MARKET INSIGHTS. Guide to the Markets. Europe 4Q 2015 As of 30 September 2015

Transcription

1 MARKET INSIGHTS Guide to the Markets Europe 4Q 215 As of 3 September 215

2 Global Market Insights Strategy Team Americas Europe Asia Dr. David P. Kelly, CFA New York Andrew D. Goldberg New York Anastasia V. Amoroso, CFA Houston Julio C. Callegari São Paulo James C. Liu, CFA New York Samantha M. Azzarello New York David M. Lebovitz New York Gabriela D. Santos New York Hannah J. Anderson New York Abigail B. Dwyer New York Ainsley E. Woolridge New York Stephanie H. Flanders London Manuel Arroyo Ozores, CFA Madrid Tilmann Galler, CFA Frankfurt Lucia Gutierrez-Mellado Madrid Vincent Juvyns Luxembourg Dr. David Stubbs London Maria Paola Toschi Milan Michael J. Bell, CFA London Alexander W. Dryden London Nandini L. Ramakrishnan London Tai Hui Hong Kong Yoshinori Shigemi Tokyo Kerry Craig, CFA Melbourne Dr. Jasslyn Yeo, CFA Singapore Ian Hui Hong Kong Akira Kunikyo Tokyo Ben Luk Hong Kong Anthony Tsoi, CFA Hong Kong 2 For China, Australia, Vietnam and Canada distribution: Please note this communication is for intended recipients only. In Australia for wholesale clients use only and in Canada for institutional clients use only. For further details, please refer to the full disclaimer. Unless otherwise stated, all data is as of 3 September 215 or most recently available.

3 Page reference Europe economy 4. Europe: GDP and inflation 5. Eurozone cyclical indicators 6. Eurozone recovery monitor 7. Eurozone credit conditions 8. European Central Bank (ECB) policies 9. Europe cash accounts 1. UK economic indicators Global economy 11. World economic data 12. Global Purchasing Managers Index (PMI) for manufacturing 13. Global inflation dynamics 14. Central bank policy 15. Global currency trends 16. US Federal Reserve outlook 17. US: GDP and inflation 18. US employment 19. US cyclical indicators 2. US consumer finances 21. Japan: GDP and inflation 22. Japan: Abenomics and the economy 23. China: GDP, inflation and policy rate 24. China economic indicators 25. China financial dynamics 26. Emerging market and developed market divergences 27. Emerging markets challenges 28. Emerging markets trade connections with developed markets Equities 29. World stock market returns 3. European sector returns 31. MSCI Europe Index at inflection points 32. MSCI Europe Index equity valuations 33. MSCI Europe earnings and profit margins 34. European small capitalisation equities 35. US S&P 5 at inflection points 36. US S&P 5 equity valuations 37. US S&P 5 earnings and profit margins 38. Bear markets 39. Interest rates and equities 4. Japanese equities 41. Chinese equities 42. Developed markets equity valuations by country 43. Emerging markets equity valuations by country 44. Emerging markets: Valuations and returns 45. Emerging markets: Dividends and valuations 46. Equity income 47. Annual returns and intra-year declines Fixed income 48. Fixed income sector returns 49. Government interest rates 5. Fixed income interest rate risk 51. Liquidity risks 52. Government bonds 53. Investment-grade bonds 54. US high yield bonds 55. European high yield bonds 56. Emerging market debt 57. Emerging market debt composition Other assets and investor behaviour 58. Asset class returns 59. Correlation of returns (EUR) 6. Asset volatility 61. Commodity returns 62. Commodities 63. Oil consumption and production 64. Life expectancy and pension shortfall 65. Consumer confidence and the stock market 66. Industry fund flows 67. US asset returns by holding period 68. Alternative asset class returns 69. Risk/return characteristics of alternatives 7. Alternative strategies 3

4 Europe: GDP and inflation GTM Europe 4 Europe economy Real GDP EU28, change quarter on quarter 1,5 1,,5 Average since Q15 Real GDP,4,4 Average Inflation EU28, change year on year 5 4 Average since 1999 Aug 15 Headline CPI* 2,2, Core CPI 1,8,8, 3 -,5 2-1, -1,5 1-2, -2,5-3, '99 '1 '3 '5 '7 '9 '11 '13-1 '99 '1 '3 '5 '7 '9 '11 '13 Source: (Both charts) Eurostat, FactSet, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding energy and unprocessed food. Guide to the Markets - Europe. Data as of 3 September

5 Eurozone cyclical indicators GTM Europe 5 Europe economy New auto registrations EU19, millions of new passenger cars, seasonally adjusted 1,2 1,,8 Average:,89 Aug 215:,81 Retail sales growth EU19, excluding motor vehicles, change year on year Jul 215: 2,6,6 '96 '98 ' '2 '4 '6 '8 '1 '12 '14-6 '1 '3 '5 '7 '9 '11 '13 GDP growth and money supply EU19, change year on year 6 GDP (y/y) M1* advanced by 12 months 18 (y/y) '96 '98 ' '2 '4 '6 '8 '1 '12 '14 Source: (Top left and bottom left, top right) ECB, Eurostat, FactSet, J.P. Morgan Asset Management. (Bottom right) BEA, Eurostat, FactSet, J.P. Morgan Asset Management. *M1 is defined as the sum of currency held by the public and transaction deposits at depository institutions. Guide to the Markets - Europe. Data as of 3 September Non-residential gross fixed capital formation of GDP Eurozone 14 '99 '1 '3 '5 '7 '9 '11 '13 '15 US

6 Eurozone recovery monitor GTM Europe 6 Europe economy Eurozone core vs. periphery 1,5,8, Core driving eurozone growth GDP growth q/q (lhs) -,8 Business surveys* (rhs) Periphery driving eurozone growth -1,5 '1 '11 '12 '14 '15 1,5 1,,5, -,5-1, -1,5 Economic sentiment** Change from one year ago 12 1,1 6, 5, ,3 Italy France Spain Germany Greece 4,1 Employment change Indexed to 21, current unemployment rate 15 1 Eurozone domestic demand Change year on year 3 2 Domestic demand Current unemployment rate Italy 12,4 France 1, Eurozone 11, Ireland 9,8 Germany 6,4 Spain 22,4 '1 '11 '12 '13 ' Eurozone GDP '11 '12 '13 '14 6 Source: (Top left) Bloomberg, Eurostat, Markit, J.P. Morgan Asset Management. (Top right) European Commission, FactSet, J.P. Morgan Asset Management. (Bottom left) Eurostat, FactSet, INE, J.P. Morgan Asset Management. (Bottom right) Eurostat, FactSet, J.P. Morgan Asset Management. *Purchasing Managers Indices and national measures of economic sentiment, standard deviations from mean. Core is Germany and France. Periphery is Italy and Spain. **Economic sentiment is a composite indicator made up of five sectoral confidence indicators produced monthly by the European Commission. Guide to the Markets - Europe. Data as of 3 September 215.

