MARKET INSIGHTS. Guide to the Markets. UK Q As of 30 June 2016

Transcription

1 MARKET INSIGHTS Guide to the Markets UK Q3 16 As of 3 June 16

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 Samantha M. Azzarello New York David M. Lebovitz New York Gabriela D. Santos New York Abigail B. Dwyer, CFA New York John C. Manley New York Ainsley E. Woolridge New York Hannah J. Anderson 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 Marcella Chow Hong Kong Kerry Craig, CFA Melbourne Dr. Jasslyn Yeo, CFA Singapore Ian Hui Hong Kong Akira Kunikyo Tokyo Ben Luk Hong Kong 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 June 16 or most recently available.

3 Page reference UK economy. UK: GDP and inflation 5. UK labour market dynamics 6. UK growth monitor 7. UK housing 8. UK consumer finances 9. Brexit: The UK and the EU Global economy 1. Global Purchasing Managers Index (PMI) for manufacturing 11. Global inflation dynamics 1. Global central bank policy 13. Developed world consumption 1. Global supply dynamics 15. Global currency trends 16. Eurozone: GDP and inflation 17. Eurozone growth monitor 18. Eurozone recovery monitor 19. Eurozone credit conditions. European Central Bank (ECB) policies 1. European reform potential. US Federal Reserve outlook 3. US: GDP and inflation. US labour market 5. US growth monitor 6. US consumer finances 7. US politics 8. Japan: GDP and inflation 9. Japan: Abenomics and the economy 3. China: GDP, inflation and policy rate 31. China economic indicators 3. China financial dynamics 33. Emerging market challenges Equities 3. World stock market returns 35. European sector returns and valuations 36. European earnings and market exposure 37. MSCI Europe ex-uk performance and drivers 38. MSCI Europe ex-uk equity valuations 39. UK FTSE All-Share at inflection points. UK FTSE All-Share performance, earnings, and yields 1. UK FTSE All-Share equity valuations. US S&P 5 at inflection points 3. US S&P 5 performance and drivers. US S&P 5 equity valuations 5. US value vs. growth 6. US bear markets 7. Interest rates and equities 8. Japanese equities performance and drivers 9. Developed market equity valuations by country 5. Emerging market equity valuations by country 51. Emerging markets: Valuations and returns 5. Emerging market vulnerabilities 53. Emerging market equities 5. Chinese equities 55. Equity income Fixed income 56. Fixed income sector returns 57. Fixed income interest rate risk 58. Liquidity risks 59. Historical yields of government bonds 6. Government bond yields 61. Global investment-grade bonds 6. Global investment-grade bond market 63. US high yield bonds 6. European high yield bonds 65. Emerging market debt Other assets 66. Commodities 67. Oil market drivers 68. Gold market dynamics 69. Risk-adjusted returns and downside protection 7. Alternative strategies 71. Correlation of returns (GBP) Investing principles 7. Life expectancy and pension shortfall 73. Cash investments 7. The power of compounding 75. Annual returns and intra-year declines 76. Impact of being out of the market 77. US asset returns by holding period 78. Asset class returns (GBP) 3

4 UK: GDP and inflation UK economy Real GDP Inflation Average % change quarter on quarter since 1999 Q116 % change year on year Real GDP.5%.% 1 Average Average since 1999 May 16 Headline CPI*.%.3% Core CPI 1.6% 1.% -1 - UK consensus forecast 13 June 1.9%.1% 8 June 1.%.% % change ' ' ' '6 '8 '1 '1 '1 '16 Source: (Left) Consensus Economics, FactSet, ONS, J.P. Morgan Asset Management. Forecasts conducted by Consensus Economics were taken from a subset of UK economists. (Right) FactSet, ONS, 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 - UK. Data as of 3 June 16.

5 UK labour market dynamics 5 UK economy Productivity since the pre-crisis peak Index level, productivity per worker rebased to 1 as of Q UK productivity, had pre-8 trend continued Wage growth % change year on year 6 3 Nominal wage growth* Headline CPI Real wage growth US UK -6 ' ' '6 '8 '1 '1 '1 '16 UK unemployment rate and consumer confidence %, unemployment rate (LHS); Index level, consumer confidence (RHS) Unemployment rate 1 9 '8 '9 '1 '11 '1 '13 '1 '15 '16 Consumer confidence Source: (Left) BEA, ONS, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) FactSet, ONS, J.P. Morgan Asset Management. *Nominal wages include bonuses. (Bottom right) FactSet, GFK, ONS, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 June 16. 5

6 UK growth monitor 6 UK economy Retail sales vs. consumer confidence Index level (LHS); % change year on year (RHS) Consumer confidence Retail sales -8 '79 '8 '85 '88 '91 '9 '97 ' '3 '6 '9 '1 ' Manufacturing and services investment intentions Index level Services Manufacturing '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 UK total in employment Millions of people 35 Recession Industrial production Index level, 199= '79 '8 '85 '88 '91 '9 '97 ' '3 '6 '9 '1 '15 75 '79 '8 '89 '9 '99 ' '9 '1 Source: (Top left) GFK, ONS, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom left and bottom right) ONS, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) Bank of England, Thomson Reuters Datastream, J.P. Morgan Asset Management. Light grey columns in all charts indicate recession. Guide to the Markets - UK. Data as of 3 June 16. 6

