MARKET INSIGHTS. Guide to the Markets. UK Q As of 31 December 2015

Transcription

1 MARKET INSIGHTS Guide to the Markets UK Q1 1 As of 31 December 15

2 Global Market Insights Strategy Team Americas Europe Asia Dr. David P. Kelly, CFA New York Andrew D. Goldberg New York Anastasia V. Amoroso, CFA Houston Julio C. Callegari São Paulo James C. Liu, CFA New York Samantha M. Azzarello New York David M. Lebovitz New York Gabriela D. Santos New York Hannah J. Anderson New York Abigail B. Dwyer, CFA New York Ainsley E. Woolridge New York Stephanie H. Flanders London Manuel Arroyo Ozores, CFA Madrid Tilmann Galler, CFA Frankfurt Lucia Gutierrez-Mellado Madrid Vincent Juvyns Luxembourg Dr. David Stubbs London Maria Paola Toschi Milan Michael J. Bell, CFA London Alexander W. Dryden London Nandini L. Ramakrishnan London Tai Hui Hong Kong Yoshinori Shigemi Tokyo Marcella Chow Hong Kong Kerry Craig, CFA Melbourne Dr. Jasslyn Yeo, CFA Singapore Ian Hui Hong Kong Akira Kunikyo Tokyo Ben Luk Hong Kong Anthony Tsoi, CFA Hong Kong For China, Australia, Vietnam and Canada distribution: Please note this communication is for intended recipients only; in Australia for wholesale clients use only and in Canada for institutional clients use only. For further details, please refer to the full disclaimer. Unless otherwise stated, all data is as of 31 December 15 or most recently available.

3 Page reference UK economy. UK: GDP and inflation 5. UK labour market dynamics. UK cyclical indicators 7. UK housing. UK household sensitivity to interest rates 9. UK consumer finances Global economy 1. Global Purchasing Managers Index (PMI) for manufacturing 11. Global inflation dynamics 1. Global economic divergences 13. Central bank policy 1. Developed world consumption 15. Global supply dynamics 1. Global currency trends 17. Eurozone: GDP and inflation 1. Eurozone cyclical indicators 19. Eurozone recovery monitor. Eurozone credit conditions 1. European Central Bank (ECB) policies. European investment and reform potential 3. US Federal Reserve outlook. US: GDP and inflation 5. US employment. US economic indicators 7. US consumer finances. Japan: GDP and inflation 9. Japan: Abenomics and the economy 3. China: GDP, inflation and policy rate 31. China economic indicators 3. China financial dynamics 33. Emerging markets trade connections with developed markets 3. Emerging market challenges 35. Emerging markets financial dynamics Equities 3. World stock market returns 37. European sector returns 3. UK FTSE All-Share at inflection points (GBP) 39. UK FTSE All-Share equity valuations. UK FTSE All-Share earnings and revenues 1. MSCI Europe ex-uk equity valuations. MSCI Europe ex-uk earnings and profit margins 3. US S&P 5 at inflection points. US S&P 5 equity valuations 5. US S&P 5 earnings and profit margins. Bear markets 7. Interest rates and equities. Japanese equities 9. Chinese equities 5. Emerging markets: Valuations and returns 51. Emerging market equities 5. Emerging market equity valuations by country 53. Equity income 5. Annual returns and intra-year declines Fixed income 55. Fixed income sector returns 5. Fixed income interest rate risk 57. Liquidity risks 5. Government bonds 59. US investment-grade bonds. Global investment-grade market 1. US high yield bonds. European high yield bonds 3. Emerging market debt Other assets and investor behaviour. Asset class returns 5. Correlation of returns (GBP). Asset volatility and dispersion in returns 7. Risk-adjusted returns and downside protection. Commodities 9. Oil consumption and production 7. Life expectancy and pension shortfall 71. Cash investments 7. Industry fund flows 73. US asset returns by holding period 7. Risk/return characteristics of alternatives 75. Alternative strategies 3

4 UK: GDP and inflation UK economy Real GDP Change quarter on quarter 1 Average since 1999 Q315 Real GDP.5. Inflation Change year on year 5 Average since 1999 Nov 15 Headline CPI*.1.1 Core CPI Average ' ' ' ' ' '1 '1 '1-1 ' ' ' ' ' '1 '1 '1 Source: (Both charts) FactSet, ONS, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - UK. Data as of 31 December 15.

