MARKET INSIGHTS. Guide to the Markets. Europe 1Q 2016 As of 31 December 2015

Transcription

1 MARKET INSIGHTS Guide to the Markets Europe 1Q 1 As of 31 December 15

2 Global Market Insights Strategy Team Americas Europe Asia Dr. David P. Kelly, CFA New York Andrew D. Goldberg New York Anastasia V. Amoroso, CFA Houston Julio C. Callegari São Paulo James C. Liu, CFA New York Samantha M. Azzarello New York David M. Lebovitz New York Gabriela D. Santos New York Hannah J. Anderson New York Abigail B. Dwyer, CFA New York Ainsley E. Woolridge New York Stephanie H. Flanders London Manuel Arroyo Ozores, CFA Madrid Tilmann Galler, CFA Frankfurt Lucia Gutierrez-Mellado Madrid Vincent Juvyns Luxembourg Dr. David Stubbs London Maria Paola Toschi Milan Michael J. Bell, CFA London Alexander W. Dryden London Nandini L. Ramakrishnan London Tai Hui Hong Kong Yoshinori Shigemi Tokyo Marcella Chow Hong Kong Kerry Craig, CFA Melbourne Dr. Jasslyn Yeo, CFA Singapore Ian Hui Hong Kong Akira Kunikyo Tokyo Ben Luk Hong Kong Anthony Tsoi, CFA Hong Kong 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 31 December 15 or most recently available.

3 Page reference Europe economy. Europe: GDP and inflation 5. Eurozone cyclical indicators. Eurozone recovery monitor 7. Eurozone credit conditions 8. European Central Bank (ECB) policies 9. European investment and reform potential 1. UK economic indicators Global economy 11. World economic data 1. Global Purchasing Managers Index (PMI) for manufacturing 13. Global inflation dynamics 1. Global economic divergences 15. Central bank policy 1. Developed world consumption 17. Global supply dynamics 18. Global currency trends 19. US Federal Reserve outlook. US: GDP and inflation 1. US employment. US economic indicators 3. US consumer finances. Japan: GDP and inflation 5. Japan: Abenomics and the economy. China: GDP, inflation and policy rate 7. China economic indicators 8. China financial dynamics 9. Emerging markets trade connections with developed markets 3. Emerging market challenges 31. Emerging market financial dynamics Equities 3. World stock market returns 33. European sector returns 3. MSCI Europe Index at inflection points 35. MSCI Europe Index equity valuations 3. MSCI Europe earnings and profit margins 37. European small capitalisation equities 38. US S&P 5 at inflection points 39. US S&P 5 equity valuations. US S&P 5 earnings and profit margins 1. Bear markets. Interest rates and equities 3. Japanese equities. Chinese equities 5. Developed market equity valuations by country. Emerging market equity valuations by country 7. Emerging markets: Valuations and returns 8. Emerging market equities 9. Equity income 5. Annual returns and intra-year declines Fixed income 51. Fixed income sector returns 5. Fixed income interest rate risk 53. Liquidity risks 5. Government bonds 55. US investment-grade bonds 5. Global investment-grade market 57. US high yield bonds 58. European high yield bonds 59. Emerging market debt Other assets and investor behaviour. Asset class returns 1. Correlation of returns (EUR). Asset volatility and dispersion in returns 3. Risk-adjusted returns and downside protection. Commodities 5. Oil consumption and production. Life expectancy and pension shortfall 7. Cash investments 8. Industry fund flows 9. US asset returns by holding period 7. Risk/return characteristics of alternatives 71. Alternative strategies 3

4 Europe: GDP and inflation GTM Europe Europe economy Real GDP EU8, change quarter on quarter 1,5 1,,5 Average since Q15 Real GDP,, Average Inflation EU8, change year on year 5 Average since 1999 Nov 15 Headline CPI*,,1 Core CPI 1,8,9, 3 -,5-1, -1,5 1 -, -,5-3, ' ' ' ' '8 '1 '1 '1-1 ' ' ' ' '8 '1 '1 '1 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 31 December 15.

5 Eurozone cyclical indicators GTM Europe 5 Europe economy New auto registrations EU19, millions of new passenger cars, seasonally adjusted 1, 1, Average:,89,8 Nov 15:,83 Retail sales growth EU19, excluding motor vehicles, change year on year - - Oct 15:,, '9 '98 ' ' ' ' '8 '1 '1 '1 - ' ' ' '8 '1 '1 '1 GDP growth and money supply EU19, change year on year 15 M1* advanced by 1 months (y/y) GDP (y/y) - '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 ' Eurozone core vs. periphery 1,5,8, Core driving eurozone growth -,8 GDP growth q/q (lhs) Business surveys** (rhs) Periphery driving eurozone growth -1,5 '1 '11 '1 '1 '15 1,5 1,,5, -,5-1, -1,5 Source: (Top and bottom left, top right) ECB, Eurostat, FactSet, J.P. Morgan Asset Management. (Bottom right) Bloomberg, Eurostat, Markit, J.P. Morgan Asset Management. *M1 is defined as the sum of currency held by the public and transaction deposits at depository institutions. **Purchasing managers indices and national measures of economic sentiment, standard deviations from mean. Core is Germany and France. Periphery is Italy and Spain. Guide to the Markets - Europe. Data as of 31 December 15. 5

6 Eurozone recovery monitor Europe economy Eurozone unemployment and consumer confidence 13 Eurozone unemployment rate Consumer confidence in the periphery Spain consumer confidence Italy consumer confidence ' ' ' ' '8 '1 '1 ' Eurozone consumer confidence ' ' ' ' '8 '1 '1 ' Eurozone domestic demand and GDP Change year on year 3 1-month change: Domestic demand (3Q15) +1.7 Domestic demand Net exports (3Q15) Eurozone GDP -1 - '1 '13 '1 '15 Source: (All charts) Eurostat, FactSet J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December 15.

