The Week Ahead By JPMorgan Funds

Cold Logic in a Hot Week

It will be hot all over America this week, from the parched lawns of suburbia to the melting asphalt of the cities.  It will be hot in Minnesota and Dallas and Louisiana, where police use of force and the murder of officers are generating anger on all sides.  It will be hot in Cleveland, where those who love and loath Donald Trump will gather for his nomination.  Even the airwaves seem hot, filled with pictures of mayhem in Nice and tanks on the bridges of Istanbul.  Recent polling shows that close to 70% of Americans feel we are on the wrong track.  It is as if we have finally succumbed to Howard Beale (from the movie Network), thrown open the window and shouted “I’m mad as hell and I’m not going to take this anymore!”

But in investing, cold logic has a better track record than hot emotion and the week ahead will contain many numbers worthy of logical analysis.  On the economic front, data on Housing Starts and Existing Home Sales may be a little weaker than a month earlier but should paint a picture of a generally healthy housing market.  This should be reinforced by strong numbers on home prices in the FHFA Home Price Index.

Manufacturing data could continue to look a little soft in flash PMI data in the U.S., Europe and Japan.  However, another low Unemployment Claims number in the U.S. should confirm perceptions that even moderate growth should lead to continued tightness in the labor market.  This week will also see an ECB meeting after which Mario Draghi is likely to express some concern about the implications of Brexit but still argue, as the Bank of England did last week, that it is too early to assess what it should mean for monetary policy.

This will also be a very big week for corporate earnings, with over 100 S&P500 companies due to report their results for the second quarter.  So far, the earnings season has been pretty normal, with the usual majority of companies surprising expectations on the upside.  Importantly, however, those expectations are looking for a substantial jump in earnings later this year.

In 2015, oil prices were down roughly 48% from a year earlier and the dollar was up 16%, two factors that more than explain an 11% drop in S&P500 earnings.  By the second quarter of this year, oil was only down 21% year-over-year and the dollar was flat.  By the fourth quarter of this year, if oil prices and the dollar simply remain at Friday’s prices, oil should be up 10% year-over-year while the dollar will be down 2.5%, both of which should be a positive for earnings.

It should be noted that the profits of energy companies in this earnings season will be very important in calibrating what these companies can achieve with prices at levels that could be sustained for a few years.  It should also be noted that revised government numbers on corporate profits, due out later this month, should remove much of the distortion that has plagued these data in recent years due to the late and retroactive adoption of temporary tax breaks, as these tax breaks have finally been made permanent.

Unless the U.S. economy falters, and we see no reason to expect it to do so, a return to more stable growth should lead to a strong rebound in earnings later this year, a trend that should be visible across a broad set of earnings measures.

And this is where cold logic should be applied.  Last week’s equity market rally boosted forward P/E ratios to 17.1 times, a bit above their 25-year average of 15.9 times.  However, with the U.S. economy growing steadily and earnings set to rebound, the outlook for U.S. stocks should be relatively positive.  Meanwhile, with cash yielding close to zero and real bond yields far below normal levels, it still makes sense for investors to overweight stocks relative to bonds.

In the short-run, emotions may lead to market volatility.  However, when temperatures are cooler later this year and economic and earnings trends become clearer, this year’s equity market rally will likely look more logical than the fall in interest rates that have accompanied it.

David Kelly
Chief Global Strategist
JPMorgan Funds

Schroders QuickView: How UK Interest Rate Predictions Have Shifted After The Brexit Vote

Following today’s announcement to hold interest rates from the Bank of England (BoE), Andrew Oxlade, head of editorial content at Schroders, looks at market expectations for the BoE’s interest rate policy and answers five crucial questions:

The money markets (the implied forecasts from the Overnight Indexed Swap or OIS, taken at 1pm on 14 July 2016) fully price in a cut for August. Trading also suggests a further reduction to 0% may be ordered in December, which has shifted from a forecast of November a week ago.

The expectation of lower rates marks a sharp turnaround from the mood in the months before the EU referendum when the focus was on trying to predict when the Bank’s key rate, at 0.5% since 2009, would rise rather than fall. The markets had expected no rate increase until at least 2018 for much of the first half of this year. Now markets do not expect rates to even return to 0.5%, after the expected cuts, until the summer of 2020.

The Brexit verdict has dealt a shock to the system. It has increased the need to keep supporting the economy with low rates, the BoE has indicated. Azad Zangana, Senior European Economist and Strategist at Schroders, said: “We believe August is the most likely time for a decrease in the bank rate. It gives the Bank of England more time to gauge the impact of the EU referendum. As we said earlier this week, the July meeting was too early to fully understand what the economic data is telling them.”

A poll of 53 economists by Bloomberg published on Friday (8 July) found most expecting a cut at the meeting today:

— 24 expected hold
— 23 expected a quarter point cut
— 6 expected bigger cuts

Here we answer five crucial questions about interest rates.

How and why is the bank rate controlled?
The MPC (Monetary Policy Committee) is charged with using interest rates to balance the economy. It reduces rates to stoke demand and raises them to cool it. As part of this, it has an inflation target of 2%. The MPC meets for three days once a month and looks at factors that may affect the economy and gauge what might happen in the future to the key consumer prices index (CPI) inflation figure. From September, these meetings will be held less frequently – eight times a year.

 Why has the rate been at 0.5% since March 2009?
The recovery from the financial crisis of 2008-2009 has been so fragile that the MPC has viewed it as necessary to keep rates at 0.5%. Inflation has been below 2% since early 2014 and bumped around zero for much of 2015, way below the target. It is therefore judged that low rates and other ways of stimulating the economy are needed. Levels of debt in the UK should also be considered. This is at historic highs for the UK government, as well as British consumers and companies. Higher rates would dramatically increase the burden of those debts, thereby offering another major consideration for the MPC.

How does the bank rate affect other rates, such as mortgage and savings rates?
The bank rate is heavily influential on consumer rates, in fact some mortgage deals are directly linked to it. But other factors are at play. Other schemes have been devised by the central bank with the aim of driving down borrowing costs. These have included the quantitative easing (QE) programme begun in 2009 followed by the Funding for Lending Scheme (FLS) in 2012. So while the bank rate has been fixed at 0.5% for more than seven years, mortgage and savings rates have tumbled. They fell particularly sharply after FLS. Bank of England data shows that in the past five years, the average rate for two-year fixed rate savings bonds has fallen from 3.49% to 1.15%. The average overall mortgage rate has sunk from 4.39% to 2.52%. The pricing of new mortgage and savings deals remain highly sensitive to expectations for the bank rate. As the chances of rate cuts have risen, lenders have responded. Most notable has been a new price war on 10 year fixed-rate mortgages, with HSBC first offering a rate of 2.79%, followed almost immediately by a 2.39% deal from Coventry Building Society. Some commentators have questioned the ability of banks and building societies to keep passing on rate cuts because lower rates come with slimmer profit margins.