7 UK housing 7 UK economy Home prices Index level, rebased to 1 at December 18 ONS Nationwide Halifax Housing starts* Thousands per quarter, seasonally adjusted 55 Average increase in households -1**: Q116: Q16 % change (s) y/y UK 5.1% 1 London 7 9.9% Wales 16.9% Scotland 11.5% Ireland % 8 England ex London 5.9% '3 ' '5 '6 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 15 ' ' '6 '8 '1 '1 '1 '16 Mortgage approvals and housing transactions Thousands, seasonally adjusted Housing transactions Mortgage approvals May 16: 89.7 Apr 16: 66.3 Source: (Left) FactSet, Halifax, Nationwide, ONS, J.P. Morgan Asset Management. (Top right) DCLG, FactSet, ONS, J.P. Morgan Asset Management. *Data is for England only. **1 to 1 are estimated average increases in households provided by the DCLG (Department for Communities and Local Government). (Bottom right) Bank of England, FactSet, HM Revenue & Customs, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 June 16. 7

8 UK consumer finances 8 UK economy Lending to individuals: Secured and unsecured lending %, seasonally adjusted, three-month annualised growth rate %, ratio of interest payments to profits or income Unsecured Corporate sector sector Household Secured Interest service ratio Average: Average: '9 '96 '98 ' ' ' '6 '8 '1 '1 '1 '16 5 '88 '9 '9 '9 '96 '98 ' ' ' '6 '8 '1 '1 '1 '16 Source: (Left) Bank of England, FactSet, J.P. Morgan Asset Management. (Right) ONS, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 June 16. 8

9 Brexit: The UK and the EU 9 Europe economy Exports of goods to the UK % of GDP, Tradeoffs for the UK post EU exit MARKET ACCESS TO THE EU Participation in EU legislation process Full market access Market access by negotiation UK trade balance with the EU GBP billions Goods Services Goods market access but not services FDI** in the UK ( bn) From EU 53 From US 6 Rest of world 6 '99 '1 '3 '5 '7 '9 '11 '13 '15 No financial contribution Free movement of labour Some financial contribution EU member Source: (Top left) IMF Direction of Trade statistics, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom left) Haver Analytics, J.P. Morgan Asset Management. (Right) J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 June 16. 9

10 Global Purchasing Managers Index (PMI) for manufacturing Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Global Global economy Eurozone Developed Emerging Eurozone France Germany Italy Spain Ireland Developed UK US Japan Brazil Emerging Russia India China Korea Taiwan Lowest relative to 5 PMI 5 Highest relative to 5 PMI 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. Guide to the Markets - UK. Data as of 3 June 16. 1

11 Global inflation dynamics 11 Global economy Developed economy inflation Inflation and inflation forecasts % change year on year % change year on year 5 3 Average Jan 1993 to Dec 8:.% 3 US UK Eurozone Japan Policy target Projection* Average Jan 9 to May 16: 1.% - '93 '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 '15-1 '13 '1 '15 '16 '17 Source: (Left) Haver Analytics, J.P. Morgan Asset Management. (Right) Bank of Japan, European Central Bank, J.P. Morgan Economic Research, ONS, Thomson Reuters Datastream, US Federal Reserve, J.P. Morgan Asset Management. *Inflation projections are J.P. Morgan Economic Research forecasts. Guide to the Markets - UK. Data as of 3 June

12 Global central bank policy 1 Market expectations for policy rate Percent of government bond market held by central banks % %. 5 Global economy US UK Japan Eurozone 3 Japan UK US Eurozone Projection Dec 16 Dec 17 Dec 18 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 Source: (Left) Bloomberg, J.P. Morgan Asset Management. (Right) Barclays, Citibank, Goldman Sachs, LLC., Westpac, J.P. Morgan Securities, LLC., J.P. Morgan Asset Management. Projection from central banks. Guide to the Markets - UK. Data as of 3 June 16. 1

13 Developed world consumption 13 Global economy Real private consumption growth % change year on year, four quarter moving average 6 - US UK - Eurozone -6 ' ' '6 '8 '1 '1 '1 '16 Household credit growth % change year on year UK Japan US Eurozone Real wage growth % change year on year Eurozone US UK '1 '11 '1 '13 '1 '15 '16-6 ' ' ' '6 '8 '1 '1 '1 '16 Source: (Top left) BEA, Bloomberg, Eurostat, ONS, J.P. Morgan Asset Management. (Bottom left) Bloomberg, BLS, Eurostat, ONS, J.P. Morgan Asset Management. (Right) Haver Analytics, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 June

14 Global supply dynamics 1 Labour productivity % change year on year 6 Medium-term GDP growth projections % annual GDP growth for the next five years Global economy Post-crisis average:.3% World Developed Markets Emerging Markets Pre-crisis average: 1.% - Developed markets - Emerging markets* -6 ' '3 ' '5 '6 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 Global population % change year on year (LHS); % of population (RHS) Population growth Age 65+ Forecast '6 '65 '7 '75 '8 '85 '9 '95 ' '5 '1 '15 ' Source: (Left) J.P. Morgan Economic Research, J.P. Morgan Asset Management. GDP-weighted average is used for global pre-and post- crisis levels. *Emerging markets productivity data excludes China and India due to data availability. (Top right) IMF, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Economic Research, United Nations, J.P. Morgan Asset Management. Forecasts from UN. Guide to the Markets - UK. Data as of 3 June 16. 1

