Economy & Markets Feb 15, 2022

Risk unwind, supply chains and the Ukraine

Michael Cembalest Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management

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Topics: Tracking the market risk unwind; Supply chain update; Ukraine; Invasion of the COVID Body Snatchers

Global markets have had to digest a lot of bad news in a very short period:

The latest inflation data continue to decimate the “inflation is purely transitory” theory¹.After pricing in less than one Fed hike as of last September, markets and Fed watchers now expect between 6 and 7 hikes over the next year, with some arguing for a 50 basis point move and not just 25
Europe’s energy dependence on Russia² could cause another surge in its electricity and other energy costs if Russia were to invade the Ukraine, in which case the US might launch a very wide array of sanctions
US supply chains have not resolved themselves as fast as some market participants hoped (see Appendix)

This is a lot for markets to digest in a short period; YTD, global equity indices are down 3%-10% and most global fixed income indices are down 3%-4%. In this note, we examine market risk unwind measures, the likely ability of corporate revenues to keep pace with rising input costs, an update on supply chains, my shrinking network of trusted research contacts and some thoughts on the Ukraine and the road not taken.

If you missed it, we published a piece on cryptocurrencies and blockchains called the “Maltese Falcoin” on February 3. Press reactions focused almost solely on the store of value topic and not on the arguably more interesting question of whether widely discussed use cases for blockchains will end up being satisfied by stablecoins (perhaps issued by Central Banks), and by permissioned, private blockchains that also have little to no implications for directional crypto valuations. Since our piece came out: the SEC is reportedly negotiating a $100 million fine with DeFi lender BlockFi for selling unregistered securities to customers, and there’s more evidence that NFT buyers may be able to transact with fiat currency instead of having to buy Ethereum tokens.

Let’s start with some risk unwind measures. The first chart shows an estimate from JP Morgan Global Market Strategy Research on the large overweight position that investors hold in credit that built up over the last decade³. This can be laid at the doorstep of the Fed for engineering the longest period of negative real rates since the 1860’s. Unfortunately, the unwind of the credit overweight has a long way to go.

The equity repricing is further along. The second chart shows the decline in stocks heavily owned by retail investors, whose returns are now converging back to the S&P 500. As for the S&P, its forward P/E valuations have declined from peak levels along negative 10 year real interest rates; although to be clear, valuations are still high in any historical context. The fourth chart shows something even more striking: the average stock in the NASDAQ is now down 42% from its peak, with many down 70% or more. The fifth chart shows other low water marks: I’m unsurprised that the SPAC market and its gaggle of adversely selected IPOs marked the beginning of the end for overpriced stocks, and for repricing of renewable and fintech stocks as well.

If we do get a 50 bps Fed hike in March and some additional equity market capitulation, that could represent an attractive equity market entry point. We’re getting closer to one now even without that.

The good news for investors: the impact of rising input costs on profits may be overstated. As shown below in some interesting work from Empirical Research, there is almost a 1:1 connection between rising costs of goods sold (which includes most labor costs) and rising revenues over the last 70 years. The link between rising SG&A expenses and revenues is strong as well, although not as tight as the link with COGS. What does this all mean? Rising costs by themselves do not result in lower margins and poor equity market returns; from 1987 to 2022, equity market returns were almost identical regardless of the level of median wage growth⁴.

The more important question is whether a recession is coming, which is way more predictive of a deeper sustained rout in equity markets. And on that front, I do not see a recession in the cards for 2022. I still think US real GDP growth will be ~3% this year as production rises to match higher levels of consumption. The latest capital spending surveys still point in this direction.

Obviously, a Ukraine invasion could interrupt a capital spending recovery and destabilize markets. A lot would depend on what sanctions are adopted. Here are the kind of sanctions reportedly contemplated by the US:

Export controls to prevent countries from selling products with US content to Russia (Huawei penalty)
Adding Russian companies and individuals to a “prohibited transactions list” with US individuals, companies and specifically banks
Prohibitions on US securities firms from underwriting or transacting in Russian sovereign debt
Blocking Russia from transacting in the Swift payments network
Delaying the Nord Stream 2 pipeline

The full imposition of this list could be very disruptive for markets, at least in the short term, given likely Russian retaliation via energy supplies. I’m dubious of Europe’s ability to withstand a protracted two-sided sanctions and trade war with Russia given its energy dependence cited earlier.

