MARKET INSIGHTS. Guide to the Markets. Europe 3Q 2016 As of 30 June 2016

Transcription

1 MARKET INSIGHTS Guide to the Markets Europe 3Q 216 As of 3 June 216

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 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 June 216 or most recently available.

3 Page reference Europe economy. Europe: GDP and inflation 5. Eurozone growth monitor 6. Eurozone recovery monitor 7. Eurozone credit conditions 8. European Central Bank (ECB) policies 9. European reform potential 1. UK economic indicators 11. Brexit: The UK and the EU Global economy 12. World economic data 13. Global Purchasing Managers Index (PMI) for manufacturing 1. Global inflation dynamics 15. Global central bank policy 16. Developed world consumption 17. Global supply dynamics 18. Global currency trends 19. US Federal Reserve outlook 2. US: GDP and inflation 21. US labour market 22. US growth monitor 23. US consumer finances 2. US politics 25. Japan: GDP and inflation 26. Japan: Abenomics and the economy 27. China: GDP, inflation and policy rate 28. China economic indicators 29. China financial dynamics 3. Emerging market challenges Equities 31. World stock market returns 32. European sector returns and valuations 33. European earnings and market exposure 3. MSCI Europe performance and drivers 35. MSCI Europe equity valuations 36. MSCI Europe Index at inflection points 37. European small capitalisation equities 38. US S&P 5 at inflection points 39. US S&P 5 performance and drivers. US S&P 5 equity valuations 1. US value vs. growth 2. US bear markets 3. Interest rates and equities. Japanese equities performance and drivers 5. Developed market equity valuations by country 6. Emerging market equity valuations by country 7. Emerging markets: Valuations and returns 8. Emerging market vulnerabilities 9. Emerging market equities 5. Chinese equities 51. Equity income Fixed income 52. Fixed income sector returns 53. Fixed income interest rate risk 5. Liquidity risks 55. Historical yields of government bonds 56. Government bond yields 57. Global investment-grade bonds 58. Global investment-grade bond market 59. US high yield bonds 6. European high yield bonds 61. Emerging market debt Other assets 62. Commodities 63. Oil market drivers 6. Gold market dynamics 65. Risk-adjusted returns and downside protection 66. Alternative strategies 67. Correlation of returns (EUR) Investing principles 68. Life expectancy and pension shortfall 69. Cash investments 7. The power of compounding 71. Annual returns and intra-year declines 72. Impact of being out of the market 73. US asset returns by holding period 7. Asset class returns (EUR) 3

4 Europe: GDP and inflation GTM Europe Europe economy Real GDP EU28, % change quarter on quarter Average since Q16 Real GDP,3%,5% Average Inflation EU28, % change year on year 5 Average since 1999 May 216 Headline CPI* 1,9% -,1% Core CPI 1,6%,7% ' '2 ' '6 '8 '1 '12 '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 energy and unprocessed food. Guide to the Markets - Europe. Data as of 3 June 216.

5 Eurozone growth monitor GTM Europe 5 Europe economy Change in unemployment and unemployment rate Thousands of people per three months (LHS); % rate (RHS) Change in unemployment Unemployment rate -5 7 ' '2 ' '6 '8 '1 '12 '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 Housing Corporate Consumer Recession Tighter -2 Looser '3 ' '5 '6 '7 '8 '9 '1 '11 '12 '13 '1 '15 '16 Economic sentiment and GDP Index level (LHS); % change year on year (RHS) Economic sentiment 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 - Europe. Data as of 3 June GDP 6 '97 '99 '1 '3 '5 '7 '9 '11 '13 '

6 Eurozone recovery monitor 6 Europe economy Contribution to eurozone GDP growth % change year on year 5 Change in inventories Exports Investment Consumption 3 Imports 2 GDP 1 Eurozone government expenditure % change year on year '99 '1 '3 '5 '7 '9 '11 '13 '15-1 Gross fixed capital formation % of GDP, non-residential 17 US One year change Domestic demand (1Q16) +1,7% Net exports (1Q16) -9,9% 1Q12 3Q12 1Q13 3Q13 1Q1 3Q1 1Q15 3Q15 1Q16 15 Eurozone 1 '99 '1 '3 '5 '7 '9 '11 '13 ' 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 - Europe. Data as of 3 June

7 Eurozone credit conditions 7 Europe economy Credit demand and eurozone GDP growth Net % of banks reporting positive loan demand (LHS); % GDP growth (RHS) 15 1 Stronger loan demand 6 Bank loans to households and non-financial corporations EUR billions, net lending flow, three-month moving average Corporate lending rates to smaller companies % interest, non-financial corporations* Consumer credit (lhs) Weaker loan demand Overall corporate (lhs) Housing loans (lhs) Eurozone GDP growth y/y (rhs) '5 '6 '7 '8 '9 '1 '11 '12 '13 '1 '15 ' Italy Germany Spain France Source: (Left) ECB, Eurostat, FactSet, J.P. Morgan Asset Management. (Top right 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 - Europe. Data as of 3 June