What else is affected by interest rates?
One of the most significant impacts of rate adjustments is on currencies. An anticipation of higher rates tends to drive a country’s currency higher while the prospect of a reduction will normally have the opposite affect. This is because a higher UK bank rate will attract foreign investors, pushing up demand for sterling-based assets and thereby supporting the currency. Many other factors also influence currency fluctuations, including economic strength and political stability.

Why cut rates after Brexit (and why not)?
The shock of the Brexit verdict runs the risk of damaging economic growth, spurring the MPC to act. However, the Bank has other measures it can deploy. It has, for example, already relaxed capital buffers so banks can lend more and it could also restart its QE and FLS programmes. The MPC may also feel that the pound has fallen too far already.

The Week Ahead By JPMorgan Funds

Low Tide for Interest Rates

The week ahead will be packed with important economic and financial market events. However, more Americans are likely to be sitting on the beach, watching the ocean, than watching markets.  This is as it should be in the second week in July. However, as they do so, particularly if they’re in charge of children, they should keep an eye on the tide.  The calmness of the sea can lull you into complacency and you don’t want to get stranded by a tide that is turning.

Last week saw a new low tide in interest rates, despite a strong June jobs report, and many investors will be pleased by gains in both stocks and bonds so far this year.

However, it’s important to recognize some of the pressures that may push rates higher from here.  In particular, extreme valuations, an increasing supply of Treasuries, diminished recession risks and rising inflation risks all argue for higher rates.  Countering this are the Fed’s extraordinarily dovish posture and the dampening effect of even lower rates elsewhere around the world.  At some stage, the forces boosting rates should prevail.  However, risk and opportunity are two sides of the same coin.  While a gradual increase in inflation in a still healthy economy should pose a problem for bonds, it should also allow stocks and real assets to outperform.

The first half of 2016 has been kind to the bond market.  Through June 30th, all broad sectors of the U.S. bond market had registered positive returns, with 30-year Treasuries generating a 16.8% total return and high yield bonds returning over 9%.

However, past performance, far from being a guarantee of future returns, can often generate a valuation problem.  The calculations are relatively simple:

On Friday, the Labor Department will release the June CPI report that should show core CPI to be up about 2.25% from a year earlier.  Subtracting this from last Thursday’s nominal yields for 10-year Treasuries, BAA corporate bonds, the bond-buyer index of 20-year muni’s and the Freddie Mac 30-year fixed rate mortgage rate, give real bond yields of – 0.85%, 1.94%, 0.93% and 0.89% respectively, in each case lower than for any month since September 1981, almost 35 years ago.  This is clearly an extremely expensive market.

On the issue of supply, on Wednesday, the government will release the monthly Treasury Statement for June.  According to the Congressional Budget Office, the budget deficit for the first nine months of this fiscal year (which ends September 30th), is running $81 billion higher than last year.  Making some reasonable assumptions about the last three months of the year (and accounting for some calendar effects) suggests a budget deficit for fiscal 2016 of roughly $565 billion, or 3.1% of GDP, up substantially from the $439 billion or 2.5% of GDP achieved in fiscal 2015.  After falling for seven straight years, government borrowing is rising.  Moreover, the populist tone of the current presidential election bodes ill for any fiscal restraint over the next few years.

Current low rates are also boosting private sector borrowing.  Total corporate debt was up a strong 6.5% year-over-year in the first quarter while consumer credit was up 6.3% year-over-year in May.  The increased supply of bonds associated with this higher indebtedness could put some upward pressure on rates.

On recession worries, last Friday’s strong jobs report should have squashed any unreasonable fears of an imminent downturn.  The payroll gain of 287,000 confirmed our strong suspicion that the weak May reading was a statistical aberration. Meanwhile, although the official unemployment rate bounced back from 4.7% in May to 4.9% in June (following a 0.3% fall the prior month), fewer involuntarily part-time and discouraged workers cut the U-6 unemployment rate to 9.6%, its lowest level since April of 2008.

If anything, in fact, the economy appears to be gaining momentum.  Our current tracking model is forecasting real GDP growth of 2.7% in the second quarter, following just 1.1% in the first.  While economists worry about the impact of Brexit on the American economy, the reality is that there is little evidence of economic, financial or political contagion.  In short, there appears to be no particular justification for a “flight to quality” surge of flows into bonds.

Conversely, inflation pressures are slowly beginning to rise.  This week’s reports on June Import Prices, Producer Prices and Consumer Prices should all show solid increases, largely reflecting a cheaper dollar and more expensive oil.  More generally, as the labor market tightens, inflation pressures are likely to increase in the months ahead.  One other issue to watch is the recent acceleration in the growth in the money supply.  M2 was up roughly 7.0% year-over-year in June, continuing a long trend of the money stock growing faster than nominal GDP.  For now, with future inflation presumed to be very low, consumers, companies and investors seem willing to hold increasingly bloated cash balances.  However, if expectations of rising inflation are established, those holding vast cash accounts may feel an urge to convert them into real assets, goods and services, potentially providing some accelerant to both economic growth and inflation.

There are, of course, strong countervailing forces, or else bond yields wouldn’t be this low.  One of them is the extraordinarily dovish stance of the Federal Reserve. This week, three voting FOMC members, Esther George, James Bullard and Loretta Mester, will all make speeches about the economy and financial markets.  However, no matter how loudly they acknowledge positive momentum on jobs, growth and inflation and that the impact of Brexit is likely to be minor, market participants will still not believe that the July 27th FOMC meeting is actually a “live” meeting.  Investors watching the Fed are like people waiting for a perpetually tardy friend – with no expectation of punctuality but a mild interest in the excuse being concocted for their lateness.

