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

Transcription

1 MARKET INSIGHTS Guide to the Markets Asia 4Q 2017 As of September 30, 2017

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 São Paulo Dr. Jasslyn Yeo, CFA Singapore Kerry Craig, CFA Melbourne 2

3 Page reference Regional and local economy 4. Asia: Economic snapshot 5. ASEAN: Economic snapshot 6. China: Economic snapshot 7. China: Cyclical indicators 8. China: Monetary policy 9. China: Credit and leverage 10. China: Fiscal policy 11. China: Exchange rate and foreign reserves 12. India: Economic snapshot 13. Japan: Economic snapshot Global economy 14. Global growth 15. Global Purchasing Managers Index (PMI): Manufacturing 16. Global inflation dynamics 17. Inflation and policy rates 18. G4 policy rates and market expectations 19. Central bank balance sheets 20. Global trade 21. United States: Economic growth and the composition of GDP 22. United States: Growth drivers 23. United States: Policy change and uncertainty 24. United States: Labor market and inflation 25. United States: Monetary policy 26. Eurozone: Economic snapshot 27. Eurozone: Inflation and lending Equities 28. Global and Asia equity market returns 29. Global equities: Earnings momentum 30. Global equities: Valuations 31. Global equities: Performance cycles 32. Global equities: High dividend 33. Emerging markets: Valuation analysis 34. APAC ex-japan and U.S. equities 35. APAC ex-japan: Valuation analysis 36. APAC ex-japan: Earnings snapshot 37. APAC ex-japan: Cyclical versus defensive equities 38. APAC ex-japan: Sector returns and valuations 39. China A-shares versus H-shares: Earnings and valuations 40. Japan: Policies, currency and equities 41. United States: Earnings and valuations 42. Europe: Earnings and valuations Fixed income 43. Global fixed income: Yields and returns 44. Global fixed income: Interest rate risk 45. Global fixed income: Valuations 46. Global fixed income: Return composition and relative valuations 47. Global government bonds 48. Global investment grade bonds 49. U.S. high yield bonds 50. Emerging market debt: Fundamentals 51. China fixed income market Other asset classes 52. Asset class returns 53. Asset class correlations 54. Volatility 55. Treasury yield and asset class performance 56. Currencies 57. Commodities 58. Oil: Short-term market dynamics 59. Gold 60. Alternative sources of income Investing principles 61. Real return on cash and yields 62. Investors market timing 63. Annual returns and intra-year declines 64. The compounding effect 65. Portfolio construction, asset class returns and volatility 66. The benefits of diversification and long-term investing 67. The benefits of saving and investing early GTM Asia 3 3

4 Asia: Economic snapshot GTM Asia 4 Regional and local economy EM Asia* contribution to real GDP growth Year-over-year growth 8% 6% Investment Consumption** Net exports GDP Investment and exports EM Asia* nominal investment, export volumes, y/y change, 3MMA 3 25% 2 4% 15% 1 Investment 2% 5% Export volumes -5% -2% -1-15% -4% '12 '13 '14 '15 '16 '17-2 '01 '03 '05 '07 '09 '11 '13 '15 '17 Source: J.P. Morgan Economic Research, National Statistics Agencies, J.P. Morgan Asset Management; (Left) CEIC; (Right) Netherlands Bureau of Policy Analysis. *EM Asia includes China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. **Consumption includes both private/household and public/government consumption. 4

5 ASEAN: Economic snapshot GTM Asia 5 Regional and local economy Exports Year-over-year change, 3-month moving average 25% 2 Philippines 15% Indonesia Consumption growth Year-over-year change 18% 15% 12% 9% 6% Indonesia Philippines Malaysia 1 5% Malaysia Thailand 3% Thailand Singapore -3% '12 '13 '14 '15 '16 '17-5% Singapore Infrastructure spending as % of GDP 4% % -1 2% -15% 1% -2 '12 '13 '14 '15 '16 '17 Indonesia Malaysia Philippines Singapore Thailand Source: National Statistics Agencies, J.P. Morgan Asset Management; (Left) FactSet; (Top right) CEIC; (Bottom right) HSBC. 5

6 China: Economic snapshot GTM Asia 6 Regional and local economy Contribution to real GDP growth Year-over-year change 2 Gross capital formation (investment) Consumption 16% Net exports GDP 12% 2016: 6.7% 8% Caixin/Markit Purchasing Managers Indices Level 56 Services 54 8/2017: /2017: Manufacturing 46 '11 '12 '13 '14 '15 '16 '17 4% Electricity consumption Year-over-year change, year-to-date 18% 15% 12% Tertiary 8/2017: 10.4% 9% -4% 6% 3% Secondary 8/2017: 6.3% -8% '80 '85 '90 '95 '00 '05 '10 '15-3% '11 '12 '13 '14 '15 '16 '17 Source: J.P. Morgan Asset Management; (Left and bottom right) CEIC, FactSet, National Bureau of Statistics of China; (Top right) Caixin/Markit. 6

7 China: Cyclical indicators GTM Asia 7 Regional and local economy Retail and auto sales Year-over-year change, 3-month moving average 25% Retail sales 2 15% 3 25% 2 15% 1 5% China home prices Year-over-year change Tier-3 cities Tier-1 cities 1 Auto sales 5% '11 '12 '13 '14 '15 '16 '17-5% -1 Tier-2 cities Industrial profits and PPI inflation Year-over-year change 4 Industrial profits PPI inflation 9% Residential floor space sold and completed Year-over-year change, 3-month moving average 6 3 6% 4 Completed Sold 2 1 3% 2-3% -1 '11 '12 '13 '14 '15 '16 '17-6% -2 '11 '12 '13 '14 '15 '16 '17 Source: CEIC, FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management; (Top left) J.P. Morgan Economic Research. 7

8 China: Monetary policy GTM Asia 8 Regional and local economy Key policy rates Per annum 6% 5% Chinese government bond yields Lending rate (1-year) 10-year 4% 3% Standing lending facility (7-day) 5-year 2% Interbank repo (7-day) Deposit rate (1-year) 1% Interest on excess reserves 2-year '15 '16 '17 Source: FactSet, People s Bank of China, J.P. Morgan Asset Management; (Left) CEIC. 8