7 Eurozone credit conditions 7 Europe economy Credit demand and eurozone GDP growth Net of banks reporting positive loan demand, GDP growth 15 Stronger loan demand 1 Bank loans to households and non-financial corporations billions, net lending flow, three-month moving average '9 '1 '11 '1 '13 '1 ' Consumer credit (lhs) Housing loans (lhs) Weaker loan demand Overall corporate (lhs) Eurozone GDP growth y/y (rhs) '5 ' '7 '8 '9 '1 '11 '1 '13 '1 ' Corporate lending rates to smaller companies Non-financial corporations, new business lending up to 1 million, 1-5 years Italy Spain Germany France '5 '7 '9 '11 '13 '15 Source: (Left) ECB, Eurostat, FactSet, J.P. Morgan Asset Management. (Top and bottom right) ECB, Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December 15. 7

8 European Central Bank (ECB) policies 8 Europe economy ECB balance sheet: Assets trillions Balance sheet expansion since Nov 1 Balance sheet expansion still to come up to March The trade-weighted euro and EUR/USD Nominal broad effective exchange rate, price of euro in dollars 11 EUR/USD , $ 1,5 1, 1,3 3 Jan 5 Jul 1: 9 Aug 1 Sep 1: -35 1, 95 Trade- 1,1 weighted euro 9 1, '11 '1 '13 '1 '15 '1 1 Euro area government bonds with a negative yield BofA/ML euro area bond index 5 Euro area bonds Dec 15 with <1 yields Value 3,tn of total outstanding 3 31 Dec 15: 1 ' '7 '8 '9 '1 '11 '1 '13 '1 '15 '1 '17 Aug '1 Nov '1 Feb '15 May '15 Jul '15 Oct '15 Source: (Left) ECB, FactSet, J.P. Morgan Asset Management. (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 31 December 15. 8

9 European investment and reform potential 9 Europe economy Potential GDP boost by 5 from implementing reforms 1 Labour market reform 1 Product market reform Retirement policy reform Gross fixed capital formation of GDP 17 1 US Eurozone 11 1 '99 '1 '3 '5 '7 '9 '11 '13 '15 Difficulty of doing business 15, lower score indicates an easier business environment 1 9 Source: (Left) OECD, J.P. Morgan Asset Management. (Top right) BEA, Eurostat, FactSet, J.P. Morgan Asset Management. (Bottom right) World Bank, 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. Guide to the Markets - Europe. Data as of 31 December 15.

10 UK economic indicators 1 Europe economy Real GDP growth comparison Rebased to 1 at 1Q US Germany UK France Japan '9 '1 '11 '1 '13 '1 '15 Unemployment rate and consumer confidence Unemployment rate Consumer confidence 5 ' '7 '8 '9 '1 '11 '1 '13 '1 '15 ' Current account of GDP Investment income Change year on year 3 Trade balance Current account balance Wage growth Nominal wage growth* Headline CPI Real wage growth '5 '7 '9 '11 '13 '15 ' '7 '8 '9 '1 '11 '1 '13 '1 '15 '1 - 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 31 December 15. 1

11 World economic data 11 Selected countries Gross domestic product (GDP) Real GDP Inflation Policy rate Unemployment Global economy per capita billions 15* 1* 15* 1* Switzerland ,9 1, -1,1 -,3 -,75 3, US ,5,5,1 1,8,5 to,5 5, Sweden ,,8, 1, -,35, UK.8.55,,3,1 1,3,5 5, Netherlands ,9 1,8,3 1,1,5 7, Finland ,1,8 -,1 1,,5 8, Germany ,5 1,8, 1,,5,3 France ,1 1,,1,9,5 1, Japan , 1,1,8,8,1 3,3 Eurozone ,5 1,7,1 1, -,3 1,7 Italy ,7 1,3,1,8,5 11,7 Spain ,1,7 -,,8,5 1, Greece ,7-1,1-1,,3,5, Brazil ,5 -,5 9, 7, 1,5 7,5 Russia ,8 -,5 15,5 8, 11, 5,3 China ,9,5 1,5 1,7,35,1 India , 7,, 5,,75 8, 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 31 December

12 Global Purchasing Managers Index (PMI) for manufacturing Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Global 5,9 53,1 5, 51,9 5, 5, 5, 5,5 5, 5, 51,8 51,5 51,7 51,9 51,7 51, 51,3 51, 51,1 5,7 5,7 51,3 51, 5,9 Global economy Eurozone Developed Emerging Eurozone France Germany Italy Spain 5, 55, 5, 53, 53,5 5, 53, 53,8 53, 53, 5, 5,3 5,3 5, 53, 5,1 5, 5, 5,5 5, 5, 5,9 5, 5,1 5,9 5, 9,8 9,8 5, 5,8 51, 5,9 5,7 5,8 5,9 5, 5,9 51,1 5,1 9, 9,7 9,5 9, 8, 8,5 9, 9, 9,3 5, 53, 53, 53, 5, 51,8 51,8 5,7 5,3 5, 5,1 5, 51, 51, 5, 5, 5, 5,5 5, 5,3 5, 5,3 5,8 53,1 9,3 9,7 5,1 51, 9, 8, 7,8,9 8,8 8,5 8, 7,5 9, 7, 8,8 8, 9, 5,7 9, 8,3 5, 5, 5, 51, 5,5 5,8 53,7 5,1 5,3 5, 5, 51, 9,9 51, 9,5 51, 5,9 51,1 5,8 5,1 51,1 51,9 51,8 53,3 5,3 5,1 5,9 53, 53,1 5,3 5, 5, 53, 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 5,7 5,1 5,9 55, 5, 5,5 5,8 5,7 5,9 5, 53,9 5,8 5, 5, 5,7 53,8 5,7 5, 5,3 5, 55,8 5,5 53, 53, 51,7 51,3 53,1 53, Ireland 5,8 5,9 55,5 5,1 55, 55,3 55, 57,3 55,7 5, 5, 5,9 55,1 57,5 5,8 55,8 57,1 5, 5,7 53, 53,8 53, 53,3 5, Developed UK US Japan Brazil 5,5 5, 5,8 57, 5,5 5,9 5,9 53, 51,7 53,3 53,3 5,8 5,9 53,9 53,8 51,7 51,8 51,5 5, 51,7 51, 55,5 5,5 51,9 53,7 57,1 55,5 55, 5, 57,3 55,8 57,9 57,5 55,9 5,8 53,9 53,9 55,1 55,7 5,1 5, 53, 53,8 53, 53,1 5,1 5,8 51, 5, 55,5 53,9 9, 9,9 51,5 5,5 5, 51,7 5, 5, 5, 5, 51, 5,3 9,9 5,9 5,1 51, 51,7 51, 5, 5, 5, 5,8 5, 5, 9,3 8,8 8,7 9,1 5, 9,3 9,1 8,7 5, 5,7 9,,, 5,9,5 7, 5,8 7,,1 3,8 5, Emerging Russia India China Korea Taiwan 8, 8,5 8,3 8,5 8,9 9,1 51, 51, 5, 5,3 51,7 8,9 7, 9,7 8,1 8,9 7, 8,7 8,3 7,9 9,1 5, 5,1 8,7 51, 5,5 51,3 51,3 51, 51,5 53, 5, 51, 51, 53,3 5,5 5,9 51, 5,1 51,3 5, 51,3 5,7 5,3 51, 5,7 5,3 9,1 9,5 8,5 8, 8,1 9, 5,7 51,7 5, 5, 5, 5, 9, 9,7 5,7 9, 8,9 9, 9, 7,8 7,3 7, 8,3 8, 8, 5,9 9,8 5, 5, 9,5 8, 9,3 5,3 8,8 8,7 9, 9,9 51,1 51,1 9, 8,8 7,8,1 7, 7,9 9, 9,1 9,1 5,7 55,5 5,7 5,7 5,3 5, 5, 55,8 5,1 53,3 5, 51, 5, 51,7 5,1 51, 9, 9,3,3 7,1,1,9 7,8 9,5 51,7 Lowest relative to 5 PMI 5 Highest relative to 5 PMI 1 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 31 December 15.