In addition, the U.S. bond market is being helped enormously by super low yields overseas.  Indeed more than three-quarters of the government bonds in the developed world now pay less than 1%.  The Bank of England, this week, may well cut the bank rate further from 0.5% to 0.25% and insist that it has further tools at its disposal to help UK growth if necessary.  The European Central Bank may not provide any booster shot to its QE program when it convenes next week, but any compromise to bail the Italian banks out of their problems would be, de facto, a dovish move.  The Bank of Japan may also want to send even-more-easy signals in the wake of a very unwelcome appreciation of the Yen.  All of this suggests that overseas yields will likely remain low.

However, there is a limit on how low foreign central banks can push policy rates. There may also be some limit beyond which the Fed will worry about its own credibility and thus the door is not closed yet on two rate hikes in 2016, potentially in mid-September and December.

This being the case, despite the strong rally in bonds so far this year, both inflation and long-term interest rates are likely to rise in the months ahead. However, while this would be bad news for bonds, it should be good news for stocks and real assets.  Real assets, such as gold and real estate, could benefit from a perception that the Fed will be unwilling or unable to hold inflation in check. Equities, having almost hit an all-time high last Friday, could move higher as money moves from cash and fixed income in a suddenly mildly-inflationary environment. Stocks could further benefit from a rebound in profits that should begin to emerge in the earnings season that starts this week.

In short, an overweight to equities relative to fixed income still seems appropriate in the summer of 2016.

David Kelly
Chief Global Strategist
JPMorgan Funds

The Week Ahead By JPMorgan Funds

Big Splash, Small Ripples

The week ahead will be dominated by the political, economic and financial fallout from the British decision to leave the European Union.  However, as investors wade through the complexity of the situation, they should find that what is a very big deal for the United Kingdom should, in the end, be much less important for the global economy.

From a political perspective, this is a crisis of the first order for the U.K. and a significant challenge to its European neighbors.

Within Britain, the vote has led to the resignation of the prime minister and widened the split within the Conservative party.  A new prime minister, particularly if he or she is a populist from the Brexit wing of the party, may have a very difficult time holding onto power and avoiding a general election. The British Labour party is also in disarray with a populist, left-leaning leader facing an open revolt from a parliamentary party that is disappointed by Labour’s lackluster campaign to stay in the E.U. and concerned that the party might not be able to appeal to enough centrist voters to regain power, even with the Tories in disarray.

Even more important than the party politics, majorities in both Scotland and Northern Ireland voted to remain in the European Union.  There is a now a very real possibility that a new Scottish independence referendum could break up the United Kingdom.  Northern Ireland is also in an excruciating situation.  Britain’s departure from the EU will complicate its relationship with the Republic of Ireland and could badly hurt its economy.  However, any idea of a United Ireland within the EU would likely be strongly resisted for fear that it could reawaken violent forces on both sides of the sectarian divide.

Within Europe, many businesses and countries have a direct interest in maintaining as much as possible of the status quo with a soon-to-be independent Britain. However, many European governments will not want to cut a sweet deal with Britain lest it encourage populist and separatist parties elsewhere within the union.

All of this occurs in a context in which the U.K.’s exit from Europe would actually be triggered by the British government invoking article 50 of the Lisbon Treaty, setting the clock running on two years of negotiations.  Two years may seem a short period by the standards of trade negotiations.  However, it is agonizingly long for those trying to make political and business decisions.

In short, it is a multi-faceted political mess, guaranteeing heightened uncertainty about Britain and, to a lesser extent, the European Union, for years to come.

The economic implications of the Brexit decision flow from the political effects and will also be most extreme for Britain itself.  Ironically, given the apparently angry mood of the electorate, the U.K. economy was in good shape prior to the vote with unemployment falling to a 10-year low in April and wages rising, although economic growth did appear to be slowing, perhaps due to Brexit uncertainty.  This uncertainty will now be heightened and could lead to hesitation to invest or hire in the U.K., possibly triggering a recession.  It does have to be noted, however, that the collapse in the value of sterling to roughly $1.33 this morning from $1.47 a week ago, could help bolster U.K. exports.

The implications for other E.U. economies are more mixed.  Ireland would be hurt by a recession in its biggest trading partner but could well take advantage of being the last English-speaking country in the E.U. to lure financial and other jobs to its shores.  For the rest of Europe, lower exports to the U.K. would be negative, although the fall in the euro in the wake of the vote could dull the blow.

For the global economy, baring financial knock-on effects, the U.K. decision should not have major consequences.  After all, the U.K. accounts for less than 4% of global GDP and faces, so far, the threat of recession, not depression.

So what could be financial knock-on effects?  Friday saw a sharp selloff in global equities, the British pound and the euro, combined with a rally in the US dollar and the Japanese yen.  It also saw a plunge in U.S. long-term bond yields, as Brexit turmoil was seen likely to discourage an already skittish Federal Reserve from any further tightening this summer.

However, it must be said that, barring any significant economic impacts on the U.S., the market reaction to Brexit leaves U.S. interest rates in an even more inappropriate place.  Data due out in the week ahead should confirm that the U.S. economy was gaining momentum in the second quarter.  Personal Income and Spendingnumbers should show good gains while Light-Vehicle Sales could top 17 million units for the 11th month in the last 12.  Consumer Confidence could also rise in Tuesday’s report, as Americans express more optimism about labor market conditions and this confidence could be further bolstered by another low Unemployment Claims number on Thursday.

Overall, the U.S. economy appears to have grown by between 2% and 3% in the just- ending 2nd quarter, with low inflation, very low interest rates and earnings set to rebound.  In this environment, Friday’s selloff in U.S. stocks leaves the market at close to fair value in absolute terms but even cheaper relative to fixed income.

Brexit is an immensely complicated problem with effects on the political, economic and financial environment.  But while it is a big splash for the U.K., it should be, in the end, a small ripple for the global economy.  Because of this, investors who can take advantage of the overreaction of other investors may well be able to profitfrom Britain’s self-inflicted wound.

David Kelly
Chief Global Strategist
JPMorgan Funds

Agecroft Assessment Of Brexit Impact & Hedge Fund Strategies

Richmond, VA — Agecroft Partners is among those that believe the impact from Brexit on the financial markets and global growth will be long-lasting, primarily because the uncertainty of its implications will take a long time to unfold. There is speculation that other countries will follow, reducing economic growth in Europe. Further exits could have profound economic implications for the weakest economies within the euro block which have been propped up by stronger members. When uncertainty increases, investors require a higher return for their invested capital. This often leads to a widening of credit spreads and a decline in  equity valuations..

