MARKET INSIGHTS. Guide to the Markets. Europe 4Q 2017 As of 30 September 2017

Transcription

1 MARKET INSIGHTS Guide to the Markets Europe 4Q 217 As of 3 September 217

2 Global Market Insights Strategy Team Dr. David Kelly, CFA New York Samantha Azzarello New York Alex Dryden, CFA New York David Lebovitz New York Gabriela Santos New York Jordan Jackson New York John Manley New York Michael Bell, CFA London Nandini Ramakrishnan London Ambrose Crofton London Jai Malhi London Manuel Arroyo Ozores, CFA Madrid Lucia Gutierrez Mellado Madrid Tilmann Galler, CFA Frankfurt Maria Paola Toschi Milan Vincent Juvyns Luxembourg Tai Hui Hong Kong Marcella Chow Hong Kong Ian Hui Hong Kong Hannah Anderson Hong Kong Chaoping Zhu, CFA Shanghai Yoshinori Shigemi Tokyo Shogo Maekawa Tokyo Tyler Voigt New York Abigail Yoder, CFA New York Julio Callegari Sao Paulo Dr. Jasslyn Yeo, CFA Singapore Kerry Craig, CFA Melbourne 2

3 3 Page reference Europe economy 4. Eurozone: GDP and inflation 5. Eurozone growth monitor 6. Eurozone: Unemployment and labour costs 7. European politics 8. Eurozone credit conditions 9. Eurozone debt 1. UK economic indicators 11. Brexit: UK trade Global economy 12. World economic data 13. Global Purchasing Managers Index (PMI) for manufacturing 14. Global growth 15. Global inflation dynamics 16. Global monetary and fiscal policy 17. Global currency trends 18. Central bank policies 19. US: GDP and inflation 2. US growth monitor 21. US: Cyclical sectors 22. US labour market 23. US inflation and wages 24. US wages and interest rates 25. US Federal Reserve outlook 26. Long-term drivers of US economic growth 27. US consumer and business environment 28. Japan: GDP and inflation 29. Japan economic indicators 3. China economic indicators 31. China financial dynamics 32. China monetary conditions and housing 33. China credit growth 34. EM: Economic snapshot 35. Emerging market adjustments 36. Globalisation and trade Equities 37. World stock market returns 38. European sector returns and valuations 39. Relative equity valuations 4. European equities 41. MSCI Europe performance and drivers 42. MSCI Europe equity valuations 43. MSCI Europe Index at inflection points 44. European small capitalisation equities 45. UK equities 46. US S&P 5 at inflection points 47. US equities 48. US S&P 5 equity indicators 49. US equity markets and reflation 5. US corporate fundamentals and activity 51. US bear markets 52. Interest rates and equities 53. Japanese equities performance and drivers 54. Japanese equities: Corporate governance 55. Developed market equity valuations by country 56. Emerging market equity valuations by country 57. Emerging markets: Valuations and returns 58. Emerging markets: Investment drivers 59. Emerging markets: Flows, earnings and income 6. Equity income 61. Correlation and volatility Fixed income 62. Global fixed income: Yields and returns 63. Fixed income interest rate risk 64. Inflation implications for fixed income 65. Historical impact of Fed tightening 66. Historical yields of government bonds 67. Government bonds 68. Global investment-grade bonds 69. Global investment-grade bond market 7. US high yield bonds 71. European high yield bonds 72. Emerging market debt Other assets 73. Commodities 74. Oil market drivers 75. Gold market dynamics 76. Risk-adjusted returns and downside protection 77. Alternative strategies 78. Correlation of returns (EUR) 79. Asset markets in coming years Investing principles 8. Life expectancy 81. Cash investments 82. The power of compounding 83. Annual returns and intra-year declines 84. Impact of being out of the market 85. US asset returns by holding period 86. Asset class returns (EUR)

4 Eurozone: GDP and inflation GTM Europe 4 Europe economy Contribution to eurozone real GDP growth Contribution to eurozone CPI inflation % contribution to GDP growth, change year on year % contribution to headline inflation, change year on year Average since 2 2Q17 1,3% 2,3% ECB inflation target Government Change in inventories Net exports Investment Consumption GDP '1 '11 '12 '13 '14 '15 '16 ' Food, alcohol, tobacco Core rate -1. Energy CPI* -1.5 '1 '11 '12 '13 '14 '15 '16 '17 Source: (Left) Eurostat, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Right) Eurostat, FactSet, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food, alcohol, tobacco and energy. Guide to the Markets - Europe. Data as of 3 September

5 Eurozone growth monitor 5 Europe economy Change in unemployment and unemployment rate Thousands of people per three months (LHS); % rate (RHS) 2, 1,5 1, 5 Change in unemployment Recession Unemployment rate Retail sales and industrial production Index level Industrial production (LHS) Retail sales (RHS) ' '2 '4 '6 '8 '1 '12 '14 '16 Composite PMI and GDP Index level (LHS); % change year on year (RHS) 65 PMI 6 GDP , ' '2 '4 '6 '8 '1 '12 '14 ' ' '2 '4 '6 '8 '1 '12 '14 '16-6 Source: (Left and top right) Eurostat, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) Eurostat, Markit, Thomson Reuters Datastream, J.P. Morgan Asset Management. Light grey columns in all charts indicate recession. Guide to the Markets - Europe. Data as of 3 September

6 Eurozone: Unemployment and labour costs GTM Europe 6 Europe economy Unemployment rate Unit labour costs % Rebased to 1 as of December 1998 Average of Portugal, Spain, Italy France Eurozone Germany Greece France Spain Germany Ireland Source: (Left) Eurostat, FactSet, J.P. Morgan Asset Management. (Right) ECB, FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

7 European politics GTM Europe 7 Europe economy Italian election polling Survey results: Do you support the euro? % % answering yes as of May Nov Nov May PD M5S FI LN FdI 4 Italy France Spain Germany Source: (Left) Termometropolitico.it, J.P. Morgan Asset Management. M5S is 5 Star Movement, PD is Democratic Party, FI is Forza Italia, LN is Lega Nord, Fdl is Brothers of Italy. (Right) Eurobarometer survey, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

8 Eurozone credit conditions 8 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 4 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* -1 Weaker loan demand -4 Italy Germany Spain France Consumer credit (LHS) Overall corporate (LHS) Housing loans (LHS) Eurozone GDP growth y/y (RHS) -2-8 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 Source: (Left) ECB, Eurostat, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top and bottom right) ECB, FactSet, J.P. Morgan Asset Management. *Interest on new business lending up to 1 million, on a 1-5 year maturity. Guide to the Markets - Europe. Data as of 3 September

