MARKET INSIGHTS. Guide to the Markets. Europe 3Q 2017 As of 30 June 2017

Transcription

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

2 Global Market Insights Strategy Team Americas Europe Asia Dr. David P. Kelly, CFA New York Julio C. Callegari São Paulo Samantha M. Azzarello New York David M. Lebovitz New York Gabriela D. Santos New York Alexander W. Dryden, CFA New York Abigail B. Dwyer, CFA New York John C. Manley New York Jordan K. Jackson New York Tyler J. Voigt New York Stephanie H. Flanders London Manuel Arroyo Ozores, CFA Madrid Tilmann Galler, CFA Frankfurt Lucia Gutierrez-Mellado Madrid Vincent Juvyns Luxembourg Dr. David Stubbs London Maria Paola Toschi Milan Michael J. Bell, CFA London Nandini L. Ramakrishnan London Jai Malhi London Tai Hui Hong Kong Kerry Craig, CFA Melbourne Yoshinori Shigemi Tokyo Marcella Chow Hong Kong Akira Kunikyo Tokyo Dr. Jasslyn Yeo, CFA Singapore Hannah J. Anderson Hong Kong Ian Hui Hong Kong Shogo Maekawa Tokyo 2

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

4 Eurozone: GDP and inflation GTM Europe 4 Europe economy Contribution to eurozone real GDP growth Eurozone CPI inflation % change year on year % contribution to headline inflation, change year on year 8 Government 3, Change in inventories 6 Exports 2,5 Investment ECB Inflation Target 2, 4 Consumption Imports 1,5 GDP 2 1,,5-2, -,5 Food, alcohol, tobacco -4-6 '1 '11 '12 '13 '14 '15 '16 '17-1, -1,5 Core rate* Energy CPI '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 June

5 Eurozone growth monitor 5 Europe economy Change in unemployment and unemployment rate Thousands of people per three months (LHS); % rate (RHS) Change in unemployment Recession Unemployment rate Retail sales and industrial production Index level Industrial production (LHS) 12 Retail sales (RHS) ' '2 '4 '6 '8 '1 '12 '14 ' Composite PMI and GDP Index level (LHS); % change year on year (RHS) PMI 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 June

6 Eurozone: Unemployment and labour costs GTM Europe 6 Europe economy Unemployment rate % Average of Portugal, Spain, Italy France Eurozone Germany Unit labour costs Rebased to 1 as of December 1998 Greece France Spain Germany Ireland Service sector productivity Index level, rebased to 1 as of December US 11 1 Eurozone 9 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 Source: (Top) Eurostat, FactSet, J.P. Morgan Asset Management. (Bottom left) FactSet, Haver, BEA, J.P. Morgan Asset Management. (Right) ECB, FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June

7 Eurozone credit conditions 7 Europe economy Credit demand and eurozone GDP growth Net % of banks reporting positive loan demand (LHS); % GDP growth (RHS) 15 1 Stronger loan demand 6 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* Italy Germany -1 Weaker loan demand -4 Spain France Consumer credit (LHS) Overall corporate (LHS) -2 Housing loans (LHS) Eurozone GDP growth y/y (RHS) '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17-8 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 June

8 European Central Bank (ECB) policies GTM Europe 8 Europe economy ECB balance sheet: Assets* EUR trillions 6, ECB June 217 forecasts 5, Forecast Trade-weighted euro and EUR/USD Index level (LHS); price of euro in dollars (RHS) EUR/USD CPI inflation** 1,5 1,3 1,6 4, 3, 2, 1, Trade-weighted euro, '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 Source: (Left) ECB, FactSet, J.P. Morgan Asset Management. *Balance sheet forecast does not include Targeted Longer Term Refinancing Operations (TLTRO). Expansion in balance sheet still to come assumes EUR 6bn per month expansion between June 217 and December 217 and reduction of monthly purchase by EUR 1bn each month starting January 218. **Inflation is Q4 to Q4 for each year (Right) FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June

9 Eurozone debt GTM Europe 9 Europe economy Eurozone: Total debt outstanding EUR billions Gross & net issuance vs. ECB purchases by country EUR billions 3 Estimated gross issuance 25 Estimated net issuance Current annual PSPP* purchases Source: (Left) Bloomberg, J.P. Morgan Asset Management. (Right) ECB, J.P. Morgan Asset Management. * Public Sector Purchase Programme. Guide to the Markets - Europe. Data as of 3 June