5 UK labour market dynamics 5 UK economy Productivity since the pre-crisis peak Productivity per worker rebased to 1 as of Q UK continuation of pre-crisis productivity trend Wage growth Change year on year 3 Nominal wage growth* Headline CPI Real wage growth -3 US ' ' '1 '1 '1 '1 1 1 UK UK unemployment rate and consumer confidence 9 7 Unemployment rate '7 ' '9 '1 '11 '1 '13 '1-3 - Consumer confidence 5-5 ' ' '1 '1 '1 '1 Source: (Left) BEA, BLS, ONS, J.P. Morgan Asset Management. (Top right) FactSet, ONS, J.P. Morgan Asset Management. (Bottom right) FactSet, GFK, ONS, J.P. Morgan Asset Management. *Nominal wages include bonuses. Guide to the Markets - UK. Data as of 31 December 15. 5

6 UK cyclical indicators UK economy New car registrations Millions, 1-month rolling total.7 mns Average:.3 Nov 15:. Business sentiment Seasonally adjusted Business confidence PMI composite '9 ' ' ' ' ' '1 '1 '1 95 '9 ' ' ' ' ' '1 '1 '1 35 Retail sales growth* Change year on year Nov 15: 5. Industrial production Capital goods, indexed = Oct 15: '9 ' ' ' ' ' '1 '1 '1 '1 '9 ' ' ' ' ' '1 '1 '1 '1 Source: (Top left) ECB, J.P. Morgan Asset Management. (Bottom left and right) FactSet, ONS, J.P. Morgan Asset Management. (Top right) Markit, OECD, J.P. Morgan Asset Management. *Volume of sales rather than value of sales. The Purchasing Managers Index (PMI) composite is a survey of business sentiment for manufacturing and service sectors. Guide to the Markets - UK. Data as of 31 December 15.

7 UK housing 7 UK economy Home prices Rebased to 1 at December ONS Nationwide Halifax Housing starts* Thousands per quarter, seasonally adjusted 55 Average increase in households -1**: Q315: Q15 (s) change y/y UK London 5 1. Wales 13.7 Scotland Ireland 1.5 England ex-london 19. '3 ' '5 ' '7 ' '9 '1 '11 '1 '13 '1 '15 15 ' ' ' ' '1 '1 '1 Mortgage approvals and housing transactions Thousands, seasonally adjusted Housing transactions Nov 15: 1. Nov 15: Mortgage approvals 7. ' '7 ' '9 '1 '11 '1 '13 '1 '15 '1 Source: (Left) FactSet, Halifax, Nationwide, ONS, J.P. Morgan Asset Management. (Top right) DCLG, FactSet, ONS, J.P. Morgan Asset Management. (Bottom right) Bank of England, FactSet, HM Revenue & Customs, J.P. Morgan Asset Management. *Data is for England only. **1 to 1 are estimated average increases in households provided by the DCLG (Department for Communities and Local Government). Guide to the Markets - UK. Data as of 31 December 15. 7

8 UK household sensitivity to interest rates UK economy Household ownership Interest service ratio of total households Ratio of interest payments to profits or income 5 Renting Corporate sector Own home without mortgage 5 Own home with mortgage 35 Household sector Average: Year Household sensitivity to interest rates of mortgages with debt more than 5 times income who need to take serious action * '1 '5 '9 '93 '97 '1 '5 '9 '13 1 Average: ' '9 '9 '9 '9 '9 ' ' ' ' ' '1 '1 '1 '1 Source: (Left) Bank of England, DCLG, NMG Research, ONS, J.P. Morgan Asset Management. (Right) ONS, J.P. Morgan Asset Management. *If interest rates rose 3 percentage points. Estimates are provided by the NMG Research Surveys between Households are defined as needing to take serious action if the additional mortgage payments from higher interest rates exceed the income available to meet higher mortgage payments. Guide to the Markets - UK. Data as of 31 December 15.