13 Global inflation dynamics 13 Global economy Developed economy inflation CPI* change year on year 5 Average Jan 9 to Sep 15: 1,5 3 Average Jan 199 to Dec 8:,3 1-1 '9 '9 '9 '9 '98 ' ' ' ' '8 '1 '1 '1 Long-term inflation expectations 5-year/5-year inflation**, 3,5 3,,5 UK US Eurozone Developed economy goods and services inflation Change year on year 9 3, 1,5 Mar '1 Sep '1 Mar '15 Sep '15-3 Services Goods - '91 '93 '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 Source: (Top) J.P. Morgan Economic Research, J.P. Morgan Asset Management. (Bottom left and right) Bloomberg, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. **5-year/5-year inflation expectations is the market expectation for average inflation over 5 years beginning in 5 years time, derived from inflation swaps. Guide to the Markets - Europe. Data as of 31 December

14 Global economic divergences GTM Europe 1 Composite PMIs: EM vs. DM Index level 58 Global manufacturing vs. Global services PMIs Index level 58 Developed markets Services Global economy 5 5 Emerging markets 5 5 Manufacturing '11 '1 '13 '1 '15 '1 8 '11 '1 '13 '1 '15 '1 Source: (Both charts) FactSet, Markit, J.P. Morgan Asset Management. The Global Purchasing Managers Index (PMI) assesses the economic health of a sector and the overall economy by surveying output and employment intentions. Guide to the Markets - Europe. Data as of 31 December 15. 1

15 Central bank policy GTM Europe 15 Market expectations for policy rate, Central bank balance sheets of nominal GDP 8 Projections* Global economy 1,5 1, UK US Japan Eurozone Japan Eurozone US UK,5, -,5 '1 '17 '18 '7 '8 '9 '1 '11 '1 '13 '1 '15 '1 Source: (Left) Bloomberg, US Federal Reserve, J.P. Morgan Asset Management. (Right) Bank of England, Bank of Japan, ECB, US Federal Reserve, J.P. Morgan Economic Research, J.P. Morgan Asset Management. *Central bank assets as percentage of nominal GDP is forecasted from Q15 to Q1 using J.P. Morgan Global Economics Research nominal GDP forecasts and assumptions for central bank balance sheet size based on statements released by each respective central bank and its governors. Guide to the Markets - Europe. Data as of 31 December

16 Developed world consumption GTM Europe 1 Real private consumption growth Change year on year 3 Household credit growth Change year on year 1 1 Japan Global economy -3 US UK Eurozone - ' ' ' '8 '1 '1 ' UK US Eurozone Real wage growth Change year on year UK Eurozone US '1 '11 '1 '13 '1 '15 - ' ' ' ' '8 '1 '1 '1 Source: (Top left) Bloomberg, 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 31 December 15. 1

17 Global supply dynamics 17 Labour productivity Change year on year 3 Emerging markets* Post-crisis average:, Global economy -3 - Pre-crisis average: 1, Developed markets ' '3 ' '5 ' '7 '8 '9 '1 '11 '1 '13 '1 '15 Medium-term GDP growth projections** World Developed markets Emerging markets Global population and old age share, 1,5 1, Population growth (y/y) Age 5+ ( population) Forecast,5 ' '5 '7 '75 '8 '85 '9 '95 ' '5 '1 '15 ' Source: (Top) J.P. Morgan Economic Research, J.P. Morgan Asset Management. (Bottom left) IMF, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Economic Research, United Nations, J.P. Morgan Asset Management. *Emerging markets productivity data excludes China and India due to data availability. **WEO medium-term growth projections are five-year ahead growth forecasts. Guide to the Markets - Europe. Data as of 31 December

18 Global currency trends 18 Global economy US dollar index Broad real effective exchange rate (REER) : -1, : +5, : -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 Nov 15 US dollar index 95,7 98,5-11: -8, 11-15: +, Currency performance since 11 Real effective exchange rate - - RMB GBP USD EUR JPY EM* US dollar performance and US rate hikes 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) BIS, Bloomberg, J.P. Morgan Asset Management. (Bottom right) FactSet, US Federal Reserve, J.P. Morgan Asset Management. *EM currency measure is the J.P. Morgan Emerging Market Currency Index, which measures the currencies of 1 emerging markets against the US dollar in nominal terms. Guide to the Markets - Europe. Data as of 31 December

19 US Federal Reserve outlook 19 Global economy Federal funds rate expectations FOMC and market expectations for the Fed funds rate 7 5 Federal funds rate US Fed FOMC forecasts median US Fed FOMC forecasts range Market expectations on 31 Dec 15 FOMC long-run projection FOMC December 15 forecasts* Long run Change in real GDP, Q to Q,1,,,, Unemployment rate, Q 5,,7,7,7,9 PCE inflation, Q to Q, 1, 1,9,, 3, '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 31 December

20 US: GDP and inflation GTM Europe Global economy Real GDP Change quarter on quarter, SAAR 1 8 Average since Q15 Real GDP,, Average Inflation Change year on year Average since 19 Average since 1999 Nov 15 Headline CPI*,1,, Core CPI,1,, - - Components of nominal GDP 3Q15 - Consumption 8, Government 17,7-8 Investment ex-housing 13, Housing 3, Net exports -,9-1 ' ' ' ' '8 '1 '1 '1 3-3 '5 '7 '75 '8 '85 '9 '95 ' '5 '1 '15 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 31 December 15.