8 European Central Bank (ECB) policies 8 Europe economy ECB balance sheet: Assets* EUR trillions,5 Balance sheet expansion since Sep 21, Balance sheet expansion still to come up to March 217 3,5 +5% +23% The trade-weighted euro and EUR/USD Index level (LHS); Price of euro in dollars (RHS) EUR/USD 3, 2,5 2, 1,5 Jan 25 Jul 212: 29% Aug 212 Sep 21: -35% Trade-weighted euro Size of bond markets EUR billions, amount outstanding ,.,5, '5 '6 '7 '8 '9 '1 '11 '12 '13 '1 '15 '16 ' Euro govt. Euro IG ex-financials BB B CCC 32 CoCos 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 - Europe. Data as of 3 June

9 European reform potential 9 Europe economy Potential GDP boost by 225 from implementing reforms % GDP growth 12 Labour market reform Product market reform 1 Retirement policy reform 8 6 Service sector productivity Index level, rebased to 1 as of December '7 '8 '9 '1 '11 '12 '13 '1 '15 Difficulty of doing business Index level, 215, a lower score indicates an easier business environment 6 US Eurozone 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 - Europe. Data as of 3 June 216.

10 UK economic indicators 1 Europe economy Real GDP growth comparison Index level, rebased to 1 at 1Q8 US UK Germany France Japan Unemployment rate and consumer confidence % rate (LHS); Index level (RHS) Unemployment rate Consumer confidence Current account Wage growth % of GDP Investment income % change year on year Trade balance 6 2 Current account balance 3 Nominal wage growth* Headline CPI Real wage growth '5 '7 '9 '11 '13 ' '2 ' '6 '8 '1 '12 '1 '16 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 June

11 Brexit: The UK and the EU GTM Europe 11 Europe economy Exports of goods to the UK % of GDP, ,7 7,1 7,1 6 2,9 1,9 1,7 1,5 1,3 1, 1,3 2,2 2,9,3 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 2 Goods Services Goods market access but not services FDI** in the UK ( bn) From EU 53 From US 262 Rest of world 26 '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 - Europe. Data as of 3 June

12 World economic data 12 Selected countries Gross domestic product (GDP) Real GDP % Inflation % Policy rate % Unemployment % Global economy EUR per capita EUR billions 216* 217* 216* 217* Switzerland ,2 1,6 -,5, -,75 3,3 United States ,9 2,3 1,3 2,3,5,7 Sweden ,5 2,6,9 1,7 -,5 7,6 Netherlands ,6 1,8, 1, -, 7,2 United Kingdom ,8 2,1,7 1,7,5 5, Finland ,7 1,1,2 1, -, 1,8 Germany ,6 1,6, 1,6 -, 6,1 France , 1,3,3 1,1 -, 9,9 Japan ,6,8,,9,1 3,2 Eurozone ,5 1,6,3 1,3 -, 1,1 Italy , 1,1,1 1,2 -, 11,6 Spain ,8 2,3 -,3 1,3 -, 21, Greece ,9 1,5,1,8 -, 2,9 Brazil ,5,9 8,6 6, 1,25 8,2 Russia ,9 1,2 7,5 6, 1,5 5,9 China ,5 6,2 2, 2,,35, India ,5 7,7,9 5,3 6,5 7,1 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 June