15 Global currency trends 15 Global economy US dollar in historical perspective Index level, broad real effective exchange rate (REER) : -1.8% : +5.7% : -9.5% 1985: Plaza Accord 1987: Louvre Accord 1995-: +3.% Average since : -7.1% 7 '73 '77 '81 '85 '89 '93 '97 '1 '5 '9 '13 May 16 US dollar index : -8.6% 11-16: +.% Trends in key currencies Real effective exchange rate, rebased to 1 as of Jan EUR USD RMB JPY GBP 8 Jan '16 Mar '16 May '16 Jul '16 US dollar performance and US rate hikes Index level, real trade-weighted exchange rate, rebased to 1 on the date of first rate hike Months Source: (Top) US Federal Reserve, J.P. Morgan Asset Management. (Bottom left) FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. (Bottom right) FactSet, US Federal Reserve, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 June 16. Current

16 Eurozone: GDP and inflation 16 Real GDP Real GDP.3%.6% 5 Inflation Average % change quarter on quarter since 1999 Q116 % change year on year Average since 1999 May 16 Headline CPI* 1.8%.1% Core CPI 1.5%.9% Global economy Average ' ' ' '6 '8 '1 '1 '1 '16 Source: (Both charts) Eurostat, FactSet, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food, energy, alcohol and tobacco. Guide to the Markets - UK. Data as of 3 June

17 Eurozone growth monitor 17 Global economy Change in unemployment and unemployment rate Thousands of people per three months (LHS); % rate (RHS), 1,5 1, 5 Change in unemployment Unemployment rate -5 ' ' ' '6 '8 '1 '1 '1 ' Retail sales and industrial production Index level Industrial production Retail sales '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 Change in credit standards Net % balance 8 Recession Housing 6 Corporate Consumer Tighter - Looser '3 ' '5 '6 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 Economic sentiment and GDP Index level (LHS); % change year on year (RHS) 13 Economic sentiment GDP '97 '99 '1 '3 '5 '7 '9 '11 '13 ' Source: (Top left) Eurostat, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom left) ECB, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right and bottom right) Eurostat, J.P. Morgan Asset Management. Light grey columns in all charts indicate recession. Guide to the Markets - UK. Data as of 3 June

18 Eurozone recovery monitor 18 Global economy Contribution to eurozone GDP growth % change year on year 5 Change in inventories Exports Investment Consumption Imports GDP One year change Domestic demand (Q116) +1.7% Net exports (Q116) -9.9% Q11 Q31 Q113 Q313 Q11 Q31 Q115 Q315 Q116 Eurozone government expenditure % change year on year Gross fixed capital formation % of GDP, non-residential Eurozone 1 '99 '1 '3 '5 '7 '9 '11 '13 '15 Source: (Left) Eurostat, FactSet J.P. Morgan Asset Management. (Top right) FactSet, OECD, J.P. Morgan Asset Management. (Bottom right) BEA, Eurostat, FactSet, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 June '99 '1 '3 '5 '7 '9 '11 '13 '15 US

19 Eurozone credit conditions 19 Credit demand and eurozone GDP growth Net % of banks reporting positive loan demand (LHS); % GDP growth (RHS) Bank loans to households and non-financial corporations EUR billions, net lending flow, three-month moving average 15 Stronger loan demand 6 Global economy Corporate lending rates to smaller companies % interest*, non-financial corporations Weaker loan demand Consumer credit (lhs) Housing loans (lhs) Overall corporate (lhs) Eurozone GDP growth y/y (rhs) '5 '6 '7 '8 '9 '1 '11 '1 '13 '1 '15 ' Italy Germany Spain France Source: (Left) ECB, Eurostat, FactSet, J.P. Morgan Asset Management. (Top and bottom right) ECB, FactSet, J.P. Morgan Asset Management. *Interest on new business lending up to 1 million, on a 1-5 year maturity. Guide to the Markets - UK. Data as of 3 June

20 European Central Bank (ECB) policies ECB balance sheet: Assets* EUR trillions The trade-weighted euro and EUR/USD Index level (LHS); Price of euro in dollars (RHS) Global economy Balance sheet expansion since Sep 1 Balance sheet expansion still to come Jan 5 Jul 1: 9% +5% +3% Aug 1 Sep 1: -35% Trade-weighted euro EUR/USD. 1.5 Size of bond markets EUR billions, amount outstanding 8, 7,1 6, 1.,.5, 1, '5 '6 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 '17 Euro govt. Euro IG BB B CCC CoCos ex-financials Source: (Left) ECB, FactSet, J.P. Morgan Asset Management. *Balance sheet forecast does not include Targeted Longer Term Refinancing Operations (TLTRO). Expansion in balance sheet still to come assumes EUR 8bn a month expansion between now and March 17. (Top right) BIS, FactSet, J.P. Morgan Asset Management. (Bottom right) Bloomberg, BofA/Merrill Lynch, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 June 16.

21 European reform potential 1 Global economy Potential GDP boost by 5 from implementing reforms % GDP growth 1 Labour market reform Product market reform 1 Retirement policy reform 8 6 Service sector productivity Index level, rebased to 1 as of December 6 15 US Eurozone 95 9 '7 '8 '9 '1 '11 '1 '13 '1 '15 Difficulty of doing business Index level, 15, lower score indicates an easier business environment 6 1 Source: (Left) OECD, J.P. Morgan Asset Management. The size of each bar shows the effect on GDP of each policy simulated in isolation. The reform of retirement policies assumes that the ratio of working-life to life-expectancy converges towards that of Switzerland. Labour market reforms are assumed to gradually reduce the structural unemployment rate to 5% in all countries where it would otherwise be above this level. Product market reforms move each country s regulation gradually towards best practice. (Top right) BEA, BLS, Eurostat, Haver, J.P. Morgan Asset Management. (Bottom right) World Bank, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 June 16.