As a result, we expect to see an accelerated increase in demand for hedge fund strategies with low correlations to market benchmarks. The interest for these types of strategies began to increase after the market volatility last August and has continued through the first half of 2016. Higher beta strategies will likely be perceived as higher (and unnecessary) risk. Some of the strategies that will see a significant increase in demand include:

–relative value fixed income
–market neutral long/short equity
–direct lending
–volatility arbitrage
–global macro.

These strategies will see an increase in demand for both their perceived ability to generate alpha (returns unrelated to market  direction) and as a hedge against a potential market sell-off.

This uncertainty will increase both hedge fund redemptions and re-allocations as money is shifted throughout the hedge fund industry. Only time will tell which specific hedge fund organization will benefit and which will suffer.

Donald A. Steinbrugge, Managing Partner
Agecroft Partners, LLC

S&P Global Ratings Comments On Brexit Vote

London –Following the United Kingdom’s  (U.K.) referendum decision to leave the European Union (Brexit), S&P Global  Ratings said today that it would be reviewing the ratings potentially affected  by the referendum result.

Despite the “leave” vote, any exit will likely be a drawn-out process while treaties or other arrangements are negotiated between the U.K. and the EU regarding their future dealings. As we have stated over the last several months, certain ratings may be affected sooner including the sovereign rating on the U.K. as well as the ratings on entities directly linked to the U.K. sovereign rating.

As we stated in our recent research update on the U.K. (April 29, 2016), a vote to leave would, in our view, deter investment in the economy, decrease official demand for sterling reserves, and put the U.K.’s financial services sector at a competitive disadvantage compared with other global financial centers. We stated that a vote to leave could affect growth performance, external funding, and the public balance sheet, adding that–depending on the circumstances and consequences of a leave vote–we could lower the rating by more than one notch if we believed that the U.K.’s institutional strength and ability to formulate policy conducive to sustainable growth were negatively affected.

As we have previously stated, the leave vote has no immediate impact on the ratings on U.K. domestic commercial banks. We see the effects of a leave vote on these banks as indirect, arising from potential adverse consequences for economic activity, new business volumes, asset prices, and demand for U.K.-related debt. U.K. banks’ liquidity buffers provide a sizable cushion against market volatility as does the Bank of England’s previously announced contingency measures to ensure sufficient banking system liquidity. That said, volatility may interrupt wholesale debt issuance and affect the values of financial assets in the near term.

In the coming weeks, we will closely assess developments and update U.K. commercial bank ratings as necessary. Since mid-2015, we have not included government support in our U.K. commercial bank ratings. As such, any changes in the U.K. sovereign credit rating would not automatically affect such ratings.

The leave vote is not expected to lead to rating actions on U.K. insurers. We see the insurance sector as less exposed to the leave vote than the rest of the financial sector. While representing about one-third of the U.K.’s very substantial financial services net export surplus, the insurance sector is far more reliant on trade with non-EU countries–especially the U.S. The sector is also a very limited recipient of inward investment The nature of any future trading relationship between the U.K. and the EU is yet to be established. However, even in the absence of any trade agreements or passporting rights, we believe that U.K. insurers operating in the EU could, through appropriate planning, continue their businesses largely uninterrupted. The same would apply for EU insurers who currently trade in the U.K. through branches.

The period of uncertainty while treaties or other arrangements are negotiated between the U.K. and the EU could weigh on insurers’ investment returns and possibly on the rate of future economic growth. However, we do not now believe that these potential issues are likely to lead to immediate rating actions on insurers.

The credit implications for U.K. corporates of an exit from the EU would vary considerably by company and industry, with many of the decisive parameters unlikely to be determined until withdrawal terms are settled. This is likely to take several years.

While we expect considerable foreign exchange volatility, a slowdown in inbound foreign direct investment, a weakening of real estate markets, and some loss of business and consumer confidence in the immediate aftermath of the leave vote, we believe that longer-term credit performance will mostly depend on medium-term domestic and global economic performance and specific arrangements for goods and services trade, regulation, taxation, competition policy, and freedom of movement. A curtailment in corporate investment in the U.K. over the medium term is a key concern as that would likely weaken innovation, slow improvements in operating efficiency and, ultimately, impair the competitiveness of British manufacturing and service industries versus peers abroad.

Many of our ratings on U.K. local governments and other public bodies benefit from our assumption that the U.K. government would be willing and able to provide extraordinary support to avoid a payment default by such bodies. That assumption extends to sectors, such as social housing, where many of our ratings include one notch or more for government support and mirror that of the sovereign. Highly rated U.K. local governments are in a similar situation. Therefore, while any direct impact from a leave vote is likely to be modest and only materialize over time, we are likely to lower the ratings on a number of these bodies following a sovereign downgrade.

We do not expect an immediate impact on the ratings on U.K. structured finance products. However, we expect an uncertain time, possibly as long as several years, for the U.K. and Europe. The macroeconomic reaction to the exit is going to be the main factor that could potentially impact the ratings. Specifically regarding commercial real estate, depending upon the market’s reaction, the exit could simply lead to a slight dip in U.K. migration or could involve some corporate office diversification toward Europe. We expect any impact will be mostly felt in London in the office-space market, with some small potential effect on residential housing.

As previously stated, the leave vote will not directly affect our credit analysis of the underlying collateral backing U.K. covered bonds. Furthermore, a possible depreciation of sterling will not, in our view, alter the capacity of covered bond issuers to meet their payment obligations.



New Insurance Asset Allocation Challenges: A European Perspective

By Mathilde Sauvé, Head of Institutional Solutions, AXA IM

The stubbornly low yield and low interest rate environment is forcing investors to rethink how they construct their investment portfolios. Historically, carriers outsourced their investment portfolio decisions to one asset manager. However, as portfolios became more sophisticated and they recognized that to generate yield they needed to consider diversifying their portfolios, the move away from the traditional asset classes began.

We have seen increased exposure to alternative credit, private equity, loans and infrastructure debt for example, which has allowed carriers to generate this increased yield, owing to the illiquidity premium or premium generated from the complexity of the assets.

However, exploring new asset classes and thus taking on multiple fund managers can prove challenging in today’s regulatory environment given the increased reporting burden following the advent of Solvency II.

All Change…Again: Efficiency
We are now seeing a full reversal where insurers are again trying to rationalize the number of fund managers they use. Generating efficiencies around reporting, monitoring and governance across multiple asset classes frees up insurer members to get on with other tasks necessary for running a carrier. They want partners who are able to complement them throughout the whole value chain, from providing asset management expertise to efficient reporting and regulatory services.