13 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 52, 52,3 52, 52, 51,7 51, 51,6 51,8 51,5 5,8 51,1 5,9 5,8 5, 5, 51,1 51, 5,7 5,9 5, 5,6 5,1 5, 5, Global economy Eurozone Developed Emerging Developed Emerging Eurozone France Germany Italy Spain Ireland UK US Japan Brazil Russia India China Korea Taiwan 53,2 53,8 53,3 53,2 52,6 52,3 52,3 52,6 52,9 52,1 52, 52,2 52,5 52,3 52,1 52,9 52,6 52, 52,3 51, 51,1 5,7 5,5 51,3 51,5 5,9 5,7 5,8 5,7 5,5 5,8 51,1 5, 9,5 9,6 9,5 8,8 8, 8,3 8,9 9,2 9,2 9,3 8,8 5,1 9,5 9,5 9,3 51,8 5,7 5,3 5,6 5,1 5,6 51, 51, 52,2 52, 52,2 52,5 52, 52,3 52, 52,3 52,8 53,2 52,3 51,2 51,6 51,7 51,5 52,8 7,8 6,9 8,8 8,5 8, 7,5 9,2 7,6 8,8 8, 9, 5,7 9,6 8,3 5,6 5,6 5,6 51, 5, 5,2 9,6 8, 8, 8,3 52, 51, 9,9 51, 9,5 51,2 5,9 51,1 52,8 52,1 51,1 51,9 51,8 53,3 52,3 52,1 52,9 53,2 52,3 5,5 5,7 51,8 52,1 5,5 51,9 9,8 5,7 9, 9, 8, 9,9 51,9 53,3 53,8 5,8 5,1 55,3 53,8 52,7 5,1 5,9 55,6 53,2 52,2 53,5 53,9 52, 53,5 53,9 52,8 52,6 52,6 5,7 53,8 5,7 5,2 5,3 5,2 55,8 5,5 53,6 53,2 51,7 51,3 53,1 53, 55, 5,1 53, 53,5 51,8 52,2 55, 57,3 55,7 56,6 56,2 56,9 55,1 57,5 56,8 55,8 57,1 5,6 56,7 53,6 53,8 53,6 53,3 5,2 5,3 52,9 5,9 52,6 51,5 53, 5,9 53,3 51,8 53, 53,2 52,7 52,9 5, 53,5 52,1 51,8 51,5 52,1 51,8 51,6 55,2 52, 51,8 53, 5,7 5,8 9, 5, 52,1 55,8 57,9 57,5 55,9 5,8 53,9 53,9 55,1 55,7 5,1 5, 53,6 53,8 53, 53,1 5,1 52,8 51,2 52, 51,3 51,5 5,8 5,7 51,3 5,5 52,2 51,7 52, 52, 52, 52,2 51,6 5,3 9,9 5,9 5,1 51,2 51,7 51, 52, 52,6 52,6 52,3 5,1 9,1 8,2 7,7 8,1 9,1 5,2 9,3 9,1 8,7 5,2 5,7 9,6 6,2 6, 5,9 6,5 7,2 5,8 7,,1 3,8 5,6 7,,5 6, 2,6 1,6 3,2 51, 51, 5, 5,3 51,7 8,9 7,6 9,7 8,1 8,9 7,6 8,7 8,3 7,9 9,1 5,2 5,1 8,7 9,8 9,3 8,3 8, 9,6 51,5 53, 52, 51, 51,6 53,3 5,5 52,9 51,2 52,1 51,3 52,6 51,3 52,7 52,3 51,2 5,7 5,3 9,1 51,1 51,1 52, 5,5 5,7 51,7 51,7 5,2 5,2 5, 5, 9,6 9,7 5,7 9,6 8,9 9,2 9, 7,8 7,3 7,2 8,3 8,6 8,2 8, 8, 9,7 9, 9,2 8,6 9,3 5,3 8,8 8,7 9, 9,9 51,1 51,1 9,2 8,8 7,8 6,1 7,6 7,9 9,2 9,1 9,1 5,7 9,5 8,7 9,5 5, 5,1 5,5 55,8 56,1 53,3 52, 51, 5, 51,7 52,1 51, 9,2 9,3 6,3 7,1 6,1 6,9 7,8 9,5 51,7 5,6 9, 51,1 9,7 8,5 5,5 Lowest relative to 5 PMI 5 Highest relative to 5 PMI 13 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 - Europe. Data as of 3 June 216.

14 Global inflation dynamics GTM Europe 1 Global economy Developed economy inflation Inflation and inflation forecasts % change year on year % change year on year 5 3 Average Jan 1993 to Dec 28: 2,% US UK Eurozone Japan Policy target Projection* Average Jan 29 to May 216: 1,2% -2 '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 - Europe. Data as of 3 June

15 Global central bank policy GTM Europe 15 Market expectations for policy rate Percent of government bond market held by central banks % % 2, 5 Global economy 1,5 1, UK US Japan Eurozone 3 US UK Japan Eurozone Projection,5 2, 1 -,5-1, Dec 16 Dec 17 Dec 18 '7 '8 '9 '1 '11 '12 '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 - Europe. Data as of 3 June

16 Developed world consumption GTM Europe 16 Global economy Real private consumption growth % change year on year, four quarter moving average US UK Eurozone -6 '2 ' '6 '8 '1 '12 '1 '16 Household credit growth % change year on year UK Japan US Eurozone Real wage growth % change year on year 2 Eurozone US UK '1 '11 '12 '13 '1 '15 '16-6 ' '2 ' '6 '8 '1 '12 '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, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June

17 Global supply dynamics 17 Labour productivity % change year on year 6 Medium-term GDP growth projections % annual GDP growth for the next five years Global economy 2 Post-crisis average:,3% 2 World Developed markets Emerging markets Pre-crisis average: 1,% -2 - Developed markets Emerging markets* -6 '2 '3 ' '5 '6 '7 '8 '9 '1 '11 '12 '13 '1 '15 '16 Global population and old age share % change year on year (LHS); % of population (RHS) 2, 1,5 1,,5 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 - Europe. Data as of 3 June