9 China: Credit and leverage GTM Asia 9 Regional and local economy Credit growth to GDP growth Broad credit measure*, ratio, year-over-year growth, 3-month moving average 4.0x Rapid rebound in CPI & PPI 3.5x 3.0x Tightening: 125bp rate hikes, BASEL III adoption Interbank liquidity crunch Tightening: shadow banking Loosening: 165bp rate cuts, LGFV debt swap*** Loosening: 216bp 2.5x rate cuts, 4tn Loosening: 56bp A-share tightening 2.0x stimulus rate cuts, trust market crash 1.5x boom Rate cut 1.0x 0.5x Global Financial Crisis Wenzhou SME crisis** 0.0x '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Tightening Credit growth Year-over-year change Total social financing New bank credit breakdown by borrowers % of total credit extended 10 8 Households Corporations NBFI**** Government 3 2 Broad credit* RMB bank lending 2 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 YTD 9 Source: People s Bank of China, J.P. Morgan Asset Management; (Top and bottom left) CEIC; (Bottom right) BIS. Credit growth to GDP growth ratio utilizes rolling 12-month nominal GDP and broad credit. *The broad 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. **Wenzhou SME crisis refers to the wave of bankruptcies and funding problems faced by a large number of small and medium enterprises (SMEs) in Wenzhou in ***LGFV refers to local government financing vehicle. ****NBFI stands for Non-Bank Financial Institutions. YTD new bank credit breakdown by borrowers is as of 31/8/2017.

10 China: Fiscal policy GTM Asia 10 Regional and local economy Fixed asset investment Year-over-year change, year-to-date 4 Private 3 Fiscal balance* Share of GDP 2% 1% -1% -2% -3% -4% -5% 2Q 2017: -3.9% '06 '08 '10 '12 '14 '16 2 Local government Public project planned investment RMB trillions Newly started projects Projects under construction 1 State-owned enterprises '11 '12 '13 '14 '15 '16 ' Source: CEIC, FactSet, National Bureau of Statistics, J.P. Morgan Asset Management. *Fiscal balance is the difference between reported total government revenue and government expenditure. 10

11 China: Exchange rate and foreign reserves GTM Asia 11 Regional and local economy Chinese yuan exchange rate: CFETS RMB* vs. USD Index, rebased January 2016 = 100 Stronger yuan USD / CNY and change in FX reserves USD / CNY (inverted) USD / CNY CFETS RMB index Weaker yuan Change in monthly FX reserves (USD billions) Source: FactSet, J.P. Morgan Asset Management; (Left) China Foreign Exchange Trade Center, J.P. Morgan Economic Research; (Right) People s Bank of China. *CFETS RMB index is the China Foreign Exchange Trade System basket of 24 currencies traded against the renminbi. 11

12 India: Economic snapshot GTM Asia 12 Regional and local economy Real GDP growth Year-over-year change 14% 12% 1 8% 10-yr avg. 2Q17 Real GDP growth 7.3% 5.7% Vehicle sales Number of passenger vehicles, thousands Average: Jul. 2017: % 4% 2% '06 '08 '10 '12 '14 '16 Inflation and repo rate Year-over-year change, % per annum 18% 14% 1 6% 2% -2% -6% CPI Repo rate WPI* Latest WPI 3. Repo rate 6. CPI 3.4% Credit and deposit growth Year-over-year change 4 '05 '07 '09 '11 '13 '15 '17 '06 '08 '10 '12 '14 '16 Source: J.P. Morgan Asset Management; (Top left) J.P. Morgan Economic Research, Ministry of Statistics and Programme Implementation; (Top right) Society of Indian Automobile Manufacturers; (Bottom left and right) Reserve Bank of India; (Bottom right) Reuters. *Wholesale Price Index (WPI) value shown is year-over-year change. 35% 3 25% 2 15% 1 5% Domestic credit Deposits 12

13 Japan: Economic snapshot GTM Asia 13 Regional and local economy Tankan business conditions Diffusion Index, all enterprises Manufacturing Non-manufacturing '85 '90 '95 '00 '05 '10 '15 Corporate inflation expectations* % 5 years ahead 1.2% Latest 5 years ahead 1.1% 3 years ahead 0.8% 3 years ahead 1.1% 1 year ahead 0.8% 1 year ahead 0.4% '14 '15 '16 '17 Operating profits Year-over-year change Manufacturing Real wage growth and labor market Year-over-year change, 6-month moving average Inverted scale Total real cash earnings Unemployment rate 2 Non-manufacturing -2-4 '11 '12 '13 '14 '15 '16 '17 Source: J.P. Morgan Asset Management; (Top left and top right) Bank of Japan; (Bottom left and right) FactSet; (Bottom left) Ministry of Finance; (Bottom right) Japanese Statistics Bureau and Statistics Center, Ministry of Health, Labor and Welfare. *Inflation expectations are calculated from the responses to the Bank of Japan s all firm survey of business expectations and are for inflation expectations 1, 3 and 5 years from each point in time. 13

14 Global growth GTM Asia 14 Global economy Real GDP growth Year-over-year change 1 Emerging market (EM) GDP growth Developed market (DM) GDP growth 8% EM less DM growth EM growth outperforms DM 6% 4% Forecast* 2% -2% DM growth outperforms EM -4% -6% '80 '85 '90 '95 '00 '05 '10 '15 '20 Source: IMF, J.P. Morgan Asset Management. *Forecasts are from the IMF s April 2017 World Economic Outlook. 14

15 Global Purchasing Managers Index (PMI): Manufacturing GTM Asia 15 Global Purchasing Managers Index for manufacturing Global economy Oct'15 Nov'15 Dec'15 Jan'16 Feb'16 Mar'16 Apr'16 May'16 Jun'16 Jul'16 Aug'16 Sep'16 Oct'16 Nov'16 Dec'16 Jan'17 Feb'17 Mar'17 Apr'17 May'17 Jun'17 Jul'17 Aug'17 Sep'17 Global DM EM U.S Euro area Germany France Italy Spain Greece UK Australia Japan China China (NBS) Korea Taiw an Indonesia India Russia Brazil Mexico # countries above 50* Source: Australian Industry Group, J.P. Morgan Economic Research, Markit, National Bureau of Statistics of China (NBS), J.P. Morgan Asset Management. Heatmap colors are based on PMI relative to 50, which indicates contraction (below 50) or expansion (above 50) of the sector. *Number of countries displayed in the above heatmap, excluding regional aggregates (Global, DM, EM and euro area), which are in expansionary territory. The Markit PMI, not the National Bureau of Statistics PMI, is counted for China. 15