On the Ukraine itself, last weekend I reread John Mearsheimer’s essay from 2014 in Foreign Affairs magazine, entitled “Why the Ukraine Crisis Is the West’s Fault: The Liberal Delusions That Provoked Putin”⁵. The piece reviews how we got here and what policy options might have been chosen instead.

The story begins with the Clinton Administration’s NATO enlargement in the 1990’s, an expansion of more territory than French, German and Italian land mass combined. Mearsheimer cites George Kennan, an architect of the US post-war policy of Soviet containment, on NATO’s enlargement in 1998: “I think the Russians will gradually react quite adversely and it will affect their policies. I think it’s a tragic mistake. There was no reason for this whatsoever. No one was threatening anyone else”. Ten years later in 2008, NATO leaders announced that “Georgia and Ukraine would become members of NATO”. The Russians made clear at the time that red lines had been crossed, which the US and Europeans mostly ignored. In 2013, the president of a US-bankrolled organization working in the Ukraine to draw it into the Western orbit wrote in the Washington Post, “Ukraine’s choice to join Europe will accelerate the demise of the ideology of Russian imperialism that Putin represents. Russians, too, face a choice, and Putin may find himself on the losing end not just abroad but within Russia itself.” These predictions have not aged well.

Since the 1990’s, there has been a battle between Liberalism and Realism in Western foreign policy circles on the Ukraine. Depending upon what happens now to the Ukraine, which the West has made clear it will not defend militarily⁶, the Realists might turn out to be right. That’s why Mearsheimer concluded in his essay that some sort of “Finlandization” of the Ukraine would be a better outcome for all sides.

NATO enlargement

Black: Original members (1949)

Brown: 1950-1980

Purple: 1999-2004

Red: 2009-2020

Blue: NATO Membership Action Plan

Orange: “Intensified NATO dialogue”

Gray: not in NATO

Invasion of the COVID Body Snatchers: another one bites the dust

What should I do when a research firm whose work I respect, value and pay for ventures into irresponsible and poorly vetted COVID commentary? Like the 1956 film Invasion of the Body Snatchers, seemingly normal individuals start behaving strangely and all of a sudden, they become pod people. The latest episode involves a firm whose work I often cite. In a recent public note and email exchange, one of its principal authors argued the following:

[A] COVID vaccines may not work that well. Yes, data from health agencies across the developed world show much higher hospitalization, ICU and mortality outcomes for unvaccinated people. But this data is unreliable, mostly since unvaccinated cohorts are not comparable to vaccinated ones. Why? A large number of unvaccinated people are frail, sicker individuals with cancer and heart conditions that prevent them from being vaccinated even if they want to be!

There is so much that’s wrong here. First, COVID vaccines work very well in the elderly, the sick and most immunocompromised people; that’s why there are very few for whom COVID vaccines are not recommended
Second, their description of the unvaccinated is completely off-base. The unvaccinated in the US tend to be younger people whose decisions are driven by lack of trust in the gov’t, lack of trust in vaccines, the belief that vaccines are unnecessary and concerns about myocarditis and other side effects⁷. In the UK, people are vaccinated and boosted in order of their age and vulnerability (UK vaccines are solely available through the NHS). As a result, the UK vaccinated cohort is more frail and elderly than the unvaccinated
My contacts at the Scripps Institute for biomedical sciences described their assertions as “patently false and unsupported by data”, and contacts at the La Jolla Institute of Immunology described them as “silly/bogus”

[B] Difficulty in measuring flu vaccine efficacy is also proof that COVID vaccine efficacy figures are not reliable. The healthier two thirds of a typical retirement home get the flu vaccine while the weakest third are told by their doctors to not take the flu vaccine. As a result, deaths are disproportionally higher in the weak third than in the healthier two thirds, rendering flu vaccine efficacy measures much less meaningful. Same for COVID!