9 UK consumer finances 9 UK economy Lending to individuals: Secured and unsecured lending Household debt Seasonally adjusted, three-month annualised growth rate of income 17 Unsecured Secured 1 1 OBR forecast* '5 '7 '9 '11 '13 '15 '17 '19 '1 Household savings and consumer confidence Net balance 1 Consumer confidence - - ' ' ' ' ' '1 '1 '1 '1 Household savings** - ' '5 ' '7 ' '9 '1 '11 '1 '13 '1 '15 '1 Source: (Left) Bank of England, FactSet, J.P. Morgan Asset Management. (Top right) OBR, J.P. Morgan Asset Management. (Bottom right) FactSet, GFK, ONS, J.P. Morgan Asset Management. *Household debt forecasts begin in September 15. **Three-quarter moving average applied to household savings ratio. Household savings ratio is expressed as a percentage of total available households' resources. Quarterly data for consumer confidence are calculated as unweighted average of monthly figures. Guide to the Markets - UK. Data as of 31 December 15. 9

10 Global Purchasing Managers Index (PMI) for manufacturing Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Global Global economy Eurozone Developed Emerging Eurozone France Germany Italy Spain Ireland Developed UK US Japan Brazil Emerging Russia India China Korea Taiwan Lowest relative to 5 PMI 5 Highest relative to 5 PMI Source: FactSet, Markit, J.P. Morgan Asset Management. The Global Purchasing Managers Index (PMI) assesses the economic health of the manufacturing sector by surveying output and employment intentions. Guide to the Markets - UK. Data as of 31 December 15. 1

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

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

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

14 Developed world consumption 1 Real private consumption growth Change year on year 3 Household credit growth Change year on year 1 1 Japan Global economy US -3 UK - Eurozone ' ' ' ' '1 '1 '1 1 1 UK US Eurozone Real wage growth Change year on year UK Eurozone US '1 '11 '1 '13 '1 '15 - ' ' ' ' ' '1 '1 '1 Source: (Top left) Bloomberg, J.P. Morgan Asset Management. (Bottom left) Bloomberg, BLS, Eurostat, ONS, J.P. Morgan Asset Management. (Right) Haver Analytics, J.P. Morgan Asset Management. Guide to the Markets UK. Data as of 31 December 15. 1

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

16 Global currency trends 1 Global economy US dollar index Broad real effective exchange rate (REER) : : : : Plaza Accord 197: Louvre Accord 1995-: +3. Average since : '73 '77 '1 '5 '9 '93 '97 '1 '5 '9 '13 Nov 15 US dollar index : : +. Currency performance since 11 Real effective exchange rate - - RMB GBP USD EUR JPY EM* US dollar performance and US rate hikes Real trade-weighted exchange rate, rebased to 1 on the date of first rate hike Months Source: (Top) US Federal Reserve, J.P. Morgan Asset Management. (Bottom left) BIS, Bloomberg, J.P. Morgan Asset Management. (Bottom right) FactSet, US Federal Reserve, J.P. Morgan Asset Management. *EM currency measure is the J.P. Morgan Emerging Market Currency Index, which measures the currencies of 1 emerging markets against the US dollar in nominal terms. Guide to the Markets - UK. Data as of 31 December

17 Eurozone: GDP and inflation 17 Real GDP Change quarter on quarter Average since 1999 Q315 Real GDP.3.3 Inflation Change year on year 5 Average since 1999 Nov 15 Headline CPI* 1.9. Core CPI 1..9 Global economy 1 Average ' ' ' ' ' '1 '1 '1 ' ' ' ' ' '1 '1 '1 Source: (Both charts) Eurostat, FactSet, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food, energy, alcohol and tobacco. Guide to the Markets - UK. Data as of 31 December

18 Eurozone cyclical indicators 1 Global economy New auto registrations EU19, millions of new passenger cars, seasonally adjusted Average:.9 '9 '9 ' ' ' ' ' '1 '1 '1 Nov 15:.3 Retail sales growth EU19, excluding motor vehicles, change year on year Oct 15:. ' ' ' ' '1 '1 '1 '1 GDP growth and money supply EU19, change year on year 15 M1* advanced by 1 months (y/y) GDP (y/y) - '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 ' Eurozone core vs. periphery Core driving eurozone growth -. GDP growth q/q (lhs) Business surveys** (rhs) Periphery driving eurozone growth -1.5 '1 '11 '1 '1 ' Source: (Top and bottom left, top right) ECB, Eurostat, FactSet, J.P. Morgan Asset Management. (Bottom right) Bloomberg, Eurostat, Markit, J.P. Morgan Asset Management. *M1 is defined as the sum of currency held by the public and transaction deposits at depository institutions. **Purchasing managers indices and national measures of economic sentiment, standard deviations from mean. Core is Germany and France. Periphery is Italy and Spain. Guide to the Markets - UK. Data as of 31 December 15. 1