9 Eurozone debt GTM Europe 9 Europe economy Eurozone debt and ECB PSPP* purchases Euro area net bond supply in 217** EUR billions EUR billions 2, 1,8 1,6 1,4 Total outstanding debt Cumulative ECB PSPP purchases 33% limit Gross bond issuance Gross bond issuance minus redemptions PSPP purchases in 217 Net bond supply 1,2 1, Source: (Left) ECB, Eurostat, J.P. Morgan Asset Management. (Right) ECB, J.P. Morgan Securities Research, J.P. Morgan Asset Management. *PSPP is Public Sector Purchase Programme. 33% is the ECB purchase limit. **Gross issuance and gross minus redemptions and PSPP are 217 figures for YTD plus estimates for remainder of the year. Net bond supply is gross bond issuance minus redemptions minus PSPP purchases in 217. Guide to the Markets - Europe. Data as of 3 September

10 UK economic indicators GTM Europe 1 Europe economy Real GDP growth comparison Index level, rebased to 1 at 1Q8 US UK Germany France Japan Unemployment rate and consumer confidence Index level (LHS); % (RHS) 1 Consumer confidence Unemployment rate '7 '9 '11 '13 '15 '17 4 Current account % of GDP Investment income Trade balance Current account balance -8 '5 '7 '9 '11 '13 '15 '17 Real wage growth % change year on year Nominal wage growth* Headline CPI Real wage growth -6 '2 '4 '6 '8 '1 '12 '14 '16 Source: (Top left) FactSet, OECD, J.P. Morgan Asset Management. (Bottom left) ONS, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) GFK, ONS, Thomson Reuters Datasteam, J.P. Morgan Asset Management. (Bottom right) Bloomberg, ONS, J.P. Morgan Asset Management. *Nominal wages include bonuses. Guide to the Markets - Europe. Data as of 3 September

11 Brexit: UK trade 11 Europe economy UK exports and imports of goods and services GBP billions EU27 US Switzerland Exports: Services Goods China Imports: Services Goods Japan Australia Singapore Hong Kong Canada India UK export share EU27 44% US 2% Asia 13% Middle East 5% Saudi Arabia Source: UK ONS Pink Book, JP. Morgan Asset Management. Data is latest available, measured at end of 215. Middle East includes Israel, Saudi Arabia, residual Gulf Arabian countries and other near and middle eastern countries. Asia includes China, Hong Kong, India, Indonesia, Iran, Japan, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand. Guide to the Markets - Europe. Data as of 3 September

12 World economic data 12 Selected countries Gross domestic product (GDP) Real GDP % Inflation % Policy rate % Unemployment % Global economy EUR per capita EUR billions 217* 218* 217* 218* Switzerland ,3 1,7,5,6 -,75 3, United States ,2 2,3 2, 2, 1,25 4,4 Sweden ,8 2,4 1,8 1,8 -,5 6, Netherlands ,3 1,9 1,3 1,4 -,4 7,2 Finland ,5 1,5 1, 1,2 -,4 7,5 Germany ,1 1,8 1,7 1,6 -,4 5,6 United Kingdom ,5 1,3 2,6 2,5,25 4,3 France ,7 1,6 1,1 1,2 -,4 9,2 Japan ,5 1,1,5,7,1 2,8 Eurozone ,1 1,8 1,5 1,4 -,4 9,1 Italy ,4 1,2 1,4 1,2 -,4 11,2 Spain ,1 2,5 1,9 1,4 -,4 17,2 Greece , 2, 1,2 1, -,4 21,1 Russia ,7 1,7 4, 4, 8,5 5,2 Brazil ,6 2,4 3,5 4, 8,25 8,2 China ,7 6,4 1,7 2,2 4,35 4, India ,1 6,8 4,5 3,6 6, 8,4 Source: Bloomberg, various national statistical agencies, J.P. Morgan Asset Management. Table ordered by GDP per capita. Nominal GDP figure is latest quarter annualised. *Forecasts are Bloomberg consensus estimates. Guide to the Markets - Europe. Data as of 3 September

13 Global Purchasing Managers Index (PMI) for manufacturing Global economy Eurozone Developed Emerging Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Global 51, 51, 5,7 5,9 5, 5,6 5,2 5,1 5,4 51, 5,8 51,1 52, 52,1 52,7 52,8 53, 53, 52,7 52,6 52,6 52,7 53,2 53,2 Developed 52,5 52,3 52, 52,1 5,8 5,9 5,5 5,4 51,2 51,5 51,2 51,5 52,6 53, 53,8 54,2 54,1 53,9 54,1 54,1 53,9 54, 54,2 54,6 Emerging 49, 49,2 49, 49,4 48,9 5,2 49,6 49,5 49,3 5,3 5,1 5,3 51, 5,8 51,1 5,8 51,3 51,6 5,9 5,6 5,8 5,9 51,7 51,3 Eurozone 52,3 52,8 53,2 52,3 51,2 51,6 51,7 51,5 52,8 52, 51,7 52,6 53,5 53,7 54,9 55,2 55,4 56,2 56,7 57, 57,4 56,6 57,4 58,1 France 5,6 5,6 51,4 5, 5,2 49,6 48, 48,4 48,3 48,6 48,3 49,7 51,8 51,7 53,5 53,6 52,2 53,3 55,1 53,8 54,8 54,9 55,8 56,1 Germany 52,1 52,9 53,2 52,3 5,5 5,7 51,8 52,1 54,5 53,8 53,6 54,3 55, 54,3 55,6 56,4 56,8 58,3 58,2 59,5 59,6 58,1 59,3 6,6 Italy 54,1 54,9 55,6 53,2 52,2 53,5 53,9 52,4 53,5 51,2 49,8 51, 5,9 52,2 53,2 53, 55, 55,7 56,2 55,1 55,2 55,1 56,3 56,3 Spain 51,3 53,1 53, 55,4 54,1 53,4 53,5 51,8 52,2 51, 51, 52,3 53,3 54,5 55,3 55,6 54,8 53,9 54,5 55,4 54,7 54, 52,4 54,3 Greece 47,3 48,1 5,2 5, 48,4 49, 49,7 48,4 5,4 48,7 5,4 49,2 48,6 48,3 49,3 46,6 47,7 46,7 48,2 49,6 5,5 5,5 52,2 52,8 Ireland 53,6 53,3 54,2 54,3 52,9 54,9 52,6 51,5 53, 5,2 51,7 51,3 52,1 53,7 55,7 55,5 53,8 53,6 55, 55,9 56, 54,6 56,1 55,4 Sweden 53,4 54,9 55,9 55,3 51,6 53, 53,9 54,1 52,9 55,5 51,1 54,9 58,5 57,4 6,3 62,1 6,9 65,1 62,5 58,7 62,3 6,4 54,7 63,7 Switzerland 49,6 49, 49,9 5,2 51,1 53, 53,1 55,3 51,5 51,5 51,6 54,4 55,2 55,9 56,2 54,6 57,8 58,6 57,4 55,6 6,1 6,9 61,2 61,7 UK 54,5 52,4 51,2 52,2 5,9 51,3 49,6 5,5 53,1 48,4 53, 55,6 54,2 53,4 55,8 55,4 54,6 54,3 57,2 56,4 54,2 55,2 56,7 55,9 US 54,1 52,8 51,2 52,4 51,3 51,5 5,8 5,7 51,3 52,9 52, 51,5 53,4 54,1 54,3 55, 54,2 53,3 52,8 52,7 52, 53,3 52,8 53,1 Australia 5,2 52,5 51,9 51,5 53,5 58,1 53,4 51, 51,8 56,4 46,9 49,8 5,9 54,2 55,4 51,2 59,3 57,5 59,2 54,8 55, 56, 59,8 54,2 Japan 52,4 52,6 52,6 52,3 5,1 49,1 48,2 47,7 48,1 49,3 49,5 5,4 51,4 51,3 52,4 52,7 53,3 52,4 52,7 53,1 52,4 52,1 52,2 52,9 China 48,3 48,6 48,2 48,4 48, 49,7 49,4 49,2 48,6 5,6 5, 5,1 51,2 5,9 51,9 51, 51,7 51,2 5,3 49,6 5,4 51,1 51,6 51, Indonesia 47,8 46,9 47,8 48,9 48,7 5,6 5,9 5,6 51,9 48,4 5,4 5,9 48,7 49,7 49, 5,4 49,3 5,5 51,2 5,6 49,5 48,6 5,7 5,4 Korea 49,1 49,1 5,7 49,5 48,7 49,5 5, 5,1 5,5 5,1 48,6 47,6 48, 48, 49,4 49, 49,2 48,4 49,4 49,2 5,1 49,1 49,9 5,6 Taiwan 47,8 49,5 51,7 5,6 49,4 51,1 49,7 48,5 5,5 51, 51,8 52,2 52,7 54,7 56,2 55,6 54,5 56,2 54,4 53,1 53,3 53,6 54,3 54,2 India 5,7 5,3 49,1 51,1 51,1 52,4 5,5 5,7 51,7 51,8 52,6 52,1 54,4 52,3 49,6 5,4 5,7 52,5 52,5 51,6 5,9 47,9 51,2 51,2 Brazil 44,1 43,8 45,6 47,4 44,5 46, 42,6 41,6 43,2 46, 45,7 46, 46,3 46,2 45,2 44, 46,9 49,6 5,1 52, 5,5 5, 5,9 5,9 Mexico 53, 53, 52,4 52,2 53,1 53,2 52,4 53,6 51,1 5,6 5,9 51,9 51,8 51,1 5,2 5,8 5,6 51,5 5,7 51,2 52,3 51,2 52,2 52,8 Russia 5,2 5,1 48,7 49,8 49,3 48,3 48, 49,6 51,5 49,5 5,8 51,1 52,4 53,6 53,7 54,7 52,5 52,4 5,8 52,4 5,3 52,7 51,6 51,9 Lowest relative to 5 PMI 5 Highest relative to 5 PMI Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 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. The results are rebased such that a score of 5 means that economic conditions are neither accelerating nor deteriorating. Guide to the Markets - Europe. Data as of 3 September 217.