Yikes. First of all, doctors generally do recommend the flu vaccine for frailer adults. It does not provoke a strong antibody response (in part since it has no adjuvant), and it’s extremely well tolerated by the aged and frail
Second, according to a Professor of Epidemiology I contacted at Harvard’s School of Public Health, flu and COVID vaccine efficacy error terms are not comparable. Flu vaccine efficacy can be difficult to measure⁸. But the same is much less true for COVID; for reasons related to genetic testing and identifiable variants, COVID vaccine efficacy studies yield results that are very similar to more rigorous randomized control trials and observational studies with strict controls. Bottom line: a “flippant and facile” comparison with little basis in actual scientific data

[C] Why are COVID mortality rates so much higher in the developed world than in the developing world whose vaccination rates are so much lower? Another sign that COVID vaccines don’t work well!

If you can use Google, it would take you all of 5 minutes to see why this comment is so poorly informed, and callous as well. Overall death rates in many EM nations have been much higher than normal. According to most demographers, these elevated death rates are picking up COVID mortality that country health agencies are not properly identifying. See charts on the following page for estimates of actual COVID mortality levels

So, what will I do with their research now? I will still read it since their work is generally good. That said, my prior unquestioned confidence in their work is gone, and I will do a lot more checking and verifying. As for any personal relationships with their researchers, those might be gone too. mRNA vaccines are estimated to have saved one million lives in the US in 2021⁹, and I trust the people who work on such estimates a lot more than people creating their own narratives as they go along. As I get older, my personal world is shrinking. I distance myself from people on the far right and the far left, and now I distance myself from people who use stylized pseudo-facts and sloppy research to push a given agenda. Life is too short for that.

Michael Cembalest
JP Morgan Asset Management

Estimating COVID mortality

In many countries, strained healthcare systems are unable to accurately track COVID deaths. More than 100 countries do not collect reliable statistics on expected or actual deaths at all, or do not release them in a timely manner. Some demographers estimate COVID deaths by looking at deaths from all causes vs trend, rather than just at reported COVID deaths. The first chart compares the two; the farther above the line a country is, the more its excess deaths in 2020 exceeded reported COVID deaths. Many of the highest outliers are EM countries.

The second set of charts shows estimates of COVID mortality derived from a machine learning model. Again, estimated COVID death levels for lower middle income countries are much higher than reported ones, despite the fact that many of these countries have average population ages that are far below US and European levels (a key factor affecting COVID mortality). No approach is perfect, and demographers argue over models; but they all agree that developing country COVID deaths are massively underreported.

So, if you ask why the EM world has much lower death rates despite less vaccination, all that shows is a lack of understanding of basic pandemic research, even now two full years after the pandemic began.

Source: “Exploring the Gap between Excess Mortality and COVID Deaths in 67 Countries”, San Marchi (University of Bologna) et al, JAMA Network Global Health Research Letter, July 2021

Source: “The pandemic’s true death toll: millions more than official counts”, Nature, January 2022

Appendix: supply chain conditions still very tight, some signs of modest improvement from peak levels

¹ Inflation is not just a US phenomenon. From the JP Morgan Economics Research Global Data Watch, February 11, 2022: “Across countries, the sharp rise in core inflation in the Euro area and EM Asia (ex. China and India) is most notable. An acceleration in food and services price inflation points to pressures extending well beyond items closely linked to the pandemic. US measures of inflation breadth have moved substantially higher and align with evidence of rising wage inflation”.

² As we illustrate each year in our Energy paper, Europe imports roughly the same amount of oil and gas from Russia as it produces for itself. There is perhaps no greater difference between Europe and the US than the question of energy dependence.

³ “The credit unwind”, Flows & Liquidity Report, JP Morgan Global Markets Strategy, Feb 9, 2022

⁴ See Exhibit 22 in “The Yield Curve and the Equity Market”, Empirical Research Partners, February 11, 2022

⁵ John Mearsheimer is a Distinguished Service Professor of Political Science at the University of Chicago

⁶ When the Ukraine abandoned its nuclear weapons 30 years ago, the Budapest Memorandum offered Ukraine security assurances against the future use of force by the US, UK and Russia. But the Memorandum only required signatories to raise any issues with the UN Security Council; it was not a defense treaty and the US has stated in the past that it is not legally binding.