10 European politics 1 Europe economy Europe 217 political timeline January France Socialist presidential primaries 29 March UK Article 5 invoked 7 May France Second round of the presidential election 8 June UK General election September Spain Possible Catalonia independence referendum Jan Feb Mar Apr May Jun Jul Aug Sep Oct 25 January Italy Court decision on Italicum electoral reform 15 March Netherlands General election 23 April France First round of the presidential election June France Legislative election 24 September Germany Federal election Survey results: Do you support the euro? % answering yes as of November Italy France Spain Belgium N lands Germany Italian election polling %, latest data M5S PD FI LN FdI Source: (Top) J.P. Morgan Asset Management. (Bottom left) European Commission, J.P. Morgan Asset Management. (Bottom right) Scenaripolitici.com, 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. Guide to the Markets - Europe. Data as of 3 June

11 UK economic indicators GTM Europe 11 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, consumer confidence (LHS); %, unemployment rate (RHS) Consumer confidence Unemployment rate Current account % of GDP 4 2 Investment income Trade balance Current account balance Wage growth % change year on year 6 3 Nominal wage growth* Headline CPI Real wage growth '5 '7 '9 '11 '13 '15 '17-6 '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) FactSet, GFK, ONS, J.P. Morgan Asset Management. (Bottom right) FactSet, ONS, J.P. Morgan Asset Management. *Nominal wages include bonuses. Guide to the Markets - Europe. Data as of 3 June

12 Brexit: Outcomes for the UK and trade GTM Europe 12 Europe economy Tradeoffs for the UK post EU exit MARKET ACCESS TO THE EU Participation in EU legislation process Full market access Norway EU Goods and services exports and imports % of UK GDP EU27 US Switzerland Market access by negotiation Switzerland China Japan Exports Imports Goods market access but not services Turkey Australia Singapore UK export share WTO ACCESS Canada No financial contribution Free movement of labour Some financial contribution EU member Hong Kong Canada Saudi Arabia India EU27 44% US 2% Asia 13% Middle East 5% SHARING OF SOVEREIGNTY Source: (Left) J.P. Morgan Asset Management. (Right) UK ONS Pink Book, JP. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June

13 Brexit: Current account and financial services 13 Europe economy Current account balance % of GDP 8 Services balance 6 Financial services balance Net current account 4 Goods balance 2 UK financial services Annual gross value added, GBP billion 25% 14% 13% 11% 5% 3% 29% Sales & trading Investment banking Retail & business banking Private wealth management Asset Management Insurance & reinsurance Market infrastructure & other -2 UK financial services industry revenues GBP billion '9 '95 ' '5 '1 ' EU related international business Non-EU international business Domestic business with UK clients Source: (Left) Thomson Reuters Datastream, ONS, J.P. Morgan Asset Management. (Top and bottom right) Oliver Wyman, J.P. Morgan Asset Management. International business revenues include wholesale revenues. Guide to the Markets - Europe. Data as of 3 June

14 World economic data 14 Selected countries Gross domestic product (GDP) Real GDP % Inflation % Policy rate % Unemployment % Global economy EUR per capita EUR billions 217* 218* 217* 218* Switzerland ,4 1,7,5,6 -,75 3,1 United States ,2 2,3 2,3 2,2 1,25 4,3 Sweden ,6 2,3 1,7 1,9 -,5 7,2 Netherlands ,2 1,7 1,4 1,5 -,4 7,2 Finland ,4 1,4 1,1 1,3 -,4 1,7 Germany ,8 1,6 1,7 1,6 -,4 5,7 United Kingdom ,6 1,3 2,7 2,6,25 4,6 Japan ,3 1,,6,8,1 3,1 France ,4 1,5 1,3 1,3 -,4 9,3 Eurozone ,9 1,6 1,6 1,5 -,4 9,3 Italy ,2 1, 1,4 1,3 -,4 11,6 Spain ,8 2,3 2,1 1,5 -,4 18,8 Greece ,9 2, 1,1 1, -,4 23,3 Brazil ,5 2,1 3,8 4,4 1,25 8,2 Russia ,2 1,5 4,3 4,1 9, 5,5 China ,6 6,3 1,9 2,2 4,35 4, India ,1 7,4 4,5 4, 6,25 8,4 Source: Bloomberg, FactSet, various national statistical agencies, J.P. Morgan Asset Management. Table ordered by GDP per capita. Nominal GDP figure is latest quarter annualised. *Forecasts are Bloomberg consensus estimates. Guide to the Markets - Europe. Data as of 3 June