18 Global currency trends 18 Global economy US dollar in historical perspective Index level, broad real effective exchange rate (REER) : -21,8% : +52,7% : -29,5% 1985: Plaza Accord 1987: Louvre Accord : +3,2% Average since : -7,1% 7 '73 '77 '81 '85 '89 '93 '97 '1 '5 '9 '13 May 216 US dollar index 95,8 97, : -28,6% : +2,% 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 - Europe. Data as of 3 June 216. Current

19 US Federal Reserve outlook 19 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 216 FOMC long-run projection FOMC June 216 forecasts* Long run Change in real GDP, Q to Q 2, 2, 2, 2, Unemployment rate, Q,7,6,6,8 PCE inflation, Q to Q 1, 1,9 2, 2, 3 3,% 2 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 - Europe. Data as of 3 June

20 US: GDP and inflation GTM Europe 2 Global economy Real GDP Inflation Average % change quarter on quarter, SAAR 1Q16 since 1999 % change year on year 1 8 Real GDP 1,9% 1,1% Average 2 Average since 1999 May 216 Headline CPI* 2,2% 1,1% Core CPI 2,% 2,2% Components of nominal GDP 1Q16 Consumption 68,6% Government 17,6 Investment ex-housing 12,9 Housing 3,6 Net exports -2,8-1 ' '2 ' '6 '8 '1 '12 '1 ' ' '2 ' '6 '8 '1 '12 '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 - Europe. Data as of 3 June

21 US labour market 21 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 216:,7% May 216: 2,% Quits and job openings Thousands 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 - Europe. Data as of 3 June

22 US growth monitor 22 Industrial production % change year on year 2 1 Manufacturing, ex-metals & machinery Global economy -1-2 Metals & machinery -3 '7 '76 '78 '8 '82 '8 '86 '88 '9 '92 '9 '96 '98 ' '2 ' '6 '8 '1 '12 '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 - Europe. Data as of 3 June

23 US consumer finances GTM Europe 23 Household net worth USD billions, SAAR Q7: $ Q16*: $89.5 Consumer balance sheet USD trillions outstanding, not seasonally adjusted, 1Q16 1 Total assets: $12,6tn 3Q7 peak: $81,9tn 1Q9 low: $68,7tn Global economy '89 '91 '93 '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 ' Homes: 25% 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: 21% 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. *1Q16 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 - Europe. Data as of 3 June

24 US politics GTM Europe 2 Composition of the Senate Number of seats held by each party US public support for presidential candidates %, Real Clear Politics average 55 Global economy Republican Democrat Current: 5 seats Current: 6 seats* 2 6 Democrats would need a 5,% swing in nationwide votes to close this gap 5 Clinton 5 35 Trump 3 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 2 Composition of the House Number of seats held by each party Republican Democrat Current: 27 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., 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 - Europe. Data as of 3 June , 6,3 S&P 5 return** Democratic president Republican president 3,9 2,6 Real GDP growth

25 Japan: GDP and inflation GTM Europe 25 Global economy Real GDP growth Inflation Average % change quarter on quarter since Q16 % change year on year 3 Real GDP,2%,5% 5 2 Average Average since 1999 May 216 Headline CPI*,% -,% Core CPI -,3%,7% CPI less food & consumption tax -,1% -,% ' '2 ' '6 '8 '1 '12 '1 '16-3 ' '2 ' '6 '8 '1 '12 '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 - Europe. Data as of 3 June

26 Japan: Abenomics and the economy GTM Europe 26 Global economy Wage growth % change year on year, three-month moving average Core CPI* Nominal wage growth -2 '7 '8 '9 '1 '11 '12 '13 '1 '15 '16 Bank lending and job-to-applicant ratio % lending growth year on year (LHS); ratio of number of jobs to applicants (RHS) 8 Job-to-applicant ratio 1,6 1, 1,2 1, Japanese yen effective exchange rate Index level 2 Abe elected NIRP,8, , 1, '7 '8 '9 '1 '11 '12 '13 '1 '15 '16 Bank lending (y/y) -8 '92 '9 '96 '98 ' '2 ' '6 '8 '1 '12 '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 - Europe. Data as of 3 June 216., 26

27 China: GDP, inflation and policy rate 27 Global economy Real GDP growth % change year on year GDP growth Investment Consumption Net exports 1Q16: 6,7% Inflation % change year on year May 216 Headline CPI* 2,% Core CPI** 1,% Headline PPI*** -2,8% Policy rate and reserve ratio requirement (RRR)**** % policy rate on one-year renminbi deposits (LHS); % RRR (RHS) 5 RRR 3 2 PBoC policy rate 1 '9 '92 '9 '96 '98 ' '2 ' '6 '8 '1 '12 '1 '16 '6 '7 '8 '9 '1 '11 '12 '13 '1 '15 ' 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 216. ***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 - Europe. Data as of 3 June