⁷None of these sources cite pre-existing medical conditions as a major reason why people are unvaccinated:

https://www.kff.org/coronavirus-covid-19/poll-finding/kff-covid-19-vaccine-monitor-profile-of-the-unvaccinated/

https://www.cdc.gov/vaccines/imz-managers/coverage/adultvaxview/pubs-resources/sociodemographic-factors-covid19-vaccination.html

https://www.census.gov/library/stories/2021/12/who-are-the-adults-not-vaccinated-against-covid.html

https://www.washingtonpost.com/politics/2021/11/16/party-divide-vaccination/

⁸“Lessons from vaccine effectiveness and impact studies”, Lipsitch (Harvard) et al, Int’l Journal of Epidemiology, 2016

⁹“The US COVID-19 Vaccination Program at One Year: How Many Deaths and Hospitalizations Were Averted?”, Commonwealth Fund, Eric Schneider (M.D., M.Sc.) December 2021

Listen to the Podcast

Podcast

FEMALE VOICE: This podcast has been prepared exclusively for institutional wholesale professional clients and qualified investors only, as defined by local laws and regulations. Please read other important information, which can be found on the link at the end of the podcast episode.

MR. MICHAEL CEMBALEST: Good afternoon, and welcome to the Eye on the Market podcast. This is Michael Cembalest. A couple weeks ago, we issued a piece on cryptocurrencies and the blockchain. It’s called The Maltese Falcoin. You can find a link to it in today’s piece, or you can get it from the people you talk to at J.P. Morgan. In this Eye on the Market, we’re going to look at the fact that the markets have had a lot of negative news to digest in a pretty short period here. After pricing in less than one Fed hike last September, the markets now expect between six and seven hikes over the last year. I can’t remember the last time over three months the markets went from expecting no hikes to expecting six or seven. And some people are arguing for a 50-basis-point hike and not just 25.

On top of that, the U.S. supply chain situation hasn’t really resolved itself as fast as some of us had hoped. And now we have the situation in the Ukraine that the markets are adjusting to as well. And there are a lot of issues here related to European energy dependence and a possible U.S. sanction bazooka with a very wide range of impacts. So we’re going to take a look in this note at global equity indices, which are down 3 to 10% this year, and the fact that a lot of the global fixed income indices are down 3 to 4% as well.

So let’s start by talking about some of these market risk unwind measures. The first chart in today’s piece is from the Global Market Strategy Group in the Investment Bank at J.P. Morgan. They estimated the implied credit in overweight, in other words the overweight the credit positions in corporate bonds, high yield bonds that investors have. And it’s at a very high level, and it’s just beginning to unwind. We all knew that this day was coming, and now it looks like it’s finally here. This one can be laid at the doorstep of the Fed for engineering the longest period of negative real interest rates in probably 150 years. In any case, the unwind of this fixed income credit overweight has a long way to go.

The equity repricing I think is a little bit further along. Stocks that were heavily favored by retail investors have come crashing down. Valuations on the S&P have fallen let’s say three multiple points from their peak levels, although they’re still on the expensive side. On the NASDAQ, the average stock is down to around 40% from peak levels, with a lot of the stocks down 70% or more. And we’re really seeing some carnage in SPACs and renewables and fintech and things like that. If we get a 50-basis-point Fed hike in March and some additional equity market capitulation, that could represent a reasonably attractive equity market entry point. And we might be getting closer to one now, even without that.

The good news for investors is that the impact of rising input costs on profits, sorry about the noise, the impact of rising input costs on profits might be overstated. ‘Cause one of the things that we’re following is how are all of these rising labor, commodity, and interest costs going to affect margins and revenues? Over the last 70 years, there’s been a remarkably close connection between rising costs and rising revenues, in part because one person’s rising costs are somebody else’s revenues.