7 Eurozone credit conditions 7 Europe economy Credit demand and eurozone GDP growth Net of banks reporting positive loan demand, GDP growth 15 6 Stronger loan demand Bank loans to households and non-financial corporations billions, net lending flow, three-month moving average '9 '1 '11 '12 '13 '14 ' Consumer credit (lhs) Housing loans (lhs) Weaker loan demand Overall corporate (lhs) Eurozone GDP growth y/y (rhs) '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 ' Corporate lending rates to smaller companies Non-financial corporations, new business lending up to 1 million, 1-5 years Italy Spain Germany France 2 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 Source: (Left) ECB, Eurostat, FactSet, J.P. Morgan Asset Management. (Top and bottom right) ECB, Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

8 European Central Bank (ECB) policies 8 Europe economy ECB balance sheet: Assets trillions 4, 3,5 3, 2,5 2, 1,5 1, Balance sheet expansion since Nov 214 Balance sheet expansion still to come up to Sep 216 Jan 25 Jul 212: Aug 212 Sep 214: -35 Central bank quantitative easing purchases 3 of net issuance over 25 of debt outstanding QE period Fed BoE BoJ ECB The trade-weighted euro and EURUSD Nominal broad effective exchange rate, price of euro in dollars 11 1,6 15 EURUSD $ 1,5 1,4 1 1,3,5 95 Trade-weighted euro, 9 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '11 '12 '13 '14 '15 1,2 1,1 1, Source: (Left) ECB, FactSet, J.P. Morgan Asset Management. (Top right) Bank of England (BoE), Bank of Japan (BoJ), Deutsche Bank, European Central Bank (ECB), US Federal Reserve, J.P. Morgan Asset Management. (Bottom right) BIS, FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

9 Europe cash accounts GTM Europe 9 Europe economy Euro area deposits trillions 3,5 3, Aug 212: 3,3tn Aug 215: 2,2tn Income generated by 1. investment in a one-year bank deposit 5. Income 4. 27: 4.58 Inflation (y/y) 5 4 2,5 3. Sep 215: 1 3 2, ,5 1, 1. 1,5, '6 '7 '8 '9 '1 '11 '12 '13 '14 '15-1. ' '2 '4 '6 '8 '1 '12 '14-1 Source: (Left) ECB, J.P. Morgan Asset Management. (Right) Bloomberg, Eurostat, J.P. Morgan Asset Management. Blue marker points represent year on year inflation and illustrate how the value of income would have been eroded due to inflation. Guide to the Markets - Europe. Data as of 3 September

10 UK economic indicators 1 Europe economy Real GDP growth Rebased to 1 at 1Q8 11 US 16 Germany UK France Japan Unemployment rate and consumer confidence 9, Unemployment rate Consumer confidence 8, 7, 6, , -4 9 '8 '9 '1 '11 '12 '13 '14 '15 4, '5 '6 '7 '8 '9 '1 '11 '12 '13 '14-5 Current account of GDP Investment income Change year on year 4 Trade balance 6 2 Current account balance '5 '7 '9 '11 '13 '15 Wage growth -2-4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 Source: (Top left) OECD, J.P. Morgan Asset Management. (Bottom left) FactSet, ONS, J.P. Morgan Asset Management. (Top right) FactSet, GFK, ONS, J.P. Morgan Asset Management. (Bottom right) FactSet, ONS, J.P. Morgan Asset Management. *Nominal wages include bonuses. Guide to the Markets - Europe. Data as of 3 September 215. Nominal wage growth* Headline CPI Real wage growth 1

11 World economic data 11 Selected countries Gross domestic product (GDP) Real GDP Inflation Policy rate Unemployment Global economy per capita billions 215* 216* 215* 216* Switzerland ,8 1,2-1,1 -,2 -,75 3,2 United States ,5 2,7,3 2,,25 5,1 Sweden ,7 2,8,2 1,4 -,35 6,4 United Kingdom ,6 2,4,2 1,5,5 5,5 Netherlands ,1 1,8,4 1,3,5 7,2 Finland ,2 1,,1 1,2,5 8,3 Germany ,6 1,9,3 1,5,5 6,4 France ,1 1,4,2 1,1,5 1, Japan ,7 1,2,8 1,,1 3,3 Eurozone ,4 1,6,1 1,2,5 11, Italy ,7 1,2,2 1,,5 12,4 Spain ,1 2,6 -,3 1,1,5 22,4 Greece ,4 -,4-1,4,1,5 24,6 Russia ,8,3 15,3 7,7 11, 5,6 Brazil ,5 -,6 8,8 6,3 14,25 7,6 China ,8 6,5 1,6 2, 4,6 4, India ,4 7,5 6,2 5, 6,75 8,6 Source: Bloomberg, FactSet, various national statistical agencies, J.P. Morgan Asset Management. Table ordered by GDP per capita. Nominal GDP figure is latest quarter annualised. *Forecasts are Bloomberg consensus estimates. Guide to the Markets - Europe. Data as of 3 September