22 US Federal Reserve outlook Global economy Federal funds rate expectations % Fed funds rate, FOMC and market expectations Federal funds rate US Fed FOMC forecasts median US Fed FOMC forecasts range Market expectations on 3 Jun 16 FOMC long-run projection FOMC June 16 forecasts* Long run Change in real GDP, Q to Q.... Unemployment rate, Q PCE inflation, Q to Q % 1 '99 '3 '7 '11 '15 '19 Source: Bloomberg, Federal Reserve Bank of New York, US 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 - UK. Data as of 3 June 16.

23 US: GDP and inflation 3 Real GDP Inflation % change quarter on quarter, SAAR Average since 1999 Q116 % change year on year 1 Real GDP 1.9% 1.1% Average since 1999 May 16 Headline CPI*.% 1.1% Core CPI.%.% Global economy 6 Average Components of nominal GDP Q116 Consumption 68.6% Government 17.6 Investment ex-housing 1.9 Housing 3.6 Net exports ' ' ' '6 '8 '1 '1 '1 ' ' ' ' '6 '8 '1 '1 '1 '16 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 - UK. Data as of 3 June 16. 3

24 US labour market Unemployment rate and wage growth %, wage growth year on year, seasonally adjusted, wages of production and non-supervisory workers Global economy 5-yr average:.3% Unemployment 5-yr average: 6.1% Wage growth May 16:.7% June 16:.% Quits and job openings Thousands 6, 5,, 3,, Job openings Quits Employee compensation and profitability % of GDP Employee compensation Corporate profits 1, '1 '3 '5 '7 '9 '11 '13 '15 Source: (Top) BEA, FactSet, J.P. Morgan Asset Management. (Bottom left) BLS, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) BEA, FactSet, J.P. Morgan Asset Management.. Guide to the Markets - UK. Data as of 3 June 16.

25 US growth monitor 5 Industrial production % change year on year 1 Manufacturing, ex-metals & machinery Global economy -1 - Metals & machinery -3 '7 '76 '78 '8 '8 '8 '86 '88 '9 '9 '9 '96 '98 ' ' ' '6 '8 '1 '1 '1 '16 Initial jobless claims vs. consumer confidence Jobless claims in thousands (LHS); Index level (RHS) Jobless claims Consumer confidence Housing starts Thousands, SAAR Recession Source: (Top) Haver, J.P. Morgan Asset Management. (Bottom left) US Census Bureau, J.P. Morgan Asset Management. (Bottom right) FactSet, J.P. Morgan Asset Management. Light grey columns in all charts indicate recession. Guide to the Markets - UK. Data as of 3 June 16. 5

26 US consumer finances 6 Household net worth USD billions, SAAR Q7: $67,67 Q16*: $89,5 Consumer balance sheet $ trillions outstanding, not seasonally adjusted, Q116 1 Total assets: $1.6tn Q37 peak: $81.9tn Q19 low: $68.7tn Global economy Homes: 5% Other tangible: 6% Deposits: 1% % of total US mortgages that are fixed rate** 71% Household debt service ratio and savings rate % of disposable personal income, seasonally adjusted 1 Debt service ratio Savings rate '8 '85 '9 '95 ' '5 '1 ' Pension funds: 1% Other financial assets: 39% Other non-revolving: 1% Revolving***: 7% Auto loans: 7% Other liabilities: 8% Student debt: 9% Total liabilities: $1.5tn Mortgages: 67% Source: (Top left and right) FactSet, US Federal Reserve, J.P. Morgan Asset Management. (Bottom left) US Federal Reserve, Thomson Reuters Datastream, J.P. Morgan Asset Management. *Q116 numbers for US household net worth and debt service ratio are J.P. Morgan Asset Management forecasts. **Taken from the Monthly Interest Rate Survey for 15-year and 3-year fixed mortgages. ***Revolving includes credit cards. Guide to the Markets - UK. Data as of 3 June 16. 6

27 US politics 7 Global economy Composition of the Senate Number of seats held by each party Republican Democrat Current: 5 seats Current: 6 seats* 6 Democrats would need a 5.% swing in nationwide votes to close this gap US public support for presidential candidates %, multiple poll average Clinton Trump 3 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 7 Composition of the House Number of seats held by each party Republican Democrat Current: 7 seats Current: 187 seats Democrats would need a 1.5% swing in nationwide votes to close this gap Market and economic performance under presidents % avg. annual GDP growth & % S&P 5 returns, std. dev., Democratic president Republican president Source: (Top and bottom left) New York Times, Real Clear Politics, United States Senate, United States House of Representatives, J.P. Morgan Asset Management. *There are registered Democrats in the U.S. Senate and two Independents who caucus with the Democrats. Percentage swing in votes needed to shift party control of each chamber of Congress is calculated as the vote spread in the last election for each individual seat plus the percentage change nationally required so that a new party would attain a majority. (Top right) Real Clear Politics, J.P. Morgan Asset Management. Percentage shown is the rolling four-poll average. (Bottom right) BEA, Office of the President, Standard & Poor s, U.S. House of Representatives, U.S. Senate, FactSet, J.P. Morgan Asset Management. **Stock market returns are price returns and do not include dividends. Average annual returns are calculated using year-end to year-end and fourth quarter to fourth quarter numbers for both the S&P 5 and real GDP, respectively. Guide to the Markets - UK. Data as of 3 June S&P 5 return** Real GDP growth

28 Japan: GDP and inflation 8 Global economy Real GDP growth Inflation Average % change quarter on quarter since 1999 Q115 % change year on year 3 Real GDP.%.5% 5 Average 1 3 Average since 1999 May 16 Headline CPI*.% -.% Core CPI -.3%.7% CPI less food & consumption tax -.1% -.% ' ' ' '6 '8 '1 '1 '1 '16-3 ' ' ' '6 '8 '1 '1 '1 '16 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 - UK. Data as of 3 June 16. 8