And it’s amazing when you look at this, and the same thing holds for rising SG&A expenses and revenues, the link is pretty strong as well. And what that tells us is that rising costs by themselves don’t result in lower profit margins and poor equity returns. If you look over the last few decades, equity market returns are almost identical regardless of the level of wage growth that was going on, in part because wage growth pushed up aggregate corporate revenues as well.

So the more important question is whether a recession’s coming. And that’s way more predictive of a deeper and more sustained route in equity markets. And on that front, I don’t see a recession in the cards this year. I still think GDP growth is going to be around 3%. Production is still struggling to catch up to higher levels of consumption. And the latest capital spending surveys that we see are still pointing in this direction.

Now of course in the near term, a Ukrainian invasion could be very destabilizing. A lot would depend on what kind of sanctions get adopted. The U.S. is apparently talking about some pretty severe ones, export controls to prevent countries, other countries from selling products with U.S. content to Russia, which is essentially the Huawei penalty, putting Russian companies and individuals on prohibited transactions lists, particularly for U.S. banks, prohibiting U.S. securities firms from either underwriting or even transacting in Russian sovereign debt, blocking Russia from the SWIFT payments network. And then trying to further delay the Nord Stream 2 pipeline.

The full imposition of all of this, of these sanctions could be pretty disruptive, at least in the short term, given the likely Russian retaliation in terms of energy supplies. I’m a little dubious of Europe’s ability to withstand a protracted two-sided sanctions war here. Russia exports a lot of energy as we all know to Europe. And the latest numbers we’ve been tracking is that Europe produces around the same amount of oil and gas for itself as it imports from Russia. That probably is the biggest difference, of all the ways of describing differences between the U.S. and Europe, energy dependence is maybe the biggest one. And just to reiterate, Europe is as reliable on Russia for its energy as it is on itself. And so with that kind of backdrop, I think it’s right to wonder how assiduously Europe would stick to any kind of protracted sanctions war with Russia.

On the Ukraine itself, last weekend I reread an essay that I had saved from 2014 in Foreign Affairs magazine from John Mearsheimer at the University of Chicago. And you can kind of tell where he’s going where he says the Ukraine crisis is the West’s fault, the liberal delusions that provoked Putin. It’s an interesting read; I didn’t agree with all of it. You probably won’t agree with all of it. But it does lay out some facts that are important to understand. The story begins with the Clinton administration’s NATO enlargement in the 1990s, an amount of enlargement in terms of land that was larger than aggregate French, German, and Italian land mass combined. So this was a large enlargement to the East.

And for those of you that remember George Kennan from college, where we all studied him, he was an architect of the post-war policy of containment of the Soviet Union, when this NATO enlargement began happening, Mearsheimer quotes Kennan as saying, and here’s a quote, “I think the Russians will react quite adversely to this, and it will affect their policies. I think this is a tragic mistake. There was no reason for this whatsoever. No one was threatening anybody else.” And then ten years later, NATO announced that Georgia and the Ukraine would become members. The Russians made it clear at the time that certain red lines had been crossed, the Europeans and the U.S. ignored them, and then here we are.

So the bottom line is that since the 1990s, there’s been this battle between liberalism and realism in the Western foreign policy circles on this whole question of the Ukraine. And depending upon what happens now, particularly since the West has made it clear that it will not militarily defend the Ukraine, the realists might turn out to be right. And that’s why Mearsheimer had concluded in his essay at the time that some kind of Finlandization of the Ukraine would be a better outcome for all sides. If you don’t know what Finlandization means, it means what it sounds like. But you can look it up, and there’s a lot of history to it.

We have an appendix this week on supply chain conditions. They are still pretty tight. There are some signs of modest improvements from peak levels. But whether it’s whole issue of the notorious container ships in LA and Long Beach, as we have discussed before, some of the worst-run ports in the world, or you’re looking at container freight rates, or you’re looking at global manufacturing delivery times, air freight rates, shipping rates, demand for trucks, the supply chain delays are alive and well, unfortunately. And it looks like it’s going to take a few more months for them to settle down. We thought they would start really settling down by May or June, but I was hoping for a little bit more progress on some of these things than we’ve seen so far.

