2011 Securities Lending Outlook Presentation

8/3/2019 2011 Securities Lending Outlook Presentation

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2011 SECURITIES LENDING OUTLOOK

February 8, 2011

Host

Paul WilsonInternational Head of Client Management and Sales, Financing and Markets Products, J.P. Morgan

Featured Guest Speaker

David MackieHead of Western European Economic Research, J.P. Morgan

Speakers

John Shellard

Global Head Equities Lending, J.P. Morgan

Robert Taub

U.S. Fixed Income Desk Manager, J.P. Morgan

Matthew Sarson

Trading Manager, Securities Lending Investment Desk, J.P. Morgan


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THE OUTLOOK FOR THE GLOBAL ECONOMY

David Mackie

Head of Western European Economic Research


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Overview of global economy in 2011

2011 should be a solid year for global growth, with good performance everywhere

except the Euro area periphery.

Divergent inflation pressure at the core level: upward in EM, steady to down in G3.

Divergent central banks: modest tightening in EM, no tightening in the G3.

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In the first year of recovery, in terms of growth the world was divided into:

Those that have baggage (the need to repair household, bank and public sector

balance sheets): U.S., U.K., Euro area periphery.

Those that dont have baggage: EM, Germany, Scandinavia, Switzerland, Japan

%q/q, saar

U.S. 2.9

U.K. 1.9

Spain 0.0

EM 7.3Germany 3.7

Sweden 5.4

Switzerland 3.0

Japan 3.7

GDP growth 2Q09 3Q10

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Key themes for global growth in 2011

Ongoing strength in those economies without baggage.

A change in the household deleveraging process eases the drag in economies with

baggage.

Non-financial corporates provide the engine for growth even in economies with

baggage: boosting demand directly and generating income for households.

Monetary policy easy everywhere and the traction builds over time; mild fiscal tightening

in Western Europe; US policymakers go all in.

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95

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2008 2009 2010

Ongoing growth in economies without baggage

Euro area domestic final sales

*1Q08 = 100

Germany

Euro area ex. Germany

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U.S. household saving and the stock of debt outstanding

The household deleveraging process: the flow adjustment is complete,

the stock adjustment is ongoing

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80 85 90 95 00 05 10

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Financialposition

Debt

% of GDP % of GDP

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-6

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87 92 97 02 07

U.K. business investment share in GDP U.K. private non financial corporations net lending

In general, nonfinancial corporates do not have any baggage: not only is

corporate spending at a low level, but cashflow is very elevated

* % of GDP, positive indicates net lending

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65 70 75 80 85 90 95 00 05 10

* Nominal share, %

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* *


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Resource utilization Global core inflation

Divergent resource utilization drives divergent core inflation outlook

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04 05 06 07 08 09 10 11

* %oya

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91 93 95 97 99 01 03 05 07 09 11

* Standard deviations from long-term average

EM

DM

DM excl US

EM

Global

US

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* *


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To exit the current crisis, the region either needs sovereign debt

restructuring or a long period of liquidity support at very low interest

rates

% of GDP

2015 2020

Scenario 1 Scenario 2 Scenario 3 Scenario 1 Scenario 2 Scenario 3

Esp 84 83 79 89 87 78

Grc 161 151 142 184 153 125

Ire 135 129 121 155 136 113

Prt 95 95 89 95 95 80

Gross debt under alternative interest rate subsidies relative to German borrowingrates

Note: Scenario 1 assumes borrowing rates are capped at 6% through 2012 but then move to marketrates thereafter. Scenario 2 assumes market rates are capped at 350bp above the German borrowingcost from now through 2020. Scenario 3 assumes market rates are capped at 100bp above the Germanborrowing cost from now through 2020. See "A way out of the EMU fiscal crisis," Global Issues,

December 16, 2010.

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2011 SECURITIES LENDING OUTLOOK

Speakers

John Shellard

Global Head Equities Lending, J.P. Morgan

Robert Taub

U.S. Fixed Income Desk Manager, J.P. Morgan

Matthew Sarson

Trading Manager, Securities Lending Investment Desk, J.P. Morgan


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Securities Lending Equities Q4 Market Environment

Another volatile quarter for equity markets. Uncertain environment contributed to risk aversion

amongst investors. Hedge funds still lacking direction and conviction, having taken risk off the

table. Year finished with a strong equity market rally in December, especially in the U.S.

Securities lending balances came down in the run up to year end.

Demand continued to come from directional and capital raising trades. Sectors in demand

included financial, consumer and industrial.