19 Eurozone recovery monitor 19 Global economy Eurozone unemployment and consumer confidence 13 Eurozone unemployment rate Consumer confidence in the periphery Italy consumer confidence Spain consumer confidence 75 ' ' ' ' ' '1 '1 ' Eurozone consumer confidence ' ' ' ' ' '1 '1 ' Eurozone domestic demand Change year on year 3 1-month change: Domestic demand (Q315) +1.7 Domestic demand Net exports (Q315) -. 1 Eurozone GDP -1 - '1 '13 '1 '15 Source: (All charts) Eurostat, FactSet J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 31 December

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

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

22 European investment and reform potential Global economy Potential GDP boost by 5 from implementing reforms* 1 Labour market reform 1 Product market reform Retirement policy reform Gross fixed capital formation of GDP 17 US 1 15 Eurozone 1 '99 '1 '3 '5 '7 '9 '11 '13 ' Difficulty of doing business 15, lower score indicates an easier business environment Source: (Left) OECD, J.P. Morgan Asset Management. (Top right) BEA, Eurostat, FactSet, J.P. Morgan Asset Management. (Bottom right) World Bank, J.P. Morgan Asset Management. *The size of each bar shows the effect on GDP of each policy simulated in isolation. The reform of retirement policies assumes that the ratio of working-life to life-expectancy converges towards that of Switzerland. Labour market reforms are assumed to gradually reduce the structural unemployment rate to 5 in all countries where it would otherwise be above this level. Product market reforms move each country s regulation gradually towards best practice. Guide to the Markets - UK. Data as of 31 December 15.

23 US Federal Reserve outlook 3 Global economy Federal funds rate expectations FOMC and market expectations for the Fed funds rate 7 5 Federal funds rate US Fed FOMC forecasts median US Fed FOMC forecasts range Market expectations on 31 Dec 15 FOMC long-run projection FOMC December 15 forecasts* Long run Change in real GDP, Q to Q Unemployment rate, Q PCE inflation, Q to Q '99 '3 '7 '11 '15 '19 Source: Bloomberg, Federal Reserve Bank of New York, US Federal Reserve, J.P. Morgan Asset Management. *Forecasts of 17 Federal Open Market Committee (FOMC) participants, midpoints of central tendency except for Federal funds rate, which is a median estimate. Guide to the Markets - UK. Data as of 31 December 15. 3

24 US: GDP and inflation Real GDP Change quarter on quarter, SAAR 1 Average since 1999 Q315 Real GDP.. Inflation Change year on year 15 Average since 19 Average since 1999 Nov 15 Headline CPI*.1..5 Core CPI.1.. Global economy Average Components of nominal GDP Q315 Consumption. Government 17.7 Investment ex-housing 13. Housing 3. Net exports ' ' ' ' ' '1 '1 '1 3-3 '5 '7 '75 ' '5 '9 '95 ' '5 '1 '15 Source: (Left) BEA, FactSet, J.P. Morgan Asset Management. (Right) BLS, FactSet, J.P. Morgan Asset Management. SAAR is seasonally adjusted annual rate. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - UK. Data as of 31 December 15.

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

26 US economic indicators Global economy Durable goods and fixed investment of GDP 3 ' '7 ' '9 ' '1 Initial jobless claims vs. consumer confidence Jobless claims in thousands 7 Jobless claims Consumer confidence '7 ' '9 ' '1 1 1 Housing starts Thousands, SAAR 3, Recession Federal funds effective rate 5, 15 1, 1 5 ' '7 ' '9 ' '1 ' '9 ' '1 Source: (Top left) BEA, FactSet, J.P. Morgan Asset Management. (Bottom left) US Census Bureau, J.P. Morgan Asset Management. (Top right) BLS, FactSet, The Conference Board, J.P. Morgan Asset Management. (Bottom right) FactSet, J.P. Morgan Asset Management. Shaded areas highlight US recessionary periods. Guide to the Markets -UK. Data as of 31 December 15.