28 China economic indicators 28 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 1,, -1, -2, -3, -, 216 target: -3,% '85 '9 '95 ' '5 '1 '15 China home prices % change year on year 3 2 Tier-1 cities 1-1 Tier-2 cities Tier-3 cities '11 '12 '13 '1 '15 '16 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

29 China financial dynamics 29 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) 13 6, 125 Trade-weighted RMB 6, USD/RMB 95 '11 '12 '13 '1 '15 '16 China foreign exchange reserves and external debt USD trillions External debt as a % of global GDP EM Asia 1998 US 28 China 21 1,7% 21,8% 1,2% 6,2 6,3 6, 6,5 6,6 6,7 Japan UK US Eurozone China Korea Source: (Left) BIS, IMF World Economic Outlook October 215, 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 - Europe. Data as of 3 June

30 Emerging market challenges 3 Net capital flows and GDP USD trillion (LHS); % change year on year (RHS) Broad private non-financial credit % of GDP Global economy Capital flows Developed markets (lhs) Emerging markets (rhs) Emerging markets ex-china (rhs) 1 ' '2 ' '6 '8 '1 '12 ' REER ratio: EM vs. DM* Index level 115 EM FX expensive GDP -3 '7 '8 '9 '1 '11 '12 '13 '1 '15 '16 95 EM FX cheap 85 '96 '98 ' '2 ' '6 '8 '1 '12 '1 '16 Source: (Left) Institute of International Finance, IMF World Economic Outlook October 215, J.P. Morgan Asset Management. (Top right) BIS, IMF World Economic Outlook October 215, 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 - Europe. Data as of 3 June

31 World stock market returns 31 EUR Local YTD 2Q16 2,2% Europe 19,6% 26,7% Asia ex-jp 38,% -23,% TOPIX -,6% 73,% MSCI EM 62,8% 35,% Small Cap 2,% 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% 2,% TOPIX 12,1%,7% HDY Equity 6,% 5,7% HDY Equity,1% 1-yr ann. 8,2% US S&P 5 7,3% 19,6% Asia ex-jp 28,6% 26,1% MSCI 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,% 26,7% US S&P 5 32,% 19,7% Asia ex-jp 7,7% 12,9% US S&P 5 1,%,2% MSCI EM 3,6% 5,1% US S&P 5 2,5% 7,3% Asia ex-jp 7,1% 18,6% MSCI EM 28,8%,6% 11,1% -37,9% HDY Equity -3,%,2% Small Cap,8% 27,5% MSCI EM 1,% -5,7% Small Cap -8,7% 16,8% MSCI EM 17,% 21,5% TOPIX 5,% 16,5% Small Cap 6,7% 11,5% Small Cap 2,8% 1,5% US S&P 5 3,8%,% Small Cap 1,6% 7,3% Small Cap 6,3% Equities 16,% HDY Equity 21,6% 12,5% 19,% 3,2% Europe 6,5% -1,% HDY Equity,7% -38,6% Small Cap -,% -,3% -,1% 37,6% 35,8% 3,% HDY Equity 3,2% 23,9% TOPIX 1,% 23,1% US S&P 5 15,1% -5,8% -7,5% -7,5% Europe -8,8% 16,3% Small Cap 18,% 15,6% 17,1% 2,5% Europe 22,3% 15,3% 23,6% 16,2% HDY Equity 8,7% 15,3% 8,2% 8,8% Europe 5,% 8,3% 1,9%,3% Small Cap,7%,1% Asia ex-jp 1,3%,1% TOPIX -7,% 3,% MSCI EM,8% 6,3% HDY Equity 6,% 6,2% 5,9% 5,2% Small Cap 13,6% -,9% US S&P 5 5,5% -3,3% Europe -38,5% 32,5% Europe 28,6% 2,9% 11,1% -9,6% TOPIX -17,% 1,2% US S&P 5 16,% 13,9% HDY Equity 2,5% 11,8% MSCI EM 5,6% 6,3% HDY Equity,2% -1,2% -,7% 3,1% 1,%,8% Europe,5% 3,6% US S&P 5 15,8% -8,8% Small Cap -3,8% -9,8% Asia ex-jp -7,7% 22,5% US S&P 5 26,5% 16,2% HDY Equity 8,% -1,3% Asia ex-jp -1,6% 13,6% HDY Equity 1,% -1,1% Asia ex-jp 6,2% 1,1% TOPIX 1,3% 1,5% Asia ex-jp -5,3% -6,6% TOPIX -18,5% 3,1% Asia ex-jp 1,1%,8% MSCI EM 6,% -8,7% TOPIX 3,% -1,5% TOPIX -11,1% -5,8% MSCI EM -5,7% 1,5% TOPIX 7,6% 11,7% Europe 7,5% -15,% MSCI EM -12,5% 5,9% TOPIX 2,9% -6,5% MSCI EM 3,8% 7,% Europe 5,2% -,9% MSCI EM -5,% -6,7% Europe -3,2%,2% Europe 1,6% 1,9% TOPIX 1,2% 31 Source: FactSet, MSCI, Standard & Poor s, TOPIX, J.P. Morgan Asset Management. Annualised return covers the period 26 to 215. 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 June 216.