15 Global Purchasing Managers Index (PMI) for manufacturing Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Global 5,8 5,5 5,4 51, 51, 5,7 5,9 5, 5,7 5,2 5,1 5,4 51, 5,7 51, 51,9 52, 52,7 52,7 53, 53, 52,7 52,6 52,6 Global economy Eurozone Developed Emerging Eurozone France Germany Italy Spain 52,1 51,9 51,7 52,6 52,3 52, 52,1 5,8 5,9 5,5 5,3 51,1 51,4 51,2 51,5 52,6 52,9 53,7 54,2 54,1 53,9 54,1 54,1 53,9 49,1 48,6 48,4 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 5,8 5,5 5,8 52,4 52,3 52, 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 49,6 48,3 5,6 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 51,8 53,3 52,3 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 55,3 53,8 52,7 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 53,6 53,2 51,7 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 Developed Switzerland UK US Japan 5, 51,3 48, 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 52,3 51,8 51,5 54,5 52,5 51,2 52,5 5,9 51,1 49,5 5,4 53,1 48,3 53,5 55,3 54,2 53,5 55,9 55,6 54,6 54, 57, 56,3 54,3 53,8 53, 53,1 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 52,1 51,2 51,7 51, 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 Brazil 47,2 45,8 47, 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, 51,5 Emerging Russia India China Korea 48,3 47,9 49,1 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 52,3 51,2 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 47,8 47,3 47,2 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 47,6 47,9 49,2 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 Taiwan 47,1 46,1 46,9 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 56,2 Lowest relative to 5 PMI 5 Highest relative to 5 PMI 15 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 June 217.

16 Global growth 16 Global exports, PMI manufacturing and services % growth year on year, three-month moving average (LHS), Index level (RHS) 7 Global manufacturing PMI 56 Global economy Global services PMI Global exports Jul '14 Oct '14 Jan '15 Apr '15 Jul '15 Oct '15 Jan '16 Apr '16 Jul '16 Oct '16 Jan '17 Apr '17 48 Source: Haver Analytics, Thomson Reuters Datastream, Netherlan JP. Morgan Asset Management. The Global Purchasing Managers Index (PMI) assesses the economic health of the manufacturing and services 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 June

17 Global inflation dynamics GTM Europe 17 Global economy Consumer price inflation and forecasts Producer price inflation % change year on year, three-month moving average % change year on year Forecasts* 5 1 China Eurozone 8 4 US UK 6 Japan China Eurozone US UK Japan '12 '13 '14 '15 '16 '17 '18-8 '1 '12 '14 '16 Source: (Left) Bloomberg, BLS, Eurostat, J.P. Morgan Economic Research, Ministry of Internal Affairs and Communications, ONS, Thomson Reuters Datastream, J.P. Morgan Asset Management. *Inflation forecasts are from Bloomberg consensus forecasts. (Right) Bank of Japan, Bureau of Statistics of China, Conference Board, Eurostat, ONS, Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June

18 Global central bank policy GTM Europe 18 Global economy Market expectations for policy rate Central bank balance sheets % USD billions 2,5 US 18. UK Switzerland 2, Eurozone UK 16. Japan Japan Eurozone 14. US 1, , 1. Forecast*,5 8., ,5-1, June '17 June '18 June 19 June 2 June '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 Source: (Left) Bloomberg, J.P. Morgan Asset Management. (Right) Bank of England, Bank of Japan, ECB, Swiss National Bank, US Federal Reserve, J.P. Morgan Asset Management. *Projection from central banks, national sources and J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June

19 Developed market fiscal policy GTM Europe 19 Change in deficit excluding debt interest, Developed economy government debt and interest expense % of potential GDP % of GDP 1, 12 Forecast* 2, Global economy,5, Tighter policy 11 1 Gross debt 1,9 1,8 1,7 1,6 -,5 Looser policy 9 Interest expense 1,5 1,4-1, -1, to 216 Change in gross debt (% of GDP) Change in interest costs (% of GDP) US 43,3 -,2 Eurozone 26,4 -,55 UK 46,9,8 Japan 56,2,25 6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 '19 1,3 1,2 1,1 1, Source: (Left) 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. (Right) IMF Fiscal Monitor April 217, J.P. Morgan Asset Management. Government debt ratio is gross debt for all advanced economies in the G2. *Forecasts from the IMF. Guide to the Markets - Europe. Data as of 3 June

20 Global currency trends 2 Global economy US dollar in historical perspective Index level, broad real effective exchange rate (REER) : -21,8% : +52,7% : -29,5% 1985: Plaza Accord 1987: Louvre Accord : +34,2% Average since 1973 May 217 US dollar index 95,8 99, : -28,9% : +23,7% : 7-7,1% '73 '77 '81 '85 '89 '93 '97 '1 '5 '9 '13 '17 US-German interest rate differential %, 2-year yields (LHS); price of a dollar in EUR (RHS) 2-year spread USD/EUR US dollar vs. market rate expectations in the next 12 months Index (LHS); basis points (RHS) Trade-weighted dollar 75 US rate hikes priced over 12 months 7 '13 '14 '15 '16 '17 Source: (Top) US Federal Reserve, J.P. Morgan Asset Management. (Bottom left) FactSet, J.P. Morgan Asset Management. (Bottom right) Bloomberg, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June