16 Composite output PMI core CPI, year-over-year change, lagged 3-months % Core CPI (lagged 3-months) 65 Global inflation dynamics Developed market inflation and growth GTM Asia 16 Inflation and productivity Productivity growth, CPI, year-over-year change, lagged 6-months 5% 4% Global headline CPI (lagged 6-months) Global economy % 2% 1% % % -2% Global productivity growth 35-3% Composite PMI 30 '00 '02 '04 '06 '08 '10 '12 '14 '16 0.5% -4% '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 Source: J.P. Morgan Economic Research, J.P. Morgan Asset Management; (Left) Markit; (Right) National statistics agencies. 16

17 Inflation and policy rates GTM Asia 17 Monthly inflation trend Year-over-year change Below target or below range by more than 0.5% Within +/- 0.5% of target or within range Above target or above range by more than 0.5% Global economy Country Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Central bank target Key policy rate* ( easing, tightening) China ( 10/2015) India ( 8/2017) Indonesia ( 9/2017) Japan ( 2/2016) Korea ( 6/2016) Malaysia ( 7/2016) Taiwan ( 6/2016) Thailand ( 4/2015) U.S ( 6/2017) Eurozone ( 3/2016) UK ( 8/2016) 17 Source: FactSet, various central banks, J.P. Morgan Economic Research, J.P. Morgan Asset Management. All inflation numbers refer to headline CPI inflation. *Arrows and dates indicate the direction and date of last change, respectively. The central bank s policy rates used are: the one-year benchmark lending rate (China), RBI policy repo rate (India), BI 7-day reverse repo rate (Indonesia), the BoJ s policy rate on the aggregate balance of all financial institutions current accounts at the BoJ (Japan), BoK base rate (Korea), overnight policy rate (Malaysia), discount rate (Taiwan), one-day repurchase rate (Thailand), fed funds rate (U.S.), eurozone main refinancing operations rate (eurozone) and BoE official bank rate (UK).

18 G4 policy rates and market expectations GTM Asia 18 Global economy Central bank key policy rates BoE official bank rate (BoE) Policy rate Deposit rate* Eurozone % Japan -0.1 to % UK 0.25% 0. U.S. 1.0 to 1.25% 1.25% Market expectations for policy rates Market implied policy rates*** 2.1% 1.74% 1.8% 1.63% 1.5% 1.32% 1.2% 0.92% 0.78% 0.9% U.S. UK 1.87% 1.03% BoJ uncollateralized overnight call rate** (BoJ) Eurozone main refinancing operations rate (ECB) Federal funds rate (Fed) 0.6% 0.3% % -0.6% 0.45% 0.25% Eurozone -0.06% -0.05% -0.02% -0.06% Japan 0.03% -0.28% -0.36% 12/17 12/18 12/19 12/20 Source: Bloomberg Finance L.P., J.P. Morgan Asset Management; (Left) FactSet. G4 are the Bank of England, the Bank of Japan, the European Central Bank and the U.S. Federal Reserve. *Key deposit rates that central banks charge commercial banks on their excess reserves. **The BoJ is adopting a three-tier system in which a negative interest rate of -0.1% will be applied to the policy rate balance of the aggregate amount of all financial institutions that have current accounts at the BoJ. ***Market implied policy rates are derived from the Overnight Index Swaps market. 18

19 Central bank balance sheets Central bank asset holdings Share of domestic government bonds owned by G4 central banks 45% Central bank asset purchases GTM Asia month rolling bond purchases by G4 central banks*, USD billions 2000 Projections 4 Japan Global economy 35% 3 25% UK Eurozone % U.S. 1 5% '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 0 U.S. Eurozone -500 UK Japan Net '16 '17 '18 '19 Source: Bloomberg Finance L.P., J.P. Morgan Asset Management. *New purchases of assets are based on monthly holdings as reported by each respective G4 central bank (the U.S. Federal Reserve (Fed), the European Central Bank (ECB), the Bank of Japan (BoJ) and the Bank of England (BoE)), announced purchase plans for the Fed, the ECB, the BoE and the BoJ, and J.P. Morgan Asset Management projections. 19

20 Global trade GTM Asia 20 Global economy Globalization sentiment and GDP per capita growth Attitudes toward globalization and % change in GDP per person 10 % agreeing: Globalization is a force for good Norway Finland Sweden Australia UK United States France Hong Kong Germany Saudi Arabia Vietnam Philippines India Thailand Malaysia Singapore Denmark UAE Indonesia Developed markets Emerging markets 3-5% 5% 1 15% 2 25% 3 35% Growth of GDP per capita at purchasing power parity, Exports as a share of GDP 2016 Goods exports* U.S. EU* Japan Canada Brazil India China Russia Mexico Australia Korea ASEAN Taiwan 7.8% 11.8% 10.3% 13.1% 11.6% 15.2% % 25.5% 35.7% 35.1% U.S. 45.1% 52.9% EU Japan China Other Source: FactSet, IMF, J.P. Morgan Asset Management; (Left) Economist/YouGov, World Bank. *EU exports as a percentage of GDP excludes intra-eu trade as the European Union is considered one regional economy. Change in GDP per capita at purchasing power parity is based on World Bank data. 20

21 United States: Economic growth and the composition of GDP GTM Asia 21 Global economy Real GDP Year-over-year change 1 8% 6% 4% 2% Real GDP 2Q17 Year-over-year change: 2.2% Quarter-over-quarter SAAR change: 3.1% Average: 2.8% Average post-gfc: 2.2% Components of GDP 2Q17 nominal GDP, USD trillions % Housing % Investment ex-housing % Gov t spending % Consumption -2% 5 3-4% 1-6% '67 '72 '77 '82 '87 '92 '97 '02 '07 '12 ' % Net exports Source: Bureau of Economic Analysis, FactSet, J.P. Morgan Asset Management. 21