21 US employment 1 Unemployment rate and wage growth Seasonally adjusted, wages of production and non-supervisory workers change year on year 1 Global economy 8 Unemployment 5-yr average:,1 5-yr average:,3 Wage growth '7 '8 '9 ' '1 Nov 15: 5, Nov 15:, US employment quits vs. planning to raise wages 3..8 NFIB small business net planning to raise wages* 1 Income expectations of respondents expecting household income to rise in the next year Nov 15: 55, 1. Private industry total job quits** 1. ' ' ' '8 '1 '1 '1 '1 5 5 '1 ' '3 ' '5 ' '7 '8 '9 '1 '11 '1 '13 '1 '15 Source: (Top) BEA, FactSet, J.P. Morgan Asset Management. (Bottom left) BLS, FactSet, National Federation of Independent Businesses, J.P. Morgan Asset Management. (Bottom right) FactSet, University of Michigan, J.P. Morgan Asset Management. *Three-month moving average. **Job quits are the number of people deciding to leave their current job. Guide to the Markets - Europe. Data as of 31 December 15. 1

22 US economic indicators GTM Europe Global economy Durable goods and fixed investment of GDP 3 8 ' '7 '8 '9 ' '1 Initial jobless claims vs. consumer confidence Jobless claims in thousands 7 Jobless claims Consumer confidence '7 '8 '9 ' ' Housing starts Thousands, SAAR 3. Recession Federal funds effective rate ' '7 '8 '9 ' '1 '8 '9 ' '1 Source: (Top left) BEA, FactSet, J.P. Morgan Asset Management. (Bottom left) US Census Bureau, J.P. Morgan Asset Management. (Top right) BLS, FactSet, The Conference Board, J.P. Morgan Asset Management. (Bottom right) FactSet, J.P. Morgan Asset Management. Shaded areas highlight US recessionary periods. Guide to the Markets - Europe. Data as of 31 December 15.

23 US consumer finances GTM Europe 3 Global economy Household net worth $ billions, SAAR 8. $... Q7: $7.8 '9 '9 '9 '9 '98 ' ' ' ' '8 '1 '1 '1 Q15*: $87.8 Consumer balance sheet 3Q15, $ trillions outstanding, not seasonally adjusted 1 $ Total assets: $99,5tn Homes: 5 Other tangible: Deposits: 9 3Q7 peak: $81,8tn 1Q9 low: $9,tn of total US mortgages that are fixed rate*** 71 Household debt service ratio Debt payments as of disposable personal income, seasonally adjusted 1 Q7: 13, Q15*: 1, 8 '8 '85 '9 '95 ' '5 '1 '15 Source: (All charts) FactSet, US Federal Reserve, J.P. Morgan Asset Management. *Q15 numbers for US household net worth and debt service ratio are J.P. Morgan Asset Management forecasts. **Revolving includes credit cards. ***Taken from the Monthly Interest Rate Survey for 15-year and 3-year fixed mortgages. Guide to the Markets - Europe. Data as of 31 December Pension funds: 1 Other financial assets: 39 Other non-revolving: Revolving**: Auto loans: 7 Other liabilities: 8 Student debt: 9 Total liabilities: $1,tn Mortgages: 7 3

24 Japan: GDP and inflation GTM Europe Global economy Real GDP growth Change quarter on quarter 3 Average 1 Average since Q15 Real GDP,,3 Inflation Change year on year 5 3 Average since 1999 Nov 15 Headline CPI*,,3 Core CPI -,3,9 CPI less food & -,1,1 consumption tax '99 '1 '3 '5 '7 '9 '11 '13-3 '99 '1 '3 '5 '7 '9 '11 '13 Source: (Left) FactSet, Japan Statistics Bureau & Statistics Centre, J.P. Morgan Asset Management. (Right) Bloomberg, FactSet, Japan Ministry of Internal Affairs & Communications, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - Europe. Data as of 31 December 15.

25 Japan: Abenomics and the economy GTM Europe 5 Global economy Wage growth Change year on year, three-month moving average 3 Core CPI* Wage growth ' ' '8 '1 '1 '1 Bank lending and job-to-applicant ratio Lending growth year on year, number of jobs to applicants 8 Job-to-applicant ratio 1, x 1, 1,,8 New job offers by company size Six-month moving average, thousands Companies with 9 employees or fewer, Companies with 3 employees or more ' ' ' ' '8 '1 '1 '1 - Bank lending (y/y) -8 '9 '9 '9 '98 ' ' ' ' '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. (Bottom left) Thomson Reuters Datastream, J.P. Morgan Asset Management. (Right) Bloomberg, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - Europe. Data as of 31 December 15.,,, 5

26 China: GDP, inflation and policy rate Global economy Real GDP growth Change year on year GDP growth Investment Consumption Net exports 3Q15:,9 Inflation Change year on year ' '7 '8 '9 '1 '11 '1 '13 '1 '15 Nov 15 Headline CPI* 1,5 Core CPI 1,5 Headline PPI** -5,9 3 Policy rate and reserve ratio requirement (RRR)** Policy rate on one-year renminbi deposits 5 RRR -3 - PBoC policy rate '9 '9 '9 '9 '98 ' ' ' ' '8 '1 '1 '1 1 ' '7 '8 '9 '1 '11 '1 '13 '1 '15 '1 Source: (Left and top right) FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management. (Bottom right) FactSet, People s Bank of China (PBoC), J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. **PPI is the Producer Price Index. ***Average RRR for large and small banks. Guide to the Markets - Europe. Data as of 31 December