The last topic this week is a dilemma that I want to share with you. So here’s the dilemma. What should I do when a research firm, I read a lot of research, probably 1,000 to 1,500 pages of research a week, what should I do when a research firm whose work I generally respect and also pay for starts writing irresponsible and unsubstantiated COVID stuff? And it’s like The Invasion of the Body Snatchers movie from 1956. You have normal people. They’re walking around, and all of a sudden the pods get them, and they become crazy.

The latest episode involves one of the research firms that I often cite their work in the Eye on the Market. In a recent research note, one of their principal authors argued three things. Number one, COVID vaccines probably don’t work well. And that all the data that we’ve been showing on higher hospitalization and mortality outcomes from unvaccinated people, that data is unreliable because unvaccinated groups are not comparable to vaccinated groups. Why, you may ask? Well, according to this logic, a lot of unvaccinated people are frail and sicker. They have cancer and heart conditions that prevent them from being vaccinated even if they wanted to be.

I am not making this up. He’s actually arguing that the cohort composition differences are so huge that they render all of the data that comes from the CDC and the other health organizations around the entire developed world, all that stuff is useless, and all of those health agencies are wasting their time sharing this information.

Now this is of course nonsense. The unvaccinated people in the U.S. are not generally frail and sicker and older. They’re younger people whose decisions are driven according to all the studies, by lack of trust in government, lack of trust in the vaccines, they don’t think they need the vaccines, and then concerns about myocarditis and other side effects. And in the U.K., people get vaccinated and boosted in order of their age and vulnerability. So the vaccinated group is more frail and elderly than the unvaccinated one. So that’s probably why when I showed this to some people I know at Scripps Research Institute for Biomedical Sciences, they said that their claims were patently false and unsupported by the data.

There was another line of, the second of the three. Well, since it’s hard to measure flu vaccine efficacy, that means COVID vaccine efficacy figures are not reliable as well. And in retirement homes, it’s only the healthy ones that get the flu vaccine and the weakest ones don’t. So therefore the deaths are disproportionately higher in the weaker third. I reached out to some people that I know at the La Jolla Institute of Immunology. They just described this line of thinking as silly. There are very few people for whom COVID vaccines are not recommended. And by the way, doctors generally do recommend the flu vaccine for frailer adults. The flu vaccine is not very immunogenic, which it has no adjuvant, which is why the efficacy numbers are so low. And it’s so very well tolerated by the aged and frail. So the unsupported facts and assertions just keep piling up.

And then the third one, the third thing that this particular author pointed out was well, if COVID vaccines work so well, why are COVID mortality rates so much higher in the developed world than in the developing world, whose vaccination rates are so much lower? If you can use Google, which everybody knows is a search engine, it would take you all of five minutes to see why this comment is so poorly informed. The death rates in a lot of emerging market countries have been much higher than normal. The overall death rates in the country, not the COVID-reported ones, but the overall death rates.

And according to most demographers who spend their lives looking at this, these elevated overall death rates are picking up COVID mortality that the country health agencies are unable to identify. And there’s been tons of research on this. And we have a chart in here that shows total mortality versus reported COVID mortality. And of course, the big outliers are mostly emerging market countries where the health agencies are strained and unable to accurately track the COVID deaths. So all I have to say about that is if you’re asking why the EM world has much lower death rates, despite lower vaccination, all that shows is that you don’t understand basic pandemic research two years into the pandemic.

And so what am I going to do about their research now? I’ll probably still read it since it’s generally pretty good. But my unquestioned confidence in their work is gone. And any personal relationships with their researchers are probably gone too, as I find that as I get older, my personal world is shrinking. I distance myself from people on the far right. I distance myself from people on the far left. And now I’m distancing myself from people who use garbage facts and sloppy research to push an agenda. Life is too short for that. Anyway, thank you very much for tuning in this week. And I look forward to speaking to you all next time.