27 US consumer finances 7 Global economy Household net worth $ billions, SAAR, $,,, Q7: $7, Q15*: $7, '9 '9 '9 '9 '9 ' ' ' ' ' '1 '1 '1 Consumer balance sheet Q15, $ trillions outstanding, not seasonally adjusted 1 $ 9 7 Total assets: $99.5tn Homes: 5 Other tangible: Deposits: 9 Q37 peak: $1.tn Q19 low: $9.tn of total US mortgages that are fixed rate*** 71 Household debt service ratio Debt payments as of disposable personal income, seasonally adjusted 1 Q7: Q15*: 1. ' '5 '9 '95 ' '5 '1 ' Pension funds: 1 Other financial assets: 39 Source: (All charts) FactSet, US Federal Reserve, J.P. Morgan Asset Management. *Q15 numbers for US household net worth and debt service ratio are J.P. Morgan Asset Management forecasts. **Revolving includes credit cards. ***Taken from the Monthly Interest Rate Survey for 15-year and 3-year fixed mortgages. Guide to the Markets - UK. Data as of 31 December 15. Other non-revolving: Revolving**: Auto loans: 7 Other liabilities: Student debt: 9 Total liabilities: $1.tn Mortgages: 7 7

28 Japan: GDP and inflation Global economy Real GDP growth Change quarter on quarter Average since 1999 Q315 Real GDP..3 Average Inflation Change year on year Average since 1999 Nov 15 Headline CPI*..3 Core CPI CPI less food & consumption tax '99 '1 '3 '5 '7 '9 '11 '13-3 '99 '1 '3 '5 '7 '9 '11 '13 Source: (Left) FactSet, Japan Statistics Bureau & Statistics Centre, J.P. Morgan Asset Management. (Right) Bloomberg, FactSet, Japan Ministry of Internal Affairs & Communications, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - UK. Data as of 31 December 15.

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

30 China: GDP, inflation and policy rate 3 Global economy Real GDP growth Change year on year GDP growth Investment Consumption Net exports Q315:.9 Inflation Change year on year ' '7 ' '9 '1 '11 '1 '13 '1 '15 Nov 15 Headline CPI* 1.5 Core CPI 1.5 Headline PPI** Policy rate and reserve ratio requirement (RRR)*** Policy rate on one-year renminbi deposits 5 RRR -3 - '9 '9 '9 '9 '9 ' ' ' ' ' '1 '1 '1 3 PBoC policy rate 1 ' '7 ' '9 '1 '11 '1 '13 '1 '15 '1 Source: (Left and top right) FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management. (Bottom right) FactSet, People s Bank of China (PBoC), J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. **PPI is the Producer Price Index. ***Average RRR for large and small banks. Guide to the Markets - UK. Data as of 31 December

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

32 China financial dynamics 3 Global economy Credit to private sector of GDP 1 1: 1 1 '79 ' '9 '9 '99 ' '9 '1 Chinese renminbi Trade-weighted RMB indexed to 1 in Trade-weighted RMB RMB USD/RMB 95 '11 '1 '13 '1 '15 ' public, household and non-financial corporate debt China foreign exchange reserves and external debt of GDP Trillions USD Public debt 5 35 Non-financial corporate debt $ External debt as a of global GDP 3 Household debt EM Asia US China Japan UK US Eurozone China Korea 1 ' ' ' ' '1 '1 '1 Source: (Top left) FactSet, World Bank, J.P. Morgan Asset Management. (Bottom left) BIS, IMF World Economic Outlook October 15, Lombard Street Research, J.P. Morgan Asset Management. (Top right) BIS, FactSet, J.P. Morgan Asset Management. (Bottom right) FactSet, People s Bank of China, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 31 December 15. 3

33 Emerging markets trade connections with developed markets 33 Global economy World export volume Change year on year, three-month moving average ' ' ' ' ' '1 '1 '1 '1 EM exports breakdown Percentage of total exports, 1 Manufacturing exports China Turkey Korea Mexico India S. Africa Brazil Indonesia Colombia Russia Chile Oct 15: Commodity exports Trade linkages with China Merchandise exports to and imports from China, of GDP Turkey Spain Mexico UK Italy India US France Sweden Switzerland Brazil Indonesia Russia Germany South Africa Japan Australia Saudi Arabia Thailand Chile Malaysia Korea Singapore Imports Exports Source: (Top left) Netherlands Bureau for Economic Policy Analysis World Trade Monitor, J.P. Morgan Asset Management. (Bottom left) World Bank, J.P. Morgan Asset Management. (Right) OECD, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 31 December