21 US: GDP and inflation GTM Europe 21 Global economy Real GDP Inflation % change quarter on quarter, SAAR Average since Q17 % change year on year 8, Real GDP 1,8% 1,4% 8 6, 6 4, Average 2, 4, 2-2, Average since 1999 May 217 Headline CPI* 2,2% 1,9% Core CPI 2,% 1,7% -4, -6, -8, Components of nominal GDP 1Q17 Consumption 68,9% Government 17,5% Investment ex-housing 12,6% Housing 4,% Net exports -2,9% -2-1, '1 '4 '7 '1 '13 '16-4 ' '2 '4 '6 '8 '1 '12 '14 '16 Source: (Left) BEA, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Right) BLS, Thomson Reuters Datastream, J.P. Morgan Asset Management. SAAR is seasonally adjusted annual rate. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - Europe. Data as of 3 June

22 US Federal Reserve outlook 22 Global economy Federal funds rate expectations % fed funds rate, FOMC and market expectations Federal funds rate US Fed FOMC forecasts median Market expectations on 3 June 217 FOMC June 217 forecasts* Long run Change in real GDP, 4Q to 4Q 2,2 2,1 1,9 1,8 Unemployment rate, 4Q 4,3 4,2 4,2 4,6 PCE inflation, 4Q to 4Q 1,6 2, 2, 2, FOMC long-run projection: 3,% 2 Long-run market expectation: 2,6% 1 '99 '3 '7 '11 '15 '19 Long-run Source: Bloomberg, Federal Reserve Bank of New York, US Federal Reserve, J.P. Morgan Asset Management. *Forecasts of Federal Open Market Committee (FOMC) participants, midpoints of central tendency except for federal funds rate, which is a median estimate. Long-run market expectation is the 1-year forward fed funds swap rate. Guide to the Markets - Europe. Data as of 3 June

23 US labour market 23 Unemployment rate and wage growth %, wage growth year on year, seasonally adjusted, wages of production and non-supervisory workers Global economy 5-yr average: 4,2% Unemployment 5-yr average: 6,2% Wage growth May 217: 4,3% May 217: 2,4% Companies due to raise wages vs. employment cost index % of total (LHS); % change year on year (RHS) Employment cost index 5 NFIB companies planning to raise wages '87 '9 '93 '96 '99 '2 '5 '8 '11 '14 '17 4,5 4, 3,5 3, 2,5 2, 1,5 1, Employee compensation and profitability % of GDP Employee compensation Corporate profits Source: (Top) BEA, FactSet, J.P. Morgan Asset Management. (Bottom left) BLS, National Federation of Independent Business, Thomson Reuters Datastream, J.P. Morgan Asset Management. Employment cost index and NFIB companies planning to raise wages are 12-month moving averages. (Bottom right) BEA, FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June

24 US growth monitor 24 Global economy Corporate profits, business investment and employment growth % change year on year Recession 6 4 Profits 2-2 Business investment Employment -4 '84 '86 '88 '9 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 ' Initial jobless claims vs. consumer confidence Jobless claims in thousands (LHS); index level (RHS) 7 Jobless claims Consumer confidence '84 '94 '4 ' Housing starts and Conference Board Leading Economic Index Index level (LHS); thousands (RHS) Leading indicator Housing starts 5 '84 '94 '4 ' 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 June

25 US: Cyclical sectors GTM Europe 25 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 31 May 217: 16, Average: 62, May 217: 57, '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 June

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 ,6 1,2,8,4, Immigrant 1,3% 1,% US born 1,4%,6% '77-'86 '87-'96 '97-'6 '7-'16 '17-'26 Growth in investment in structures and equipment Non-residential fixed assets, year on year % change Forecast*,3% Drivers of US GDP growth Average year on year % change 4,5 4, 3,5 3, 2,5 2, 4,2% 1,4% 3,% 3,3% Growth in workers + Growth in real output per worker Growth in real GDP 3,1% 1,5% 3,2% 1,3% 4 216: 1,6% 1,5 1, 2,% 2,1% 1,3%,4% 2,5 '55 '6 '65 '7 '75 '8 '85 '9 '95 ' '5 '1 '15, 2,8% 1,% 1,2% 1,6% 1,9%,9% '57-'66 '67-'76 '77-'86 '87-'96 '97-'6 '7-'16 Source: (Top left) Census Bureau, DOD, DOJ, J.P. Morgan Asset Management. *Forecast by J.P. Morgan Asset Management. (Bottom left) BEA, BLS, J.P. Morgan Asset Management. (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 June