Variety – Access To The Esoteric Asset Classes
Increasingly, insurers do not want to go to a series of boutiques for each of the more esoteric asset classes. We are finding that multi-asset is a particularly attractive option for smaller and medium-sized insurers, whose investment pots may be too small to justify a segregated mandate. Going into more esoteric asset classes can be a resource-intensive exercise. For smaller carriers, the costs associated with hiring investment expertise for all their asset class requirements, often results in much of the benefit generated being lost. If one partner can offer access to all desired asset classes, these costs can be significantly reduced.

In addition, multi-asset funds allow a certain degree of flexibility that, for example, is important  property and casualty (P&C) insurers, who often have portfolio durations of less than two years. Smaller tactical allocations are also sometimes required for lines of direct lending to SMEs, especially in areas where the asset class is growing.

Discretionary Mandates, Satellites And A Move Towards Total Return
Insurers will often have a core portfolio in fixed income designed to match the liability risk and usually  made up of government bonds, investment-grade credit and some diversification. Here, the guidelines are set in terms of target duration, target yield and target solvency capital ratio (SCR) budget. Carriers are also becoming more open to offering their fund managers discretionary mandates, allowing their investment partners more flexibility on when to enter, increase exposure to and exit certain asset classes in a return seeking part of the portfolio.

We have also noticed that in the request for proposals from small and medium size insurers, many are now asking for proposals to be presented on a total return basis, rather than aiming for a benchmark. Then there’s another type of discussion happening which looks at developing a satellite portfolio, which is there to grow the assets – here we’re talking about pure yield, total return, along with a volatility budget and the insurer’s SCR budget.

The impression we get is that being an investment expert is no longer enough. As a true partner, you have to understand all your client’s needs to enable them to make better decisions – the investment, risk, economic, regulatory and accounting decisions.

Mathilde Sauvé joined AXA IM in 2011 after four years AXA Group Risk Management where she represented the company and the insurance industry in the negotiation process for Solvency II. Prior to AXA, she was a sell side-equity analyst on the insurance sector at French broker Oddo. As of March 31, assets under management at AXA IM totaled $759 billion.



The Week Ahead By JPMorgan Funds

The Velvet Landing

I have been on many flights in the course of my life and in all of those flights I’ve never been on a plane that landed so softly that I didn’t feel it.  Yet the median projections released by the Federal Reserve last week forecast just such a gentle landing for the U.S. economy.

According to these forecasts, the economy will grow at a roughly 2.0% pace over the next two and a half years, essentially the same pace as in the expansion so far. However, almost miraculously, the unemployment rate, which has fallen by 5.3 percentage points since 2009 and 0.8 percentage points over the last year, suddenly stops falling, flatlining to 4.7% by the end of this year and staying at 4.6% through the end of 2018.  Inflation, held down by falling oil prices in recent years, is equally co-operative, being almost unaffected by an oil price rebound with the year-over-year consumption deflator averaging 1.5% at the end of this year and then drifting very gently up to 2.0% by the end of 2018.

In the week ahead, attention will likely be focused on Thursday’s Brexit referendum. However, before then, on Tuesday and Wednesday, Janet Yellen will testify to Congressional committees on the Fed’s forecast and may have to address these issues.

On the growth forecast, 2.0% seems reasonable, so long as the unemployment rate is falling. Indeed, given the rough start to the year, it may even seem ambitious for  2016. However, the unemployment rate in May was 4.7% and given an expected pickup in real GDP growth, it is likely to fall further by the end of this year. A similar GDP growth forecast to the Fed’s, in our internal models, yields 4.5% unemployment in the fourth quarter of this year and 3.9% in the fourth quarter of 2017.

Meanwhile, although the CPI inflation rate was just 1.1% year-over-year in May, we estimate that lower-than-a-year-ago energy prices cut this number by 0.7%.  A very slow drift up in oil prices to $51 a barrel on WTI by 4Q2016 and $53 by 1Q2017, could help boost year-over-year CPI inflation to 2.5% year-over-year in Q4 and over 3.0% by the following quarter.   Even the Fed’s preferred measure of inflation, the soft-rising personal consumption deflator, could well hit 2.0% year-over-year by the end of this year and move higher from there.

In other words, we believe that the Fed continues to overestimate the potential growth rate of the U.S. economy and thus is probably underestimating the risk that it overheats over the next two years.  Data due out this week should generally support this contention, with both Existing and New Home Sales likely to look strong and flash Markit  PMIs, for the U.S., Europe and Japan all pointing to somewhat more strength in global manufacturing.  Investors will also keep a close eye on Unemployment Claims to see if stronger second-quarter economic growth continues to support the labor market.

In global markets, in the week ahead, the focus will be on Thursday’s British referendum on European Union membership.  The campaign remains very close with opinion polls in the last few days showing at a swing back towards staying in the wake of the shocking and tragic murder of Jo Cox, MP.  However, this still leaves the sides almost exactly tied and, given the unusual nature of the vote and the recent unreliability of polls, all that can honestly be said today is that it is too close to call.

If Britain decides to stay in the EU, it is reasonable to expect a positive reaction in the UK stock market as well as in Sterling and a generally positive response from global equity markets.  After all, a stay vote would simply maintain the status quo while eliminating the uncertainty that has been an inevitable result of the close campaign.

If Britain decides to leave, the market reaction is much harder to predict, since one uncertainty would have been replaced by others:  How would Britain negotiate trade with Europe?  What would it mean for the British government?  What would it mean for the stability of the United Kingdom itself, given the perceived desire of Scotland to remain in the EU? And could it ignite a domino effect with other countries expressing a desire to opt out of pan-European institutions?  By Friday, we will know the outcome of the vote and should be able to explore some of the ripple effects.

Apart from this, however, the economic data should be a little friendlier to the stock market and more difficult for the bond markets than the tone of Fed comments last week.  Given current super-low interest rates around the world and a global economy that is still moving forward steadily, albeit slowly, an overweight to risk assets still seems appropriate.