FEMALE VOICE: Michael Cembalest’s Eye on the Market offers a unique perspective on the economy, current events, markets, and investment portfolios, and is a production of J.P. Morgan Asset and Wealth Management. Michael Cembalest is the Chairman of Market and Investment Strategy for J.P. Morgan Asset Management and is one of our most renowned and provocative speakers. For more information, please subscribe to the Eye on the Market by contacting your J.P. Morgan representative. If you’d like to hear more, please explore episodes on iTunes or on our website.

This podcast is intended for informational purposes only and is a communication on behalf of J.P. Morgan Institutional Investments Incorporated. Views may not be suitable for all investors and are not intended as personal investment advice or a solicitation or recommendation. Outlooks and past performance are never guarantees of future results. This is not investment research.

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In Luxembourg, this material is issued by J.P. Morgan Bank Luxembourg S.A. (JPMBL), with registered office at European Bank and Business Centre, 6 route de Treves, L-2633, Senningerberg, Luxembourg. R.C.S Luxembourg B10.958. Authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. J.P. Morgan Bank Luxembourg S.A. is authorized as a credit institution in accordance with the Law of 5th April 1993. In the United Kingdom, this material is issued by J.P. Morgan Bank Luxembourg S.A., London Branch, registered office at 25 Bank Street, Canary Wharf, London E14 5JP. Authorised and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. Deemed authorised by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details of the Temporary Permissions Regime, which allows EEA-based firms to operate in the UK for a limited period while seeking full authorisation, are available on the Financial Conduct Authority’s website. In Spain, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Sucursal en España, with registered office at Paseo de la Castellana, 31, 28046 Madrid, Spain. J.P. Morgan Bank Luxembourg S.A., Sucursal en España is registered under number 1516 within the administrative registry of the Bank of Spain and supervised by the Spanish Securities Market Commission (CNMV). In Germany, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Frankfurt Branch, registered office at Taunustor 1 (TaunusTurm), 60310 Frankfurt, Germany, jointly supervised by the Commission de Surveillance du Secteur Financier (CSSF) and the European Central Bank (ECB), and in certain areas also supervised by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). In Italy, this material is distributed by J.P. Morgan Bank Luxembourg S.A– Milan Branch, registered office at Via Cordusio 3, 20123 Milano, Italy and regulated by Bank of Italy and the Commissione Nazionale per le Società e la Borsa (CONSOB). In the Netherlands, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Amsterdam Branch, with registered office at World Trade Centre, Tower B, Strawinskylaan 1135, 1077 XX, Amsterdam, The Netherlands. J.P. Morgan Bank Luxembourg S.A., Amsterdam Branch is authorized and regulated by the Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF in Luxembourg; J.P. Morgan Bank Luxembourg S.A., Amsterdam Branch is also authorized and supervised by De Nederlandsche Bank (DNB) and the Autoriteit Financiële Markten (AFM) in the Netherlands. Registered with the Kamer van Koophandel as a branch of J.P. Morgan Bank Luxembourg S.A. under registration number 71651845. In Denmark, this material is distributed by J.P. Morgan Bank Luxembourg, Copenhagen Br, filial af J.P. Morgan Bank Luxembourg S.A. with registered office at Kalvebod Brygge 39-41, 1560 København V, Denmark. J.P. Morgan Bank Luxembourg, Copenhagen Br, filial af J.P. Morgan Bank Luxembourg S.A. is authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. J.P. Morgan Bank Luxembourg, Copenhagen Br, filial af J.P. Morgan Bank Luxembourg S.A. is also subject to the supervision of Finanstilsynet (Danish FSA) and registered with Finanstilsynet as a branch of J.P. Morgan Bank Luxembourg S.A. under code 29009. In Sweden, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Stockholm Bankfilial, with registered office at Hamngatan 15, Stockholm, 11147, Sweden. J.P. Morgan Bank Luxembourg S.A., Stockholm Bankfilial is authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. J.P. Morgan Bank Luxembourg S.A., Stockholm Bankfilial is also subject to the supervision of Finansinspektionen (Swedish FSA). Registered with Finansinspektionen as a branch of J.P. Morgan Bank Luxembourg S.A. In France, this material is distributed by JPMorgan Chase Bank, N.A. (“JPMCB”), Paris branch, which is regulated by the French banking authorities Autorité de Contrôle Prudentiel et de Résolution and Autorité des Marchés Financiers. In Switzerland, this material is distributed by J.P. Morgan (Suisse) SA, which is regulated in Switzerland by the Swiss Financial Market Supervisory Authority (FINMA).

