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MARKET INSIGHTS
Investing in the UK
Portfolio Discussion | UK
2Q | 2015
The UK has been among the fastest growing developed economies
in the past years. Despite government plans for further fiscal
entrenchment and the drag on growth and productivity that this will
entail, the economic recovery should continue to strengthen as the
rest of the developed world advances.
MARKET INSIGHTS
Guide to the Markets
UK | 2Q 2015 | As of 31 March 2015
The pace of economic recovery has surprised both markets and
policy makers alike
• Stronger economic growth should continue as the components of growth by sector
have been increasing.
SLIDE COMBO: 5 | 13 | 41
Components of UK growth
UK economy
Rebased to 100 at Q1 2008
Rebased to 100 at 2007
115
Exports
105
110
Consumption
100
| 5
GTM – UK
Labour productivity and GDP per capita
Real GDP demand components
110
GDP
95
Investment
90
85
Continuation of pre-crisis
productivity trend
105
100
80
75
'08
'09
'10
'11
'12
'13
'14
% of GDP
4
%
2
Investment income
Trade balance
Current transfers
Current account
balance
• UK inflation is low by historical standards. The Bank of England are likely to err on the
side of caution, wanting to see stable economic growth before raising interest rates.
Labour productivity
95
Real GDP per capita
90
Current account
85
80
0
75
-2
70
-4
-6
'05
'07
'09
'11
65
'13
'95
'97
'99
'01
'03
'05
'07
Europe
Eurozone
46.8 46.7 48.3 48.8 50.3 51.4 51.1 51.3 51.6 52.7 54.0 53.2 53.0 53.4 52.2 51.8 51.8 50.7 50.3 50.6 50.1 50.6 51.0 51.0 52.2
France
44.0 44.4 46.4 48.4 49.7 49.7 49.8 49.1 48.4 47.0 49.3 49.7 52.1 51.2 49.6 48.2 47.8 46.9 48.8 48.5 48.4 47.5 49.2 47.6 48.8
Germany
49.0 48.1 49.4 48.6 50.7 51.8 51.1 51.7 52.7 54.3 56.5 54.8 53.7 54.1 52.3 52.0 52.4 51.4 49.9 51.4 49.5 51.2 50.9 51.1 52.8
Emerging
| 13
Mar
Feb
Dec
Nov
Oct
Sep
Aug
51.0 50.1 50.4 50.3 50.6 51.5 51.6 51.9 52.8 52.9 52.9 53.2 52.4 51.9 52.2 52.6 52.4 52.5 52.2 52.2 51.8 51.5 51.7 51.9 51.8
Italy
44.5 45.5 47.3 49.1 50.4 51.3 50.8 50.7 51.4 53.3 53.1 52.3 52.4 54.0 53.2 52.6 51.9 49.8 50.7 49.0 49.0 48.4 49.9 51.9 53.3
Spain
44.2 44.7 48.1 50.0 49.8 51.1 50.7 50.9 48.6 50.8 52.2 52.5 52.8 52.7 52.9 54.6 53.9 52.8 52.6 52.6 54.7 53.8 54.7 54.2 54.3
Ireland
48.6 48.0 49.7 50.3 51.0 52.0 52.7 54.9 52.4 53.5 52.8 52.9 55.5 56.1 55.0 55.3 55.4 57.3 55.7 56.6 56.2 56.9 55.1 57.5 56.8
UK
50.0 50.4 51.9 52.5 54.5 58.4 56.9 56.4 57.8 57.3 56.7 56.1 55.4 56.9 56.5 56.7 54.9 52.9 51.4 53.3 53.4 52.8 53.0 54.0 54.4
US
54.6 52.1 52.3 51.9 53.7 53.1 52.8 51.8 54.7 55.0 53.7 57.1 55.5 55.4 56.4 57.3 55.8 57.9 57.5 55.9 54.8 53.9 53.9 55.1 55.7
Japan
50.4 51.1 51.5 52.3 50.7 52.2 52.5 54.2 55.1 55.2 56.6 55.5 53.9 49.4 49.9 51.5 50.5 52.2 51.7 52.4 52.0 52.0 52.2 51.6 50.3
Brazil
51.8 50.8 50.4 50.4 48.5 49.4 49.9 50.2 49.7 50.5 50.8 50.4 50.6 49.3 48.8 48.7 49.1 50.2 49.3 49.1 48.7 50.2 50.7 49.6 46.2
Russia
50.8 50.6 50.4 51.7 49.2 49.4 49.4 51.8 49.4 48.8 48.0 48.5 48.3 48.5 48.9 49.1 51.0 51.0 50.4 50.3 51.7 48.9 47.6 49.7 48.1
India
52.0 51.0 50.1 50.3 50.1 48.5 49.6 49.6 51.3 50.7 51.4 52.5 51.3 51.3 51.4 51.5 53.0 52.4 51.0 51.6 53.3 54.5 52.9 51.2 52.1
China
51.6 50.4 49.2 48.2 47.7 50.1 50.2 50.9 50.8 50.5 49.5 48.5 48.0 48.1 49.4 50.7 51.7 50.2 50.2 50.4 50.0 49.6 49.7 50.7 49.6
Korea
52.0 52.6 51.1 49.4 47.2 47.5 49.7 50.2 50.4 50.8 50.9 49.8 50.4 50.2 49.5 48.4 49.3 50.3 48.8 48.7 49.0 49.9 51.1 51.1 49.2
Taiwan
51.2 50.7 47.1 49.5 48.6 50.0 52.0 53.0 53.4 55.2 55.5 54.7 52.7 52.3 52.4 54.0 55.8 56.1 53.3 52.0 51.4 50.0 51.7 52.1 51.0
Lowest relative to 50 PMI
50
• A stronger global economy means more demand for UK goods. The US and eurozone
countries are main recipients of UK products, a stronger US economy and stabilization
within eurozone should help boost UK exports.