29 Japan: Abenomics and the economy 9 Global economy Wage growth % change year on year, three-month moving average 3 Core CPI* 1-1 Nominal wage growth - '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 Japanese yen effective exchange rate Index level Abe elected NIRP 18 Bank lending and job-to-applicant ratio % lending growth year on year (LHS); ratio of number of jobs to applicants (RHS) Job-to-applicant ratio '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 Bank lending (y/y) -8 '9 '9 '96 '98 ' ' ' '6 '8 '1 '1 '1 Source: (Top left) FactSet, Japan Ministry of Internal Affairs & Communications, Japan Ministry of Health, Labour and Welfare, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. (Bottom left) FactSet, J.P. Morgan Asset Management. (Right) Bloomberg, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 June

30 China: GDP, inflation and policy rate 3 Global economy Real GDP growth % change year on year GDP growth Investment Consumption Net exports Q116: 6.7% Inflation % change year on year May 16 Headline CPI*.% Core CPI** 1.% Headline PPI*** -.8% 6 3 Policy rate and reserve ratio requirement (RRR)**** % policy rate on one-year renminbi deposits (LHS); % RRR (RHS) 5 RRR -3-6 '9 '9 '9 '96 '98 ' ' ' '6 '8 '1 '1 '1 '16 3 PBoC policy rate 1 '6 '8 '1 '1 '1 ' Source: (Left and top right) FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. **Core CPI number is as of March 16. ***PPI is the Producer Price Index. (Bottom right) FactSet, People s Bank of China (PBoC), J.P. Morgan Asset Management. ****Average RRR for large and small banks. Guide to the Markets - UK. Data as of 3 June 16. 3

31 China economic indicators 31 Global economy China industrial production and retail sales % change year on year, three-month moving average Retail sales Industrial production Central government fiscal deficit % of GDP target: -3.% '85 '9 '95 ' '5 '1 '15 China home prices % change year on year 3 1 Tier-1 cities Source: (Left) FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management. (Top right) CEIC, FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management. (Bottom right) BofA/Merrill Lynch, CEIC, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June Tier- cities Tier-3 cities '11 '1 '13 '1 '15 '16 31

32 China financial dynamics 3 Global economy Public, household and non-financial corporate debt % of GDP, Public debt Non-financial corporate debt Household debt Chinese renminbi Rebased index level (LHS); Price of RMB in dollars (RHS) Trade-weighted RMB USD/RMB 95 '11 '1 '13 '1 '15 '16 China foreign exchange reserves and external debt USD trillions External debt as a % of global GDP EM Asia 1998 US 8 China 1 1.7% 1.8% 1.% Japan UK US Eurozone China Korea Source: (Left) BIS, IMF World Economic Outlook October 15, Lombard Street Research, J.P. Morgan Asset Management. (Top right) BIS, FactSet, J.P. Morgan Asset Management. (Bottom right) FactSet, People s Bank of China, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 June 16. 3

33 Emerging market challenges 33 Net capital flows and GDP USD trillions (LHS); % change year on year (RHS) Broad private non-financial credit % of GDP Global economy 5 3 Capital flows Developed markets (lhs) Emerging markets (rhs) Emerging markets ex-china (rhs) 1 ' ' ' '6 '8 '1 '1 ' REER ratio: EM vs. DM* Index level 115 EM FX expensive GDP -3 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 95 EM FX cheap 85 '96 '98 ' ' ' '6 '8 '1 '1 '1 '16 Source: (Left) Institute of International Finance, IMF World Economic Outlook April 16, J.P. Morgan Asset Management. (Top right) BIS, IMF World Economic Outlook April 16, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Economic Research, MSCI, J.P. Morgan Asset Management. *REER is real effective exchange rate weighted by emerging market equities. Guide to the Markets - UK. Data as of 3 June