12 Global Purchasing Managers Index (PMI) for manufacturing Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Global 51,9 52,8 52,9 52,9 53,1 52,4 51,9 52,1 52,6 52,4 52,5 52,2 52,2 51,8 51,5 51,7 51,9 51,7 51, 51,3 51, 51,1 5,7 5,6 Global economy Eurozone Developed Eurozone France Germany Italy Spain Ireland UK US Japan Brazil 51,3 51,6 52,7 54, 53,2 53, 53,4 52,2 51,8 51,8 5,7 5,3 5,6 5,1 5,6 51, 51, 52,2 52, 52,2 52,5 52,4 52,3 52, 49,1 48,4 47, 49,3 49,7 52,1 51,2 49,6 48,2 47,8 46,9 48,8 48,5 48,4 47,5 49,2 47,6 48,8 48, 49,4 5,7 49,6 48,3 5,6 51,7 52,7 54,3 56,5 54,8 53,7 54,1 52,3 52, 52,4 51,4 49,9 51,4 49,5 51,2 5,9 51,1 52,8 52,1 51,1 51,9 51,8 53,3 52,3 5,7 51,4 53,3 53,1 52,3 52,4 54, 53,2 52,6 51,9 49,8 5,7 49, 49, 48,4 49,9 51,9 53,3 53,8 54,8 54,1 55,3 53,8 52,7 5,9 48,6 5,8 52,2 52,5 52,8 52,7 52,9 54,6 53,9 52,8 52,6 52,6 54,7 53,8 54,7 54,2 54,3 54,2 55,8 54,5 53,6 53,2 51,7 54,9 52,4 53,5 52,8 52,9 55,5 56,1 55, 55,3 55,4 57,3 55,7 56,6 56,2 56,9 55,1 57,5 56,8 55,8 57,1 54,6 56,7 53,6 53,8 56,4 57,8 57,3 56,6 55,9 55,2 57,2 56,6 56,8 54,8 53, 51,5 53,4 53,4 52,8 52,9 53,9 54,1 51,7 51,9 51,4 51,9 51,5 51,5 51,8 54,7 55, 53,7 57,1 55,5 55,4 56,4 57,3 55,8 57,9 57,5 55,9 54,8 53,9 53,9 55,1 55,7 54,1 54, 53,6 53,8 53, 53,1 54,2 55,1 55,2 56,6 55,5 53,9 49,4 49,9 51,5 5,5 52,2 51,7 52,4 52, 52, 52,2 51,6 5,3 49,9 5,9 5,1 51,2 51,7 51, 5,2 49,7 5,5 5,8 5,4 5,6 49,3 48,8 48,7 49,1 5,2 49,3 49,1 48,7 5,2 5,7 49,6 46,2 46, 45,9 46,5 47,2 45,8 47, Russia 51,8 49,4 48,8 48, 48,5 48,3 48,5 48,9 49,1 51, 51, 5,4 5,3 51,7 48,9 47,6 49,7 48,1 48,9 47,6 48,7 48,3 47,9 49,1 Emerging India China Korea 49,6 51,3 5,7 51,4 52,5 51,3 51,3 51,4 51,5 53, 52,4 51, 51,6 53,3 54,5 52,9 51,2 52,1 51,3 52,6 51,3 52,7 52,3 51,2 5,9 5,8 5,5 49,5 48,5 48, 48,1 49,4 5,7 51,7 5,2 5,2 5,4 5, 49,6 49,7 5,7 49,6 48,9 49,2 49,4 47,8 47,3 47,2 5,2 5,4 5,8 5,9 49,8 5,4 5,2 49,5 48,4 49,3 5,3 48,8 48,7 49, 49,9 51,1 51,1 49,2 48,8 47,8 46,1 47,6 47,9 49,2 Taiwan 53, 53,4 55,2 55,5 54,7 52,7 52,3 52,4 54, 55,8 56,1 53,3 52, 51,4 5, 51,7 52,1 51, 49,2 49,3 46,3 47,1 46,1 46,9 Lowest relative to 5 PMI 5 Highest relative to 5 PMI 12 Source: FactSet, Markit, J.P. Morgan Asset Management. The Global Purchasing Managers Index (PMI) assesses the economic health of the manufacturing sector by surveying output and employment intentions. Global PMI is a GDP-weighted calculation. Guide to the Markets - Europe. Data as of 3 September 215.

13 Global inflation dynamics 13 Global economy Developed economies inflation CPI* change year on year 5 4 Average Jan 29 to Sep 215: 1,5 3 Average Jan 199 to Dec 28: 2, '9 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 Long-term inflation expectations 5-year/5-year inflation** 4, 3,5 3, UK US Eurozone Commodities and China producer prices (PPI) Bloomberg commodity index 1 China PPI (y/y) lagged 3 months 5 2,5 2, 1,5 Mar 14 Sep 14 Mar 15 Sep '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 ' Source: (Top) J.P. Morgan Economic Research, J.P. Morgan Asset Management. (Bottom left and right) Bloomberg, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. **5-year/5-year inflation expectations is the market expectation for average inflation over 5 years beginning in 5 years time, derived from inflation swaps. Guide to the Markets - Europe. Data as of 3 September

14 Central bank policy GTM Europe 14 Global economy Market expectations for policy rate 2,8 US Fed FOMC Sep 215 median forecast 2,3 UK US Eurozone 1,8 Central bank balance sheets of nominal GDP 8 Japan 6 Eurozone US UK Projections* 1,3 4,8 2,3 -, '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 Source: (Left) Bloomberg, US Federal Reserve, J.P. Morgan Asset Management. (Right) Bank of England, Bank of Japan, ECB, US Federal Reserve, J.P. Morgan Economic Research, J.P. Morgan Asset Management. *Central bank assets as percentage of nominal GDP is forecasted from 3Q15 to 1Q16 using J.P. Morgan Global Economics Research nominal GDP forecasts and assumptions for central bank balance sheet size based on statements released by each respective central bank and its governors. Guide to the Markets - Europe. Data as of 3 September

15 Global currency trends 15 Global economy US dollar index Broad real effective exchange rate (REER) Average since : -7,1 7 '73 '77 '81 '85 '89 '93 '97 '1 '5 '9 '13 Aug 215 US dollar index 95,7 97,3 1985: Plaza : Accord +52, : : 1987: Louvre : -21,8 +34,2 Accord -28, : +2, : -29,5 Exchange rates Real effective exchange rate, indexed 21 = Chinese yuan US dollar Euro Japanese yen Currency performance against US dollar Last 12 months -2,2-3,4-1 -5,9-6,6-8, ,6-14,1-16,6-19,7-2,8 8 6 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14-4 Swiss franc Chinese Indian renminbi rupee British pound Japanese yen Euro Swed. krona Can. dollar Aus. dollar Mex. peso -38,5 Brazilian real Source: (Top) US Federal Reserve, J.P. Morgan Asset Management. (Bottom left) BIS, FactSet, J.P. Morgan Asset Management. (Bottom right) FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

16 US Federal Reserve outlook 16 Federal funds rate expectations FOMC and market expectations for the Fed funds rate 7 Federal funds rate US Fed FOMC forecasts median FOMC September 215 forecasts* Long run Global economy US Fed FOMC forecasts range Market expectations on 3 September 215 FOMC long-run projection Change in real GDP, 4Q to 4Q 2,1 2,3 2,2 2, Unemployment rate, 4Q 5, 4,8 4,8 4,9 PCE inflation, 4Q to 4Q,4 1,7 1,9 2, 3,5 3 2, , ,125,375,21 '99 '3 '7 '11 '15,645 Source: Bloomberg, US Federal Reserve, New York Federal Reserve, J.P. Morgan Asset Management. *Forecasts of 17 Federal Open Market Committee (FOMC) participants, midpoints of central tendency except for federal funds rate, which is a median estimate. Guide to the Markets - Europe. Data as of 3 September

17 US: GDP and inflation GTM Europe 17 Global economy Real GDP Change quarter on quarter, SAAR Average since Q15 Real GDP 2, 3,9 Average Inflation Change year on year Average since 1964 Average since 1999 Aug 215 Headline CPI* 4,1 2,3,2 Core CPI 4,1 2, 1, Components of nominal GDP 2Q15 Consumption 68,3 Government 17,7 Investment ex- housing 13,5 Housing 3,3 Net exports -2,9-1 '99 '1 '3 '5 '7 '9 '11 ' '64 '69 '74 '79 '84 '89 '94 '99 '4 '9 '14 Source: (Left) BEA, FactSet, J.P. Morgan Asset Management. (Right) BLS, FactSet, J.P. Morgan Asset Management. SAAR is seasonally adjusted annual rate. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - Europe. Data as of 3 September

