FMP Market Themes and Outlook October 2012

Market Outlook and Key ThemesOctober 2012

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• What are current investment themes?

• What are current market conditions?

• Are equities fairly valued?

• What are the risk in fixed income?

• Where are current yields on bonds?

• Where do we go from here?

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Investment Themes

Theme Why? Current Environment Portfolio Positioning

Uncertain Global Fiscal

Concerns

• Sovereign Health

• Political Transitions

• Austerity & Tax Policy

• Eurozone Mess

• Global Central Banks’

Stimulus Policies

• US Elections

• EM Markets = Fiscal Health

• Diversify Holdings Around the

Globe

• Invest in Managers That Can

Allocate By Country

• Manage Volatility

Divergent Economic Growth • US Finding Its Way

• Weak Japan & Europe

• EM Showing Strength

• US GDP 2%, but Below Ave.

• Eurozone Recession

• Japan – Three Decades and

Going

• BRIC – 6-8% GDP Growth

• Country Exposure to Growing

Regions

• EM Exposure

• Global, Large Cap Holdings

Historically Low Interest Rates • Hurts Income Generation

• Dampened Global Growth

Likely to Keep Rates Low

• US Treasury @ 1.8%

• Monetary Policies to Stimulate

Growth & Provide Liquidity

• Focus on real yields

• Managers with Multi Sector,

Multi Region Approach

Inflation & Interest Rates • Continued Monetary Policies

Continue to Push Odds

• Surging Money Supply

• Stable Wage Inflation

• Commodity Prices Moderating

• Long term view of when, not

if.

Risk Premium vs. Equity

Valuations

• Negative Real Interest Rates

Support Corp. Investment

• Global Valuation Trends

• Continued US earnings

growth @ 8%+

• Global Valuations Well Below

LT Averages

• “Be Greedy When Others Are

Fearful”

Investment Themes

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Current Economic Conditions

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Investment Outlook - BlackRock

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Investment Outlook – Goldman Sachs

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Equity Market - Valuation

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11.6 13.2 15.2

14.0 16.7 21.0

12.3 14.1 16.6

14.0 16.3 21.9

13.0 14.4 16.2

14.2 17.1 21.3Sm

all

Value Blend Growth

La

rge

Mid

Value Blend Growth

La

rge

82.6% 78.7% 72.2%

Mid 87.7% 86.2% 75.8%

Sm

all

91.2% 84.6% 75.8%

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11$0

$20

$40

$60

$80

$100

$120

'94 '96 '98 '00 '02 '04 '06 '08 '10 '128x

12x

16x

20x

24x

28x

S&P 500 Index: Forward P/E Ratio

S&P 500 Operating Earnings Estimates

Average: 16.2x

2Q12: $110.91

Aug. 2012: 12.7x

Eq

uit

ies

Consensus estimates of the next twelve months’ rolling earnings

Current P/E as % of 20-year avg. P/E

E.g.: Large Cap Blend stocks are 21.3%

cheaper than their historical average.

Current P/E vs. 20-year avg. P/E

Source: (Top and bottom left) Standard & Poor’s , FactSet, J.P. Morgan Asset Management. (Right) Russell Investment Group, IBES, FactSet.

Earnings estimates are for calendar years and taken at quarter end dates throughout the year. Forward Price to Earnings is price divided by

consensus analyst estimates of earnings per share for the next 12 months. P/E ratios are calculated and provided by Russell based on IBES

consensus estimates of earnings over the next 12 months.

Data are as of 9/14/12.


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Source: J.P. Morgan Asset Management; Bloomberg. The securities highlighted above have been selected based on their significance and are shown for illustrative purposes only. Data as of July 4, 2012.

2.38%

3.16%

1.87%

2.16%

2.84%

2.71%

2.61%

4.05%

7.20%

7.00%

10.50%

9.90%

0% 2% 4% 6% 8% 10% 12%

United Technologies

Time Warner

Microsoft

Merck

2012 Estimated FreeCashflow Yield

Current Dividend Yield

10 Year Debt Yield to Maturity

(Pharm/medtech)

(Software & Services)

(Media)

(Industrial Cyclical)

Equity Market Update - Valuations

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Fixed Income Market Update

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Fixed Income

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Fixed Income

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Fixed Income

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Where Do We Go From Here?

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Search for Yield

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FMP Market Themes and Outlook October 2012

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