22 United States: Growth drivers GTM Asia 22 Light vehicle sales Millions, seasonally adjusted annualized rate 24 Retail sales Year-over-year change, 3-month moving average Global economy /2017: Average: '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 Average: 2.6% 9/2017: 3.2% Housing starts Thousands, seasonally] adjusted annualized rate 2,400 2,000 U.S. capital expenditures & CEO economic outlook Year-over-year change Real private non-residential fixed investment Index 1,600 1, Average: 1,326 8/2017: 1,180 0 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 CEO economic outlook Source: J.P. Morgan Asset Management; (Top left) U.S. Bureau of Economic Analysis; (Top right, bottom left and right) FactSet; (Bottom left and right) U.S. Census Bureau. 22

23 United States: Policy change and uncertainty GTM Asia 23 Global economy OECD corporate income tax rate by country 4 35% % 25% 26% 2007 Share of nominal GDP, , 2016 CBO baseline % Forecast 2% 22% -2% U.S. federal budget surplus / deficit 2 35% -4% -6% 1 22% 23% 22% 2017: -3.6% 19% -8% 16% 15% -1-12% Average* U.S. Japan Korea UK Germany Canada '90 '95 '00 '05 '10 '15 '20 '25 Trade barriers Share of U.S. goods imports subject to trade barriers** 12% 1 Estimated*** Market reaction to budget concerns 3-month minus 1-month T-bill yields, basis points 8% China 6% 4% Total 2% Total ex-china '95 '98 '01 '04 '07 '10 '13 ' debt ceiling/gov. shutdown 2015 debt ceiling 2016 gov. funding 2017 debt ceiling 23 Source: J.P. Morgan Asset Management; (Top left) OECD; (Bottom left) Chad P. Bown, Peterson Institute for International Economics, Office of the U.S. Trade Representative; (Top right) CBO; (Bottom right) FactSet, Federal Reserve federal deficit is based on the Congressional Budget Office (CBO) June 2017 Baseline Budget Forecast. *Average based on Organization for Economic Cooperation and Development s (OECD) 35 countries in simple average terms. **Trade barriers = antidumping, countervailing duties, global safeguards and national security. ***Projected share through 2017 based on actions taken during the first 100 days of the Trump presidency.

24 United States: Labor market and inflation GTM Asia 24 Unemployment rate and average hourly earnings* Percent of labor force, year-over-year change, seasonally adjusted Recessions Inflation Year-over-year change, seasonally adjusted Avg. since 1985 Avg. since /2017 Headline CPI 2.6% 2.2% 1.9% Global economy Unemployment rate PCE** 2.2% 1.8% 1.4% Core PCE** 2.2% 1.7% 1.3% 8/2017: 4.4% 8/2017: 2.3% Average hourly earnings Source: FactSet, U.S. Bureau of Labor Statistics, J.P. Morgan Asset Management; (Right) U.S. Bureau of Economic Analysis. *Average hourly earnings are calculated from the wages of production and non-supervisory workers. **PCE and core PCE are the Personal Consumption Expenditure (PCE) deflator. 24

25 United States: Monetary policy GTM Asia 25 Global economy Federal funds rate expectations* FOMC and market expectations for the fed funds rate 6% FOMC median projections (as of 20/9/17) Market expectations (as of 30/9/17) 5% FOMC long-run projection (as of 20/9/17) 4% Federal Reserve balance sheet USD trillions Jan. 2014: Tapering of purchases begins Sep. 2011: Operation Nov. 2010: Twist QE2 begins Sep. 2012: QE3 begins Oct. 2014: End of QE3; balance sheet stands at $4.5T Other MBS Forecast* 3% Federal funds rate % 1% % 1.75% 1.59% 2 1 Dec. 2008: QE1 begins Treasuries 25 Long '05 '07 '09 '11 '13 '15 '17 '19 '21 run 0 '05 '07 '09 '11 '13 '15 '17 '19 '21 Source: FactSet, Federal Reserve, J.P. Morgan Asset Management. *Balance sheet reduction assumes reduction from current level, beginning October 2017 and lasting four years, concluding in October Reduction of Treasuries and MBS is per FOMC guidelines from the September 2017 meeting minutes: Treasury securities will be reduced $6 billion per month initially and reduction rate will increase in steps of $6 billion at three-month intervals over 12 months until reaching $30 billion per month; MBS will be reduced $4 billion per month initially and reduction rate will increase in steps of $4 billion at three-month intervals over 12 months until reaching $20 billion per month; Other assets are reduced in proportion. Forecasts do not take into account months where maturing assets do not exceed the stated cap nor do they consider the reinvestment of principal or interest repayment in excess of the stated cap.

26 Eurozone: Economic snapshot Economic growth Real GDP growth, q/q seasonally adjusted annual rate 5% 4% Core Periphery 3% Consumer confidence* and retail sales Year-over-year change, 3-month moving average Retail sales GTM Asia 26 Index Global economy 2% 1% -1% -2% '12 '13 '14 '15 '16 '17 Consumer confidence Businesses and investment Business confidence, y/y change fixed asset investment lagged 1Q 2% Eurozone business confidence 1% -1% -2% -3% Fixed investment -4% '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 15% 1 5% -5% -1-15% -2-25% Unemployment rate Share of active population 13% 12% 11% 1 9% 8% 7/2017: 9.1% 7% '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source: Eurostat, FactSet, J.P. Morgan Asset Management; (Top right and bottom left) European Commission. *Eurozone consumer confidence as reported by the European Commission, which measures the level of optimism that consumers have about the economy. Core eurozone countries are: Austria, Belgium, Germany, Finland, France, Luxembourg and the Netherlands; Periphery countries are: Cyprus, Estonia, Greece, Ireland, Italy, Latvia, Lithuania, Malta, Portugal, Slovakia, Slovenia and Spain. 26

27 Eurozone: Inflation and lending GTM Asia 27 Eurozone CPI inflation Contribution to headline inflation, year-over-year change % Eurozone bank lending Year-over-year change Corporate Global economy % 1. ECB inflation target: 2% Household 0.5% Corporate lending rates to smaller companies Interest rate**, non-financial corporations 0. Spain -0.5% -1. Food, alcohol, tobacco Core rate* Energy CPI Germany France Italy -1.5% '12 '13 '14 '15 '16 '17 Source: ECB, FactSet, J.P. Morgan Asset Management; (Left) Eurostat. *Core rate is CPI inflation (HICP) excluding energy, food, alcohol and tobacco. **Interest on new business lending up to 1 million, on a 1-5 year maturity. 27