18 US employment 18 Global economy Unemployment rate and wage growth Seasonally adjusted, wages of production and non-supervisory workers year on year 12 1 Unemployment yr average: 4,3 5-yr average: 6,1 Wage growth '7 '8 '9 ' '1 Sep 215: 5,1 Sep 215: 1,9 Labour force participation rate of population aged 16+ working or looking for work Disabled Retired Other 62 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 Sep 215: 62,4 Income expectations of respondents expecting household income to rise in the next year Aug 215: 55,3 45 ' '2 '4 '6 '8 '1 '12 '14 Source: (Top) BEA, FactSet, J.P. Morgan Asset Management. (Bottom left) Constructing the Reason-for-Nonparticipation Variable Using the Monthly CPS, 6 February 214, Shigeru Fujita, Federal Reserve Bank of Philadelphia, J.P. Morgan Asset Management. (Bottom right) University of Michigan, FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

19 US cyclical indicators GTM Europe 19 Global economy Light vehicle sales Millions, SAAR Average: 15,4 8 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 Sep 215: 18,1 Manufacturing and trade inventories Days of sales, seasonally adjusted '96 '98 ' '2 '4 '6 '8 '1 '12 '14 Jul 215: 41,4 Housing starts Thousands, SAAR Aug 215: Real capital goods orders* Non-defence capital goods orders ex-aircraft, $ billions, seasonally adjusted 7 $ Average: '96 '98 ' '2 '4 '6 '8 '1 '12 ' Average: 55,9 4 '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 Source: (Top left) BEA, FactSet, J.P. Morgan Asset Management. (Top and bottom right and bottom left) FactSet, US Census Bureau, J.P. Morgan Asset Management. *Capital goods orders deflated using the producer price index for capital goods. SAAR is seasonally adjusted annual rate. Guide to the Markets - Europe. Data as of 3 September 215. Aug 215: 58,5 19

20 US consumer finances GTM Europe 2 Household net worth $ billions, SAAR 8. $ 2Q7: $ Q15*: $ Home sales, prices and housing starts Rebased to 1 at December Global economy '9 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 ' ,3 Household debt service ratio Debt payments as of disposable personal income, seasonally adjusted 14 4Q7: 13, , Q15*: 9,8 5 Price index Existing home sales Housing starts +135,5 8 '8 '85 '9 '95 ' '5 '1 '15 25 '99 '1 '3 '5 '7 '9 '11 '13 Source: (Top and bottom left) FactSet, US Federal Reserve, J.P. Morgan Asset Management. (Right) FactSet, National Association of Realtors, US Census Bureau, J.P. Morgan Asset Management. Price index is the mean existing home sale price. SAAR is seasonally adjusted annual rate. *2Q15 numbers for US household net worth and debt service ratio are J.P. Morgan Asset Management forecasts. Guide to the Markets - Europe. Data as of 3 September

21 Japan: GDP and inflation GTM Europe 21 Global economy Real GDP growth Change quarter on quarter 4 3 Average 2 1 Average since Q15 Real GDP,2 -,3 Inflation Change year on year Average since 1999 Aug 215 Headline CPI*,,2 Core CPI -,3,8 CPI less food & -,1 -,1 consumption tax '99 '1 '3 '5 '7 '9 '11 '13-3 '99 '1 '3 '5 '7 '9 '11 '13 Source: (Left) FactSet, Japan Statistics Bureau & Statistics Centre, J.P. Morgan Asset Management. (Right) Bloomberg, FactSet, Japan Ministry of Internal Affairs & Communications, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - Europe. Data as of 3 September

22 Japan: Abenomics and the economy GTM Europe 22 Global economy Wage growth Change year on year, three-month moving average 3 Core CPI* 2 Wage growth '3 '5 '7 '9 '11 '13 Bank lending and job-to-applicant ratio Lending growth year on year, number of jobs to applicants 8 4 Job-to-applicant ratio 1,4 x 1,2 1,,8 New job offers by company size Three-month moving average, thousands 6 Companies with 29 employees or fewer, Companies with 3 employees or more 2 ' '2 '4 '6 '8 '1 '12 '14-4 Bank lending (y/y) -8 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14,4,2, Source: (Top left) ) FactSet, Japan Ministry of Internal Affairs & Communications, Japan Ministry of Health, Labour and Welfare, J.P. Morgan Asset Management. (Bottom left) Thomson Reuters Datastream, J.P. Morgan Asset Management. (Right) Bloomberg, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - Europe. Data as of 3 September

23 China: GDP, inflation and policy rate 23 Global economy Real GDP growth Change year on year GDP growth Investment Consumption Net exports 2Q15: 7, Inflation Change year on year Aug 215 Food CPI 3,7 Headline CPI* 2, Core CPI 1, ' '2 '4 '6 '8 '1 '12 ' Policy rate and reserve ratio requirement (RRR)** Policy rate on one-year renminbi deposits 5 25 RRR '9 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 ' PBoC policy rate '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 ' Source: (Left and top right) FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management. (Bottom right) FactSet, People s Bank of China (PBoC), J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. **Average RRR for large and small banks. Guide to the Markets - Europe. Data as of 3 September

24 China economic indicators GTM Europe 24 Global economy China industrial production, retail and auto sales Year on year change, 3-month moving average 3 Retail sales (lhs) 25 Industrial production (lhs) Auto sales (rhs) '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 ' Manufacturing and services components of GDP 12-month moving average, of nominal GDP 5 Services 45 Manufacturing 4 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 External account Imports y/y (lhs) Exports y/y (lhs) Trade balance (rhs) -4 '4 '6 '8 '1 '12 '14 1 $ bn Top 1 cities property prices Month on month change 2 Source: (Top and bottom left, top right) FactSet, National Bureau of Statistics of China, J.P Morgan Asset Management. (Bottom right) Soufun, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September '11 '12 '13 '14 '15 24

25 China financial dynamics GTM Europe 25 Global economy Chinese renminbi 13 6, RMB 125 Trade-weighted RMB 6, USDRMB 95 '11 '12 '13 '14 '15 6,2 6,3 6,4 6,5 6,6 6,7 214 public, household and non-financial corporate debt of GDP Public debt Non-financial corporate debt Household debt Japan UK US Eurozone China Korea Credit to private sector 8 China foreign exchange reserves and external debt of GDP Trillions USD : 141 $ External debt as a of global GDP 14 4 EM Asia US China ,7 21,8 1, '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 1 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 Source: (Top left) BIS, CEIC, Lombard Street Research, J.P. Morgan Asset Management. (Bottom left) FactSet, World Bank, J.P. Morgan Asset Management. (Top right) BIS, IMF World Economic Outlook April 215, Lombard Street Research, J.P. Morgan Asset Management. (Bottom right) People s Bank of China, FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