14 Global growth GTM Europe 14 Global economy Components of global growth Global GDP growth and MSCI ACWI EPS growth % change year on year % change year on year (LHS); % change year on year (RHS) 9 4 8,5 Inflation EPS Real GDP 8 Nominal GDP 3 7,2 7, ,8 5,4 1 5, 5,1 5, 5 4,3 4,4 4 3, , Nominal GDP '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17* -4 '98 ' '2 '4 '6 '8 '1 '12 '14 '16-1 Source: (Left) Thomson Reuters Datastream, J.P. Morgan Asset Management. *217 are based on Oxford economics GDP estimates. Chart is based on end of year GDP. (Right) MSCI, IBES, Thomson Reuters Datastream, J.P. Morgan Asset Management. EPS is earnings per share. Nominal GDP used is based on purchasing power parity (PPP) valuation of country GDP. Guide to the Markets - Europe. Data as of 3 September

15 Global inflation dynamics Global economy Eurozone Developed Emerging Global Developed Emerging Eurozone France Germany Italy Spain Greece Ireland Sweden Switzerland UK US Australia Japan China Indonesia Korea Taiwan India Brazil Mexico Russia Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 1,4 1,5 1,6 1,6 1,8 1,7 1,6 1,6 1,5 1,6 1,5 1,5 1,7 1,7 1,8 1,9 2,3 2,1 1,9 2, 1,8 1,7 1,7 1,9,,2,4,5,8,5,5,5,5,6,5,6,9 1,1 1,2 1,5 2, 2,1 1,8 1,9 1,6 1,4 1,5 1,7 3,6 3,5 3,6 3,5 3,5 3,7 3,4 3,4 3,2 3,2 3,2 2,9 3,1 3,1 3,1 3, 3,2 2,4 2,5 2,6 2,6 2,5 2,4 2,7 -,1,1,1,2,3 -,2, -,2 -,1,1,2,2,4,5,6 1,1 1,8 2, 1,5 1,9 1,4 1,3 1,3 1,5,1,2,1,3,3 -,1 -,1 -,1,1,3,4,4,5,5,7,8 1,6 1,4 1,4 1,4,9,8,8 1, -,1,2,2,2,4 -,2,1 -,3,,2,4,3,5,7,7 1,7 1,9 2,2 1,5 2, 1,4 1,5 1,5 1,8,2,3,2,1,4 -,2 -,2 -,4 -,3 -,3 -,2 -,2,1 -,2,1,5 1, 1,6 1,4 2, 1,6 1,2 1,2 1,4-1,1 -,9 -,4 -,1 -,4-1, -1, -1,2-1,1 -,9 -,7 -,3,,5,5 1,4 2,9 3, 2,1 2,6 2, 1,6 1,7 2, -,8 -,1 -,1,4 -,1,1 -,7 -,4 -,2,2,2,4 -,1,6 -,2,3 1,5 1,4 1,7 1,6 1,5,9,9,6 -,1 -,1 -,1,2, -,2 -,6 -,2 -,2,1,1 -,4 -,3 -,4 -,2 -,2,2,3,6,7, -,6 -,2,4,9,9,8,7 1,3,8 1,2 1,,8 1,2 1,1 1,2,8 1,1 1,3 1,7 1,5 1,9 1,4 2, 1,8 1,8 2,3 2,2-1,3-1,1-1,2-1,4-1,5 -,9-1, -,5 -,5 -,6 -,5, -,3 -,3 -,2 -,2,3,7,5,7,4,4,6,5 -,1 -,1,1,2,3,3,5,3,3,5,6,6 1,,9 1,2 1,6 1,8 2,3 2,3 2,7 2,9 2,6 2,6 2,9,,2,5,7 1,4 1,,9 1,1 1, 1,,8 1,1 1,5 1,6 1,7 2,1 2,5 2,7 2,4 2,2 1,9 1,6 1,7 1,9 1,9 1,8 1,8 2, 2,3 2,1 1,7 1,5 1, 1,5 1, 1,2 1,3 1,5 1,5 1,8 2,1 2,1 2,2 2,6 2,8 2,3 2,7 2,6,,3,3,2 -,1,2, -,3 -,5 -,4 -,4 -,5 -,5,1,5,3,4,3,2,4,4,4,4,7 1,6 1,3 1,5 1,6 1,8 2,3 2,3 2,3 2, 1,9 1,8 1,3 1,9 2,1 2,3 2,1 2,5,8,9 1,2 1,5 1,5 1,4 1,8 6,8 6,2 4,9 3,4 4,1 4,4 4,4 3,6 3,3 3,5 3,2 2,8 3,1 3,3 3,6 3, 3,5 3,8 3,6 4,2 4,3 4,4 3,9 3,8,5,8,8 1,1,6 1,1,8 1,,8,7,4,5 1,3 1,5 1,5 1,3 2, 1,9 2,2 1,9 2, 1,9 2,2 2,6,3,3,5,1,8 2,4 2, 1,9 1,2,9 1,2,6,3 1,7 2, 1,7 2,2 -,1,2,1,6 1,,8 1, 4,4 5, 5,4 5,6 5,7 5,3 4,8 5,5 5,8 5,8 6,1 5, 4,4 4,2 3,6 3,4 3,2 3,7 3,9 3, 2,2 1,5 2,4 3,4 9,5 9,9 1,5 1,7 1,7 1,4 9,4 9,3 9,3 8,8 8,7 9, 8,5 7,9 7, 6,3 5,4 4,8 4,6 4,1 3,6 3, 2,7 2,5 2,5 2,5 2,2 2,1 2,6 2,9 2,6 2,5 2,6 2,5 2,7 2,7 3, 3,1 3,3 3,4 4,7 4,9 5,4 5,8 6,2 6,3 6,4 6,7 15,7 15,6 15, 12,9 9,8 8,1 7,3 7,3 7,3 7,5 7,2 6,9 6,4 6,1 5,8 5,4 5, 4,6 4,3 4,1 4,1 4,3 3,9 3,3 Source: Bank of Mexico, DGBAS, ECB, FactSet, Federal Reserve, Goskomstat of Russia, IBGE, India Ministry of Statistics & Programme Implementation, Japan Ministry of Internal Affairs & Communication, Korean National Statistical Office, Melbourne Institute, National Bureau of Statistics China, Riksbank, Statistics Indonesia, Swiss National Bank, UK Office for National Statistics (ONS), J.P. Morgan Asset Management. Figures are % change year on year. Heatmap colours are based on z-score of year on year inflation rate relative to five-year history. Guide to the Markets - Europe. Data as of 3 September

