.605(a)(9)(v) promulgated under the U.S. Commodity Exchange act. “J.P. Morgan Private Bank” is a marketing name for private banking business conducted by JPMorgan Chase & Co. and its subsidiaries worldwide. Bank products and services are offered by JPMorgan Chase Bank, N.a. and its affiliates. Securities are offered by J.P. Morgan Securities llC, member NySE, FINra and SIPC, and other affiliates globally as local legislation permits.In the United Kingdom, this material is approved by J.P. Morgan International Bank limited (JPMIB) with the registered office located at 25 Bank Street, Canary Wharf, london E14 5JP, registered in England No. 03838766 and is authorized by the Prudential regulation authority and regulated by the Financial Conduct authority and Prudential regulation authority. In addition, this material may be distributed by: JPMorgan Chase Bank, N.a. (JPMCB) Paris branch, which is regulated by the French banking authorities autorité de Contrôle Prudentiel et de résolution and autorité des Marchés Financiers; J.P. Morgan (Suisse) Sa, regulated by the Swiss Financial Market Supervisory authority; JPMCB Bahrain branch, licensed as a conventional wholesale bank by the Central Bank of Bahrain (for professional clients only); JPMCB Dubai branch, regulated by the Dubai Financial Services authority (for professional clients only). In Hong Kong, this material is distributed by JPMCB Hong Kong branch except to recipients having an account at JPMCB Singapore branch and where this material relates to a Collective Investment Scheme (other than private funds such as private equity and hedge funds), in which case it is distributed by J.P. Morgan Securities (asia Pacific) limited (JPMSaPl). Both JPMCB Hong Kong branch and JPMSaPl are regulated by the Hong Kong Monetary authority and the Securities and Futures Commission of Hong Kong. In Singapore, this material is distributed by JPMCB Singapore branch except to recipients having an account at JPMCB Singapore branch and where this material relates to a Collective Investment Scheme (other than private funds such as private equity and hedge funds), in which case it is distributed by J.P. Morgan (S.E.a.) limited (JPMSEal). Both JPMCB Singapore branch and JPMSEal are regulated by the Monetary authority of Singapore. the contents of this document have not been reviewed by any regulatory authority in Hong Kong or Singapore. you are advised to exercise caution in relation to this document. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. If you no longer wish to receive these communications, please contact your usual J.P. Morgan representative.With respect to countries in latin america, the distribution of this material may be restricted in certain jurisdictions. receipt of this material does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation.Should you have any questions regarding the information contained in this material or about J.P. Morgan products and services, please contact your J.P. Morgan private banking representative. additional information is available upon request. “J.P. Morgan” is a marketing name for JPMorgan Chase & Co. and its subsidiaries and affiliates worldwide. this material may not be reproduced or circulated without J.P. Morgan’s authority.Past performance where presented throughout this document is not a guarantee of future results.© 2014 JPMorgan Chase & Co. all rights reserved. 0714-0504-01