Highest relative to 50 PMI
UK FTSE 100 equity valuations
GTM – UK
| 41
Earnings yield and 10-year bond yield
Forward P/E ratio
14
%
x
20
31 Mar 2015:
15.5x
16
Earnings yield
(inverse of forward P/E)
12
Average: 14.0x
10
12
8
8
'97
'99
'01
'03
'05
'07
'09
'11
'13
FTSE 100 dividend yield vs. UK corporate bonds
10
%
6
UK
corporate
bond yield
8
6
31 Mar 2015:
6.5%
4
31 Mar 2015:
1.6%
31 Mar 2015:
3.5%
4
2
Dividend yield
2
0
• The pace of economic growth in the UK is faster than some of the world’s largest
economies, but crucially many of the world’s developed markets have now moved out
of recession.
• Forward looking economic indicators such as the purchasing managers’ index for
manufacturing (PMI) signal that developed economies should continue to strengthen.
Source: Markit, J.P. Morgan Economic Research, J.P. Morgan Asset Management. The Global Purchasing Managers’ Index (PMI) assesses the economic health of
the manufacturing sector by surveying output and employment intentions. For Global PMI, heatmap colours are based on PMI relative to global recent history; for
countries, heatmap colours are based on PMI relative to all countries shown. Global PMI is GDP-weighted calculation. Guide to the Markets - UK.
Data as of 31 March 2015.
24
Equities
'13
2015
Jul
Jun
May
Apr
Mar
Feb
Jan
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
GTM – UK
2014
Global
Developed
Global economy
Mar
2013
41
'11
The UK will benefit from strengthening economies in the
developed world
Global Purchasing Managers’ Index (PMI) for manufacturing
13
'09
Source: (Top and bottom left) ONS, FactSet, J.P. Morgan Asset Management. (Right) ONS, OECD, J.P. Morgan Asset Management. Pre-crisis linear labour
productivity trend is calculated between 1997 and 2007, and is projected from 2008 onwards. Guide to the Markets - UK. Data as of 31 March 2015.
Jan
5
• Structural issues in the labour market are continuing to correct, with the falling
unemployment rate reinforcing the improving economic situation.
'97
'99
'01
'03
'05
31 Mar 2015:
2.9%
'07
'09
'11
'13
The UK equity market has rallied along with other developed
equity markets around the global, but UK valuations still remain
relatively attractive
10-year Gilt yield
0
'97
'99
'01
'03
'05
'07
Source: (Top left and right) FTSE, Tullett Prebon, FactSet, J.P. Morgan Asset Management. (Bottom left) BofA/Merrill Lynch, FactSet, FTSE, J.P. Morgan Asset
Management. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by consensus estimates for earnings in the next 12 months
and is provided by FactSet Market Aggregates. Earnings yield is calculated as the inverse of the forward P/E ratio. Guide to the Markets - UK. Data as of 31 March
2015.
'09
'11
'13
• Even though the forward price-to-earnings ratio on the FTSE 100 has risen since the
depths of the recession, UK equities are not yet expensive. The dividend yield on offer
is also very attractive compared to the yield on corporate debt.
• Investors should take a selective approach to UK equities and not limit themselves to
the blue chip stocks of the big UK equity index. The FTSE 100 is comprised of the UK
largest listed stocks and is dominated by the banking and mining sectors.
• It is worth considering where the UK is in the economic cycle and which sectors of the
economy and which size companies will perform the best at each point in the cycle.
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Investment implications
• The UK economy is improving along with many other economies
in the developed world. Economic data suggests the UK recovery
will continue and be broad based.
• Low rates continue to make cash a losing proposition: The Bank of
England is likely to keep interest rates on hold until late 2015 or
even 2016. The higher dividend yield available on UK equities can
provide an alternative source of income.
• UK equities remain attractive. Valuations on the largest stocks are
not yet expensive compared to their own history, but investors
should consider both company size and sector when looking for
market outperformance.
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