16 Global monetary and fiscal policy GTM Europe 16 Global economy Market expectations for policy rate % 1.8 1,6 US 1,7 1,3 1.,8 UK,9,4.2 -,1, Japan, -,4 -,3 Eurozone -, ,6 -,5 Switzerland -,4 Dec 17 Dec 18 Dec 19 Change in deficit excluding debt interest, % of potential GDP Tighter policy G4 central bank asset purchases USD billions, rolling 12-month flows 2, 1,5 1, Forecast* Looser policy '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 '19 '2 16 Source: (Top left) Bloomberg, J.P. Morgan Asset Management. Expectations calculated using OIS forwards. (Bottom left) Bank of England (BoE), Bank of Japan (BoJ), European Central Bank (ECB), US Federal Reserve (Fed), Bloomberg, J.P. Morgan Asset Management. *Balance sheet forecast assumptions: BoE to have zero net purchases until the end of 19; BoJ to have an ann. pace of 6tn yen until the end of 17, then a reduction in the ann. monthly purchase rate by 1tn yen each quarter until Oct 18, when purchases continue at an ann. monthly pace of 2tn yen; ECB to keep purchases at EUR 6bn per month from Oct 17 to Dec 17 and then reduce monthly purchases to EUR 4bn in Jan 18, then to EUR 2bn in Jul 18 and to zero asset purchases at the end of 18; Fed forecast is based on a monthly reduction of USD 1bn, starting in Oct 17 and then stepping up the monthly reduction by a further USD 1bn in each subsequent quarter until reaching a maximum of USD 5bn reduction per month, depending on the monthly maturity schedule of the balance sheet. (Right) OECD, J.P. Morgan Asset Management. Figures correspond to the estimated change in the primary balance or structural deficit excluding net interest payments as a share of GDP. Guide to the Markets - Europe. Data as of 3 September 217.

17 Global currency trends 17 Global economy US dollar real effective exchange rate Index level, broad real effective exchange rate (REER) '73 '77 '81 '85 '89 '93 '97 '1 '5 '9 '13 '17 Euro real effective exchange rate Index level, broad real effective exchange rate (REER) '99 '2 '5 '8 '11 '14 '17 GBP real effective exchange rate Index level, broad real effective exchange rate (REER) '8 '85 '9 '95 ' '5 '1 '15 Source: (Top) Thomson Reuters Datastream, US Federal Reserve, J.P. Morgan Asset Management. (Bottom left) European Central Bank, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) Bank of England, Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

18 Central bank policies GTM Europe 18 Fed balance sheet: Assets USD trillions ECB balance sheet: Assets EUR trillions 5 Forecast 6 Forecast Global economy 4 3 Other MBS Treasuries 1 18 '3 '5 '7 '9 '11 '13 '15 '17 '19 '3 '5 '7 '9 '11 '13 '15 '17 Source: (Left) FactSet, US Federal Reserve, J.P. Morgan Asset Management. Fed balance sheet forecast is based on a monthly reduction of USD 1bn, starting in Oct 217 and then stepping up the monthly reduction by a further USD 1bn in each subsequent quarter until reaching a maximum of USD 5bn reduction per month, depending on the monthly maturity schedule of the balance sheet. (Right) ECB, Thomson Reuters Datastream, J.P. Morgan Asset Management. Balance sheet forecast does not include Targeted Longer Term Refinancing Operations (TLTRO). Forecast assumption is for the European Central Bank to keep purchases at EUR 6bn per month from Oct 217 to Dec 217 and then reduce monthly purchases to EUR 4bn in Jan 218, then to EUR 2bn in July 218 and to zero asset purchases at the end of 218. Guide to the Markets - Europe. Data as of 3 September

19 US: GDP and inflation GTM Europe 19 Global economy Contribution to US real GDP growth Inflation % contribution to GDP growth, change year on year Average % change year on year since 2 2Q17 Government 7 5 Change in inventories 2,% 2,2% Net exports 6 4 Investment Consumption 5 GDP Average since 2 August 217 Headline CPI* 2,2% 1,9% Core CPI 2,% 1,7% '1 '11 '12 '13 '14 '15 '16 '17-2 ' '2 '4 '6 '8 '1 '12 '14 '16 Source: (Left) BEA, Haver Analytics, J.P. Morgan Asset Management. (Right) BLS, Thomson Reuters Datastream, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - Europe. Data as of 3 September