Active quarter for yield enhancement trading. Main revenue generating markets were France and

Italy, with activity also in Netherlands and Spain.

In general hedge funds had a good year, returning 7-9% on average. However wide variance

between strategies and individual funds.

Heavy lobbying from industry on the European Commission short selling regulatory proposals.

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Securities Lending Outlook for Equities Q1 2011

Optimistic that 2011 will see an increase in hedge fund activity as they look to put money to work

and generate returns for investors. Expect continued strong investment inflows into hedge

funds.

Increased M&A activity as cash rich companies look to grow through acquisitions.

Expect continued strength in equity markets as EU works towards a more robust solution to theEuro Sovereign debt crisis, and continued improvement in the global economy.

However, balances likely to struggle in Q1. Strong equity markets resulting in greater long bias

from hedge funds and lack of appetite to go short.

Initial yield enhancement indications are mixed. Tax changes and lower than expected demand,

offset by higher dividend payments.

Continued discussions with regulators and Governments on the regulatory environment.

Continued focus on collateral, both by clients and borrowers.

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The Change to Treasury Supply and the Impact on Treasury Repo

Rates

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Treasury Issuance

As the budget deficit narrowed, net issuance declined from its 2009 peak. J.P. Morgan is

expecting the treasury to issue additional $1.1 trillion Treasuries in CY 2011 as opposed to

$1.5trillion in CY2010.

The Debt Ceiling

On 1/27th Treasury announced their plan to decrease the issuance of US treasury bills in

the Supplementary Funding Program from $200bn to $5bn. The decrease may lead to

downward pressure on repo rates temporarily and lower yields on UST bills and discount

notes.

The Federal Reserve Banks Large Scale Asset Purchase (LSAP) program, also known as

quantitative easing (QE2)

At the last FOMC meeting, The Fed announced their commitment to continue to buy back

$600bn in treasuries from the market by June 2011.

FDIC changes to fee calculations


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The Storm Has Passed, But Headwinds Prevail

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Challenges remain on the Distribution side of the Securities Lending business

Balance sheet constraints

Treasury supply

Short-end Investor demand continues to exceed available supply-

Favorable market conditions for issuers

Collateralized Commercial Paper/non-traditional repo balances

Concerns remain around the Euro-zone

Spain/Italy

Regulatory impact current market environment

Strong Floater demand

Step-up putable structures

Collateralized CP


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The Storm Has Passed, But Headwinds Prevail

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Early rumblings of the Fed Exit plan

Market generally believes no Fed action for 2011

Beginnings of differences in opinion

J.P. Morgan believes no Fed move until Q1 2013

Short-end participant behavior-recap


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Analysts Compensation:The research analysts responsible for the preparation of this report receive compensation based upon various factors, includi ng thequality and accuracy of research, client feedback, competitive factors and overall firm revenues. The firms overall revenuesinclude revenues from itsinvestment banking and fixed income business units. Principal Trading: JPMorgan and/or its affiliates normally make a market and trade as principal in fixedincome securities discussed in this report. Legal Entities: J.P. Morgan is the global brand name for J.P. Morgan Securities LLC (JPMS) and its non-USaffiliates worldwide. J.P. Morgan Cazenove is a brand name for equity research produced by J.P. Morgan Securities Ltd.; J.P. Morgan Equities Limited;JPMorgan Chase Bank, N.A., Dubai Branch; and J.P. Morgan Bank International LLC. J.P.Morgan Securities Inc. is a member of NYSE and SIPC. JPMorganChase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. J.P. Morgan Futures Inc., is a member ofthe NFA. J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority.J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. J.P. Morgan Securi ties (Asia Pacific) Limited(CE number AAJ321) is regulated by the Hong Kong Monetary Authority. JPMorgan Chase Bank, Singapore branch is regulated by the Monetary Authority ofSingapore. J.P. Morgan Securities Asia Private Limited is regulated by the MAS and the Financial Services Agency in Japan. J.P. Morgan Australia Limited(ABN 52 002 888 011/AFS License No: 238188) (JPMSAL) is a licensed securities dealer.J.P.Morgan Saudi Arabia Ltd. is authorized by the Capital MarketAuthority of the Kingdom of Saudi Arabia (CMA), license number 35-07079. General: Information has been obtained from sources believed to be reliable butJPMorgan does not warrant its completeness or accuracy except with respect to disclosures relative to JPMS and/or its affilia tes and the analysts involvementwith the issuer. Opinions and estimates constitute our judgment at the date of this material and are subject to change without notice. Past performance is not

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2011 Securities Lending Outlook Presentation

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