UK | June 2023

Karen Ward, Chief Market Strategist EMEA

 Big themes GTM UK

• Short-term: markets are hopeful Goldilocks is on her way back

• This narrative could be disrupted by persistent inflation, or further banking turmoil

• Medium-term: the pandemic and energy crisis have changed the regime
• Austerity is over
• Stable, ultra-low inflation is over
• Zero/negative interest rates are over
• Performance led by assets that require a zero discount rate is over

• Investment implications:
• Make good use of fixed income now yields have reset, staying quality for now
• Consider medium-term rotation from Growth to Value and better diversification by region
• Think beyond bonds for diversification, making use of alternatives for inflation protection

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 Economies are proving remarkably resilient GTM UK 4

Composite Purchasing Managers’ Index (PMI)

Global economy

Index level
70

65

60

55

50

45

40

35

30
'10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23
US Eurozone UK

Source: S&P Global, J.P. Morgan Asset Management. A score of 50 indicates that economic activity is neither expanding nor contracting, above 50 indicates expansion. Guide to the Markets - UK.
3 Data as of 31 May 2023.
 Tighter credit conditions now pose a risk GTM UK 23/37

US credit conditions Eurozone credit conditions

Global economy

% of banks tightening lending standards % of banks tightening lending standards

100 80
Recession

80
60

60
Lending
standards
tightening 40
40
Lending
standards
tightening
20
20

0
-20

-40 -20
'90 '93 '96 '99 '02 '05 '08 '11 '14 '17 '20 '23 '03 '05 '07 '09 '11 '13 '15 '17 '19 '21 '23
For large and medium firms For small firms For consumers For large firms For small firms For households

Source: (Left) Federal Reserve, Refinitiv Datastream, J.P. Morgan Asset Management. Data is from the Senior Loan Officer Opinion Survey. Periods of “recession” are defined using US National Bureau of
Economic Research (NBER) business cycle dates. (Right) European Central Bank, Refinitiv Datastream, J.P. Morgan Asset Management. Data is from the Euro Area Bank Lending Survey.
4 Guide to the Markets – UK. Data as of 31 May 2023.
 Headline inflation is easing in the US GTM UK 19

US headline inflation breakdown

Global economy

% change year on year

10

-1
Jan '21 May '21 Sep '21 Jan '22 May '22 Sep '22 Jan '23
Shelter Core services ex-shelter Core goods ex-autos Autos Food Energy Total

5 Source: BLS, Refinitiv Datastream, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 31 May 2023.
 But core remains sticky everywhere GTM UK

Core inflation
% change year on year
8

-1
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22
US Eurozone UK

Source: BLS, Eurostat, ONS, Refinitiv Datastream, J.P. Morgan Asset Management. US core inflation is defined as headline inflation less food and energy. Eurozone and UK core inflation is defined as
6 headline inflation less energy, food, alcohol and tobacco. Data as of 31 May 2023.
 This central banks should be able to pause GTM UK 8

Market expectations for central bank policy rates

Global economy

%
6

-1
+0 +1 +2 Years +3 +4 +5
US Eurozone UK Japan

Source: Bloomberg, J.P. Morgan Asset Management. Expectations are calculated using OIS forwards. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK.
7 Data as of 31 May 2023.
 Look for balance between stocks and bonds, and between regions GTM UK 47

Global forward P/E ratios

x, multiple
40

35
Equities

30

25

20

15

10

0
World US Europe UK EM China
ex-UK
Range since 1990 Average since 1990 Current

Source: IBES, MSCI, Refinitiv Datastream, S&P Global, J.P. Morgan Asset Management. Forward P/E ratio is price to 12-month forward earnings. MSCI indices are used for all regions/countries (due to data
availability), except for the US, which is represented by the S&P 500. Range and average for China is since 1996, due to data availability. Past performance is not a reliable indicator of current and future
8 results. Guide to the Markets - UK. Data as of 31 May 2023.
 Quality matters during recessions GTM UK 52

S&P 500 Quality vs S&P 500 relative performance

Relative total return index level, rebased to 100 in January 1990
160
Recession

150
Equities

140

130

120

110

100

90
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22

Source: J.P. Morgan Asset Management Quantitative Beta Solutions, S&P Global, J.P. Morgan Asset Management. S&P 500 Quality index is the top quartile quality stocks in the S&P 500 determined by
JPMAM Quantitative Beta Strategies based on measures of profitability, financial risk and earnings quality. Periods of “recession” are defined using US National Bureau of Economic Research (NBER)
9 business cycle dates. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 May 2023.
 Government bonds offer diversification potential GTM UK 74

Historical returns from 10-year govt. bonds during shocks Total return scenarios for US Treasuries
%, total return over the period when stocks were falling %
35 30

30
20

25
Fixed Income

10
20

15 0

10
-10

-20
0

-5 -30
Tech bubble Global financial crisis Eurozone sov. debt Covid-19 -300bps -200bps -100bps 0bps +100bps +200bps +300bps
crisis Yield change by end of 2023
US Germany UK 2-year 10-year

Source: (Left) Refinitiv Datastream, J.P. Morgan Asset Management. Returns are shown over the period when MSCI World was falling in local currency terms. Tech bubble: 24 Mar '00 to 21 Sep '01; Global
financial crisis: 13 Jul '07 to 9 Mar '09; Eurozone sovereign debt crisis: 18 Feb '11 to 3 Oct '11; Covid-19: 19 Feb '20 to 23 Mar ’20. (Right) Bloomberg, J.P. Morgan Asset Management. Chart indicates the
calculated total return achieved by purchasing US Treasuries at the current yield and selling at the end of 2023 given various changes in yield. For illustrative purposes only. Past performance is not a
10 reliable indicator of current and future results. Guide to the Markets - UK. Data as of 31 May 2023.
 Big themes GTM UK

• Short-term: markets are hopeful Goldilocks is on her way back

• This narrative could be disrupted by persistent inflation, or further banking turmoil

• Medium-term: the pandemic and energy crisis have changed the regime
• Austerity is over
• Stable, ultra-low inflation is over
• Zero/negative interest rates are over
• Performance led by assets that require a zero discount rate is over

• Investment implications:
• Make good use of fixed income now yields have reset, staying quality for now
• Consider medium-term rotation from Growth to Value and better diversification by region
• Think beyond bonds for diversification, making use of alternatives for inflation protection

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 GTM UK

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 J.P. Morgan Asset Management: Risks and disclosures GTM UK

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Prepared by: Karen Ward, Maria Paola Toschi, Tilmann Galler, Vincent Juvyns, Michael Bell, Hugh Gimber, Max
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McKechnie, Natasha May and Zara Nokes.
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Guide to the Markets - UK
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