20 US growth monitor 2 Global economy Corporate profits, business investment and employment growth % change year on year Recession 6 Profits Business investment Employment -4 '84 '88 '92 '96 ' '4 '8 '12 ' Initial jobless claims vs. consumer confidence Jobless claims in thousands (LHS); index level (RHS) 7 Consumer confidence Jobless claims 2 '84 '94 '4 ' Housing starts and Conference Board Leading Economic Index Index level (LHS); thousands (RHS) Housing starts 7 Leading indicator 5 '84 '94 '4 '14 3, 2, 1, Source: (All charts) Thomson Reuters Datastream, J.P. Morgan Asset Management. Light grey columns in all charts indicate recessions determined by NBER. Guide to the Markets - Europe. Data as of 3 September

21 US: Cyclical sectors GTM Europe 21 Light vehicle sales Millions, seasonally adjusted annual rate Real capital goods orders Non-defense capital goods orders ex-aircraft, USD billions, SA 8 Global economy Average: 15,6 August 217: 16, Average: 62, August 217: 59, '98 ' '2 '4 '6 '8 '1 '12 '14 '16 Source: (Left) BEA, FactSet, J.P. Morgan Asset Management. (Right) Census Bureau, FactSet, J.P. Morgan Asset Management, Capital goods orders deflated using the producer price index for capital goods with a base year of 29. Guide to the Markets - Europe. Data as of 3 September

22 US labour market 22 US unemployment rate and wage growth %, wage growth is year on year Global economy Unemployment August 217: 4,4% Wage growth August 217: 2,3% Source: BEA, FactSet, J.P. Morgan Asset Management. Wage growth is average hourly earnings of total private production and non-supervisory employees. Guide to the Markets - Europe. Data as of 3 September

23 US inflation and wages 23 ISM Manufacturing and core inflation Index level, advanced 18 months (LHS); absolute change in year on year core CPI in % (RHS) 7 ISM Manufacturing 6 Recession Global economy 5 4 Core CPI 3 '89 '93 '97 '1 '5 '9 '13 ' Wage growth and companies planning to raise wages % change year on year (LHS); % of businesses (RHS) 5 4 NFIB companies planning to raise wages Wage growth and US quit rate % change year on year (LHS); % of total employment (RHS) 5 US quit rate Wage growth 1 '1 '3 '5 '7 '9 '11 '13 '15 ' Wage growth 1 '1 '3 '5 '7 '9 '11 '13 '15 ' Source: (Top) ISM, Thomson Reuters Datastream, J.P. Morgan Asset Management. Light grey columns indicate recessions determined by NBER. (Bottom left) BLS, NFIB, Thomson Reuters Datastream, J.P. Morgan Asset Management. NFIB companies planning to raise wages is a 12-month moving average. Wage growth is average hourly earnings of total private production and non-supervisory employees. (Bottom right) BLS, Thomson Reuters Datastream, J.P. Morgan Asset Management. US quit rate is a three-month moving average. Wage growth is average hourly earnings of total private production and non-supervisory employees Guide to the Markets - Europe. Data as of 3 September 217.

24 US wages and interest rates 24 US wage growth and Fed funds rate % Fed funds rate (LHS); % change year on year (RHS) 12 Recession Wage growth 6 Global economy Fed funds rate '84 '87 '9 '93 '96 '99 '2 '5 '8 '11 '14 '17 1 Source: Thomson Reuters Datastream, US Federal Reserve, J.P. Morgan Asset Management. Wage growth is average hourly earnings of total private production and non-supervisory employees. Light grey columns indicate recessions determined by NBER. Guide to the Markets - Europe. Data as of 3 September

25 US Federal Reserve outlook 25 Global economy Federal funds rate expectations % Fed funds rate, FOMC and market expectations FOMC September 217 forecasts* Change in real GDP, 4Q to 4Q 2,4 2,1 2, 1,8 Unemployment rate, 4Q 4,3 4,1 4,1 4,2 PCE inflation, 4Q to 4Q 1,6 1,9 2, 2, Federal funds rate US Fed FOMC median forecasts Market expectations on 3 September ' '2 '4 '6 '8 '1 '12 '14 '16 '18 '2 Source: Bloomberg, Federal Reserve Bank of New York, US Federal Reserve, J.P. Morgan Asset Management. *Forecasts are median estimates of Federal Open Market Committee (FOMC) participants. Guide to the Markets - Europe. Data as of 3 September

26 Long-term drivers of US economic growth GTM Europe 26 Global economy Growth in US working age population % increase in civilian non-institutional population ages Immigrant 1,3% 1,% US born 1,4%,6% Forecast*,3% '77-'86 '87-'96 '97-'6 '7-'16 '17-'26 Drivers of US GDP growth Average year on year % change 4.5 4,2% ,4% 3,% 3,3% Growth in workers + Growth in real output per worker Growth in real GDP 3,1% 3,2% US productivity % change year on year 6 3 Recession ,% 2,1% 1,5% 1,3% 1,3%,4%.5-3 '81 '86 '91 '96 '1 '6 '11 '16. 2,8% 1,% 1,2% 1,6% 1,9%,9% '57-'66 '67-'76 '77-'86 '87-'96 '97-'6 '7-'16 26 Source: (Top left) Census Bureau, DOD, DOJ, J.P. Morgan Asset Management. *Forecast by J.P. Morgan Asset Management. (Bottom left) BLS, Thomson Reuters Datastream, J.P. Morgan Asset Management. Light grey columns indicate recessions determined by NBER. (Right) BEA, BLS, J.P. Morgan Asset Management. GDP drivers are calculated as the average annualised growth between 4Q of the first and last year. Future working age population is calculated as the total estimated number of Americans from the Census Bureau, controlled for military enrollment, growth in institutionalised population and demographic trends. Guide to the Markets - Europe. Data as of 3 September 217.

27 US consumer and business environment GTM Europe 27 Global economy Future capex intentions and business investment Index level (LHS); % change year on year (RHS) 4 Future capex intentions Business investment -3-2 '5 '7 '9 '11 '13 '15 '17 US savings rate % of disposable income Recession '81 '86 '91 '96 '1 '6 '11 '16 National tax rate on corporate income %, including local government taxes Headline rate US Japan Italy Germany Canada UK Source: (Top left) BEA, Dallas Fed, Kansas City Fed, New York Fed, Philadelphia Fed, Richmond Fed, Thomson Reuters Datastream, J.P. Morgan Asset Management. Capex intentions is an average index level of the five aforementioned Fed districts equally weighted, displayed using a three-month moving average. (Bottom left) BEA, Thomson Reuters Datastream, J.P. Morgan Asset Management. Light grey columns indicate recessions determined by NBER. (Right) Germany Federal Ministry of Finance, OECD, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

28 Japan: GDP and inflation GTM Europe 28 Real GDP growth Average Inflation % change quarter on quarter since 2 2Q17 % change year on year 3 Real GDP,2%,6% 4 Average since 2 August 217 Headline CPI*,%,7% Core CPI -,1%,2% Global economy 2 1 Average '1 '3 '5 '7 '9 '11 '13 '15 '17-3 '1 '3 '5 '7 '9 '11 '13 '15 '17 Source: (Left) Thomson Reuters Datastream, Japan Statistics Bureau & Statistics Centre, J.P. Morgan Asset Management. (Right) Japan Ministry of Internal Affairs & Communications, Thomson Reuters Datastream, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - Europe. Data as of 3 September