27 China economic indicators GTM Europe 7 Global economy China industrial production, retail and auto sales Manufacturing and services components of GDP Change month on month, three-month moving average 1-month moving average, of nominal GDP 3 7 Retail sales (lhs) 55 Industrial production (lhs) Services Auto sales (rhs) '5 ' '7 '8 '9 '1 '11 '1 '13 '1 ' Manufacturing '5 ' '7 '8 '9 '1 '11 '1 '13 '1 '15 External account Change year on year Exports Imports Top 1 cities property prices Change month on month 1 - '5 ' '7 '8 '9 '1 '11 '1 '13 '1 '15 Source: (Top and bottom left, top right) FactSet, National Bureau of Statistics of China, J.P Morgan Asset Management. (Bottom right) Soufun, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December '11 '1 '13 '1 '15 7

28 China financial dynamics GTM Europe 8 Global economy Credit to private sector of GDP 1 1: '79 '8 '89 '9 '99 ' '9 '1 Chinese renminbi Trade-weighted RMB indexed to 1 in 1 13, RMB 15 Trade-weighted RMB, USD/RMB 95 '11 '1 '13 '1 '15 '1,,3,,5,,7 1 public, household and non-financial corporate debt China foreign exchange reserves and external debt of GDP Trillions USD Public debt 5 35 Non-financial corporate debt $ External debt as a of global GDP 3 Household debt EM Asia US China ,7 1,8 1, Japan UK US Eurozone China Korea 1 ' ' ' '8 '1 '1 '1 Source: (Top left) FactSet, World Bank, J.P. Morgan Asset Management. (Bottom 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 - Europe. Data as of 31 December 15. 8

29 Emerging markets trade connections with developed markets GTM Europe 9 Global economy World export volume Change year on year, three-month moving average ' ' ' ' '8 '1 '1 '1 '1 EM exports breakdown Percentage of total exports, 1 1 China Turkey Korea Mexico 75 India S. Africa Manufacturing exports 5 5 Brazil Indonesia Colombia Russia Chile Oct 15: 1, Trade linkages with China Merchandise exports to and imports from China, of GDP Mexico Spain Turkey UK Italy India US France Sweden Switzerland Brazil Indonesia Russia Germany South Africa Japan Australia Saudi Arabia Thailand Chile Malaysia Korea Singapore Imports Exports Commodity exports Source: (Top left) Netherlands Bureau for Economic Policy Analysis World Trade Monitor, J.P. Morgan Asset Management. (Bottom left) World Bank, J.P. Morgan Asset Management. (Right) OECD, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December 15. 9

30 Emerging market challenges 3 Global economy Emerging markets: GDP and capital flows 1 $tn Capital flows ,5 8,5 7,5,5 5,5,5 Broad private non-financial credit of GDP Developed markets (lhs) Emerging markets (rhs) Emerging Markets ex-china (rhs) 1 ' ' ' ' '8 '1 '1 '1 Relative EM / DM equity performance and USD REER* Equity performance rebased to 1 at MSCI EM / MSCI DM EM GDP growth (y/y) 3,5, USD REER (inverted) '93 '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 1,5 '95 ' '5 '1 '15 13 Source: (Left) Institute of International Finance, IMF World Economic Outlook October 15, J.P. Morgan Asset Management. (Top right) BIS, IMF World Economic Outlook October 15, 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 31 December 15. 3

31 Emerging market financial dynamics 31 Global economy EM current account of GDP Commodity importers (lhs) 1 Commodity exporters (lhs) 5 China (rhs) EM equity performance and US rate hikes MSCI EM Index in USD, rebased to 1 on the date of first rate hike Jun Jun 1999 Apr 199 Current Days 5 EM foreign exchange reserves vs. external debt of GDP External debt* EM reserves ' '1 ' '3 ' '5 ' '7 '8 '9 '1 '11 '1 '13 '1 '15 5 '9 '9 '98 ' ' '1 '1 Source: (Left) Bloomberg, J.P. Morgan Asset Management. (Top right) MSCI, US Federal Reserve, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Economic Research, J.P. Morgan Asset Management. *External debt includes both private and sovereign and is displayed as a four quarter moving average. Guide to the Markets - Europe. Data as of 31 December

32 Local World stock market returns Q15, Europe 19,,7 Asia ex-jp 38, -3, TOPIX -, 73, M SCI EM,8 35, Small Cap, 5,5 US S&P 5,1,8 Asia ex-jp 19,7 7, Small Cap 35,8 9,5 US S&P 5 13,7, TOPIX 1,1 3 1, TOPIX 9,8 1-yr ann. 8, US S&P 5 7,3 19, Asia ex-jp 8,,1 M SCI EM 33, -33,7 US S&P 5-37, 7, Asia ex-jp 7, 8,3 Asia ex-jp 15, 3,5 HDY Equity 1,5 18,1 Europe 1,,7 US S&P 5 3, 19,7 Asia ex-jp 7,7 1,9 US S&P 5 1, 1, US S&P 5 7, 7,3 Asia ex-jp 7,1 18, M SCI EM 8,8, Portfolio 11,1-37,9 HDY Equity -3,, Small Cap,8 7,5 M SCI EM 1, -5,7 Small Cap -8,7 1,8 M SCI EM 17, 1,5 TOPIX 5, 1,5 Small Cap,7 11,5 Small Cap,8 7, Small Cap,9 7,3 Small Cap,3 Equities 1, HDY Equity 1, 1,5 Portfolio 19, 3, Europe,5-1, HDY Equity,7-38, Small Cap -, -,3 Portfolio -,1 37, Portfolio 35,8 3, HDY Equity 3, 3,9 TOPIX 1, 3,1 US S&P 5 15,1-5,8 Portfolio -7,5-7,5 Europe -8,8 1,3 Small Cap 18, 15, Portfolio 17,1,5 Europe,3 15,3 Portfolio 3, 1, HDY Equity 8,7 15,3 Portfolio 8, 8,8 Europe 5, 8,3 Portfolio 1,9 7,1 HDY Equity 5,5 7,1 Portfolio 5,3,3 HDY Equity,, Portfolio 5,9 5, Small Cap 13, -,9 US S&P 5 5,5-3,3 Europe -38,5 3,5 Europe 8,,9 Portfolio 11,1-9, TOPIX -17, 1, US S&P 5 1, 13,9 HDY Equity,5 11,8 M SCI EM 5,,3 HDY Equity,,7 Asia ex-jp 3,,8 Europe,5 3, US S&P 5 15,8-8,8 Small Cap -3,8-9,8 Asia ex-jp -7,7,5 US S&P 5,5 1, HDY Equity 8, -1,3 Asia ex-jp -1, 13, HDY Equity 1, -1,1 Asia ex-jp, 1,1 TOPIX 1,3 1,5 Asia ex-jp -5,3 5, Europe 5,,8 M SCI EM, -8,7 TOPIX 3, -1,5 TOPIX -11,1-5,8 M SCI EM -5,7 1,5 TOPIX 7, 11,7 Europe 7,5-15, M SCI EM -1,5 5,9 TOPIX,9 -,5 M SCI EM 3,8 7, Europe 5, -,9 M SCI EM -5, 3,5 M SCI EM 1, 1,9 TOPIX 1, 3 Source: FactSet, MSCI, Standard & Poor s, TOPIX, J.P. Morgan Asset Management. Annualised return covers the period 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): 3 Europe; 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 31 December 15.