In Hong Kong, this material is distributed by JPMCB, Hong Kong branch. JPMCB, Hong Kong branch is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong. In Hong Kong, we will cease to use your personal data for our marketing purposes without charge if you so request. In Singapore, this material is distributed by JPMCB, Singapore branch. JPMCB, Singapore branch is regulated by the Monetary Authority of Singapore. Dealing and advisory services and discretionary investment management services are provided to you by JPMCB, Hong Kong/Singapore branch (as notified to you). Banking and custody services are provided to you by JPMCB Singapore Branch. The contents of this document have not been reviewed by any regulatory authority in Hong Kong, Singapore or any other jurisdictions. You are advised to exercise caution in relation to this document. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. For materials which constitute product advertisement under the Securities and Futures Act and the Financial Advisers Act, this advertisement has not been reviewed by the Monetary Authority of Singapore. JPMorgan Chase Bank, N.A. is a national banking association chartered under the laws of the United States, and as a body corporate, its shareholder’s liability is limited.

With respect to countries in Latin America, the distribution of this material may be restricted in certain jurisdictions. We may offer and/or sell to you securities or other financial instruments which may not be registered under, and are not the subject of a public offering under, the securities or other financial regulatory laws of your home country. Such securities or instruments are offered and/or sold to you on a private basis only. Any communication by us to you regarding such securities or instruments, including without limitation the delivery of a prospectus, term sheet or other offering document, is not intended by us as an offer to sell or a solicitation of an offer to buy any securities or instruments in any jurisdiction in which such an offer or a solicitation is unlawful. Furthermore, such securities or instruments may be subject to certain regulatory and/or contractual restrictions on subsequent transfer by you, and you are solely responsible for ascertaining and complying with such restrictions. To the extent this content makes reference to a fund, the Fund may not be publicly offered in any Latin American country, without previous registration of such fund’s securities in compliance with the laws of the corresponding jurisdiction. Public offering of any security, including the shares of the Fund, without previous registration at Brazilian Securities and Exchange Commission— CVM is completely prohibited. Some products or services contained in the materials might not be currently provided by the Brazilian and Mexican platforms.

JPMorgan Chase Bank, N.A. (JPMCBNA) (ABN 43 074 112 011/AFS Licence No: 238367) is regulated by the Australian Securities and Investment Commission and the Australian Prudential Regulation

Authority. Material provided by JPMCBNA in Australia is to “wholesale clients” only. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Corporations Act 2001 (Cth). Please inform us if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.

JPMorgan Chase Bank, N.A. (JPMCBNA) (ABN 43 074 112 011/AFS Licence No: 238367) is regulated by the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority. Material provided by JPMCBNA in Australia is to “wholesale clients” only. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Corporations Act 2001 (Cth). Please inform us if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.

JPMS is a registered foreign company (overseas) (ARBN 109293610) incorporated in Delaware, U.S.A. Under Australian financial services licensing requirements, carrying on a financial services business in Australia requires a financial service provider, such as J.P. Morgan Securities LLC (JPMS), to hold an Australian Financial Services Licence (AFSL), unless an exemption applies. JPMS is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (Cth) (Act) in respect of financial services it provides to you, and is regulated by the SEC, FINRA and CFTC under U.S. laws, which differ from Australian laws. Material provided by JPMS in Australia is to “wholesale clients” only. The information provided in this material is not intended to be, and must not be, distributed or passed on, directly or indirectly, to any other class of persons in Australia. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Act. Please inform us immediately if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.

This material has not been prepared specifically for Australian investors. It:

May contain references to dollar amounts which are not Australian dollars;
May contain financial information which is not prepared in accordance with Australian law or practices;
May not address risks associated with investment in foreign currency denominated investments; and Does not address Australian tax issues.

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