34 GBP Local World stock market returns YTD Q % Euro ex-uk.5% 17.3% Asia ex-jp 8.6% 38.% Asia ex-jp 38.% 37.5% MSCI EM 33.6% 1.3% TOPIX -.6% -1.8% S&P 5-37.% 59.% MSCI EM 6.8% 53.6% Asia ex-jp 67.% 3.5% Small Cap.% 3.7% Asia ex-jp 15.6%.9% S&P 5.1%.9% HDY Equity 1.5% 17.3% Asia ex-jp 19.7% 17.% Euro ex-uk.% 3.5% Sm all Cap 35.8% 9.9% S&P 5 3.%.8% S&P % 11.7% Asia ex-jp 7.7% 18.% TOPIX 1.1% 7.3% S&P 5 1.% 18.1% HDY Equity 6.% 17.5% MSCI EM 3.6% 3 1.8% HDY Equity.1% 1.% S&P 5.5% 1-yr ann. 9.% S&P 5 7.3% 8.1% Asia ex-jp 7.1% 16.3% MSCI EM 8.8% 15.5% Euro ex-uk 6.6% -18.3% HDY Equity -3.% 8.9% Sm all Cap.8%.9% MSCI EM 1.% -.% FTSE 1 -.% 13.% MSCI EM 17.% 6.3% Euro ex-uk.% 8.7% Sm all Cap 6.7% 5.9% Small Cap.8% 1.5% S&P 5 3.8% 9.% Small Cap 1.6% 8.1% Sm all Cap 6.3% Equities 1.% FTSE 1 1.% 13.7% HDY Equity 1.6% 13.3% Portfolio 11.% 7.9% HDY Equity.7% -19.1% Sm all Cap -.% -1.9% Portfolio -38.5% 7.3% FTSE 1 7.3% 7.3% Portfolio 35.6% 19.5% TOPIX 1.% 18.7% S&P % -7.% Portfolio -6.5% -8.% Small Cap -8.7% 13.% Small Cap 18.% 11.6% Portfolio 16.%.7% TOPIX 5.% 18.7% FTSE % 8.% HDY Equity 8.7% 7.6% Portfolio 7.5% 5.9% Euro ex-uk 9.1%.% Portfolio 1.% 13.1% Small Cap.7% 1.8% Asia ex-jp 1.3% 9.1% TOPIX -7.% 8.% MSCI EM.8% 7.% HDY Equity 6.% 6.9% Portfolio 6.% 9.8% Portfolio 18.6% 7.% FTSE 1 7.% -3.9% Euro ex-uk -.7% 3.% HDY Equity 3.% 17.3% Portfolio 11.9% -11.9% TOPIX -17.% 1.9% S&P 5 16.% 17.6% Portfolio 3.1%.3% MSCI EM 5.6%.9% HDY Equity.% 11.6% Portfolio.8% 8.3% Portfolio 1.7% 6.% Euro ex-uk.5% 3.1% Small Cap 13.6% 3.7% S&P 5 5.5% -8.3% FTSE 1-8.3% 19.3% Euro ex-uk 9.% 1.6% FTSE 1 1.6% -13.9% Euro ex-uk -1.1% 1.3% HDY Equity 1.% 16.8% HDY Equity.5%.7% TOPIX 1.3% -1.3% FTSE 1-1.3% 6.6% FTSE 1 6.6% 8.1% Asia ex-jp 1.1% 5.5% MSCI EM 6.% 1.6% S&P % -.6% Small Cap -3.8% -33.9% Asia ex-jp -7.7% 1.6% S&P 5 6.5% 1.1% HDY Equity 8.% -16.5% Asia ex-jp -1.6% 1.% FTSE 1 1.% 1.% Asia ex-jp 6.%.7% FTSE 1.7% -3.6% Asia ex-jp -5.3% 5.3% TOPIX -18.5% 6.5% FTSE 1 6.5%.8% FTSE 1.8% -1.5% TOPIX 3.% -6.8% TOPIX -11.1% -35.% MSCI EM -5.7% -6.7% TOPIX 7.6% 5.7% Euro ex-uk 5.1% -17.6% MSCI EM -1.5%.8% TOPIX.9% -.1% MSCI EM 3.8%.% Euro ex-uk 7.% -9.7% MSCI EM -5.%.% Euro ex-uk -7.%.3% Euro ex-uk -.6%.6% TOPIX 1.% 3 Source: FactSet, MSCI, Standard & Poor s, TOPIX, J.P. Morgan Asset Management. Annualised return covers the period 6 to 15. 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): % FTSE 1; % S&P 5; 15% EM; 1% Euro ex-uk; 1% Asia ex-japan; 1% TOPIX; 1% HDY Equity and 5% small cap. All indices are total return. Guide to the Markets - UK. Data as of 3 June 16.

35 European sector returns and valuations 35 MSCI Europe Index Financials Health care Cons. staples Cons. disc. Industrials Materials Energy Telecom Utilities Tech Europe Europe weight 18.6% 1.6% 16.7% 1.7% 11.6% 7.% 7.3%.8%.%.3% 1% Growth weight Value weight 5.3% 19.6% 9.6% 1.6% 13.1% 6.7%.% 3.6%.1% 7.% 1% 3.7% 9.5%.9% 7.1% 1.1% 7.6% 1.3% 5.9% 8.% 1.6% 1% Weights Q Equities YTD Since market peak* Since market low* Return Beta to Europe 1.3x.65x.6x.96x 1.1x 1.9x 1.x.81x.86x.98x 1.x β Correl. to int. rates ρ Forward P/E ratio 9.8x 16.5x.8x 11.9x 1.7x 17.x 19.1x 17.x 1.x 17.3x 1.5x 15-year average 1.7x 15.5x 15.9x 1.1x 1.1x 1.7x 11.9x 16.7x 13.3x.x 13.1x Trailing P/E ratio 1.5x 17.x 1.5x 13.9x 15.8x 18.7x 18.7x 19.9x 1.1x 18.8x 15.3x P/E 15-year average 1.5x 16.7x 17.x 16.7x 16.1x 1.x 11.9x 18.7x 1.x 35.7x 1.6x Dividend yield 15-year average.6% 3.%.7% 3.%.9% 3.% 6.7%.5%.9% 1.8% 3.7% 3.9%.7%.8%.8%.8%.9%.%.5%.9% 1.8% 3.3% Div 35 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 7 to end of latest quarter; since market low represents period 9 March 9 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 - UK. Data as of 3 June 16.

