EFTA01181051.pdf

From: US GIO To: Undisclosed recipients:; Subject: GIO Investment Theme: 4Q Rotation into High Beta Date: Wed, 05 Sep 2012 14:52:28 +0000 Attachments: GIO_Trade_Alert_2012-09-04_(4Q12_Rotation).pdf; US_Equity_FLASH_7-27-I2.pdf Inline-Images: image002.jpg; image004.png Global Investment Opportunities Group (GIO) J.P. Morgan Investment Themes Jeanne Sun (212) 622-2646 September 4, 2012 Jeanne h sunawmorgan corn Positioning for a 4Q Rotation into High Beta As we return from (an all too short) summer, US markets are up nearly 13% YTD. However, despite the seemingly strong performance, we believe there are still opportunities for new money in equity markets. First, the overall performance of the S&P 500 masks underlying composition as high beta sectors have generally lagged low- and market-beta sectors. Per the exhibit below, the sectors with highest betas (greater than 1.1 vs. the S&P 500) were generally the worst performing groups and up only 10% YTD on average. If you strip out Financials, the average drops to 7%. This compares with sectors with market betas up 19% and low beta sectors up 12%. Second, we believe there are technical reasons to see support for high beta sectors. Through July this year, Equity Long/Shod hedge funds were up 2.5% vs. 11% for the S&P 500 and 20% of hedge funds were still down on the year. Similarly, according to a note by JPMS LLC's Equity Strategist Tom Lee 32% of actively managed funds were underperforming their benchmarks by 250 bp or more and on average, large cap funds were underperforming by 111 basis points. Already trading desks are starting to see a reversal of flows with investors covering their equity underweights (see JPM's Flows and Liquidi port from August 17). Lastly, while market valuations at 12.7x forward earnings do not feel particularly cheap, they are not expensive either relative to historic levels and, in fact, are in line with the average multiples for the last 3 years. Furthermore, like this year's performance, the overall market multiple masks underlying sector differences with most high beta sectors still trading at a 10% discount to 3 year averages versus market beta and low beta sectors which are in line or above historic averages. We believe these factors provide support for a potential fourth quarter rotation into high beta stocks. Please contact your JPMorgan representative for implementation recommendations. Current PT Sector 3Y Beta vs 3y Avg YTD Perfomiance Coname, Sac es 0.67 1.11 la% Teleormunicsion Services 0.68 1.21 21.0% t Avg: tkiies 0.71 1.13 3.1% 12% Heath Care 0.79 1.09 13.3% Consumer Cisaetionaory 1.04 1.01 116% Avg: Technology 1.05 0.93 20.3% 19% Indutak 1.14 0.87 19.3% Energy 1.18 0.99 4.1% Avg: Fin anc a s 1.18 0.90 17.6% 10% Maerials 1.22 0.90 Source. Bloomberg. As of August 31. 2012 IMPORTANT INFORMATION EFTA01181051 This presentation and the material contained herein is not a product of the J.P. Morgan Research Department and is not a research report, although it may refer to a research report or research analyst. This presentation should be reviewed in conjunction with U.S. research published by J.P. Morgan Securities. LLC to the extent that such research exists. The opinions and ideas expressed herein do not take into account individual client circumstances, objectives and needs. Transactions in any securities that may be referenced herein may not be suitable for all investors. This presentation has been prepared for information purposes only. Nothing in this material is intended to be a solicitation for any product or service offered by J.P. Morgan's Private Bank or any of its affiliates. Information contained herein has been obtained from sources believed to be reliable but we do not guarantee its accuracy or completeness and accept no responsibility for any direct or consequential losses arising from its use. The views and strategies described herein may not be suitable for all investors. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument and is being provided merely to illustrate a particular investment strategy. Remember, when investing in mutual funds, please consider the investment objectives, risks, charges, and expenses associated with the funds before investing. You may obtain a fund's prospectus by contacting your financial representative. The prospectus contains this and other information, which should be carefully read before investing. Past performance is no guarantee of future results. Investment Products: Not FDIC Insured No Bank Guarantee May Lose Value This email is confidential and subject to important disclaimers and conditions including on offers for the purchase or sale of securities. accuracy and completeness of information, viruses. confidentiality. legal privilege, and legal entity disclaimers, available at htm://www.jpmorgan.comipagesidisclosuresiemail. EFTA01181052