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JP Morgan Private Bank: seven critical graphs

Cesar Perez, chief investment strategist EMEA at JP Morgan Private Bank, highlights the information he believes conveys important messages.

With an annualised 15.23 million US vehicle sales number for January 2013, US auto sales are now back in the 15-17 million annualized historic average sales range, up from a low of 9 million in 2009. There is still plenty of underlying structural demand as the average cars life in the US is above 10 years. This together with the recovery in US housing will help support consumption growth in 2013 despite the fiscal drag.

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The chart shows the extent of the jobless recovery in the US in the aftermath of the 2007 recession. It is remarkable that the absolute level of GDP is well above the previous peak while this has been achieved with 6 million less people employed. This is why the Fed is focusing on employment now. The slack in the labour market has until now been very supportive for corporate profitability, because in the current recovery cycle very low labour compensation costs are allowing for a much stronger profit cycle. We expect the U.S. economy to add somewhere between 150,000 to 200,000 jobs per months during 2013.

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Draghi has addressed the funding problems of the banking sector through the LTRO and those of sovereigns in trouble with the OMT. What hasn’t been resolved yet is the nonfinancial corporate funding, where interest rates in the periphery are almost twice as high as in the core. As a consequence, businesses in the periphery are at an inherent disadvantage to their competitors in core countries. This difference has to be resolved in order for the periphery to be able to grow again.

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This is the evidence that fiscal transfers are finally occurring in the Euro area, which no longer is only a monetary union. Through the latest support package for Greece, the country’s funding costs have been reduced so far that even with a debt to GDP ratio of around 170%, its interest payments as a percentage of GDP are actually lower than those of the UK, Italy or Spain. For the programmes duration the debt sustainability of Greece is thus much better than previously expected and what one would expect when only looking at the country’s exuberant debt level.

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While yields in the fixed income universe are at record lows spreads still look quite reasonable compared to ten-year historic averages.

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Active managers are having a much tougher time outperforming their benchmark when correlations are high and stock picking has a lesser impact than macro factors. As correlations have come down now, we expect active managers to have better performance over the coming years compared to the very difficult 2010-2012 period.

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Price to earnings are probably the most often used valuation multiple today, but we find that Price to book relative to ROE is a much better estimate for equity performance as can be seen by the scatter plot in the chart.

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