33 European sector returns 33 MSCI Europe Index Financials Health care Cons. staples Cons. disc. Industrials Materials Energy Telecom Utilities Tech Europe Europe weight, 1, 1,7 11,7 11,,5, 5, 3,9,1 1 Growth weight Value weight 1, 18,7, 1, 1,,3,7 3,7,5 7, 1 35, 9,1,7 7,1 1,3,7 11,9,3 7,5,9 1 Weights Q15 3,3,7,8,5,5, 3,1, 5, 13, 5, Equities 15 Since market peak* Since market low* 3,5 1,1 15,3 1,5,8-11, -1, 1,3 -,9 1,9 5, -31, 113, 1, 9,8,5-17,3 -,3 5, -, 11, 17,9 19,9,5 198, 75, 18, 9,1 31, 131,7,5 181,8 15,9 Return Beta to Europe 1,33x,x,x,95x 1,13x 1,3x 1,x,8x,8x,99x 1,x β Correl to int. rates**,,15,1,,1,,19,,17,19, ρ Forward P/E ratio 11,x 17,x,3x 1,1x 15,x 1,x 1,x 19,x 1,5x 18,8x 15,x 15-year average Trailing P/E ratio 1,9x 15,8x 15,9x 1,x 1,1x 1,5x 11,7x 17,x 13,5x,x 13,3x 11,5x 18,9x 1,8x 1,x 1,8x 17,x 1,1x,3x 1,x 1,x 15,9x P/E 15-year average 1,7x 17,x 17,x 1,9x 1,x 1,x 11,8x 19,x 1,x 3,3x 1,8x Dividend yield 15-year average 3,9,7,7,,9 3,9,,,9 1,5 3, 3,8,7,7,8,8,9,,,8 1,8 3,3 Div 33 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 - Europe. Data as of 31 December 15.

34 MSCI Europe Index at inflection points 3 MSCI Europe Index 1.8 Sep : P/E = 1,8x 1.3 Characteristic Sep Jul 7 Dec 15 Index level P/E ratio (fwd) 1,8x 13,x 15,x Dividend yield 1,8,8 3, Euro 1-year* 5,,, 1 Jul 7: P/E = 13,x Dec 15: P/E = 15,x Total return: +133 Equities Dec 199: 1 Mar 3: 9 Mar 9: P/E = 1,3x P/E = 11,9x P/E = 8,3x '97 '98 '99 ' '1 ' '3 ' '5 ' '7 '8 '9 '1 '11 '1 '13 '1 '15 '1 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 1 months and is provided by FactSet Market Aggregates. Return calculations shown in green are based on the total return index. *Represented by the German Bund yield. Guide to the Markets - Europe. Data as of 31 December 15. 3

35 MSCI Europe Index equity valuations GTM Europe 35 Forward P/E ratio x 1 1 Average: 13,9x 31 Dec 15: 15,x Earnings yield and 1-year bond yield Earnings yield (inverse of forward P/E) Equities 8 MSCI Europe cyclically adjusted P/E ratio Adjusted using trailing 1-year average inflation-adjusted earnings 5 x 35 ' ' ' '8 '1 '1 '1 '1 31 Dec 15:, Average: 17,8x 3 Nov 15: 15.x 1-year European bond yield* 31 Dec 15:, 5 '8 '8 '88 '9 '9 ' ' '8 '1 ' ' ' ' '8 '1 '1 '1 Source: (Top left) FactSet, J.P. Morgan Asset Management. (Bottom left) FactSet, MSCI, J.P. Morgan Asset Management. (Right) Bloomberg, FactSet, MSCI, Tullett Prebon, J.P. Morgan Asset Management. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by consensus estimates for earnings in the next 1 months and is provided by FactSet Market Aggregates. Earnings yield is calculated as the inverse of the forward P/E ratio. *Represented by the German Bund Yield. Guide to the Markets - Europe. Data as of 31 December

36 MSCI Europe earnings and profit margins 3 MSCI Europe earnings and performance Index level, analyst estimates of the next 1 month of earnings 11 MSCI Europe index level MSCI Europe EPS US and European operating profit margins Earnings per share/sales per share for MSCI Europe and S&P 5* US Europe Equities '5 ' '7 '8 '9 '1 '11 '1 '13 '1 '15 '1 Margin expansion over the last 1 months Earnings per share/sales per share 1, ,5 8, 5 '8 '9 '1 '11 '1 '13 '1 '15 '1 7 -,5 Portugal Ireland France Switz. Italy Europe Germany Spain UK Source: (Left) FactSet, MSCI, J.P. Morgan Asset Management. (Top right) FactSet, MSCI, J.P. Morgan Asset Management. (Bottom right) FactSet, MSCI, Standard & Poor s, J.P. Morgan Asset Management. *Data is last 1 months. EPS is earnings per share. Guide to the Markets - Europe. Data as of 31 December 15. 3

37 European small capitalisation equities 37 Small cap relative performance and economic performance Relative performance indexed to Nov 1 5 MSCI small cap minus large cap performance 15 Risk-adjusted return ratios* By company market capitalisation and holding period 1, x,8 Small caps Mid caps Large caps 3 1, Equities , European small cap: Price-to-book value 3, x,5 1-year 5-year 1-year 31 Dec 15:,x , month net change in 1, Eurozone composite PMI - - '5 '7 '9 '11 '13 '15,5 ' ' '8 '1 '1 '1 '1 Source: (Left) Bloomberg, ZEW, J.P. Morgan Asset Management. (Top right) Bloomberg, MSCI, J.P. Morgan Asset Management. (Bottom right) Citibank, J.P. Morgan Asset Management. *Risk-adjusted returns are calculated assuming the free rate is equal to zero. Guide to the Markets - Europe. Data as of 31 December 15., Average: 1,8x 37