28 Global and Asia equity market returns GTM Asia yrs ('07 - '16) Q '17 YTD '17 Ann. Ret. Ann. Vol. India Japan India ASEAN U.S. HK U.S. India Japan Taiwan China China U.S. India Equities 73.1% % 102.8% 32.4% % 32.6% 23.9% 9.9% 19.6% 14.8% 43.4% 7.2% 31.6% China U.S. Taiwan Korea ASEAN India Japan U.S. U.S. U.S. Asia ex- JP Korea HK China 66.2% % 80.2% 27.2% -6.1% % 13.4% 1.3% 11.6% 6.7% 32.4% 7.1% 27.6% HK Taiwan ASEAN HK Europe China Europe Taiwan HK Korea Europe Asia ex- JP Taiwan Korea 41.2% % % -10.5% 23.1% % - 0.5% 9.2% 6.5% 31.2% 5.7% 25.4% Asia ex- Asia ex- Europe JP JP Taiwan Korea ASEAN HK China Europe ASEAN HK HK ASEAN HK 40.5% % 72.5% 22.7% % 22.8% 11.1% 8.3% - 2.3% 6.2% 5.1% 27.8% 4.9% 23.6% ASEAN ASEAN Korea India Japan Asia ex- Asia ex- Asia ex- Taiwan ASEAN India U.S. India JP JP JP ASEAN 39.2% % 72.1% 20.9% -14.2% 22.7% 9.8% 6.4% - 6.1% 5.8% 4.5% 24.1% 4.5% 23.2% Korea China China Asia ex- Asia ex- Asia e x- HK Korea Korea Korea Japan Japan Taiwan China JP JP JP 32.6% % 62.6% 19.9% % 4.2% 5.1% - 6.3% 2.7% 4.1% 23.5% 4.2% 23. Europe HK HK Japan Asia e x- JP Europe China HK China HK ASEAN Europe Korea Taiwan 14.4% % 60.2% 15.6% % 19.9% % - 7.6% 2.3% 3.4% 23.4% 3.5% 22.7% Asia ex- Asia ex- Asia ex- Taiwan Europe U.S. China Taiwan Japan China India ASEAN India Europe JP JP JP 9.1% % 36.8% 15.4% -18.2% 17.7% 3.3% - 3.7% - 8.9% 1.1% % 3.1% 21.5% U.S. Korea U.S. China Taiwan U.S. India Europe Taiwan Europe Korea Japan Japan Japan % 27.1% 4.8% -20.2% 16.1% - 3.8% - 5.7% % 2.7% 14.6% 1.4% 16.8% Japan India Japan Europe India Japan ASEAN Korea ASEAN India Taiwan U.S. Europe U.S % % 6.4% 4.5% -37.2% 8.4% - 4.5% -10.7% -18.4% - 1.4% 1.4% 14.4% 1.2% 16.5% Source: FactSet, MSCI, J.P. Morgan Asset Management. Returns are total returns based on MSCI indices in U.S. dollar terms. 10-yr total (net) return data is used to calculate annualized returns (Ann. Ret.) and 10-yr price return data is used to calculate annualized volatility (Ann. Vol.) and reflect the period 31/12/06 31/12/16. 28

29 Global equities: Earnings momentum GTM Asia 29 Forward earnings per share Index, U.S. dollar, rebased to Developed market equities earnings momentum Earnings revision*, three-month moving average Asia Pacific ex-japan U.S U.S. Japan Japan -0.3 Europe Equities Europe EM -0.4 '14 '15 '16 '17 Emerging market equities earnings momentum Earnings revision*, three-month moving average EM EMEA 0.0 EM Latin America EM Asia 20 '08 '09 '10 '11 '12 '13 '14 '15 '16 ' '14 '15 '16 '17 Source: MSCI, J.P. Morgan Asset Management; (Left) Bloomberg Finance L.P.; (Right) Standard & Poor s. *Earnings revision is calculated by taking the difference between the number of analyst upgrades and analyst downgrades, divided by the total number of analyst revisions on a monthly basis. Earnings revision above zero would mean that there were more upgrade revisions than downgrade revisions. 29

30 Global equities: Valuations GTM Asia 30 Equity market valuations Price to earnings Forward P/E ratios 30x yr. range 15-yr. average Latest 20x 10x Equities 0x Equity market valuations Price to book Trailing P/B ratios 5x 4x S&P 500 Europe ex-uk Asia Pac ex-japan Asia Pacific Emerging markets ASEAN Australia China A (CSI 300) China Hong Kong India Japan Korea Taiwan Russia Mexico Brazil Turkey 15-yr. range 15-yr. average Latest 3x 2x 1x 0x S&P Europe ex-uk Asia Pac ex-japan Asia Pacific Emerging markets ASEAN Australia China A (CSI 300) China Hong Kong India Japan Korea Taiwan Russia Mexico Brazil Turkey Source: China Securities Index, FactSet, MSCI, Standard & Poor s, J.P. Morgan Asset Management. P/E and P/B ratios are in local currency terms. China A valuations based on the CSI300 Index and use 10 years of data due to availability. China H valuations are based on the MSCI China. 15-year range for P/E and P/B ratios are cut off to maintain a more reasonable scale. 30

31 Global equities: Performance cycles GTM Asia 31 Periods of Global ex-u.s. and U.S. outperformance Cumulative outperformance, MSCI AC World ex-u.s., MSCI U.S U.S. outperforms Global (ex-u.s.) +215% Equities 10 Global (ex-u.s.) outperforms U.S % +98% +39% -5 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 Source: FactSet, MSCI, J.P. Morgan Asset Management. Performance is based on MSCI AC World ex-u.s. and MSCI USA Total Return indices. 31