36 European earnings and market exposure 36 Europe economy vs. equity market % of GDP, % of total profits 8 6 Economy Equities Europe earnings per share growth % change year on year, 1Q Equities -18 Europe Eurozone Eurozone ex-energy Sector EPS growth % change year on year, FY 15 results % -3% -1% 1% 6% 7% 11% 19% % International exposure European consumer Manufacturing Energy and commodities* -6-5% Source: (Left) Eurostat, FactSet, IMF World Economic Outlook October 15, Stoxx, J.P. Morgan Asset Management. European equities is Stoxx 6. *Profits for energy and commodities as of 1. (Top right) FactSet, MSCI, J.P. Morgan Asset Management. Based on the Stoxx 6 index. (Bottom right) UBS, J.P. Morgan Asset Management. Based on MSCI EMU. Guide to the Markets - UK. Data as of 3 June

37 MSCI Europe ex-uk performance and drivers 37 Equities MSCI Europe ex-uk earnings and performance Index level, next 1 months earnings estimates (LHS); Index level (RHS) 1 1, MSCI Europe ex-uk MSCI Europe ex-uk EPS index level 1, , 1,1 1, 9 Eurozone 1-month EPS growth and real GDP growth % change year on year 6 - Real GDP - growth, advanced 6 EPS Growth -6 months ' '5 '6 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 US and European operating profit margins Earnings per share/sales per share for MSCI Europe ex-uk and S&P 5* US Europe ex-uk 6 '8 '9 '1 '11 '1 '13 '1 '15 '16 5 Source: (Left) FactSet, MSCI, J.P. Morgan Asset Management. EPS is earnings per share. (Top right) IBES, J.P. Morgan Asset Management. (Bottom right) FactSet, MSCI, Standard & Poor s, J.P. Morgan Asset Management. *Data is last 1 months. Guide to the Markets - UK. Data as of 3 June

38 MSCI Europe ex-uk equity valuations 38 MSCI Europe ex-uk forward P/E ratio x, multiple Dividend yield and 1-year bond yield % yield Average: 13.5x 3 June 16: 1.x 5 Dividend yield 3 June 16: 3.8% Equities 8 MSCI Europe ex-uk cyclically adjusted P/E ratio x, adjusted using trailing 1-year average inflation-adjusted earnings 55 ' ' '6 '8 '1 '1 '1 ' Average: 19.x 3 June 16: 15.x 5 '8 '8 '88 '9 '96 ' ' '8 '1 ' year German bund yield -1 '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 Source: (Top left) FactSet, 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 1 months and is provided by FactSet Market Aggregates. (Bottom left and right) FactSet, MSCI, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 June June 16: -.1% 38

39 UK FTSE All-Share at inflection points 39 FTSE All-Share index, Characteristic Sep Jun 7 Jun 16 Index level 3,66 3,79 3,515 P/E ratio (fwd).1x 13.x 15.x Dividend yield.%.7%.1% UK 1-year 5.3% 5.5%.9% 3 June 16: P/E = 15.x 3,515 3,5 Total return: +79% Sep : P/E =.6x 3,66 15 Jun 7: P/E = 13.x 3,79 3, Equities,5 +151% -8% -5% +15%, 31 Dec 1996: P/E = 1.5x,1 1 Mar 3: P/E = 1.5x 1,593 9 Mar 9: P/E = 8.x 1,79 1,5 '97 '98 '99 ' '1 ' '3 ' '5 '6 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 Source: FactSet, FTSE, 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 1 months and is provided by FactSet Market Aggregates. Return calculations shown in green are based on the total return index. Guide to the Markets - UK. Data as of 3 June

40 UK FTSE All-Share performance, earnings and yields FTSE All-Share earnings and performance Index level, next 1 months earnings estimates (LHS); index level (RHS) 85 8 FTSE All-Share EPS FTSE All-Share index level, Source of UK company revenues % of revenues International UK 75 3,5 5 7 Equities ,,5 Dividend yield and ex-energy dividend yield % yield UK Eurozone 5 5 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 Source: (Left) FactSet, FTSE, J.P. Morgan Asset Management. EPS is earnings per share. (Top right) MSCI UK, Citi, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Economic Research, J.P. Morgan Asset Management. Japan is Nikkei 5, Eurozone is Euro Stoxx 5, US is S&P 5. Guide to the Markets - UK. Data as of 3 June 16., 1,5 MSCI EM MSCI World Japan US Dividend yield Dividend yield ex-energy 1 3 5

41 UK FTSE All-Share equity valuations Forward P/E ratio x, multiple % yield 7 16 Average: 13.8x 3 June 16: 15.x Dividend yield and 1-year Gilt yield 6 Dividend yield 1 Equities 1 8 '98 ' ' ' '6 '8 '1 '1 '1 '16 FTSE All-Share Shiller CAPE x, adjusted using trailing 1-year average inflation-adjusted earnings June 16:.1% 5 15 Average: 17.x 3 June 16: 1.3x 5 '83 '87 '91 '95 '99 '3 '7 '11 ' year Gilt yield '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 Source: (Top left) FactSet, FTSE, 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 1 months and is provided by FactSet Market Aggregates. (Bottom left) FTSE, Goldman Sachs, J.P. Morgan Asset Management. (Right) FactSet, FTSE, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 June June 16:.9% 1

42 US S&P 5 at inflection points S&P 5 Index,, Characteristic Mar Oct 7 Jun 16 Index level 1,57 1,565,99 P/E ratio (fwd) 7.3x 15.8x 16.x Dividend yield 1.1% 1.7%.3% US 1-year 6.%.6% 1.5% 3 June 16: P/E = 16,x,99 1,8 1,6 Mar : P/E = 7.x 1,57 9 Oct 7: P/E = 15.8x 1,565 Equities 1, Total return: +116% -7% +11% +6% 1, -55% 1, 8 31 Dec 1996: P/E = 16.x 71 9 Oct : P/E = 1.1x Mar 9: P/E = 1.3x '97 '98 '99 ' '1 ' '3 ' '5 '6 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 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 1 months and is provided by FactSet Market Aggregates. Return calculations shown in green are based on the total return index. Guide to the Markets - UK. Data as of 3 June 16.