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

35 Emerging market financial dynamics 35 EM current account of GDP 5 Commodity importers (lhs) Commodity exporters (lhs) China (rhs) 1 EM equity performance and US rate hikes MSCI EM Index in USD, rebased to 1 on the date of first rate hike Jun Jun 1999 Apr 199 Current Global economy Days 5 1 EM foreign exchange reserves vs. external debt of GDP External debt* EM reserves ' '1 ' '3 ' '5 ' '7 ' '9 '1 '11 '1 '13 '1 '15 5 '9 '9 '9 ' ' '1 '1 Source: (Left) Bloomberg, J.P. Morgan Asset Management. (Top right) MSCI, US Federal Reserve, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Economic Research, J.P. Morgan Asset Management. *External debt includes both private and sovereign and is displayed as a four quarter moving average. Guide to the Markets - UK. Data as of 31 December

36 World stock market returns 3 Local Q Euro ex-uk.5 3. Asia ex-jp TOPIX MSCI EM. 3.5 Small Cap..9 S&P Asia ex-jp Small Cap 35.. S&P TOPIX TOPIX 9. 1-yr ann. 9. S&P Asia ex-jp MSCI EM S&P Asia ex-jp Asia ex-jp HDY Equity Euro ex-uk. 9.9 S&P Asia ex-jp S&P S&P Asia ex-jp MSCI EM Euro ex-uk HDY Equity Small Cap..9 MSCI EM FTSE MSCI EM Euro ex-uk..7 Small Cap Small Cap. 7. Small Cap.9.1 Small Cap.3 Equities 1. FTSE HDY Equity Portfolio HDY Equity Small Cap Portfolio FTSE Portfolio TOPIX S&P Portfolio Small Cap Small Cap Portfolio 1..7 TOPIX FTSE HDY Equity.7 7. Portfolio Euro ex-uk 9.1. Portfolio HDY Equity Portfolio HDY Equity..9 Portfolio. 9. Portfolio FTSE Euro ex-uk HDY Equity Portfolio TOPIX S&P Portfolio MSCI EM 5..9 HDY Equity.. Asia ex-jp 3.. Euro ex-uk Small Cap S&P FTSE Euro ex-uk FTSE Euro ex-uk HDY Equity HDY Equity.5.7 TOPIX FTSE Euro ex-uk. 5.5 MSCI EM. 1. S&P Small Cap Asia ex-jp S&P HDY Equity Asia ex-jp FTSE Asia ex-jp..7 FTSE Asia ex-jp FTSE FTSE TOPIX TOPIX MSCI EM TOPIX Euro ex-uk MSCI EM TOPIX MSCI EM 3.. Euro ex-uk MSCI EM MSCI EM 1.. TOPIX 1. 3 Source: FactSet, MSCI, Standard & Poor s, TOPIX, J.P. Morgan Asset Management. Annualised return covers the period to 15. HDY Equity: MSCI AC World High Dividend Yield Index; Small Cap: MSCI Europe Small Cap Index. Hypothetical portfolio (for illustrative purposes only and should not be taken as a recommendation): FTSE 1; S&P 5; 15 EM; 1 Euro ex-uk; 1 Asia ex-japan; 1 TOPIX; 1 HDY Equity and 5 small cap. All indices are total return. Guide to the Markets - UK. Data as of 31 December 15.

37 European sector returns 37 MSCI Europe Index Europe weight Growth weight Value weight Financials Health care Cons. staples Cons. disc. Industrials Materials Energy Telecom Utilities Tech Europe Weights Q Equities 15 Since market peak* Since market low* Return Beta to Europe 1.33x.x.x.95x 1.13x 1.3x 1.x.x.x.99x 1.x β Correl. to int. rates** ρ Forward P/E ratio 11.x 17.x.3x 1.1x 15.x 1.x 1.x 19.x 1.5x 1.x 15.x 15-year average Trailing P/E ratio 1.9x 15.x 15.9x 1.x 1.1x 1.5x 11.7x 17.x 13.5x.x 13.3x 11.5x 1.9x 1.x 1.x 1.x 17.x 1.1x.3x 1.x 1.x 15.9x P/E 15-year average 1.7x 17.x 17.x 1.9x 1.x 1.x 11.x 19.x 1.x 3.3x 1.x Dividend yield 15-year average Div 37 Source: FactSet, MSCI, J.P Morgan Asset Management. All calculations are total return in local currency, not annualised. * Since market peak represents period 9 October 7 to end of latest quarter; since market low represents period 9 March 9 to end of latest quarter. ** Correlation to interest rates is calculated using daily sector returns and daily 1-year German Bund yield over the last 1 years. Guide to the Markets - UK. Data as of 31 December 15.