26 Emerging market and developed market divergences 26 Domestic demand growth rate by region Change year on year 5 Developed markets 15 Global trade of global GDP 6 5 Global economy '64 '69 '74 '79 '84 '89 '94 '99 '4 '9 '14-5 Change in commodity prices* Year to date -1 Emerging markets '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 Source: (Left) J.P. Morgan Economic Research, J.P. Morgan Asset Management. (Top right) Worldbank, J.P. Morgan Asset Management. (Bottom right) Bloomberg, J.P. Morgan Asset Management. *Change in generic first future price (USD). Guide to the Markets - Europe. Data as of 3 September

27 Emerging markets challenges 27 Global economy Consensus growth forecasts Estimates for next 12 months India China Indonesia Thailand Turkey Brazil Russia Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 EM equity performance and US rate hikes MSCI EM Index in USD, rebased to 1 on the date of first rate hike 15 3 Jun Jun Apr Days 25 Relative EM / DM equity performance and USD REER* Equity performance rebased to 1 at MSCI EM / MSCI DM USD REER (inverted) '93 '95 '97 '99 '1 '3 '5 '7 '9 '11 ' Source: (Left) Bloomberg, J.P. Morgan Asset Management. (Top right) MSCI, US Federal Reserve, J.P. Morgan Asset Management. (Bottom right) FactSet, MSCI, J.P. Morgan Asset Management. *REER is real effective exchange rate. Guide to the Markets - Europe. Data as of 3 September

28 Emerging markets trade connections with developed markets GTM Europe 28 Global economy EM exports breakdown Manufacturing exports as of merchandise exports China Czech Republic Korea Taiwan Turkey Philippines Hungary Poland Mexico Thailand Vietnam Malaysia India Ukraine Argentina Asian countries EMEA countries LatAm countries S. Africa Indonesia Peru Brazil Russia Colombia Chile Nigeria Venezuela Commodity exports as of merchandise exports EM GDP growth: Sensitivity to DM growth* Estimated increase in real GDP growth from a 1 increase in DM growth Commodity exporters Manufacturers Chile S. Africa Russia Colombia Brazil Mexico Taiwan Turkey Korea Thailand Europe US Japan If the US economy expands by 1, then the Mexican economy is estimated to grow by an additional,3, other things equal.,,2,4,6,8 1, 1,2 Source: (Left) IMF, World Trade Organisation, J.P. Morgan Asset Management. (Right) FactSet, IMF, J.P. Morgan Asset Management. *Assumes a 1 increase in GDP growth from Japan, Europe and the US, and estimates a reaction function through a multistage regression measuring emerging market economies sensitivity to export volumes. Developed market imports are used as a proxy for developed demand and estimated from a 1 pick up in domestic GDP. The sample period tested ranges between 1993 and 214 reflecting quarterly data. Guide to the Markets - Europe. Data as of 3 September

29 World stock market returns YTD 3Q15 Ten-yr Ann. Local 55, M SCI EM 35,8 2,2 Europe 19,6 26,7 Asia ex-jp 38, -23, TOPIX -4,6 73,4 M SCI EM 62,8 35,4 Small Cap 24,4 5,5 US S&P 5 2,1 2,8 Asia ex-jp 19,7 27,2 Small Cap 35,8 29,5 US S&P 5 13,7 1,7 TOPIX 2, -6,6 US S&P 5-6,4 11, Asia ex-jp 1, 45,3 TOPIX 45,2 19,6 Asia ex-jp 28,6 26,1 M SCI EM 33,6-33,7 US S&P 5-37, 67,2 Asia ex-jp 67,2 28,3 Asia ex-jp 15,6 3,5 HDY Equity 1,5 18,1 Europe 16,4 26,7 US S&P 5 32,4 19,7 Asia ex-jp 7,7 4, Small Cap -2, -8,7 HDY Equity -6,4 1,1 M SCI EM 1,3 41,9 Asia ex-jp 24,1 18,6 M SCI EM 28,8 4,6 11,1-37,9 HDY Equity -34,4 4,2 Small Cap 4,8 27,5 M SCI EM 14,4-5,7 Small Cap -8,7 16,8 M SCI EM 17,4 21,5 TOPIX 54,4 16,5 Small Cap 6,7 3,3 Europe,2-8,8 Europe -7, 9,3 Small Cap 8,2 Equities 33,8 Small Cap 23,3 16, HDY Equity 21,6 3,2 Europe 6,5-38,6 Small Cap -4,4 37,6 35,8 23,9 TOPIX 1, -5,8-7,5 16,3 Small Cap 18,4 2,5 Europe 22,3 16,2 HDY Equity 8,7 2,7 US S&P 5-5,3-9,8 Small Cap -9, 8,9 US S&P 5 7,7 33,6 23,9 12,5 19,4-1, HDY Equity 4,7-4,3-4,1 34, HDY Equity 3,2 23,1 US S&P 5 15,1-7,5 Europe -8,8 15,6 17,1 15,3 23,6 15,3 8,2 1, -3,3-1,8-8,9 8,5 8, 27, HDY Equity 17,7 5,2 Small Cap 13,6-4,9 US S&P 5 5,5-43,3 Europe -38,5 32,5 Europe 28,6 2,9 11,1-9,6 TOPIX -17, 14,2 US S&P 5 16, 13,9 HDY Equity 2,5 11,8 M SCI EM 5,6 -,8 HDY Equity -4,9-11,1 TOPIX -12,8 8,2 HDY Equity 7,7 26,7 Europe 25,5 3,6 US S&P 5 15,8-8,8 Small Cap -3,8-49,8 Asia ex-jp -47,7 22,5 US S&P 5 26,5 16,2 HDY Equity 8, -14,3 Asia ex-jp -14,6 13,6 HDY Equity 14, -1,1 Asia ex-jp 6,2 1,1 TOPIX 1,3-4,9 Asia ex-jp -8,4-17,1 Asia ex-jp -13,8 6,4 Europe 6,4 2,9 US S&P 5 4,9-8,7 TOPIX 3, -14,5 TOPIX -11,1-5,8 M SCI EM -45,7 1,5 TOPIX 7,6 11,7 Europe 7,5-15,4 M SCI EM -12,5 5,9 TOPIX 2,9-6,5 M SCI EM 3,8 7,4 Europe 5,2-8,1 M SCI EM -6,9-17,9 M SCI EM -12, 3,5 TOPIX 3,9 29 Source: FactSet, MSCI, Standard & Poor s, TOPIX, J.P. Morgan Asset Management. Annualised return covers the period 25 to 214. HDY Equity: MSCI AC World High Dividend Yield Index; Small Cap: MSCI Europe Small Cap Index. Hypothetical portfolio (for illustrative purposes only and should not be taken as a recommendation): 3 Europe; 2 S&P 5; 15 EM; 1 Asia ex-japan; 1 TOPIX; 1 HDY equity and 5 small cap. All indices are total return. Guide to the Markets - Europe. Data as of 3 September 215.