David Kelly
Chief Global Strategist
JPMorgan Funds

Highlights Of The S&P Global Ratings’ 32nd Annual Insurance Conference

S&P’s 32nd Annual Insurance Conference took place in New York June 14-15 at the NY Marriott Marquis with the title: Managing an Uncertain Reality. Following the meeting, which was attended by a good many industry leaders, the key topics of interest were assembled by S&P Global Ratings and published in three separate articles, as follows:

Global Reinsurers Facing Prolonged Weak Market

 New York, NY — The global reinsurance market  remains mired in a prolonged soft patch, but there have been signs that  pricing may have reached a bottom, said panelists who spoke at the S&P Global Ratings 2016 Insurance Conference in New York on June 16.

“It’s a tough market,” said Constantine Iordanou, chairman and CEO of Arch Capital Group. “On a scale of 1-10, with 10 being a great market and one being a terrible market, we’re at a two or three. But I see some signs of bottoming in some of the sectors.”

With more than half of business written by global reinsurers coming into effect at the beginning of each year, the January renewal season generally sets the tone for the whole year. In a survey S&P Global Ratings carried out in the first quarter, the largest global reinsurers indicated that pricing across lines and regions had continued its downward trend, although the decline was less than many expected.

Brian Young, president and CEO of Odyssey Re Holdings, said he expects pricing for midyear renewals to be down in the neighborhood of 5%, but that “there are signs that the pressure is moderating.”

Contributing to the soft market are a number of factors, not the least of which is consolidation among primary insurers, which, although trimming the number of customers for reinsurers, has also created ever-larger companies that are more willing to retain risk.

“The number of insurance companies is declining,” said Chris O’Kane, CEO of Aspen Insurance Holdings. At the same time, insurers’ increased reliance on modeling has made them more comfortable holding onto risk. “We’ve seen more use of models – especially in Europe – and models give a sense of security. Some people might say models give a false sense of security.”

At any rate, there’s a “supply-demand imbalance that I think is going to be with us for a little while to come,” O’Kane said.

Iordanou agreed, saying that unlike many cycles in the past, “we’ve seen more willingness by clients to retain risk because their balance sheets are healthy.”

“It’s not a question of how much capacity is available, but a question of whether that capacity is willing to take the risk,” he added.

At the same time, enhanced quantitative methods across the sector have put competitors on a more even playing field in many respects, panelists said, which is contributing to softer pricing.

“If you look at past bad markets, there was a lot of very ill-informed competition,” Aspen’s O’Kane said “There were a lot of things ready to go wrong, and when they went wrong, they did so big time.” Now, he said, participants are “better-informed and more disciplined,” though perhaps the effects have already been priced into the market.

“I’m not saying there won’t be some more declines, but I would say we’re reaching the bottom in pricing,” O’Kane said. “The question is, ‘What will get us back off the bottom?’, and I don’t have an answer for that one.”

Odyssey’s Young suggested that a catastrophic event or “another financial crisis, as we saw in 2008-2009 that impairs balance sheets” could be a catalyst for a change.

“You’d need some big losses to emerge,” he said. “Even in today’s soft market, where you see losses, you see a correction” in pricing, as occurred in Alberta, Canada after wildfires swept through and largely destroyed the city of Fort McMurray. Still, “it’s not having a global impact. For us to see corrective action globally, I think you’d need to see (losses of) $50bn – or maybe north of that.”

Either way, the global reinsurance industry has enjoyed relatively good profitability because of the low level of catastrophe losses and high level of reserve releases, which has freed up money set aside to settle possible claims that didn’t materialize.

As Arch’s Iordanou put it: “With no (catastrophes), you can have lousy pricing and still come out ahead.”

Nonetheless, pricing dynamics in the markets have changed, panelists said.

“Historically, the reinsurance market was very volatile: It put prices up significantly after an event, it rode that pricing for a period, and then it lowered pricing very quickly,” said O’Kane of Aspen. Now, “the upturn tends to be a bit milder and a bit shorter” because of improved quantitative disciplines.

He went on to warn about the “drying up of reserve releases, which I think is coming,” and said that, on the underwriting side, “there isn’t really, in this global market, any unnoticed pocket of excellent returns.” Rather than try to explore areas of new business, O’Kane said, “the questions we need to answer now are, ‘How are we going to retain some margin? How are we going to prevent the erosion of margin?'”

Iordanou agreed that finding a large and hugely profitable untapped opportunity was extremely unlikely, and that “you have to go to small or niche transactions to find something where there’s no efficiency in the market.”

“Given the current marketplace in reinsurance, you have to be patient and disciplined because you’re walking through a minefield right now,” he said.

That has fed into (often declining) compensation for underwriters, and has made retention of talent at reinsurers a sometimes difficult prospect. The panelists agreed that remaining disciplined and allowing underwriters to survive a fairly fallow period, was essential.

Iordanou said his firm compensates underwriters based on bottom-line profitability, not top-line revenue. “As (Warren) Buffett says, ‘Premium doesn’t know anything about losses, and vice-versa,'” he said.

As Odyssey’s Young put it: “In this environment, where would you rather work – at a firm that says, ‘You need to write business right now’ or one that says, ‘It’s okay to put the pen down. If the deal doesn’t make sense, don’t do it’?”

The panelists collectively projected that return on equity for the year would be somewhere in the 7%-8% range, but some added that the goal of 15% returns over the longer-term remained.

“We’ll just hunker down,” said O’Kane. “We’ll survive this.”


US P/C Industry Reserve Adequacy, Reflecting Greater Discipline, Still Sound

New York, NY — Reserves for the U.S. property/casualty (P/C) industry continue to surpass industry leaders’ expectations despite an air of skepticism, said panelists at the S&P Global Ratings Insurance Conference on June 15 in New York.

Like other industry observers, S&P Global Ratings had expected P/C reserve releases to decline in 2015 because of softer commercial-lines pricing and less margin in the reserves of older accident years that have supported positive development for the past 10 years.

“Reserve adequacy is always a concern, especially in lines where claims take time to emerge (i.e., long-tail lines),” said John Iten, director at S&P  Global Ratings and moderator at the conference. The concerns stem from P/C’s cyclical nature in which soft markets yield more releases because of price competition and hard markets see more reserve strengthening.

Even with this cyclicality, reserves have held up unusually well in recent years. S&P Global Ratings estimates that net reserve releases (excluding mortgage and financial guaranty insurance) totaled $6.7bn in 2015, down from the $9.6bn released in 2014.

Conning Inc. agreed with these findings in its recent publication of 2015 reserve adequacy.

“We think industry reserves are 2% redundant right now, down from 4% last year,” said Robert Farnam, vice president of insurance research at Conning.. “Overall claims trends are benign; frequency trends had been going down, although they may have bottomed, and severity trends have been moderate for the most part.”