32 European sector returns and valuations 32 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% 7,2% 7,3%,8%,2%,3% 1% Growth weight Value weight 5,3% 19,6% 29,6% 1,6% 13,1% 6,7%,% 3,6%,1% 7,% 1% 32,7% 9,5% 2,9% 7,1% 1,1% 7,6% 1,3% 5,9% 8,% 1,6% 1% Weights 2Q16-6,7 8, 7,7-7,2 -,8,6 19,1-2,7 7,8-2,2 1,6 Equities YTD Since market peak* Since market low* -19,7-2,3 9, -11,9,3 6,6 25,2-6, 5, -7,1-3,2-5,1 18,8 123,5 9,7 2,9-11,8 19,9,3-1,5 3,5 1,1 133,5 199,6 226,8 231, 183,5 19,1 6,5 116,9 73, 161,7 1,7 Return Beta to Europe 1,3x,65x,6x,96x 1,12x 1,29x 1,x,81x,86x,98x 1,x β Correl to int. rates,15,11,1,13,12,12,12,1,13,11,1 ρ Forward P/E ratio 9,8x 16,5x 2,8x 11,9x 1,7x 17,2x 19,1x 17,2x 1,x 17,3x 1,5x 15-year average 1,7x 15,5x 15,9x 1,1x 1,1x 12,7x 11,9x 16,7x 13,3x 2,2x 13,1x Trailing P/E ratio 1,5x 17,2x 21,5x 13,9x 15,8x 18,7x 18,7x 19,9x 1,1x 18,8x 15,3x P/E 15-year average 12,5x 16,7x 17,2x 16,7x 16,1x 1,x 11,9x 18,7x 1,x 35,7x 1,6x Dividend yield 15-year average,6% 3,% 2,7% 3,2% 2,9% 3,2% 6,7%,5%,9% 1,8% 3,7% 3,9% 2,7% 2,8% 2,8% 2,8% 2,9%,2%,5%,9% 1,8% 3,3% Div 32 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 June 216.

33 European earnings and market exposure 33 Europe economy vs. equity market % of GDP, % of total profits 8 Economy Europe earnings per share growth % change year on year, Q Equities Equities Europe Eurozone Eurozone ex-energy Sector EPS growth % change year on year, FY 215 results % -3% -1% 1% 6% 7% 11% 19% International exposure European consumer Manufacturing Energy and commodities* % -23% Source: (Left) Eurostat, FactSet, IMF World Economic Outlook October 215, Stoxx, J.P. Morgan Asset Management. European equities is Stoxx 6. *Profits for energy and commodities as of 21. (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 - Europe. Data as of 3 June

34 MSCI Europe performance and drivers 3 MSCI Europe earnings and performance Index level, next 12 months earnings estimates (LHS); Index level (RHS) MSCI Europe EPS MSCI Europe index level Dividend yield and ex-energy dividend yield % yield UK Eurozone MSCI EM MSCI World Japan US Dividend yield Dividend yield ex-energy Equities US and European operating profit margins %, earnings per share/sales per share for MSCI Europe and S&P 5* 7 1. US Europe 5 '8 '9 '1 '11 '12 '13 '1 '15 '16 7 Source: (Left) FactSet, MSCI, J.P. Morgan Asset Management. EPS is earnings per share. (Top right) J.P. Morgan Economic Research, 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 June

35 MSCI Europe equity valuations GTM Europe 35 MSCI Europe forward P/E ratio x, multiple 2 Dividend yield and 1-year bond yield % yield Average: 1,x 3 June 216: 1,5x 6 5 Dividend yield Equities 12 8 '2 ' '6 '8 '1 '12 '1 '16 MSCI Europe cyclically adjusted P/E ratio x, adjusted using trailing 1-year average inflation-adjusted earnings 3 3 June 216: 3,7% Average: 17,8x 3 June 216: 1,2x 3 June 216: -,1% -1 '8 '8 '88 '92 '96 ' ' '8 '12 '16 '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 12 months and is provided by FactSet Market Aggregates. (Bottom left) FactSet, MSCI, J.P. Morgan Asset Management. (Right) Bloomberg, FactSet, MSCI, Tullett Prebon, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June year German Bund yield 35