30 European sector returns 3 MSCI Europe Index Financials Health care Cons. staples Cons. disc. Industrials Materials Energy Telecom Utilities Tech Europe Europe weight 22,9 14,1 14,7 11,5 11, 6,6 6,5 5, 4, 3,6 1 Growth weight Value weight 11,6 18,3 21,7 17,2 13,3 6,2 1,5 3,3,1 6,7 1 35,4 1, 6,8 5,3 8,6 6,9 11,8 7, 8,2,1 1 Weights 3Q15-8,2-2,6 2, -9,2-7,7-18,4-13,4-6,4-4,3-6, -7, Equities YTD Since market peak* Since market low*,2 5,2 7,9 3,7,3-13,2-13,3 4,1-5,9 1,5,2-33,8 14,1 91,2 59,5 13,1-19,1-7,1 45,5-11,4-1,6 12,1 181,6 192,8 179,6 252,7 165,3 91,8 27,5 118,6 56,1 148,9 14,3 Return Beta to Europe 1,33x,63x,64x,95x 1,13x 1,31x 1,x,79x,86x,99x 1,x β Correl to int. rates**,25,16,16,22,22,21,2,22,18,2,24 ρ Forward P/E ratio 1,3x 16,7x 18,7x 12,7x 14,1x 13,9x 12,9x 18,x 13,3x 16,3x 13,7x 15-year average Trailing P/E ratio 11,x 16,x 15,9x 14,5x 14,1x 12,4x 11,8x 18,x 13,6x 21,1x 13,4x 11,9x 18,4x 2,1x 15,1x 16,2x 15,7x 12,7x 2,x 13,9x 19,7x 15,2x P/E 15-year average 12,8x 17,3x 17,2x 17,1x 16,3x 14,1x 11,9x 2,2x 14,4x 37,1x 14,9x Dividend yield 15-year average 3,8 2,7 2,9 2,6 2,9 3,6 6,2 4,1 5, 1,8 3,4 3,8 2,7 2,7 2,8 2,7 2,9 4, 4,4 4,8 1,8 3,3 Div 3 Source: FactSet, MSCI, J.P Morgan Asset Management. All calculations are total return in local currency, not annualised. *Since market peak represents period 9 October 27 to end of latest quarter. Since market low represents period 9 March 29 to end of latest quarter. **Correlation to interest rates is calculated using daily sector returns and daily 1-year German Bund yield over the last 1 years. Guide to the Markets - Europe. Data as of 3 September 215.

31 MSCI Europe Index at inflection points 31 MSCI Europe Index Characteristic Sep 2 Jul 27 Sep Sep 2: P/E = 21,8x Index level P/E ratio (fwd) 21,8x 13,x 13,7x Dividend yield 1,8 2,8 3,4 Euro 1 year* 5,2 4,6,6 16 Jul 27: P/E = 13,x Sep 215: P/E = 13,7x Total return: +133 Equities Dec 1996: 12 Mar 23: 9 Mar 29: P/E = 16,3x P/E = 11,9x P/E = 8,3x '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 Source: FactSet, MSCI, Tullett Prebon, J.P. Morgan Asset Management. Local currency returns. P/E ratios are forward P/E ratios. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by the mean consensus estimates for earnings in the next 12 months and is provided by FactSet Market Aggregates. Return calculations shown in green are based on the total return index. *Represented by the German Bund Yield. Guide to the Markets - Europe. Data as of 3 September

32 MSCI Europe Index equity valuations GTM Europe 32 Forward P/E ratio 24 x Average: 13,9x 3 Sep 215: 14,x Earnings yield and 1-year bond yield Earnings yield (inverse of forward P/E) Equities 8 '1 '3 '5 '7 '9 '11 '13 MSCI Europe cyclically adjusted P/E ratio Adjusted using trailing 1-year average inflation-adjusted earnings 4 x Sep 215: 7,3 3 2 Average: 17,8x 2 1-year European bond yield* 3 Sep 215:, Jul 215: 15,8x '8 '83 '86 '89 '92 '95 '98 '1 '4 '7 '1 '13 ' '2 '4 '6 '8 '1 '12 '14 Source: (Top left) FactSet, J.P. Morgan Asset Management. (Bottom left) FactSet, MSCI, J.P. Morgan Asset Management. (Right) FactSet, MSCI, Tullett Prebon, J.P. Morgan Asset Management. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by consensus estimates for earnings in the next 12 months and is provided by FactSet Market Aggregates. Earnings yield is calculated as the inverse of the forward P/E ratio. *Represented by the German Bund Yield. Guide to the Markets - Europe. Data as of 3 September

33 MSCI Europe earnings and profit margins 33 MSCI Europe earnings and performance Index level, analyst estimates of the next 12 month of earnings 1,5 MSCI Europe profits MSCI Europe index level 1, US and European operating profit margins Earnings per share/sales per share for MSCI Europe and S&P 5* 11 1 US 9,5 9, Europe Equities 8,5 8, 7, '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 Margin expansion over the last 12 months Earnings per share/sales per share 1,5 7, 1. 1, 6,5 9,5 6, 8, 5,5 '7 '8 '9 '1 '11 '12 '13 '14 7 -,5 Ireland Spain Portugal Italy France Germany Europe Switz. UK Source: (Left) FactSet, MSCI, J.P. Morgan Asset Management. (Top right) FactSet, MSCI, J.P. Morgan Asset Management. (Bottom right) FactSet, MSCI, Standard & Poor s, J.P. Morgan Asset Management. *Data is last 12 months. Guide to the Markets - Europe. Data as of 3 September

34 European small capitalisation equities 34 Small cap relative performance and economic performance Relative performance indexed to Nov MSCI small cap minus large cap performance 2 15 Risk-adjusted return ratios* By company market capitalisation and holding period 1,2 x,8 Small caps Mid caps Large caps 3 1,4 Equities , European small cap: Price-to-book value 3, x 2,5 1 year 5 year 1 year 3 Sep 215: 2,1x month net change in Eurozone composite PMI -4 '5 '7 '9 '11 '13 '15 2, 1,5 1,,5 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 Source: (Left) Bloomberg, ZEW, J.P. Morgan Asset Management. (Top right) Bloomberg, MSCI, J.P. Morgan Asset Management. (Bottom right) Citibank, J.P. Morgan Asset Management. *Risk free rate assumed to be equal to zero. Guide to the Markets - Europe. Data as of 3 September Average: 1,8x 34

35 US S&P 5 at inflection points 35 S&P 5 Index Characteristic Mar 2 Oct 27 Sep 215 Index level P/E ratio (fwd) 27,2x 15,7x 15,1x Dividend yield 1,1 1,8 2,5 US 1 year 6,2 4,7 2,1 3 Sep 215: P/E = 15,1x Mar 2: P/E = 27,2x Oct 27: P/E = 15,7x Equities 1.4 Total return: Dec 1996: 9 Oct 22: 9 Mar 29: P/E = 16,x P/E = 14,1x P/E = 1,3x '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 Source: FactSet, Standard & Poor s, Tullett Prebon, J.P. Morgan Asset Management. The P/E ratios are forward P/E ratios. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by the mean consensus estimates for earnings in the next 12 months and is provided by FactSet Market Aggregates. Return calculations shown in green are based on the total return index. Guide to the Markets - Europe. Data as of 3 September