27 US business environment GTM Europe 27 Global economy Philly Fed Capex intentions vs. bank credit Index level (LHS); % change year on year (RHS) 5 4 Philly Fed Capex intentions* Bank credit -3 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 '16 ' National tax rate on corporate income %, including local government taxes % 4% 41% 33% 37% 31% 39% 3% Headline rate 36% 3% Foreign content of domestic sales % 25 27% % Clothing Tech Autos Energy Staples 1 US Japan Italy Germany Canada UK Source: (Top left) Thomson Reuters Datastream, J.P. Morgan Asset Management. *Philly Fed Capex intentions is 3-month moving average, 12-months advanced. (Bottom left) US Department of Commerce, J.P. Morgan Asset Management. (Right) Germany Federal Ministry of Finance, OECD, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June

28 Japan: Abenomics and the economy GTM Europe 28 Wage growth % change year on year, three-month moving average Bank lending and job-to-applicant ratio % lending growth year on year (LHS); ratio of number of jobs to applicants (RHS) Core CPI* Nominal wage growth 8 Job-to-applicant ratio 1,6 Global economy 4 1,4 1,2 1, Index level Japanese yen effective exchange rate Abe elected US election Yield curve targeting,8,6 NIRP -4,4,2 Bank lending (y/y) -8 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 '16, Source: (Top left) FactSet, Japan Ministry of Health, Labour and Welfare, Japan Ministry of Internal Affairs & Communications,, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. (Bottom left) FactSet, J.P. Morgan Asset Management. NIRP stands for negative interest rate policy. (Right) Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June

29 China economic indicators 29 Global economy China industrial production and retail sales % change year on year Retail sales Industrial production Fixed asset investment (FAI) % change year on year 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 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 June

30 China monetary conditions and housing 3 Chinese house prices vs. Shanghai Interbank Offered Rate % (LHS); % change year on year (RHS) 7 China house price growth 12 Chinese property inventories Months of inventory 25 2 Top 2 nd tier average Low 2 nd tier average 1 st tier* average Global economy '12 '13 '14 '15 '16 '17 3 Policy rate and reserve ratio requirement (RRR)** % policy rate on one-year renminbi deposits (LHS); % RRR (RHS) 2-4 RRR 1 SHIBOR '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 PBoC policy rate 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 June

31 China financial dynamics 31 Public, household and non-financial corporate debt % of GDP, 2Q16 3 Public debt Chinese renminbi Rebased index level (LHS); price of a dollar in RMB (RHS) Trade-weighted RMB Global economy 25 2 Non-financial corporation debt Household debt USD/RMB 15 1 China FX reserves Change in monthly FX reserves (USD billions) '96 '98 ' '2 '4 '6 '8 '1 '12 '14 ' '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 June

32 China economic and financial linkages GTM Europe 32 Global economy China s share of world GDP and trade % of world total '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 China s share of merchandise imports % of total imports of selected economies Real GDP Real goods and services trade Forecast Foreign bank lending to China by sector % of total world lending by sector Latest Foreign ownership of Chinese bonds*** ,9% 1,6% 1,3% 5 2 All sectors Chinese nonfinancial corps Chinese banks Holdings of US Treasuries 32 Source: (Top left) OECD, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom left) Thomson Reuters Datastream, OECD, J.P. Morgan Asset Management. *Chinese Taipei, Hong Kong, Malaysia, the Philippines, Singapore, Thailand and Vietnam. **BRIIS is Brazil, India, Indonesia, Russia and South Africa. (Right) BIS, Bloomberg, OECD, J.P. Morgan Asset Management. ***Chinese bonds are onshore Chinese bonds only. All lending is lending by BIS reporting foreign banks and excludes lending in domestic markets. All sectors is lending to all sectors in China as a proportion of lending to all sectors in all countries. Chinese nonfinancial corps is lending to Chinese non-financial corps as a proportion of lending to all countries non-financial corps. Chinese banks is foreign bank lending to Chinese banks as a proportion of lending to all countries banks. Guide to the Markets - Europe. Data as of 3 June 217.

33 EM: Economic snapshot 33 EM real GDP % change quarter on quarter, saar EM industrial production vs. retail sales %, year on year growth, three-month moving average 12 China EEMEA 1 8 Retail sales Industrial production Global economy EM Asia ex-china and India Latin America '12 '13 '14 '15 '16 ' EM export and import volume % change quarter on quarter EM export volume EM import volume -2 '12 '13 '14 '15 '16-2 '12 '13 '14 '15 '16 Source: (Left) EEMEA: Emerging Europe, Middle East, Africa, J.P. Morgan Securities Research, J.P. Morgan Asset Management. (Top right) Haver Analytics, J.P. Morgan Asset Management. (Bottom right) Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June