36 MSCI Europe Index at inflection points 36 MSCI Europe Index 1.8 Sep 2: P/E = 21,8x Characteristic Sep 2 Jul 27 Jun 216 Index level P/E ratio (fwd) 21,8x 13,x 1,5x Dividend yield 1,8% 2,8% 3,7% Euro 1-year 5,3%,6% -,1% 16 Jul 27: P/E = 13,x June 216: P/E = 1,5x Total return: +133% Equities -55% +18% -5% +15% Dec 1996: 9 Mar 29: P/E = 16,3x 12 Mar 23: P/E = 8,3x 71 P/E = 11,9x '97 '98 '99 ' '1 '2 '3 ' '5 '6 '7 '8 '9 '1 '11 '12 '13 '1 '15 '16 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. Guide to the Markets - Europe. Data as of 3 June

37 European small capitalisation equities 37 Small cap relative performance and economic performance %, relative performance indexed to Nov 212 (LHS); change in PMI (RHS) 5 MSCI small cap minus large cap performance 2 15 Risk-adjusted returns by company size and holding period Sharpe ratio level* 1,,5 3 1, Small caps Equities ,5-1, European small cap: Price-to-book ratio x, multiple Mid caps Large caps 1-year 5-year 1-year Average: 1,8x 3 Jun 216: 1,7x month net change in Eurozone composite PMI - '5 '7 '9 '11 '13 ' Source: (Left) Bloomberg, ZEW, J.P. Morgan Asset Management. (Top right) Bloomberg, MSCI, J.P. Morgan Asset Management. *Risk-adjusted returns are calculated assuming the free rate is equal to zero. (Bottom right) Citibank, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June

38 US S&P 5 at inflection points 38 S&P 5 Index Characteristic Mar 2 Oct 27 Jun 216 Index level P/E ratio (fwd) 27,3x 15,8x 16,x Dividend yield 1,1% 1,7% 2,3% US 1-year 6,2%,6% 1,5% 3 June 216: P/E = 16,x Mar 2: P/E = 27,2x Oct 27: P/E = 15,8x Equities 1. Total return: +116% -7% +121% -55% +262% Dec 1996: P/E = 16,x 71 9 Oct 22: P/E = 1,1x Mar 29: P/E = 1,3x '97 '98 '99 ' '1 '2 '3 ' '5 '6 '7 '8 '9 '1 '11 '12 '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 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 June

39 US S&P 5 performance and drivers 39 S&P 5 earnings and performance Index level, next 12 months earnings estimates (LHS); Index level (RHS) S&P 5 EPS S&P 5 index level 2. 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 Equities '8 '9 '1 '11 '12 '13 '1 '15 ' '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 -2 Business output prices -3 '88 '9 '92 '9 '96 '98 ' '2 ' '6 '8 '1 '12 '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 - Europe. Data as of 3 June

40 US S&P 5 equity valuations Dividend yield and 1-year Treasury yield % yield year Treasury 5 Forward P/E ratio x, multiple Average: 16,5x 31 Dec 1999: 27,x 3 June 216: 16,x Equities 3 3 June 216: 2,3% '9 '92 '9 '96 '98 ' '2 ' '6 '8 '1 '12 '1 '16 S&P 5 Shiller cyclically adjusted P/E x, adjusted using trailing 1-year average inflation-adjusted earnings 5 3 June 216: 26,x 2 1 Dividend yield 3 June 216: 1,5% Average: 16,7x '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 ' '1 '2 '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 12 months and is provided by FactSet Market Aggregates. (Bottom right) Robert Shiller, FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June 216.

41 US value vs. growth 1 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 Source: FactSet, Russell, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June

42 US bear markets GTM Europe 2 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 % 33 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 -5% % 5 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 June 216.

43 Interest rates and equities 3 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 '88-'89 '9-'95 '99-' '-'6 Change in Fed funds 3,13% 3,% 1,75%,25% Change in 1-yr yields,85% 1,89%,9%,51% Equities Correlation,,2, Initial market reaction -7% -1% -7% -8% Subsequent market reaction 2% 7% 18% 2% Total reaction 17% -2% 1% 11% -,2 -, Negative relationship between yield movements and equity returns -, % 1 2-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 2, '-'6 is June 2 to June 26. Guide to the Markets - Europe. Data as of 3 June

44 Japanese equities performance and drivers TOPIX earnings and performance Index level, next 12 months earnings estimates (LHS); Index level (RHS) TOPIX EPS TOPIX price level Listed companies cash and cash equivalents holdings* % of market capitalisation, average between 2 and Equities Japan Germany Italy France UK US Canada Listed companies dividend pay-out and share buybacks Yen trillions 2 16 Share buybacks** Dividends '8 '9 '1 '11 '12 '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 21. (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 - Europe. Data as of 3 June '9 '95 ' '5 '1 '15