29 Japan economic indicators GTM Europe 29 Global economy Real wage growth and labour market % change year on year, six-month moving average (LHS); % (RHS) Real wages Unemployment rate (inverted) Bank lending and job-to-applicant ratio % lending growth year on year (LHS); ratio of number of jobs to applicants (RHS) 8 4 Job-to-applicant ratio Tankan business conditions Index level 6 Manufacturing 4 Non-manufacturing '8 '84 '88 '92 '96 ' '4 '8 '12 '16-4 Bank lending (y/y) -8 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 ' Source: (Top left) FactSet, J.P. Morgan Asset Management. (Bottom left and right) Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

30 China economic indicators 3 China industrial production and retail sales % change year on year Fixed asset investment (FAI) % change year on year Global economy Retail sales Industrial production Public Overall Private 1 5 '96 ' '4 '8 '12 '16 Central government fiscal deficit % of GDP '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 Source: (Left) National Bureau of Statistics of China, Thomson Reuters Datastream, J.P. Morgan Asset Management. Industrial production is a three-month moving average and retail sales is a six-month moving average. (Top right) 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 September

31 China financial dynamics 31 Public, household and non-financial corporate debt % of GDP, 1Q17 3 Chinese renminbi Rebased index level (LHS); RMB per US dollar (RHS) Trade-weighted RMB Non-financial corporation debt Global economy 25 2 Public debt Household debt USDRMB 15 1 China FX reserves Change in monthly FX reserves (USD billions) '96 '98 ' '2 '4 '6 '8 '1 '12 '14 '16-13 '13 '14 '15 '16 '17 Source: (Left) BIS, J.P. Morgan Asset Management. Household and NFC debt is market value. Government debt is gross and nominal value. (Top right) BIS, FactSet, J.P. Morgan Asset Management. (Bottom right) People s Bank of China, Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

32 China monetary conditions and housing 32 Global economy Chinese house prices vs. Shanghai Interbank Offered Rate %, three-month SHIBOR (LHS); % change year on year (RHS) China house price growth Chinese property inventories Months of inventory Top 2 nd tier average Low 2 nd tier average 1 st tier* average '12 '13 '14 '15 '16 '17 Policy rate and reserve ratio requirement (RRR)** % policy rate on one-year renminbi deposits (LHS); % RRR (RHS) RRR 3-2 SHIBOR -4 2 '11 '12 '13 '14 '15 '16 '17 Source: (Left) BIS, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) CREIS, J.P. Morgan Securities Research, J.P. Morgan Asset Management. *Tier system used in China to rank cities based on GDP, politics and population. (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 September PBoC 1 year deposit rate 32

33 China credit growth GTM Europe 33 China credit growth China new bank credit breakdown by borrowers % change year on year % of total credit extended 6 Households Corporations NBFI* Government 1 Global economy 5 4 Total social financing Augmented credit 4 1 RMB bank lending 2 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 YTD 33 Source: (Left) People s Bank of China, J.P. Morgan Asset Management. The augmented credit measure consists of all reported bank claims on the domestic economy, plus bankers acceptances, entrusted loans, trust loans, new net corporate bond and non-financial equity financing, issuance of asset-backed securities and interbank loans. Total social financing is a measure of total funds provided to the economy, tabulated from bank loans to individuals and corporations, as well as equity and bond financing to non-financial corporations. RMB bank lending is the sum of all bank-reported claims on domestic borrowers. (Right) CEIC, People s Bank of China, J.P. Morgan Asset Management. *NBFI are Non-Bank Financial Institutions. Guide to the Markets - Europe. Data as of 3 September 217.

34 EM: Economic snapshot GTM Europe 34 EM GDP growth EM inflation % change year on year % change year on year 1 Forecast 13 Forecast Global economy Manufacturing countries Commodity countries -4 ' '2 '4 '6 '8 '1 '12 '14 '16 '18 3 Manufacturing countries Commodity countries 1 ' '2 '4 '6 '8 '1 '12 '14 '16 '18 Source: (All charts) IMF, national statistics agencies, J.P. Morgan Global Economic Research, J.P. Morgan Asset Management. Manufacturing countries are China, India, Malaysia, Mexico, Philippines, Poland, Romania, Thailand, Turkey, Vietnam. Commodity countries are Argentina, Brazil, Chile, Colombia, Indonesia, Kazakhstan, Peru, Russia, South Africa, Venezuela. GDP and inflation aggregates are calculated using the mid-weight average, which is the mean of GDP-weighted average and simple average. Forecasts are from J.P. Morgan Global Economic Research. Guide to the Markets - Europe. Data as of 3 September

35 Emerging market adjustments 35 EM currencies vs. US dollar % from fair value, relative to US dollar Fragile Five current account balance % of GDP 3 2 Global economy 2 1 EM currencies expensive relative to USD Average +1 std. dev '96 '98 ' '2 '4 '6 '8 '1 '12 '14 '16 EM foreign exchange reserves vs. external debt % of GDP EM reserves 35-1 std. dev EM currencies cheap relative to USD -3 '92 '96 ' '4 '8 '12 '16 2 External debt '9 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 ' Source: (Left) J.P. Morgan Asset Management. Based on nominal exchange rates relative to PPP exchange rates and adjusted for GDP per capita. EM currencies used are a weighted average of JPM GBI-EM Global Diversified Index countries. (Top right) Haver Analytics, J.P. Morgan Asset Management. Fragile Five are Brazil, India, Indonesia, South Africa and Turkey. (Bottom right) J.P. Morgan Economic Research, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

36 Globalisation and trade GTM Europe 36 Global economy Exports of goods Global export volumes % of GDP, 216 % change year on year, three-month moving average US US 8 China Eurozone EM ex-china 7 EM Canada Eurozone Global 6 Other DM 5 Brazil 4 India 3 China 2 Russia Mexico 1 Japan Korea '12 '13 '14 '15 '16 '17 Source: (Left) IMF Direction of Trade, IMF World Economic Outlook October 216, J.P. Morgan Asset Management. (Right) CPB Netherlands, Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