38 US S&P 5 at inflection points 38 S&P 5 Index. Characteristic Mar Oct 7 Dec 15 Index level P/E ratio (fwd) 7,x 15,7x 1,1x Dividend yield 1,1 1,8,1 US 1-year,,7,3 31 Dec 15: P/E = 1,1x. 1.8 Mar : P/E = 7,x Oct 7: P/E = 15,7x 1.55 Equities 1. Total return: Dec 199: P/E = 1,x 71 9 Oct : P/E = 1,1x Mar 9: P/E = 1,3x 77 '97 '98 '99 ' '1 ' '3 ' '5 ' '7 '8 '9 '1 '11 '1 '13 '1 '15 '1 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 - Europe. Data as of 31 December

39 US S&P 5 equity valuations GTM Europe 39 Equities Earnings yield and Baa corporate bond yield 1 1 US value vs. growth performance and US Treasury yield Earnings yield (inverse of forward P/E) 31 Dec 15: 5,5 '9 '9 '9 '9 '98 ' ' ' ' '8 '1 '1 '1 '1 US 1-year yield Growth outperforms value Baa corporate bond yield Value outperforms growth Russell 1 Value/ Russell 1 Growth 31 Dec 15:, 1,8 '3 ' '5 ' '7 '8 '9 '1 '11 '1 '13 '1 '15 '1 1,5 1, 1,3 1, 1,1 1,,9 Forward P/E ratio 8 x 1 1 Average: 1,5x 31 Dec 1999:,x '9 '9 '9 '9 '98 ' ' ' ' '8 '1 '1 '1 '1 S&P 5 Shiller cyclically adjusted P/E 31 Dec 15: 1,1x Adjusted using trailing 1-year average inflation-adjusted earnings 5 31 Dec 15: x 5,9x 3 1 Average: 1,x ' '1 ' '3 ' '5 ' '7 '8 '9 ' '1 Source: (Top left) FactSet, IBES, Moody s, Standard & Poor s, J.P. Morgan Asset Management. (Bottom left) FactSet, Russell, J.P. Morgan Asset Management. (Top right) FactSet, Standard & Poor s, J.P. Morgan Asset Management. (Bottom right) Robert Shiller, 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. Guide to the Markets - Europe. Data as of 31 December

40 US S&P 5 earnings and profit margins S&P 5 earnings and performance Index level, analyst estimates of the next 1 months of earnings 13 $ S&P 5 EPS S&P 5 index level 1. S&P 5 earnings per share growth Full year 15 with Q15 forecast, change over , 5,1 1,3 Equities ,9 Total index Index exenergy of GDP 1 Employee compensation Corporate profits ,3 Most USD sensitivity Employee compensation and profitability Average USD sensitivity Index ex-energy Least USD sensitivity '8 '9 '1 '11 '1 '13 '1 '15 '1 5 ' '5 '7 '75 '8 '85 '9 '95 ' '5 '1 '15 Source: (Left and top right) FactSet, Standard & Poor s, J.P. Morgan Asset Management. (Bottom right) BEA, FactSet, J.P. Morgan Asset Management. USD sensitivity is determined by calculating the proportion of each stock s historical variation in returns that is explained by variation in the US dollar. EPS is earnings per share. Guide to the Markets - Europe. Data as of 31 December 15.

41 Bear markets GTM Europe 1 S&P 5 declines from all-time highs market decline - 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 Jul Fed tightening premature policy tightening Mar Mar Post WWII crash post-war demobilisation, recession fears May Apr Flash crash of 19 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 11 1 Current cycle Mar 9 83 Average 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 - Europe. Data as of 31 December 15.

42 Interest rates and equities 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, ,8, 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-' '-' Change in Fed funds 3,13 3, 1,75,5 Change in 1-yr yields,85 1,89,9,51, Initial market reaction Subsequent market reaction 7 18 Equities Correlation,, Total reaction , -, Negative relationship between yield movements and equity returns -, 8 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 '99-' is June 1999 to May, '-' is June to June. Guide to the Markets - Europe. Data as of 31 December 15.

43 Japanese equities 3 TOPIX earnings and performance Index level, analyst estimates of the next 1 months of earnings 1 TOPIX price level 11 TOPIX EPS Listed companies cash and cash equivalents holdings* of market capitalisation, average between and Equities Japan Germany Italy France UK US Canada Listed companies dividend pay-out and share buybacks JPY trillions 1 Share buybacks** 1 Dividends 8 3 '8 '9 '1 '11 '1 '13 '1 '15 '1 Source: (Left) FactSet, TOPIX, J.P. Morgan Asset Management. (Top right) IMF, J.P. Morgan Asset Management. (Bottom right) Nomura, J.P. Morgan Asset Management. *Cash and cash equivalent holdings derived from Unstash the Cash! Corporate Governance Reform in Japan, Chie Aoyagi and Giovanni Ganelli, IMF, August 1. **Share buyback data are for repurchases of common stock, excluding repurchases from Resolution and Collection Corp. and repurchases of preferred stock collected by Nomura. EPS is earnings per share. Guide to the Markets - Europe. Data as of 31 December 15. '9 '95 ' '5 '1 '15 3

44 Chinese equities Stock market performance and margin debt Index level, of GDP. 5.,5, Chinese household financial asset allocation Other 11 Mutual funds Equities 7 Insurance & pensions 7 Cash 7 Equities. 3. Onshore equity index (CSI 3) 1,5 1, Price to earnings ratio 5 x 3 Shenzhen Composite Shanghai Composite Hang Seng. Margin debt of GDP,5 1 1., Dec '13 Apr '1 Aug '1 Dec '1 Apr '15 Aug '15 Dec '15 ' '8 '1 '1 '1 Source: (Left) CEIC, FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management. (Top right) Central Bank of the Republic of China, J.P. Morgan Asset Management. (Bottom right) Bloomberg, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December 15.