34 Emerging market adjustments 34 EM currencies vs. US dollar % from fair value, relative to US dollar Fragile Five current account balance % of GDP 3 EM currencies expensive relative to USD 2 Global economy 2 1 Average +1 std. dev '96 '98 ' '2 '4 '6 '8 '1 '12 '14 '16 EM foreign exchange reserves vs. external debt % of GDP -1-1 std. dev EM reserves 35-2 EM currencies cheap relative to USD -3 '92 '96 ' '4 '8 '12 ' 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 June

35 Globalisation and trade 35 Exports of goods % of GDP, 216 Number of global discriminatory trade measures 8 Global economy US Eurozone Canada Brazil India US China EM ex-china Eurozone Other '9 '1 '11 '12 '13 '14 '15 China Russia Mean weighted average global tariff % 2 Mexico 14 Japan 8 Korea '88 '9 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 Source: (Left) IMF Direction of Trade, IMF World Economic Outlook October 216, J.P. Morgan Asset Management. (Top right) Centre for Economic and Policy Research, J.P. Morgan Asset Management. Discriminatory trade measures are measures taken by governments worldwide that harmed foreign traders, investors, workers, or owners of intellectual property. (Bottom right) TPG, World Bank, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June

36 World stock market returns 36 EUR Local YTD 2Q17 26,7% Asia ex-jp 38,% -23,% TOPIX -4,6% 73,4% MSCI EM 62,8% 35,4% Sm all Cap 24,4% 5,5% US S&P 5 2,1% 2,8% Asia ex-jp 19,7% 27,2% Sm all Cap 35,8% 29,5% US S&P 5 13,7% 24,4% TOPIX 12,1% 16,6% Sm all Cap 14,5% 13,7% Asia ex-jp 19,9% 1,6% Asia ex-jp 8,8% 1-yr ann. 9,4% US S&P 5 7,3% 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,% 9,7% MSCI EM 15,% 1,% Europe 2,1% 8,4% Sm all Cap 7,6% 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% 7,2% Eur ope 8,4% -,2% MSCI EM 6,7% 6,3% Asia ex-jp 3,6% 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% Europe 5,4% 8,3% Portfolio 1,9% 14,3% HDY Equity 13,1% 1,1% Portfolio 9,% 5,8% Portfolio 1,4% 3,1% TOPIX 7,4% -,7% Portfolio 4,2% -,7% TOPIX 6,8% 6,1% HDY Equity 5,4% 6,% Portfolio 4,8% -4,9% US S&P 5 5,5% -43,3% Eur ope -38,5% 32,5% Europe 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% 1,9% HDY Equity 6,9% -2,1% Small Cap 3,1% 4,5% MSCI EM 3,1% -8,8% Sm all 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% 1,7% Small Cap 7,5% -2,8% HDY Equity 1,8% 3,5% TOPIX 2,9% -14,5% TOPIX -11,1% -5,8% MSCI EM -45,7% 1,5% TOPIX 7,6% 11,7% Eur ope 7,5% -15,4% MSCI EM -12,5% 5,9% TOPIX 2,9% -6,5% MSCI EM 3,8% 7,4% Eur ope 5,2% -4,9% MSCI EM -5,4% 3,2% Eur ope 7,9% 1,1% US S&P 5 9,3% -3,3% US S&P 5 3,1% 3,2% Eur ope 3,7% 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 June

37 European sector returns and valuations 37 Equities MSCI Europe Index Europe weight Growth weight Value weight 2Q Since market peak** Since market low*** Beta to Europe Financials* Health care Cons. staples Cons. disc. Industrials Materials Energy Telecom Utilities Tech Europe 21,4% 12,9% 14,% 1,5% 13,5% 7,6% 6,6% 3,9% 3,6% 4,5% 1% 5,3% 15,3% 25,5% 14,7% 19,2% 9,1%,4% 1,7%,6% 7,9% 1% 35,9% 11,3% 3,2% 6,5% 7,9% 5,8% 12,8% 6,2% 6,7% 1,3% 1% 5, 2,9 3,4,1 3,8-1,7-4,4 -,5 2,6 2, 2,1 11, 1,9 11,7 5,9 13,2 4,6-8,3 3,2 9,4 13,7 8,4-19,9 122,7 141,5 87,7 56,7 15,6 28,2 46,6 2,7 34,9 38, 24,8 219,6 253,2 315,2 267,4 174,1 76, 12,2 8,8 241,2 195,9 1,35x,65x,64x,96x 1,12x 1,28x 1,1x,81x,85x,98x 1,x β Return Weights Forward P/E ratio 15-year average Trailing P/E ratio 15-year average 11,9x 16,2x 19,6x 12,4x 16,9x 14,5x 13,7x 15,7x 13,9x 19,9x 14,8x 1,5x 14,9x 15,3x 13,x 13,6x 12,6x 11,6x 13,4x 12,4x 18,5x 12,5x 13,7x 16,8x 2,4x 13,8x 18,2x 17,5x 2,5x 17,6x 14,2x 21,8x 16,5x 12,2x 15,9x 16,5x 15,2x 15,4x 14,4x 12,2x 14,8x 12,9x 13,8x 13,9x P/E Dividend yield 15-year average 4,1% 2,9% 2,7% 2,8% 2,5% 2,5% 6,3% 4,8% 4,7% 1,4% 3,3% 4,% 2,8% 2,8% 2,8% 2,8% 2,8% 4,4% 4,7% 5,% 1,9% 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 June 217. Div 37