37 World stock market returns 37 EUR Local YTD QTD 26,7% Asia ex-jp 38,% -23,% TOPIX -4,6% 73,4% MSCI EM 62,8% 35,4% Small Cap 24,4% 5,5% US S&P 5 2,1% 2,8% Asia ex-jp 19,7% 27,2% Small Cap 35,8% 29,5% US S&P 5 13,7% 24,4% TOPIX 12,1% 16,6% Small Cap 14,5% 17,1% Asia ex-jp 27,9% 4,2% MSCI EM 7,7% 1-yr ann. 9,4% US S&P 5 6,9% 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 16,4% 26,7% US S&P 5 32,4% 19,7% Asia ex-jp 7,7% 12,9% US S&P 5 1,4% 15,3% US S&P 5 12,% 14,3% MSCI EM 23,9% 3,% Asia ex-jp 6,7% 8,4% Small Cap 6,4% 4,6% Portfolio 11,1% -37,9% HDY Equity -34,4% 4,2% Small Cap 4,8% 27,5% MSCI EM 14,4% -5,7% Small Cap -8,7% 16,8% MSCI EM 17,4% 21,5% TOPIX 54,4% 16,5% Small Cap 6,7% 11,5% Small Cap 2,8% 14,9% MSCI EM 1,1% 1,1% Eur ope 12,2% 2,7% Europe 3,5% 6,3% Asia ex-jp 5,1% Equities 3,2% Eur ope 6,5% -1,% HDY Equity 4,7% -38,6% Small Cap -4,4% -4,3% Portfolio -4,1% 37,6% Portfolio 35,8% 34,% HDY Equity 3,2% 23,9% TOPIX 1,% 23,1% US S&P 5 15,1% -5,8% Portfolio -7,5% -7,5% Eur ope -8,8% 16,3% Small Cap 18,4% 15,6% Portfolio 17,1% 2,5% Eur ope 22,3% 15,3% Portfolio 23,6% 16,2% HDY Equity 8,7% 15,3% Portfolio 8,2% 8,8% Eur ope 5,4% 8,3% Portfolio 1,9% 14,3% HDY Equity 13,1% 1,1% Portfolio 9,% 8,2% Portfolio 15,9% 4,4% Small Cap 13,3% 2,6% Small Cap 5,4% 2,2% Portfolio 4,9% 6,1% HDY Equity 5,2% 6,% Portfolio 4,9% -4,9% US S&P 5 5,5% -43,3% Europe -38,5% 32,5% Eur ope 28,6% 2,9% Portfolio 11,1% -9,6% TOPIX -17,% 14,2% US S&P 5 16,% 13,9% HDY Equity 2,5% 11,8% MSCI EM 5,6% 6,3% HDY Equity,2% 8,9% Asia ex-jp 6,4% 4,% TOPIX 12,5% 1,1% HDY Equity 3,7% 4,5% MSCI EM 4,7% -8,8% Small Cap -3,8% -49,8% Asia ex-jp -47,7% 22,5% US S&P 5 26,5% 16,2% HDY Equity 8,% -14,3% Asia ex-jp -14,6% 13,6% HDY Equity 14,% -1,1% Asia ex-jp 6,2% 1,1% TOPIX 1,3% 1,5% Asia ex-jp -5,3% 6,6% TOPIX,3% 3,% HDY Equity 1,9%,9% TOPIX 4,7% 3,5% TOPIX 1,% -14,5% TOPIX -11,1% -5,8% MSCI EM -45,7% 1,5% TOPIX 7,6% 11,7% Europe 7,5% -15,4% MSCI EM -12,5% 5,9% TOPIX 2,9% -6,5% MSCI EM 3,8% 7,4% Europe 5,2% -4,9% MSCI EM -5,4% 3,2% Europe 7,9% 1,9% US S&P 5 14,2%,8% US S&P 5 4,5% 3,2% Eur ope 3,5% Source: FactSet, MSCI, Standard & Poor s, TOPIX, J.P. Morgan Asset Management. Annualised return covers the period 27 to 216. HDY Equity: MSCI AC World High Dividend Yield Index; Small Cap: MSCI The World Small Cap Index. Hypothetical portfolio (for illustrative purposes only and should not be taken as a recommendation): 3% Europe; 2% S&P 5; 15% EM; 1% Asia ex-japan; 1% TOPIX; 1% HDY equity and 5% small cap. All indices are total return. Guide to the Markets - Europe. Data as of 3 September

38 European sector returns and valuations 38 MSCI Europe Index Financials* Health care Cons. staples Cons. disc. Industrials Materials Energy Telecom Utilities Tech Europe Europe weight Growth weight Value weight 21,4% 12,8% 13,7% 1,5% 13,1% 7,9% 6,9% 3,8% 3,7% 4,8% 1% 5,2% 15,4% 24,9% 14,8% 18,7% 9,6%,4% 1,7%,6% 8,3% 1% 36,9% 1,4% 2,8% 6,5% 7,7% 6,3% 13,2% 6,% 6,7% 1,4% 1% Weights 3Q17 4,5, -1,5 4,5 3,6 9,5 1,1,7 3,9 5,6 3,5 Equities YTD Since market peak** Since market low*** 16, 11, 1, 1,7 17,3 14,5,9 3,9 13,7 2, 12,2-16,3 122,8 137,8 96,2 62,3 26,6 41,2 47,6 6,7 42,4 42,8 256,2 219,7 247,7 333,9 28,7 2,2 93,8 121,8 87,8 26,2 26,2 Return Beta to Europe 1,36x,65x,64x,96x 1,12x 1,28x 1,x,81x,86x,98x 1,x β Forward P/E ratio 11,7x 16,1x 19,7x 12,6x 16,9x 15,5x 15,2x 15,2x 14,5x 19,8x 14.9x 15-year average Trailing P/E ratio 1,4x 14,9x 16,2x 13,4x 14,2x 12,6x 11,3x 47,x 12,7x 18,1x 13.5x 13,2x 16,9x 2,5x 13,7x 18,6x 16,7x 19,5x 17,1x 14,4x 22,x 16,3x P/E 15-year average 12,2x 15,8x 16,7x 15,1x 15,4x 14,5x 12,2x 14,7x 12,8x 12,1x 13,9x Dividend yield 15-year average 3,9% 2,8% 2,8% 2,7% 2,4% 2,7% 5,7% 4,8% 4,7% 1,4% 3,2% 4,% 2,8% 2,8% 2,8% 2,8% 2,8% 4,4% 4,7% 5,% 1,8% 3,4% Source: FactSet, MSCI, Thomson Reuters Datastream, J.P Morgan Asset Management. All calculations are total return in local currency, not annualised. Technology and Telecomms have 1-year rather than 15-year numbers on forward and trailing P/E due to data availability. *Financials no longer includes real estate, which is now a separate section making up 2,6% of the MSCI Europe Value index and,5% of the MSCI Europe growth index. It is not included in the chart due to a lack of historical data for the sector. ** 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. Guide to the Markets - Europe. Data as of 3 September 217. Div 38

39 Relative equity valuations GTM Europe 39 Global earnings EPS, US dollar, rebased to 1 in January Global valuations Current and 25-year historical valuations 4x 75x Axis 5.2x 2 US 35x Current 25-year range 25-year average 4.8x 4.4x Equities Japan EM Price-to-earnings 3x 25x 2x 15x 4.x 3.6x 3.2x 2.8x 2.4x 2.x 1.6x Price-to-book 8 6 Europe 1x 5x 1.2x.8x.4x 4 '9 '1 '11 '12 '13 '14 '15 '16 '17 x US Europe UK Japan EM ex-uk.x Source: (Left) FTSE, IBES, MSCI, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Right) FactSet, MSCI, Standard & Poor s, J.P. Morgan Asset Management. Valuations refer to NTMA P/E for Europe ex-uk, US, Japan, UK and P/B for emerging markets. Valuation and earnings charts use MSCI indices for all regions/countries, except for the US, which is the S&P 5. Guide to the Markets - Europe. Data as of 3 September