Susan Cross, EVP and group chief actuary at XL Group plc, also believes that, based on her analysis of the global loss triangles  published by Bermuda insurers and reinsurers, reserves are still redundant  overall, but there is a slight shift between the insurance and reinsurance  segments.

“The insurance portion of the reserves is much closer to that level of adequacy or are just adequate,” she said. “Reinsurance reserves remain very strong across the market. Some deterioration in the level of reserves has occurred,” she continued, “but they remain strong.”

The panelists remember how reserve adequacy works in cycles though, and they had one takeaway: Even with the trend of favorable development continuing into 2016, it will likely start to wane.

Furthermore, these positive trends haven’t applied evenly to various sectors and among individual companies. Specifically, auto lines results diverged from those of workers’ compensation and medical malpractice.

“For personal auto liability, 2001 was the last time we thought that reserves were deficient,” Farnam said. “We don’t think they’re deficient now, but we think the redundancy has been wiped away.”

Commercial auto has been much maligned in recent years because of adverse reserve development. Despite an increase in vehicle miles driven, claims frequency for auto as a whole has seen only a small increase recently, aided by the impact of technology on automobiles (i.e., automatic break functions, enhanced video monitoring, etc.). Severity has jumped higher, though.

Technology has helped prevent smaller accidents, so the proportion of more significant accidents is higher. The cost of auto repair has increased as well.

Technology has benefited other groups as well. “Aviation is a good example where we’ve had a lot of improvements that have resulted in reduction of events,” Cross said. However, aviation has also experience pricing pressure, which is common when a line shows loss improvement. Aviation’s favorable reserve development has fortunately balanced out this pressure.

In terms of strong reserves, workers’ compensation and medical malpractice (which has more than a 20% redundancy per Conning) lead the charge. Because the former carries a quarter of the industry’s total reserves, its adequacy is important. In 2015, favorable reserve development knocked down the workers’ compensation loss ratio by about four percentage points. Pricing has improved, claim frequency has declined, and severity hasn’t been too substantial due to more modest medical inflation trends relative to earlier periods. But some of these strengths have resulted from the economic recession and its prolonged recovery.

Claims dropped dramatically in 2008 and 2009 in the midst of the recession simply because workers were leaving the workplace. Specific industries with a higher incidence of claims, such as construction, manufacturing, and transportation, lost more workers than others, which helped lower workers compensation claims frequency.

“These industries haven’t really rebounded much,” said Conning’s Farnam, “which is one  of the reasons why workers’ comp has done well.” But eventually these sectors  could improve, driving up claim frequency.

One factor has arisen as the largest disruptor on future reserves time and time again, the panelists said: inflation. It’s made predicting future reserves difficult, but insurance companies are taking different initiatives to ease the pain.

“Many companies are investing in methodologies to come up with reserve ranges,” said Sridhar Manyem, director at S&P Global Ratings. “Their stress testing is looking at the impact of inflation on reserves.” These companies are also taking greater steps than in prior years to better predict frequency and severity increases and insolvency.

Besides inflation, insurance companies are investigating other emerging risks and their impact on reserve adequacy. For example, Cross stated that XL Group has kept an eye on nanotechnology, fracking, cyber threats, concussions, e-cigarets, and Brexit, and has questioned how these risks could affect underwriting if they occur. On the global front, the U.S. judicial climate could affect other regions and countries. Certain types of claims in the U.S. have not yet migrated.

All of these trends, disruptors, and individual findings point to the larger question of whether reserve adequacy has reached its inflection point. If not, when will that occur? Fortunately, according to Farnam and Manyem, the insurance industry now has a greater level of discipline to handle a market switch than it did in 2001, for example, when asbestos and environmental claims shocked the system.

“In insurance, you can go a long time without losses, and then you see a trendm that can create a lot of noise,” Manyem said.

If 2016 is the year to rock reserves, at least insurance companies will be better prepared to tackle it.


Insurance Regulation Clarity Still Out Of Reach: S&P Global Ratings

New York, NY — Looks alone won’t tell you everything you need to know about an insurance company. To figure that out, you have to look under the hood, especially when determining an insurance company’s risk. This was the mantra at the regulation panel of the S&P Global Ratings Insurance Conference on June 15, 2016.

In 2013, the Financial Stability Oversight Council (FSOC), which is part of the Federal Reserve, began designating companies as non-bank systemically important financial institutions  (SIFIs) if the council thought one of these institutions’ failure could threaten the stability of the wider markets. Three non-bank institutions currently are designated as SIFIs in the U.S. Additionally, on the international front, nine large global insurers are labeled with the global  version of SIFI, global systemically important insurers (G-SII), which means they must follow the regulations that fall under the Financial Stability Board’s (FSB’s) purview. The International Association of Insurance Supervisors (IAIS) makes proposals to the FSB.

Because the international community’s capital regulations won’t be implemented until 2019, the debate continues as to which insurance companies fall into these “systemically important” categories. And Roy Woodall, an independent member of the FSOC and one of the conference panelists, was adamant about “looking under the hood” to make these determinations because every company varies.

The debate doesn’t just consider one country’s stability. It’s both  broader-based and more specific. “Some of the range of the debate about being systemic is the impact an institution could have on the rest of the financial sector,” said Craig Thorburn, lead insurance specialist with The World Bank.

Closer inspection of an insurance company’s risks requires the analysis of its  products and portfolios. The executive vice president of global risk management at MetLife, Graham Cox was more critical of the SIFI and G-SII  designations and of the IAIS proposals. “We haven’t had a real fundamental analysis of whether the insurance industry is systemically risky,” he said. “IAIS was asked which ones are risky rather than asking if insurance companies or certain activities are systemically  important or risky. There’s a difference.”

According to Cox, part of the IAIS’s plan that needs improving is the identification of non-traditional, non-insurance (NTNI) products, those that diverge from traditional insurance. For example, derivatives and variable annuities are considered NTNI products despite their frequency in the market and the use of derivatives often to hedge the product risk. Having these on balance sheets will count toward NTNI, as per the IAIS current basic capital regulation.

“We now think of things in two categories, and it’s confusing.” Cox said. Some products that are thought of as non-traditional are debatable as to whether they contain significant risk–funding agreements are an example. “We’re not doing anyone a service by focusing on non-traditional instead of focusing around which activities might engender systemic risk and why,” he continued.