38 Relative equity valuations GTM Europe 38 Global earnings EPS, US dollar, rebased to 1 in January US Global valuations Current and 25-year historical valuations 4x 75x Current 35x 25-year range 25-year average Axis 5,2x 4,8x 4,4x 18 Japan 3x 4,x 16 25x 3,6x 3,2x Equities EM Price-to-earnings 2x 15x 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 UK Europe Ex-UK Japan EM,x Source: (Left) FTSE, 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 June

39 Relative performance of European equities 39 Europe vs. US: Relative performance and earnings Rebased to 1 in December Europe index and earnings outperforming US Europe vs. US operating profits margins %, earnings per share / sales per share S&P 5 Equities MSCI Europe/S&P 5 earnings MSCI Europe/S&P 5 performance 7 MSCI Europe 6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 European equities flows EUR billions, cumulative US index and earnings outperforming Europe 65 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 ' Jan'16 Apr'16 Jul'16 Oct'16 Jan'17 Apr'17 Jul'17 Source: (Left) MSCI, Standard & Poor s, 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 quant research group, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June

40 MSCI Europe performance and drivers 4 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 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Europe earnings by sector EPS, % change year on year '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 Source: (Left) MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) MSCI, IBES, 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. Guide to the Markets - Europe. Data as of 3 June

41 MSCI Europe equity valuations GTM Europe 41 Equities MSCI Europe forward P/E ratio x, multiple Average: 13,5x 7 '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 MSCI Europe cyclically adjusted P/E ratio x, adjusted using trailing 1-year average inflation-adjusted earnings 3 June 217: 15,2x Dividend yield and 1-year bond yield % yield Dividend yield 3 June 217: 3,3% June 217: 17,2x 1 1-year German Bund yield 1 Average: 17,8x '8 '84 '88 '92 '96 ' '4 '8 '12 '16 3 June 217:,5% -1 '99 '1 '3 '5 '7 '9 '11 '13 '15 '17 Source: (Top left) MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by consensus estimates for earnings in the next 12 months and is provided by FactSet Market Aggregates. (Bottom left) FactSet, MSCI, J.P. Morgan Asset Management. (Right) MSCI, Thomson Reuters Datastream, Tullett Prebon, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June

42 MSCI Europe Index at inflection points 42 MSCI Europe Index Characteristic Sep 2 Jul 27 June 217 Index level Sep 2: P/E = 22,x P/E ratio (fwd) 22,x 13,3x 15,2x Dividend yield 1,8% 2,8% 3,3% German 1-year 5,3% 4,6%,4% 16 Jul 27: P/E = 13,3x June 217: P/E = 15,2x Total return: +133% Equities -55% +18% +196% -54% Dec 1996: 12 Mar 23: 9 Mar 29: P/E = 14,6x P/E = 14,4x P/E = 9,2x '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 Source: FactSet, MSCI, Tullett Prebon, J.P. Morgan Asset Management. Local currency returns. P/E ratios are forward P/E ratios. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by the mean consensus estimates for earnings in the next 12 months and is provided by FactSet Market Aggregates. Return calculations shown in green are based on the total return index. Guide to the Markets - Europe. Data as of 3 June

43 European small capitalisation equities 43 Small cap relative performance and economic performance %, relative performance (LHS); change in PMI (RHS) MSCI small cap minus large cap performance Risk-adjusted returns by company size and holding period Sharpe ratio level* 3, 2,5 2, 1,5 1, Small caps Mid caps Large caps,5 Equities 1 5, 1-year 5-year 1-year European small cap: Price-to-book ratio x, multiple Average: 1,8x 3 June 217: 1,95x month net change in eurozone composite PMI -4 '5 '7 '9 '11 '13 '15 '17-2 Source: (Left) Thomson Reuters Datastream, ZEW, 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 June

44 UK equities 44 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 Equities FTSE All-Share MSCI Europe ex-uk S&P 5 MSCI Japan Dividend yield and ex-energy dividend yield % yield UK Eurozone MSCI EM 2 18 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 ' MSCI World Japan US Dividend yield Dividend yield ex-energy Source: (Left) FTSE, 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 June