40 European equities 4 European earnings vs. the euro Last 12 months earnings per share, euros (LHS); US dollars per euro (RHS) MSCI Europe EPS Europe vs. US operating profits margins %, earnings per share / sales per share S&P 5 Equities '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 European equities flows EUR billions, cumulative 2 MSCI Europe 5 EURUSD '98 ' '2 '4 '6 '8 '1 '12 '14 ' Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Source: (Left) MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) MSCI, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) GFICC Quantitative Research Group, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

41 MSCI Europe performance and drivers 41 MSCI Europe earnings and performance Index level, next 12 months earnings estimates (LHS); index level (RHS) 13 MSCI Europe EPS MSCI Europe index level 1,8 Eurozone yearly earnings trend EPS, rebased to 1 in January , Equities ,4 1, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec European 2Q earnings by sector EPS, % change year on year , '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 6 Source: (Left) IBES, MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) IBES, MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Securities Research, J.P. Morgan Asset Management. EPS is earnings per share. Earnings are 2Q EPS growth figures. Guide to the Markets - Europe. Data as of 3 September

42 MSCI Europe equity valuations GTM Europe 42 Equities MSCI Europe forward P/E ratio x, multiple '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 4 Average: 13,5x 3 September 217: 14,9x MSCI Europe cyclically adjusted P/E ratio x, adjusted using trailing 1-year average inflation-adjusted earnings Dividend yield and 1-year bond yield % yield Dividend yield 3 September 217: 3,2% Average: 17,7x 3 September 217: 17,4x '8 '84 '88 '92 '96 ' '4 '8 '12 ' year German Bund yield 3 September 217:,5% -1 '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 Source: (Top left) IBES, MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom left) FactSet, MSCI, J.P. Morgan Asset Management. (Right) MSCI, Thomson Reuters Datastream, Tullett Prebon, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

43 MSCI Europe Index at inflection points 43 MSCI Europe Index 1,8 4 Sep 2: P/E = 22,x Characteristic Sep 2 Jul 27 Sep 217 Index level P/E ratio (fwd) 22,x 13,3x 14,9x Dividend yield 1,8% 2,8% 3,2% German 1-year 5,3% 4,6%,5% 16 Jul 27: P/E = 13,3x September 217: P/E = 14,9x ,4 Total return: +133% Equities -55% +18% -54% +26% 1, 31 Dec 1996: P/E = 14,6x Mar 23: P/E = 14,4x Mar 29: P/E = 9,2x '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 '17 Source: FactSet, MSCI, Tullett Prebon, J.P. Morgan Asset Management. Local currency returns. P/E ratios are forward P/E ratios. Return calculations shown in green are based on the total return index. Guide to the Markets - Europe. Data as of 3 September

44 European small capitalisation equities 44 Equities Small cap relative performance and economic performance % change year on year, relative performance (LHS); % (RHS) MSCI small cap minus large cap performance 2 1 Risk-adjusted returns by company size and holding period Sharpe ratio level* 2.5 Small caps Mid caps 2. Large caps year 5-year 1-year European small cap: Price-to-book ratio x, multiple -1-1 Average: 1,8x 3 September 217: 1,95x month percentage change in eurozone composite PMI -3 '4 '6 '8 '1 '12 '14 '16 Source: (Left) Markit, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) Bloomberg, MSCI, J.P. Morgan Asset Management. *Risk-adjusted returns are calculated assuming the risk-free rate is equal to zero. (Bottom right) Citibank, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

45 UK equities 45 FTSE All-Share earnings and performance Index level, next 12 months earnings estimates (LHS); index level (RHS) 32 FTSE All-Share EPS FTSE All-Share index level 4,5 Commodities weights % of index 2 3 4, ,5 5 Equities , FTSE All-Share MSCI Europe ex-uk S&P 5 Dividend yield and ex-energy dividend yield % yield MSCI Japan 2,5 UK 22 Eurozone MSCI EM 2 18 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 2, 1,5 MSCI World Japan US Dividend yield Dividend yield ex-energy Source: (Left) FTSE, IBES, Thomson Reuters Datastream, J.P. Morgan Asset Management. EPS is earnings per share. (Top right) FactSet, FTSE, MSCI, Standard & Poor s, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Economic Research, J.P. Morgan Asset Management. UK is MSCI UK, Japan is Topix, eurozone is Euro Stoxx 5, US is S&P 5. Guide to the Markets - Europe. Data as of 3 September

46 US S&P 5 at inflection points 46 S&P 5 Index 2,6 2,4 2,2 Characteristic Mar 2 Oct 27 Sep 217 Index level P/E ratio (fwd) 22,6x 14,8x 17,9x Dividend yield 1,1% 1,7% 1,9% US 1-year 6,2% 4,6% 2,3% 3 September 217: P/E = 17,9x , Equities 1,8 1,6 1,4 Total return: +116% 24 Mar 2: P/E = 22,6x % +121% 9 Oct 27: P/E = 14,8x % 1,2-55% 1, 8 31 Dec 1996: 9 Oct 22: 9 Mar 29: P/E = 15,7x P/E = 15,4x P/E = 1,8x '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 Source: FactSet, Standard & Poor s, Tullett Prebon, J.P. Morgan Asset Management. The P/E ratios are forward P/E ratios. Return calculations shown in green are based on the total return index. Guide to the Markets - Europe. Data as of 3 September

47 US equities 47 Equities 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 6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 2,8 2,6 2,4 2,2 2, 1,8 1,6 1,4 1,2 1, 8 6 Initial jobless claims vs. S&P 5 performance Thousands, three-month moving average (LHS); index level (RHS) 7 Initial jobless claims S&P 5 index level 2,7 6 2,4 2,1 5 1,8 4 1,5 1, '98 ' '2 '4 '6 '8 '1 '12 '14 '16 S&P 5 earnings per share (EPS) vs. ISM manufacturing Index level (LHS); % change year on year (RHS) ISM manufacturing EPS '98 ' '2 '4 '6 '8 '1 '12 '14 '16 Source: (Left) IBES, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) BLS, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) ISM, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September

48 US S&P 5 equity indicators 48 Equities Leading economic indicator vs. S&P 5 performance Index level 13 Leading economic S&P 5 indicator ,6 2,2 1,8 1,4 Forward P/E ratio x, multiple Jul 1999: 24,5x Average: 15,8x 3 September 217: 17,9x '9 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 '16 S&P 5 Shiller cyclically adjusted P/E x, adjusted using trailing 1-year average inflation-adjusted earnings 5 3 September 217: 3,7x , Average: 16,8x 85 '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 '17 6 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 ' '1 Source: (Left) Conference Board, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) IBES, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) Robert Shiller, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 September