32 Global equities: High dividend GTM Asia 32 Equities MSCI AC Asia Pacific ex-japan: Performance by dividend yield* USD cumulative total return of tertiles with quarterly rebalancing (Jan base = 100) Top tertile 2 nd tertile Bottom tertile 500 All stocks '00 '02 '04 '06 '08 '10 '12 '14 '16 Composition of MSCI High Dividend Equity Indices** Defensives Cyclicals Financials MSCI AC World 44.4% 40.8% 14.8% Number of companies yielding greater than 3% by region Constituents of MSCI AC World Index MSCI World (DM) 48.4% 39.4% 12.3% MSCI EM 22.8% 38.2% MSCI AC Asia Pacific ex-japan 28.7% % 0 Asia Pac. ex-japan Europe U.S. EM ex-asia Japan Source: FactSet, MSCI, J.P. Morgan Asset Management; (Top) CLSA. *Total returns based on MSCI indices in U.S. dollar terms. **Sector weight data as of 31/8/17. Positive yield does not imply positive return. 32

33 Emerging markets: Valuation analysis GTM Asia 33 EM vs. DM growth and equity performance Consensus expectations for real GDP growth in 12 months 5% EM minus DM real GDP growth 160 MSCI emerging markets P/B ratio Trailing P/B ratio 4% EM growth & equity outperformance % SD: 2.2x Equities 2% 80 Average: 1.8x 1% 60 EM growth & equity underperformance SD: 1.4x 9/2017: 1.8x MSCI EM relative to MSCI DM* -1% '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 0 Source: FactSet, MSCI, J.P. Morgan Asset Management; (Left) Consensus Economics. *All data represent price return in local currency terms with data since April

34 APAC ex-japan and U.S. equities GTM Asia 34 MSCI AC Asia Pacific ex-japan and S&P 500 Index January 1997 = 100, U.S. dollar, price return P/E 15-yr avg. Div. yield 15-yr. avg. S&P x 14.7x MSCI AC APxJ 13.5x 12.4x 2.8% 3.3% +272% 29/9/17 P/E (fwd.) = 17.7x /10/07 P/E (fwd.) = 15.2x Equities % 31/10/00 P/E (fwd.) = 24.4x -49% +101% 31/10/07 P/E (fwd.) = 16.9x -57% 29/9/17 P/E (fwd.) = 13.4x % 31/12/99 P/E (fwd.) = 17.4x +359% -65% +158% 50-51% 0 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 Source: FactSet, MSCI, Standard & Poor s, J.P. Morgan Asset Management. Forward price-to-earnings ratio is a bottom-up calculation based on the most recent index price, divided by consensus estimates for earnings in the next twelve months (NTM), and is provided by FactSet Market Aggregates. Returns are cumulative and based on price movement only, and do not include the reinvestment of dividends. Past performance is not indicative of future returns. 34

35 APAC ex-japan: Valuation analysis GTM Asia 35 Equities Relative AC APxJ / DM equity performance and USD REER Index, rebased 1995 = 100 Index, inverted scale MSCI AC APxJ / MSCI DM* USD depreciation and Asian equity outperformance USD REER Relative growth and valuation Year-over-year change 24% EM Asia minus U.S. nominal GDP growth 2 16% 12% 8% 4% Relative P/E ratio 2.0-4% -8% MSCI ACAPxJ / S&P 500 P/E '00 '02 '04 '06 '08 '10 '12 '14 '16 MSCI AC Asia Pacific ex-japan P/B ratio Trailing P/B ratio SD: 2.0x USD appreciation and Asian equity underperformance -1 SD: 1.5x Average: 1.8x 9/2017: 1.6x Source: FactSet, MSCI, J.P. Morgan Asset Management; (Top right) J.P. Morgan Economic Research. *All data represent price return in local currency terms with data since January MSCI AC APxJ is the MSCI All Country Asia Pacific ex-japan index. Developed market is represented by the MSCI The World index. REER stands for real effective exchange rate. 35

36 APAC ex-japan: Earnings snapshot GTM Asia 36 Earnings by sector Next 12-month consensus earnings per share, USD, Jan 2011 = Earnings momentum Earnings revision, 3-month moving average 0.1 Cyclicals Utilities Tech Defensives Financials Equities Staples Health care Energy Telecom Discr. Industrials 20 '11 '12 '13 '14 '15 '16 '17 Financials Materials '14 '15 '16 '17 Growth in nominal exports and earnings per share USD, year-over-year change MSCI AC Asia Pacific ex-jp EPS EM Asia ex-china exports* -6 '01 '03 '05 '07 '09 '11 '13 '15 '17 Source: FactSet, MSCI, J.P. Morgan Asset Management; (Bottom right) CEIC, national statistics agencies. Cyclicals include consumer discretionary, industrials, energy, materials and technology. Defensives include consumer staples, health care, telecom and utilities. Earnings per share (EPS) used is next 12 months aggregate estimate. *EM Asia ex-china includes Hong Kong, Malaysia, Singapore, South Korea, Taiwan, Thailand and Vietnam. Overall exports aggregate is GDP-weighted. 36

37 APAC ex-japan: Cyclicals versus defensive equities GTM Asia 37 Cyclicals ex-energy vs. defensive valuations* MSCI AC APxJ cyclicals ex-energy / defensives fwd. P/E ratio, z-score 5 Cyclicals vs. defensives relative performance and rates** MSCI AC APxJ cyclical / defensive performance 10-year U.S. Treasury yield Cyclicals vs. defensives 10-year UST 4 Cyclicals expensive relative to defensives 3 Equities Current: Cyclicals cheap relative to defensives -2 '00 '02 '04 '06 '08 '10 '12 '14 '16 37 Source: FactSet, MSCI, J.P. Morgan Asset Management. *Cyclical sectors include Consumer Discretionary, Information Technology, Industrials, Financials and Materials. REITs are excluded from this analysis. It is more appropriate to value a REIT by looking at its price relative to its funds from operations (FFO), an income measure that excludes depreciation. P/E ratios look at price relative to net income, a measure that includes depreciation, making the comparison of valuations across sectors inappropriate. Defensive sectors include Telecommunications, Health Care, Utilities and Consumer Staples. Sector valuations are equal weighted. **Cyclicals represent the MSCI AC Asia Pacific ex-japan Cyclical Sector index and defensives represent the MSCI AC Asia Pacific ex-japan Defensive Sector index.