36 US S&P 5 equity valuations 36 Earnings yield and Baa corporate bond yield Baa corporate bond yield 3 Sep 215: 6,8 Forward P/E ratio 28 x Average: 16,5x 31 Dec 1999: 26,9x 3 Sep 215: 15,1x Equities Earnings yield (inverse of forward P/E) 3 Sep 215: 5,4 3 '89 '91 '93 '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 '89 '91 '93 '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 S&P 5 Shiller cyclically adjusted P/E Adjusting using trailing 1-year average inflation-adjusted earnings 5 3 Sep 215: x 24,3x Average: 16,6x ' '1 '2 '3 '4 '5 '6 '7 '8 '9 ' '1 Source: (Left) FactSet, IBES, Moody s, Standard & Poor s, J.P. Morgan Asset Management. (Top right) FactSet, Standard & Poor s, J.P. Morgan Asset Management. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by consensus estimates for earnings in the next 12 months and is provided by FactSet Market Aggregates. (Bottom right) FactSet, Robert Shiller, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

37 US S&P 5 earnings and profit margins 37 S&P 5 earnings and performance Index level, analyst estimates of the next 12 months of earnings 13 $ 12 S&P 5 profits S&P 5 index level 2. S&P 5 earnings per share growth Change year on year, 2Q ,7, 1, Equities '7 '8 '9 '1 '11 '12 '13 ' S&P 5 operating margins and US wage growth Change year on year 11 5 Wage growth ,9 Total index Index ex-energy -6, Most USD sensitivity Average USD sensitivity Index ex-energy 7 Operating margins 6 '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 Least USD sensitivity Source: (Left and top right) FactSet, Standard & Poor s, J.P. Morgan Asset Management. (Bottom right) BEA, FactSet, J.P. Morgan Asset Management. USD sensitivity is determined by calculating the proportion of each stock s historical variation in returns that is explained by variation in the US dollar. Guide to the Markets - Europe. Data as of 3 September

38 Bear markets GTM Europe 38 S&P 5 declines from all-time highs market decline -6 3 Recession Equities Characteristics of past bear and bull markets* Bear markets Macro environment Bull markets Market corrections Market Bear Duration Commodity Aggressive Extreme Bull Bull Duration peak Return (months) Recession spike Fed tightening valuations start date Return (months) 1 Crash of 1929 excessive leverage, irrational exuberance Sep Jul Fed Tightening premature policy tightening Mar Mar Post WWII Crash post-war demobilisation, recession fears May Apr Flash crash of 1962 flash crash, Cuban Missile Crisis Dec Oct Tech crash of 197 economic overheating, civil unrest Nov Oct Stagflation OPEC oil embargo Jan May Volcker Tightening campaign against inflation Nov Mar crash Programme trading, overheating markets Aug Aug Tech bubble extreme valuations, dot com boom/bust Mar Oct Global Financial Crisis Leverage/housing, Lehman collapse Oct Oct Current cycle Mar Average Source: FactSet, NBER, Robert Shiller, Standard & Poor s, J.P. Morgan Asset Management. *A bear market represents a 2 or more decline from the previous market high using a monthly frequency; a bull market represents a 2 increase from a market trough. Periods of recession are defined using US National Bureau of Economic Research (NBER) business cycle dates. Commodity spike is defined as significant rapid upward moves in oil prices. Periods of extreme valuations are those where S&P 5 last 12 months P/E levels were approximately two standard deviations above long-run averages. Aggressive Fed tightening is defined as US Federal Reserve monetary tightening that was unexpected and significant in magnitude. Guide to the Markets - Europe. Data as of 3 September 215.

39 Interest rates and equities 39 Correlations between weekly equity returns and interest rate movements Rolling two-year correlation of weekly returns of the S&P 5, MSCI Europe Index and the 2-year Treasury yield, ,8,6 Positive relationship between yield movements and equity returns S&P 5 MSCI Europe Market reaction when the US Fed raised rates S&P 5 price return Initial reaction ,4 Subsequent market reaction Equities Correlation,2, Total reaction ,2 -,4 Negative relationship between yield movements and equity returns -, year Treasury yield Source: FactSet, MSCI, Standard & Poor s, US Treasury, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. The initial reaction represents the period during which, in our judgment, markets began pricing the first rate hike through the date of the second rate hike. The subsequent market reaction is the period from the second rate hike to a point determined to be the end of the rate hiking cycle. The total reaction is the market movement across the full rate hiking cycle. Guide to the Markets - Europe. Data as of 3 September

40 Japanese equities 4 TOPIX earnings and performance Index level, analyst estimates of the next 12 months of earnings TOPIX profits TOPIX price level 1,8 1,6 1,4 Listed companies cash and cash equivalents holdings* of market capitalisation, average between 24 and Equities ,2 1, 8 6 Japan Germany Italy France UK US Canada Listed companies dividend pay-out and share buybacks JPY trillions 16 Dividends 12 Share buybacks** '7 '8 '9 '1 '11 '12 '13 '14 Source: (Left) FactSet, TOPIX, J.P. Morgan Asset Management. (Top right) IMF, J.P. Morgan Asset Management. (Bottom right) Nomura, J.P. Morgan Asset Management. *Cash and cash equivalent holdings derived from Unstash the Cash! Corporate Governance Reform in Japan, Chie Aoyagi and Giovanni Ganelli, IMF, August 214. **Share buyback data are for repurchases of common stock, excluding repurchases from Resolution and Collection Corp. and repurchases of preferred stock collected by Nomura. Guide to the Markets - Europe. Data as of 3 September '9 '95 ' '5 '1 '15 4

41 Chinese equities 41 Stock market performance and margin debt Index level, of GDP ,5 2, Chinese household financial asset allocation Other 11 Mutual funds 2 Equities 7 Insurance & Pensions 7 Cash 72 Equities Onshore equity index (CSI 3) Margin debt of GDP 1,5 1,,5 Price to earnings ratio 5 x Shenzhen Composite : 81 Individual, 19 Institutional Shanghai Composite: 79 Institutional, 21 Individual Hang Seng: 79 Institutional, 21 Individual 1 1. Dec 13 Apr 14 Aug 14 Dec 14 Apr 15 Aug 15, '6 '8 '1 '12 '14 Source: (Left) CEIC, FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management. (Top right) Central Bank of the Republic of China, J.P. Morgan Asset Management. (Bottom right) Bloomberg, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