45 US S&P 5 at inflection points 45 S&P 5 Index Characteristic Mar 2 Oct 27 June 217 Index level P/E ratio (fwd) 22,6x 14,8x 17,5x Dividend yield 1,1% 1,7% 2,1% US 1-year 6,2% 4,6% 2,3% 3 June 217: P/E = 17,5x Equities Total return: +116% 24 Mar 2: P/E = 22,6x % +121% 9 Oct 27: P/E = 14,8x % % 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. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by the mean consensus estimates for earnings in the next 12 months and is provided by FactSet Market Aggregates. Return calculations shown in green are based on the total return index. Guide to the Markets - Europe. Data as of 3 June

46 US equities 46 Equities S&P 5 earnings and performance Index level, next 12 months earnings estimates (LHS); index level (RHS) S&P 5 EPS 218 EPS estimates Oct 16 $146.3 Jun 17 $144.4 S&P 5 index level 6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 ' Initial jobless claims vs. S&P 5 performance Thousands, four-week moving average (LHS); index level (RHS) '98 ' '2 '4 '6 '8 '1 '12 '14 '16 Index level (LHS); % change year on year (RHS) Initial jobless claims S&P 5 index level S&P 5 earnings per share (EPS) vs. ISM manufacturing 35 ISM manufacturing EPS 3 '98 ' '2 '4 '6 '8 '1 '12 '14 ' Source: (Left) Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. EPS 218 estimates are IBES as of 31 Oct 216 and 3 Jun 217. (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 June

47 US S&P 5 equity indicators 47 Equities Leading economic indicator vs. S&P 5 performance Index level Leading economic indicator S&P Forward P/E ratio x, multiple '9 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 ' Jul 1999: 24,5x Average: 15,8x S&P 5 Shiller cyclically adjusted P/E 3 June 217: 17,5x x, adjusted using trailing 1-year average inflation-adjusted earnings 5 3 June 217: 3,1x '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 ' Average: 16,8x ' '1 '2 '3 '4 '5 '6 '7 '8 '9 ' '1 Source: (Left) Conference Board, Standard & Poor s,thomson Reuters Datastream, Standard & Poor s, J.P. Morgan Asset Management. (Top right) Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by consensus estimates for earnings in the next 12 months. (Bottom right) FactSet, Robert Shiller, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 3 June 217. Average since 198: 21.7x 47

48 Equity markets and reflation 48 Equities S&P 5 average P/E ratio in various inflation environments S&P 5 trailing P/E US bond yield vs. value/growth performance* Index level (LHS); % (RHS) Value/growth US 1-year yield 6 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 US bond yield vs. banks/staples performance** Relative index level (LHS); % (RHS) Banks/staples US 1-year yield ,8 2, to to 1 1 to 3 3 to 5 5 to 7 7 to 1 1 to 15 >15 US inflation ranges (% CPI y/y) '15 '16 '17 2, 1,6 1,2 Source: (Left) Robert Shiller, J.P. Morgan Asset Management. (Top right) Russell, Thomson Reuters Datastream, Tullett Prebon, J.P. Morgan Asset Management. (Bottom right) MSC, Thomson Reuters Datastream, Tullett Prebon, J.P. Morgan Asset Management. *Value index is the Russell 1 value index. The growth index is the Russell 1 growth index. *MSCI USA index used for both banks and consumer staples. Guide to the Markets - Europe. Data as of 3 June

49 US bear markets GTM Europe 49 S&P 5 declines from all-time highs, % % -2% -4% % market decline -6% 3 Recession % 2 Equities 1-1% Characteristics of past bear and bull markets* Macro Bear markets Bull markets Return before peak environment Market corrections Market Bear Duration Bull Bull Duration 12 months 24 months peak return (months) Recession start date return (months) % % 1 Crash of 1929 excessive leverage, irrational exuberance Sep % Fed Tightening premature policy tightening Mar Jun % 58 27% 119% 3 Post WWII crash post-war demobilisation, recession fears May Apr Flash crash of 1962 flash crash, Cuban Missile Crisis Dec Jun Tech crash of 197 economic overheating, civil unrest Nov Jun Stagflation OPEC oil embargo Jan May Volcker Tightening campaign against inflation Nov Oct crash programme trading, overheating markets Aug Aug Tech bubble extreme valuations, dot com boom/bust Mar Dec Global Financial Crisis leverage/housing, Lehman collapse Oct Oct Current cycle Mar MEDIAN - 42% Source: FactSet, NBER, Robert Shiller, Standard & Poor s, J.P. Morgan Asset Management. *A bear market represents a 2% or more decline from the previous market high using a monthly frequency; a bull market represents a 2% increase from a market trough. Periods of recession are defined using US National Bureau of Economic Research (NBER) business cycle dates. Guide to the Markets - Europe. Data as of 3 June