43 US S&P 5 performance and drivers 3 S&P 5 earnings and performance Index level, next 1 months earnings estimates (LHS); Index level (RHS) 13 1 S&P 5 EPS S&P 5 index level, Initial jobless claims vs. S&P 5 performance Thousands, four week moving average (LHS); Index level (RHS) 7 Initial jobless claims S&P 5 index level 6 5,5, 1,5 11 1,8 1, Equities '8 '9 '1 '11 '1 '13 '1 '15 '16 1,6 1, 1, 1, '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 Unit labour costs vs. business output prices % change year on year, four-quarter moving average Unit labour costs - Business output prices -3 '88 '9 '9 '9 '96 '98 ' ' ' '6 '8 '1 '1 '1 '16 Source: (Left) FactSet, Standard & Poor s, J.P. Morgan Asset Management. (Top right) BLS, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) BLS, Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 June 16. 3

44 US S&P 5 equity valuations Dividend yield and 1-year Treasury yield % yield 8 7 Forward P/E ratio x, multiple 8 31 Dec 1999: 7.x year Treasury 16 1 Average: 16.5x 3 June 16: 16.x Equities 3 3 June 16:.3% '9 '9 '9 '96 '98 ' ' ' '6 '8 '1 '1 '1 '16 S&P 5 Shiller cyclically adjusted P/E x, adjusted using trailing 1-year average inflation-adjusted earnings 5 3 June 16: 6.x 1 Dividend yield 3 June 16: 1.5% 3 1 Average: 16.7x '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 ' '1 ' '3 ' '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 1 months and is provided by FactSet Market Aggregates. (Bottom right) Robert Shiller, FactSet, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 June 16.

45 US value vs. growth 5 US value vs. growth performance and US Treasury yield % yield, three month moving average (LHS); Value over growth index (RHS) US 1-year yield Value outperforms growth Equities Growth outperforms value Russell 1 Value/ Russell 1 Growth.9 1 '3 ' '5 '6 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16.8 Source: FactSet, Russell, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 June 16. 5

46 US bear markets 6 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 199 excessive leverage, irrational exuberance Sep % 33 Jul % Fed Tightening premature policy tightening Mar Mar Post WWII crash post-war demobilisation, recession fears May Apr Flash crash of 196 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 -5% 5 15% 5 Source: FactSet, NBER, Robert Shiller, Standard & Poor s, J.P. Morgan Asset Management. *A bear market represents a % or more decline from the previous market high using a monthly frequency; a bull market represents a % 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 1 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 - UK. Data as of 3 June 16.

47 Interest rates and equities 7 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 -year Treasury yield, Positive relationship between yield S&P 5 movements and equity returns.6 MSCI Europe Market reaction when the US Fed raised rates '88-'89 '9-'95 '99-' '-'6 Change in Fed funds 3.13% 3.% 1.75%.5% Change in 1-yr yields.85% 1.89%.9%.51% Equities Correlation... Initial market reaction -7% -1% -7% -8% Subsequent market reaction % 7% 18% % Total reaction 17% -% 1% 11% Negative relationship between yield movements and equity returns % 1 -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. Data for each of the rate hikes: '88-'89 is March 1988 to June 1989, '9-'95 is February 199 to February 1995, '99-' is June 1999 to May, '-'6 is June to June 6. Guide to the Markets - UK. Data as of 3 June 16. 7

48 Japanese equities performance and drivers 8 Equities TOPIX earnings and performance Listed companies cash and cash equivalents holdings* Index level, next 1 months earnings estimates (LHS); Index level (RHS) % of market capitalisation, average between and 1 1 1, TOPIX EPS TOPIX price level 1, , , Japan Germany Italy France UK US Canada 7 1, Listed companies dividend pay-out and share buybacks Yen trillions Share buybacks** 6 1 Dividends 8 3 '8 '9 '1 '11 '1 '13 '1 '15 '16 Source: (Left) FactSet, TOPIX, J.P. Morgan Asset Management. EPS is earnings per share. (Top right) IMF, 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 1. (Bottom right) Nomura, J.P. Morgan Asset Management. **Share buyback data is for repurchases of common stock, excluding repurchases from Resolution and Collection Corp. and repurchases of preferred stock collected by Nomura. Guide to the Markets - UK. Data as of 3 June 16. '9 '95 ' '5 '1 '15 8

49 Developed market equity valuations by country 9 Developed markets +5 Std dev How to interpret this chart Std dev from global average +,5 Std dev Average -,5 Std dev Expensive relative to own history Cheap relative to own history Expensive relative to world Current Average Cheap relative to world Equities -5 Std dev Italy Spain Germany France Japan UK ACWI DM Index Switz. US 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 Italy x.8x 5.x.6% 11.x 1.1x 3.3x 3.7% Spain Germany France Japan UK ACWI DM Index Switz US 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 book (P/B), price to last 1 months cash flow (P/CF) and price to last 1 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 - UK. Data as of 3 June 16. 9

50 Emerging market equity valuations by country 5 Emerging markets +6 Std dev How to interpret this chart Std dev from global average + Std dev + Std dev Average - Std dev - 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 Taiwan S. Korea EM Index China ACWI S. Africa Mexico India Current composite Current 1-year average index Forward P/E P/B P/CF Dividend yield Forward P/E P/B P/CF Dividend yield Russia x.6x 3.8x.% 6.7x.7x 5.7x.5% Brazil Taiwan S. Korea EM Index China ACWI S. Africa Mexico India 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 book (P/B), price to last 1 months cash flow (P/CF) and price to last 1 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 - UK. Data as of 3 June 16. 5