On the domestic front, insurance regulators face a diverse landscape that deeply affects the types of proposals they make and the effectiveness and risk of these proposals. Also, insurance is fundamentally regulated via a state-based, and not a federal, framework. “Faced with that kind of diversity, it does complicate things,” Thorburn said.

Lastly, panelists seemed to disagree on the value regulation has added to insurance companies. Thorburn recalled the number of risks decreasing after the Securities and Exchange Commission (SEC) started measuring it for individual companies. “If you start measuring things, people start asking if it’s something they want to keep doing and if it’s worthwhile.”

But Cox sees things differently. He believes the insurance industry was catalyzed by its own lessons after the financial crisis. “We’ve reduced risk accordingly,” he said. To Cox, there’s no proof that various measurements have affected the amount of risk-taking. It was the industry itself that managed those risks.

But as Thorburn pointed out, many of these proposals are just that: proposals. And they are very much still works in progress. One of the greatest tasks that the international bodies have faced over the years and especially now is implementation. “It’s not a translation into local law,” he said.

A lot of heavy lifting still needs to be done before these rules are finalized. The panelists agreed that, for the time being, the insurance regulation scene remains murky without an indication of when clarity will set in.


Link to Conference Agenda







The Week Ahead By JPMorgan Funds

The Folly of Fiscal

In the week ahead, our thoughts and prayers will be with the victims of the Orlando attack – yet another senseless act of mayhem in a country where such events have become all too common.

In financial markets, while some attention will be paid to Chinese economic numbers and wavering polls on the Brexit referendum, the prime focus will be the Fed’s decision on interest rates and Janet Yellen’s press conference.  While the weak May payrolls report has squashed expectations of an interest rate hike this week, communications from this meeting will shape views on rates going forward and thus should impact financial markets.

In addition, in her Q&A session, there is some risk that Janet Yellen may repeat her view that “more should be done on the fiscal side”.  While this would completely inappropriate for the American economy today, it is an idea that is in vogue among some well-known commentators on the world’s economic woes, and could well become reality in 2017, given the plans of both the leading presidential candidates to expand spending in different parts of the federal budget.

But first to the Fed’s decision itself. From the minutes of the Fed’s last meeting, it is clear that the majority of participants thought it would be appropriate to raise interest rates in June if: (1) economic growth was accelerating in the second quarter, (2) labor market conditions were continuing to strengthen and (3) inflation was rising to a 2% rate.  Since then data have generally supported conditions (1) and (3) and should do so again this week.

After a very strong April report, Retail Sales for May should post a modest gain but one that is consistent with a roughly 3.5% rise in real consumer spending in the second quarter.  In addition, Business Inventories appear to have grown by 0.4% in April, highlighting the relatively gentle nature of the current inventory correction while Building Permits should confirm continued momentum in housing despite a dip in starts from a weather-aided April surge. Overall, real GDP growth appears to have picked up to about a 2% pace in the second quarter following a 0.8% gain in Q1.

On the inflation front, Import Prices, Producer Prices and Consumer Prices should all post strong gains for May.  On a year-over-year basis, core CPI inflation could nudge up to 2.2% in May from 2.1% in April.  The Federal Reserve prefers to look at consumption deflators and while the core consumption deflator, (due out at the end of the month), may remain at 1.6% year-over-year, the overall consumption deflator could rise to 2.0% year-over-year in the fourth quarter and 2.5% year-over-year in 1Q2017 as oil goes from an inflationary headwind to a tailwind.

Despite this, some Fed officials, including Janet Yellen, have indicated concern about the health of the labor market following a mere 38,000 May payroll gain and this, along with concerns about the “Brexit” referendum, is expected to keep the Fed on hold this week.

The wording of the FOMC statement, new Fed economic forecasts and Chair Yellen’s comments will all be watched closely to divine the future path of interest rates. The FOMC will simultaneously have to justify a further pause in their treacle-slow tightening while arguing that they really, really mean it that they could raise rates in July.  The wordsmiths at the Fed have a tough job this week.

One danger that should be acknowledged at this stage is that the Fed, frustrated by their inability to stimulate demand and concerned about miserably low productivity growth, could express support for the fiscal stimulus advocated by a number of economists and commentators in recent months.  The idea is that by increasing spending on “infrastructure” the government could simultaneously increase demand in the economy while boosting long-run productivity. In a Q&A session in March, Janet Yellen seemed to support the idea of an “investment-oriented fiscal policy” given the current low level of real interest rates.  Fiscal stimulus also features in the economic plans of Hillary Clinton and Donald Trump.

This is a terrible idea at this time for three reasons.

First, most government spending cannot be described as “productivity-enhancing”. There are, of course, honorable exceptions such as the technological innovations yielded by the space program.  However, for the most part, building highways and bridges just means more traffic jams in the short run, with no impact on real output per worker in the long run.  More public money spent on education is only productivity-enhancing if it results in better educated students and an allocation of dollars to the most promising students and courses of study – neither of which are by any means guaranteed.

Second, even if in the long run there was a productivity benefit to more government spending, it would likely take years to materialize.  In the meantime, the biggest economic problem the U.S. will face over the next few years is a lack of supply rather than a lack of demand.  With the unemployment rate at 4.7%, lower than it has been more than 80% of the time over the past 50 years, any genuine surge in aggregate demand in the economy would generate a quick uptick in inflation rather than a sustainable increase in the growth rate.

Third, we can’t actually afford it.  The May Treasury statement, released last Friday, suggests that the federal budget deficit is rising this year for the first time since 2009, to roughly 2.9% of GDP.  From here, even without new policies, it is set to rise slowly and then more quickly into the next decade, boosting the recently-stable debt to GDP ratio.  All of this assumes, moreover, continued expansion for as far as the eye can see.  Any recession could cause a further nasty lurch upwards in the deficit and the trajectory of the debt.

The truth is the American economy is healthy enough today and has been healthy enough for some years to be gradually weaned off both monetary and fiscal stimulus. Moreover, it is important to do so now so that when the economy genuinely falters, Washington will have something in reserve to try to help it out.

For investors, this is something to watch in the months ahead as policies designed to stoke demand in the absence of increased supply could cause an increase in both inflation and interest rates.  However, in the short run, while uncertainty about the Fed may impede strong market moves, gradual increases in economic growth, earnings and interest rates continue to support stocks and high-yield bonds over more defensive assets.

David Kelly
Chief Global Strategist
JPMorgan Funds