38 APAC ex-japan: Sector returns and valuations GTM Asia 38 Financials Real Estate Health Care Cons. Staples Cons. Discr. Industrials Materials Energy Telecom Utilities Technology APAC ex-jp MSCI AC APxJ Weights 26.4% 6.5% 3.1% 4.9% 8.1% 6.9% 6.9% 4.3% Weights 3Q ' Equities YTD ' From peak (October 2007) From trough (October 2008) Beta to APAC ex-jp 1.08x 1.10x 0.49x 0.60x 0.93x 1.07x 1.12x 1.24x 0.79x 0.62x 0.96x 1.00x Correl to int rates* Return β ρ Forward P/E Ratio 10.7x 12.8x 25.4x 19.9x 15.9x 14.3x 13.6x 12.9x 15.2x 13.8x 14.5x 13.4x 10-yr avg. 11.3x 12.6x 20.8x 17.3x 11.6x 13.9x 12.7x 12.2x 13.9x 14.4x 14.1x 12.4x Trailing P/B Ratio 1.3x 0.9x 4.7x 2.8x 1.9x 1.4x 1.5x 1.2x 1.9x 1.4x 2.8x 1.7x 10-yr avg. 1.4x 1.0x 4.3x 2.7x 1.8x 1.5x 1.8x 1.7x 2.2x 1.5x 2.1x 1.7x Dividend Yield 3.9% 3.6% 1.3% 2.7% 1.9% 2.6% 3.2% % 4.1% 1.6% 2.8% 10-yr avg. 4.1% 4.1% 1.7% 3.1% 2.6% 2.7% 2.9% 3.1% 4.3% 3.1% 2.2% 3.3% Div P/B P/E Source: FactSet, MSCI, J.P. Morgan Asset Management. * Correlation to interest rates is calculated using daily sector returns and daily 10-year U.S. Treasury yield over the last 10 years. Returns are total (gross) returns in U.S. dollar terms. 38

39 China A-shares versus H-shares: Earnings and valuations GTM Asia 39 Equities A-share vs. H-Share earnings Next 12-month consensus earnings per share, USD, Jan 2012 = 100 Relative sector weights: A-share MSCI China (H-share) H-share Cyclicals 43.8% 61. Defensives 16.3% 11.7% Financials** 39.9% 27.3% CSI 300 (A-share) A-share vs. H-share premium Index*, price disparity between shares listed as A vs. H 160 A-shares more 150 expensive H-shares more expensive 80 '10 '11 '12 '13 '14 '15 '16 '17 Chinese index valuations NTM PE 45x 40x 35x 30x 25x Average: 113 Shanghai Comp. (A-share) Shenzhen Comp. (A-share) MSCI China (H-share) Hang Seng China (H-share) 25.6x 20x 14.7x 15x 14.7x 10x 8.4x 5x '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 1 Source: J.P. Morgan Asset Management; (Left) FactSet, MSCI; (Top right) HSI Services Limited; (Bottom right) Bloomberg. *The Hang Seng Stock Connect China AH Premium Index ( HSAHP ) tracks the average price difference of A-shares over H-shares for the most liquid Chinese companies with both A-share and H-share listings ( AH Companies ), which are eligible for Northbound and Southbound trading under the Stock Connect Scheme. An index value of 100 means prices are equal. **Both Financials and Real Estate are classified as Financials sectors and all constituent securities from these two sectors are included accordingly.

40 Japan: Policies, currency and equities Real interest rate differential and Japanese yen 2-year U.S. / Japan government bond spread (inflation adjusted) USD / JPY Real interest rate differential Nikkei 225 and Japanese yen Index Nikkei 225 GTM Asia 40 USD / JPY USD / JPY Weaker yen USD / JPY Equities Comparative dividend yield 12-month trailing dividend yield % 3. S&P % % 1. Nikkei % 0. '01 '03 '05 '07 '09 '11 '13 '15 '17 1/15-9/17 Correlation*: 0.59 Stronger yen Source: FactSet, J.P. Morgan Asset Management; (Top left) Bank of Japan, Federal Reserve; (Right) Nikkei; (Bottom left) Bloomberg Finance L.P., Standard and Poor s. *Correlation based on the daily change between the currency and the Nikkei 225 index. 40

41 United States: Earnings and valuations GTM Asia 41 S&P 500 earnings per share Quarterly operating earnings (USD) 35 S&P consensus analyst estimates* 2Q 2017* USD Q 2017 USD Q 2017 USD Q 2018 USD Q 2018 USD Forecast Geographical sources of revenue % 6% 6% 11% 7% 11% 7 82% Others Asia Pacific Europe U.S. Equities '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 S&P 500 S&P Small Cap 600 Case Shiller S&P 500 price earnings (P/E) ratio** 50x 9/2017: 30.7x 45x 40x 35x 30x +1 SD: 24.8x 25x 20x Avg.: 17.3x 15x 10x 5x -1 SD: 9.8x 0x '20 '30 '40 '50 '60 '70 '80 '90 '00 '10 41 Source: FactSet, Standard & Poor s, J.P. Morgan Asset Management; (Left) Compustat; (Bottom right) Yale University Department of Economics. EPS levels are based on operating earnings per share. *2Q earnings estimates are Standard & Poor s consensus analyst expectations, based on actual earnings for the 99% of Standard & Poor s companies that have reported and earnings estimates for the remaining 1% of companies. **Shiller P/E is a valuation measure applied to the U.S. S&P 500 equity market, which is based on the average inflation-adjusted earnings from the previous 10 years.