45 Developed market equity valuations by country GTM Europe 5 Developed markets +5 Std dev How to interpret this chart Std dev from global average +2,5 Std dev Average -2,5 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 -3,5 11,6x,8x 5,x,6% 11,x 1,1x 3,3x 3,7% Spain -2,56 12,3 1,1 6, 5,1 11,3 1,,1,9 Germany -1,8 11,9 1,5 7,3 3,3 11,7 1,6 5,7 3,1 France -1,37 13, 1,3 8,1 3,9 12, 1,5 6, 3,5 Japan -1,13 12,6 1,1 7, 2, 15,8 1,3 6,3 2, UK -,1 15,7 1,8 9,6,2 12,1 1,8 7,2,1 ACWI,8 15,1 2, 1, 2,7 13, 2, 7,3 2,6 DM,73 15,6 2,1 1, 2,7 13,8 2,1 7,6 2,6 Switz. 1,56 16,6 2,3 1,1 3,5 1,2 2,5 1, 3,2 US 2,35 16,7 2,8 11,8 2,3 1, 2,7 8,8 2,1 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 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 June

46 Emerging market equity valuations by country GTM Europe 6 Emerging markets +6 Std dev How to interpret this chart Std dev from global average + Std dev +2 Std dev Average -2 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 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 6,3x,6x 3,8x,% 6,7x,7x 5,7x,5% Brazil -2,7 12,2 1,2 5,8 3,2 1,6 1,3 5,9 3,9 Taiwan -1, 13, 1,6 7,7, 1,2 1,7 6,3 3,8 S. Korea -1,39 9,9 1,,9 1,8 9,7 1,1 5,3 1,6 EM -1,2 11,8 1, 7,3 2,7 11,3 1,5 6,1 2,8 China -1,19 1,7 1,3 8,7 2,7 11,6 1,5,6 2,9 ACWI,8 15,1 2, 1, 2,7 13, 2, 7,3 2,6 S. Africa,67 1,3 2,3 11,2 2,9 12,7 2, 9,1 3,1 Mexico 1,95 18,8 2,6 8,7 2,1 15,7 2,6 6,5 2, India 3,79 17,5 3,1 11, 1,5 16,1 3, 12,5 1,5 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 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 June

47 Emerging markets: Valuations and returns GTM Europe 7 MSCI Emerging Markets Index: Price-to-book ratio MSCI Emerging Markets Index: Price-to-book and returns x, multiple Price-to-book ratio and next 12 months % price return* 3, 8 Current level 2,75 2,5 2,25 +2, std. dev. 6 Equities 2, 1,75 Average: 1,78x 2 1,5-2 1,25 1, -2, std. dev. 3 June 216: 1,39x -,75 '96 '98 ' '2 ' '6 '8 '1 '12 '1 '16-6,75 1, 1,25 1,5 1,75 2, 2,25 2,5 2,75 3, 3,25 Source: (All charts) FactSet, MSCI, J.P. Morgan Asset Management. *Dots represent monthly data points between December 1995 and June 216. Guide to the Markets - Europe. Data as of 3 June

48 Emerging market vulnerabilities 8 EM foreign exchange reserves vs. external debt % of GDP EM equity performance and US rate hikes MSCI EM Index in USD, rebased to 1 on the date of first rate hike 15 Jun 2 Apr 199 Jun 1999 Current Equities 15 External debt Days 25 Relative EM / DM equity performance and USD REER Equity performance rebased to 1 at 1993 (LHS); Index level (RHS) 25 9 MSCI EM / MSCI DM EM reserves 5 '9 '98 '2 '6 '1 '1 2 5 USD REER (inverted) '9 '96 '98 ' '2 ' '6 '8 '1 '12 '1 ' Source: (Left) J.P. Morgan Economic Research, J.P. Morgan Asset Management. External debt includes public and private debt. (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 June

49 Emerging market equities 9 EM vs. DM growth and equity performance % next 12 months growth estimates (LHS); Index level (RHS) 5 EM minus DM GDP growth 15 EM earnings expectations by region Consensus EPS for next 12 months, local currency, rebased to 1 in EM growth & equity outperformance EM Europe EM Asia EM Latin America Equities 2 1 EM growth & equity underperformance '6 '7 '8 '9 '1 '11 '12 '13 '1 '15 '16 Number of companies yielding greater than 2% by region Constituents of the MSCI All Country World Index MSCI EM relative to MSCI DM -1 1 '96 '98 ' '2 ' '6 '8 '1 '12 '1 '16 Emerging markets Europe US Japan Source: (Left) FactSet, IBES, MSCI, J.P. Morgan Asset Management. EM DM GDP Growth is consensus estimates for EM growth in the next 12 months minus consensus estimates for DM growth in the next 12 months, provided by Consensus Economics. (Top right and bottom right) FactSet, MSCI, J.P. Morgan Asset Management. EPS is earnings per share. Guide to the Markets - Europe. Data as of 3 June