From: US GIO
To: Undisclosed recipients:;
Subject: J.P. Morgan Eye on the Market, June II, 2012
Date: Mon, 11 Jun 2012 16:01:08 +0000
Attachments: 06-11-2012_-_EOTM_-_Plan_C.pdf
Eye on the Market, June 11, 2012
Topics: What happens when countries and companies have to go for Plan C
I hosted a lunch last week for CIOs of endowments, foundations, pension plans and insurance companies. In addition to
the problems in Europe, attendees expressed deep concerns about how to meet payout targets at a time of low interest
rates. One of the consequences of today's interest rate environment is that a lot of investment funds commit to an annual
payout rate of around 5%, which is 4.5% over Libor. Until 2001, a 5% payout rate was generally below Libor. This shift is
one of the most remarkable changes in US capital markets in many decades, and has significant implications for any CIO
or high net worth investor seeking to match investments and payouts with an acceptable level of portfolio risk. There are
no magic-bullet answers to this conundrum, but mezzanine lending and rescue lending can in our view play a partial role in
a broader portfolio. Private lenders generally take steps to increase the subordination beneath them, while events in Europe
arefurther subordinating holders of Spanish government bonds. We'll take our chances in the corporate sector; see the
attached Eye on the Market for further details.
As for the Spanish bailout, recapitalization of banks has historically been a very positive step (see page 1 of attached
PDF). However, Spain's private sector is still in tough shape, so Spain may still have to opt for a sovereign rescue package
in excess of 300 billion this year or next. The Spanish bank recap reduces immediate banking sector risks, but does not
otherwise change the cautious view we have given low growth, inter-regional capital flight and rising debt burdens across
the Periphery. The primary benefit of the Spanish bank recap may be reduced financial sector contagion risk to Asia and
the US; we'll take it.
Michael Cembalest
J.P. Morgan Asset Management
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