42 Europe: Earnings and valuations GTM Asia 42 Equities Equity performance and real GDP growth differential Index, rebased 1997 = 100 Real GDP growth differential 130 1% MSCI Europe / MSCI AC World* Europe outperforms Europe Global ex-europe -1% -2% Currency and equity market performance Correlation between currency and equity markets**, 6-month mov. avg. 1.0 Currency and equity 0.8 market move together 0.6 Europe Currency and equity -0.8 market move opposite '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Europe vs. U.S. valuations Relative P/B ratio Japan -3% +1 SD: 0.81x Europe underperforms '98 '00 '02 '04 '06 '08 '10 '12 '14 '16-4% -5% -1 SD: 0.66x Average: 0.73x 9/2017: 0.63x Source: FactSet, MSCI, J.P. Morgan Asset Management; (Left) Oxford Economics. *All data represent price return in local currency terms with data since January **Equity markets represented by the MSCI EMU and MSCI Japan and currencies are USD/EUR and USD/JPY. 42

43 Global fixed income: Yields and returns GTM Asia 43 Fixed income Global bond opportunities Asia Corporate HY Local CCY EMD U.S. Corporate HY USD EMD USD Asian Bond Europe HY U.S. Corporate IG U.S. Treasury DM Government Bond Cash YTM Duration* (years) Correl. to 10-year UST 6.9% % % % % % % % % Fixed income sector returns 5-yrs Q '17 YTD '17 Ann. Ret. Europe Europe USD Europe Europe Asia HY U.S. HY Asia HY HY HY Asian HY HY 30.5% 14.9% 8.3% 5.8% 17.1% 5.3% 18.3% 10.2% USD Local Local Local Asia HY U.S. HY U.S. IG U.S. HY Asian EMD EMD EMD 25.4% 7.4% 7.5% 2.8% 11.4% 4.5% 16.1% 7.4% Local EMD Asia HY Asia HY USD EMD Asia HY USD EMD USD EMD Europe HY 19.9% 4.3% 5.5% 1.2% 11.4% 2.4% 8.7% 6.1% USD EMD Cash USD EMD U.S. Treas USD EMD Asia HY U.S. HY USD Asian 18.5% % 0.8% 10.2% 2.2% % U.S. HY USD Asian U.S. Treas Cash U.S. IG U.S. HY DM Gov't USD EMD 15.8% -1.4% 5.1% % % 5.4% USD USD DM U.S. IG U.S. HY U.S. IG Asia HY U.S. IG Asian Asian Gov't 14.3% - 1.5% 2.5% - 0.7% 5.8% 1.6% 5.4% 4.1% U.S. DM DM Europe USD USD U.S. U.S. IG Treas Gov't Gov't HY Asian Asian Treas 9.8% -2.7% 0.7% -2.6% 3.4% 1.5% 5.3% 1.2% U.S. DM DM Cash U.S. HY U.S. IG U.S. IG Cash Treas Gov't Gov't % % 1.6% 1.3% 5.2% 0.1% DM Gov't Local EMD Europe HY Europe HY U.S. Treas U.S. Treas U.S. Treas Local EMD 1.3% - 5.5% % % 2.3% - 0.6% Cash USD EMD Local EMD Local EMD Cash Cash Cash DM Gov't 0.1% -6.6% -6.1% % 0.3% 0.6% -0.7% 43 Source: Bloomberg Finance L.P., FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Based on Bloomberg Barclays U.S. Aggregate Credit - Corporate High Yield Index (U.S. Corporate HY), Bloomberg Barclays U.S. Aggregate Credit Corporate Investment Grade Index (U.S. Corporate IG), J.P. Morgan Government Bond Index EM Global (GBI-EM) (Local CCY EMD), J.P. Morgan Emerging Market Bond Index Global (EMBIG) (USD EMD), J.P. Morgan Asia Credit Index (JACI) (USD Asian), Bloomberg Barclays Pan European High Yield (Europe HY), J.P. Morgan Government Bond Index Global Traded (DM Gov t), J.P. Morgan Asia Credit Index Non-investment Grade Corporate (Asia Corporate HY), Bloomberg Barclays Global U.S. Treasury Bills (3-5 years) (U.S. Treasury) and Bloomberg Barclays U.S. Treasury Bills (1-3 months) (Cash). 5-year data is used to calculate annualized returns (Ann. Ret.). Returns are in USD and reflect the period from 31/12/11 31/12/16. Duration is a measure of the sensitivity of the price (the value of the principal) of a fixed-income investment to a change in interest rates. *Duration is expressed as number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. 10-year data is used to calculate the correlation to the 10-year UST. Positive yield does not imply positive return.

44 Global fixed income: Interest rate risk GTM Asia 44 Illustration of the impact a 1% rise in interest rates may have on selected indices Assumes a parallel shift in the yield curve and spreads are maintained 4% Price return + coupon Price return -4% Fixed income -8% -12% U.S. Treasury 1-3 years 5-7 years 7-20 years USD Asian credit Global investment grade credit Global high yield EMD USD sovereign EMD USD corporate EMD local cur. sovereign 44 Source: Barclays, Bloomberg Finance L.P., FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Based on Bloomberg Barclays US Treasury indices (US Treasury, 1-3 years, 5-7 years, 7-20 years), J.P. Morgan Asia Credit Index (JACI) (USD Asia Credit), Barclays Global Aggregate Corporates (Global Investment-grade credit), Barclays Global High Yield (Global High Yield), Barclays Emerging Markets Sovereign (EMD USD sovereign), Barclays Emerging Markets Corporate (EMD USD corporate), Barclays Emerging Markets Local Currency Government (EMD local cur. sovereign). For illustrative purposes only. Change in bond price is calculated using both duration and convexity.

45 Global fixed income: Valuations Spread to worst across fixed income sub-sectors Basis points 1,500 2,200 GTM Asia yr. range 10-yr. average Latest 1, Fixed income U.S. high yield U.S. investment grade Euro high yield Euro investment grade USD Asian credit USD Asian high yield EMD USD sovereign EMD USD corporate EMD local cur. sovereign 45 Source: BofA/Merrill Lynch, iboxx, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Based on J.P. Morgan Domestic High Yield Index (U.S. High Yield), J.P. Morgan U.S. Liquid Index (JULI) (U.S. Investment Grade), BofA/Merrill Lynch Euro Non- Financial High Yield Constrained (Euro High Yield), iboxx EUR corporates (Euro Investment Grade), J.P. Morgan Asia Credit Index (JACI) (USD Asian Credit), J.P. Morgan Asia Credit High Yield Index (USD Asian High Yield), J.P. Morgan EMBI+ (EMD USD Sovereign), J.P. Morgan Corporate Emerging Markets Bond Index CEMBI (EMD USD Corporate), J.P. Morgan GBI-EM (EMD Local Cur. Sovereign). Positive yield does not imply positive return.