45 Developed market equity valuations by country GTM Europe 5 Developed markets +5 Std dev How to interpret this chart Equities Std dev from global average +,5 Std dev Average -,5 Std dev -5 Std dev Spain Italy France UK Germany Japan ACWI DM Index Switz. US Current composite index Current Expensive relative to own history Cheap relative to own history 1-year average Expensive relative to world Current Average Cheap relative to world Forward P/E P/B P/CF Dividend yield Forward P/E P/B P/CF Dividend yield Spain -1,8 13,1x 1,x 7,1x, 11,3x 1,5x,3x,9 Italy -1,81 1,5 1, 5, 3,3 11, 1,1 3, 3,5 France -,77 1,5 1,5 8, 3, 11,9 1,, 3,3 UK -,51 15, 1,8 9,, 11,9 1,9 7,1 3,9 Germany -,8 13,3 1,7 8,,8 11,8 1,7 5,,9 Japan,15 1,1 1,3 8,1 1,9 1, 1,,5 1,8 ACWI,51 15,, 9,9, 13,,1 7,3,5 DM Index,83 15,,1 1,3, 13,7, 7,5,5 Switz. 1,75 1,7, 1,1 3, 1,1,5 1,3 3,1 US,11 1,,7 11,3,1 1,3,7 8,7, 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 - Europe. Data as of 31 December 15. 5

46 Emerging market equity valuations by country GTM Europe Emerging markets + 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 - Std dev Russia Brazil Taiwan EM Index China S. Korea ACWI S. Africa Mexico India Current composite index Current 1-year average Forward P/E P/B P/CF Dividend yield Forward P/E P/B P/CF Dividend yield Russia -,99 5,3x,5x,8x 5, 7,x,7x 5,9x,7 Brazil -,98 1,1 1,,9,1 1, 1,3,, Taiwan -1,71 11,8 1, 7,,1 1, 1,8, 3,5 EM Index -1, 11, 1, 7,,9 11,3 1,,1,8 China -1,5 1, 1, 7,8,9 11,7 1,,,9 S. Korea -1,1 1,1 1, 5,1 1,7 9,7 1,1 5, 1,5 ACWI,51 15,, 9,9, 13,,1 7,3,5 S. Africa,58 1,5, 11,3 3, 1,5,5 9, 3, Mexico 1,5 17,,5 9,1, 15,5,7,5 1,7 India 3,8 17, 3,1 1, 1,5 1,1 3,1 1, 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 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 - Europe. Data as of 31 December 15.

47 Emerging markets: Valuations and returns GTM Europe 7 MSCI Emerging Markets Index: Price to book ratio 3, x,75 +, std. dev.,5,5 MSCI Emerging Markets Index: Price to book and returns Price to book ratio and next 1 months price return* 8 Current level Equities, 1,75 1,5 Average: 1,79x 1,5 31 Dec 15: 1,x - 1, -, std. dev. -,75 '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 -,75 1, 1,5 1,5 1,75,,5,5,75 3, x 3,5 Source: (All charts) FactSet, MSCI, J.P. Morgan Asset Management. *Dots represent monthly data points between December 1995 and December 15. Guide to the Markets - Europe. Data as of 31 December 15. 7

48 Emerging market equities 8 EM vs. DM growth and equity performance Monthly, consensus expectations for GDP growth in 1 months 5 EM minus DM GDP growth EM growth & equity outperformance 1 1 EM earnings expectations by region Consensus EPS for next 1-month, local currency, rebased to 1 in 5 EM Europe EM Asia 15 Equities 3 1 EM growth & equity underperformance MSCI EM relative to MSCI DM -1 '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 Number of companies yielding greater than by region Constituents of the MSCI All Country World Index Source: (Left) FactSet, IBES, MSCI, J.P. Morgan Asset Management. (Top and bottom right) FactSet, MSCI, J.P. Morgan Asset Management. EM DM GDP Growth is consensus estimates for EM growth in the next 1 months minus consensus estimates for DM growth in the next 1 months, provided by Consensus Economics. Guide to the Markets - Europe. Data as of 31 December EM Latin America 5 ' '7 '8 '9 '1 '11 '1 '13 '1 '15 '1 Emerging markets 17 Europe US Japan 8

49 Equity income 9 S&P 5 total return index: Dividends and capital appreciation Average annualised returns Capital appreciation Dividends 1 13,9 13, 1, 15,3 3,, 1,,7 5,, 5,1 3,3,,,5-5,3 1,8 -,7 1, 5,8,1, Equities s 19s 195s 19s 197s 198s 199s s MSCI Europe indices: Price vs. total return* Rebased to 1 at December High dividend yield total return Total return Price return ' '1 ' '3 ' '5 ' '7 '8 '9 '1 '11 '1 '13 '1 '15 '1 Sources of income Yield 8 Eurozone average inflation:, (1 months to Nov 15),1, 1,,,8 Source: (Top) Ibbotson, Standard & Poor s, J.P. Morgan Asset Management. (Bottom left) FactSet, FTSE, J.P. Morgan Asset Management. High dividend yield is the FTSE 35 Higher Yield Index. (Bottom right) Barclays, BofA/Merrill Lynch, FactSet, FTSE, Tullett Prebon, J.P. Morgan Asset Management. Euro corporate: Barclays Euro Aggregate Credit - Corporate; EM debt: J.P. Morgan EMBI Global; High yield: BofA/Merrill Lynch Developed Markets High Yield Constrained; Global REITs: FTSE NAREIT Index; Converts: Barclays Global Convertibles; EM equity; MSCI EM. Yields for the bond indices are yield to worst and dividend yields for the equity indices. *Returns in local currency. Guide to the Markets - Europe. Data as of 31 December Cash Bunds Euro corp Converts EME 3, MSCI Europe, Global REITS,7 EM debt 7,9 High yield

50 Annual returns and intra-year declines 5 MSCI Europe Index intra-year declines vs. calendar-year returns Despite average intra-year drops of 15, (median 1,), annual returns are positive in 8 of 3 years Calendar-year return Intra-year decline Equities '8 '8 '8 '8 '88 '9 '9 '9 '9 '98 ' ' ' ' '8 '1 '1 '1 Source: FactSet, MSCI, J.P Morgan Asset Management. Returns are based on local price only and do not include dividends. Intra-year decline refers to the largest market fall from peak to trough within a short time period during the calendar year. Returns shown are calendar years from 198 to 15. Guide to the Markets - Europe. Data as of 31 December 15. 5