42 Developed markets equity valuations by country GTM Europe 42 Developed markets +5 Std dev How to interpret this chart Equities Std dev from global average +2.5 Std dev Average -2.5 Std dev -5 Std dev Spain Italy Germany France UK Japan ACWI DM Index Switz. US Current composite index Current Expensive relative to own history Cheap relative to own history 1-year average Expensive relative to world Current Average Cheap relative to world Forward P/E P/B P/CF Dividend yield Forward P/E P/B P/CF Dividend yield Spain -2,1 12,7x 1,2x 6,8x 4,8 11,3 1,5x 4,4x 5,1 Italy -1,83 14,2 1, 5, 3,3 11,4 1,1 3,5 3,5 Germany -1,21 11,9 1,5 7,6 3,2 11,7 1,7 5,5 2,9 France -,92 13,8 1,4 8,3 3,6 11,9 1,5 6, 3,3 UK -,79 14,2 1,7 8,9 4,4 11,8 1,9 7,1 3,8 Japan -,43 13, 1,2 7,4 2, 16,3 1,4 6,5 1,8 ACWI,13 14,2 1,9 9,4 2,8 13,4 2,1 7,3 2,5 DM Index,41 14,7 2, 9,8 2,7 13,7 2,1 7,5 2,5 Switz. 1,36 15,9 2,4 13,4 3,3 14,1 2,6 1,3 3,1 US 1,64 15,4 2,6 1,8 2,2 14,3 2,7 8,7 2, Source: FactSet, MSCI, J.P. Morgan Asset Management. Each valuation index shows an equally weighted composite of four metrics: price to forward earnings (forward P/E), price to current book (P/B), price to last 12 months cash flow (P/CF) and price to last 12 months dividends. Results are then normalised using means and average variability over the last 1 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). DM Index is the MSCI The World Index. Guide to the Markets - Europe. Data as of 3 September

43 Emerging markets equity valuations by country GTM Europe 43 Emerging markets +6 Std dev How to interpret this chart Std dev from global average +4 Std dev +2 Std dev Average -2 Std dev -4 Std dev Expensive relative to own history Cheap relative to own history Expensive relative to world Current Average Cheap relative to world Equities -6 Std dev Russia Brazil China EM Index Taiwan S. Korea ACWI S. Africa Mexico India Current composite index Current 1-year average Forward P/E P/B P/CF Dividend yield Forward P/E P/B P/CF Dividend yield Russia -5,5 4,9x,5x 2,7x 5,6 7,1x 1,2x 6,1x 3, Brazil -2,84 1,4 1, 5,2 4,4 1,4 1,8 6, 3,4 China -2,35 8,7 1,2 6,6 3,4 11,7 2,1 4,6 2,8 EM Index -1,8 1,7 1,4 6,6 3,1 11,3 1,8 6,1 2,7 Taiwan -1,72 11,5 1,5 7, 4, 14,2 1,8 6,4 3,7 S. Korea -1,24 9,8 1, 4,9 1,7 9,7 1,4 5,4 1,6 ACWI,13 14,2 1,9 9,4 2,8 13,4 2,1 7,3 2,5 S. Africa,8 15,1 2,3 11,2 3,2 12,4 2,6 8,9 3,2 Mexico 1,97 18, 2,5 9,5 2, 15,4 2,9 6,5 1,9 India 3,59 17,5 3, 12, 1,5 16,1 3,2 12,6 1,3 Source: FactSet, MSCI, J.P. Morgan Asset Management. Each valuation index shows an equally weighted composite of four metrics: price to forward earnings (forward P/E), price to current book (P/B), price to last 12 months cash flow (P/CF) and price to last 12 months dividends. Results are then normalised using means and average variability over the last 1 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). Guide to the Markets - Europe. Data as of 3 September

44 Emerging markets: Valuations and returns GTM Europe 44 MSCI Emerging Markets Index: Price to book ratio 3, x 2,75 +2, std. dev. 2,5 2,25 MSCI Emerging Markets Index: Price to book and returns Price to book ratio and next 12 months price return 8 Current level 6 4 Equities 2, 1,75 1,5 1,25 Average: 1,8x 3 Sep 215: 1,4x 2-2 1, -2, std. dev. -4,75 '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 '15-6,75 1, 1,25 1,5 1,75 2, 2,25 2,5 2,75 3, x 3,25 Source: (All charts) FactSet, MSCI, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

45 Emerging markets: Dividends and valuations 45 MSCI EM Index: Long-term growth in dividends per share (DPS) and earnings per share (EPS) Rebased to 1 at December EM DPS EM EPS (fwd) Relative valuation of high dividend yielding equities Valuation vs. long-term average, three-month moving average 13 US Europe 12 Emerging markets 11 Equities DM DPS DM EPS (fwd) ' '2 '4 '6 '8 '1 '12 '14 Number of companies yielding greater than 2 by region Constituents of the MSCI All Country World Index '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 Source: (Left) FactSet, IBES, MSCI, J.P. Morgan Asset Management. (Top and bottom right) FactSet, MSCI, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September 215. Emerging markets US Europe Japan 45

46 Equity income 46 Equities S&P 5 total return index: Dividends and capital appreciation Average annualised returns ,9 13,6 12,6 15,3 3, 1,6 4,4 4,7 5,4 6, 5,1 3,3 4,2 4,4 2,5-5,3 MSCI Europe indices: Price vs. total return* Rebased to 1 at December High dividend yield total return 2 15 Sources of income Eurozone average inflation:,1 (12 months to Aug 215) 3, 3, 1,8-2,7 3,6 16,6 2,7 4, s 194s 195s 196s 197s 198s 199s 2s Total return Price return Capital appreciation Dividends 4,1 6,7 5,9 7, '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 2,1 Cash,6 Bunds 1,6 Euro corp EME Converts MSCI Europe Global REITS EM debt High yield 46 Source: (Top) Ibbotson, Standard & Poor s, J.P. Morgan Asset Management. (Bottom left) FactSet, FTSE, J.P. Morgan Asset Management. High dividend yield is the FTSE 35 Higher Yield Index. (Bottom right) Barclays, BofA/Merrill Lynch, FactSet, FTSE, Tullett Prebon, J.P. Morgan Asset Management. Euro corporate: Barclays Euro Aggregate Credit - Corporate; EM debt: J.P. Morgan EMBI Global; High yield: BofA/Merrill Lynch Developed Markets High Yield Constrained; Global REITs: FTSE NAREIT Index; Converts: Barclays Global Convertibles; EM equity; MSCI EM. Yields for the bond indices are yield to worst and dividend yields for the equity indices. *Returns in local currency. Guide to the Markets - Europe. Data as of 3 September 215.

47 Annual returns and intra-year declines 47 MSCI Europe Index intra-year declines vs. calendar-year returns Despite average intra-year drops of 15,6 (median 11,9), annual returns are positive in 27 of 35 years Calendar-year return Intra-year decline Equities YTD '8 '82 '84 '86 '88 '9 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 Source: FactSet, MSCI, J.P Morgan Asset Management. Returns are based on price only and do not include dividends. Intra-year decline refers to the largest market fall from peak to trough within a short time period during the calendar year. Returns shown are calendar years from 198 to year to date. Guide to the Markets - Europe. Data as of 3 September