38 UK FTSE All-Share at inflection points (GBP) 3 FTSE All-Share index, Characteristic Sep Jun 7 Dec 15 Index level 3, 3,79 3, P/E ratio (fwd).x 13.x 15.3x Dividend yield UK 1 year Dec 15: P/E = 15.3x 3, 3,5 Total return: +79 Sep : P/E =.x 3, 15 Jun 7: P/E = 13.x 3,79 3, Equities, , 31 Dec 199: P/E = 1.5x,1 1 Mar 3: P/E = 1.5x 1,593 9 Mar 9: P/E =.x 1,79 1,5 '97 '9 '99 ' '1 ' '3 ' '5 ' '7 ' '9 '1 '11 '1 '13 '1 '15 '1 Source: FactSet, FTSE, Tullett Prebon, J.P. Morgan Asset Management. Local currency returns. P/E ratios are forward P/E ratios. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by the mean consensus estimates for earnings in the next 1 months and is provided by FactSet Market Aggregates. Return calculations shown in green are based on the total return index. Guide to the Markets - UK. Data as of 31 December 15. 3

39 UK FTSE All-Share equity valuations 39 Forward P/E ratio x 1 Average: 13.x 31 Dec 15: 15.3x Earnings yield and 1-year bond yield Earnings yield (inverse of forward P/E) Equities '9 ' ' ' ' ' '1 '1 '1 '1 FTSE All-Share Shiller CAPE Adjusted using trailing 1-year average inflation-adjusted earnings 35 x 31 Dec 15: year Gilt yield 31 Dec 15:. 15 Average: 17.x 31 Dec 15: 11.x 5 '3 '7 '91 '95 '99 '3 '7 '11 '15 ' ' ' ' ' '1 '1 '1 39 Source: (Top left) FactSet, FTSE, Tullett Prebon, J.P. Morgan Asset Management. (Bottom left) FTSE, Goldman Sachs, J.P. Morgan Asset Management. (Right) Bloomberg, FactSet, Tullett Prebon, J.P. Morgan Asset Management. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by consensus estimates for earnings in the next 1 months and is provided by FactSet Market Aggregates. Earnings yield is calculated as the inverse of the forward P/E ratio. Guide to the Markets - UK. Data as of 31 December 15.

40 UK FTSE All-Share earnings and revenues FTSE All-Share earnings and performance Index level, analyst estimates of the next 1 months of earnings 3 FTSE All-Share EPS FTSE All-Share index level, Average percentage of revenue sourced from the UK Concentration of largest quartile of stocks** UK US 7 Europe 9 3,5 Equities 3,,5 FTSE Small Cap FTSE 5* FTSE All-Share FTSE 1 Top quartile excess performance by region UK Europe US, ' '9 '1 '11 '1 '13 '1 '15 '1 - '9 ' ' ' ' ' '1 '1 '1 Source: (Left) FactSet, FTSE, J.P. Morgan Asset Management. (Top right) Citi, J.P. Morgan Asset Management. (Bottom right) Lipper, Morningstar, J.P. Morgan Asset Management. *Excluding Investment Trusts. **As a percentage of overall market capitalisation. EPS is earnings per share. Guide to the Markets - UK. Data as of 31 December 15.

41 MSCI Europe ex-uk equity valuations 1 Forward P/E ratio x 1 Average: 13.5x 31 Dec 15: 15.x Earnings yield and 1-year bond yield 1 1 Equities 1 MSCI Europe cyclically adjusted P/E ratio Adjusted using trailing 1-year average inflation-adjusted earnings 5 x ' ' ' ' '1 '1 '1 '1 1 Earnings yield (inverse of forward P/E) 31 Dec 15: Average: 17.x 3 Nov 15: 15.x 1-year European bond yield* 31 Dec 15:. 5 ' ' ' '9 '9 ' ' ' '1 ' ' ' ' ' '1 '1 '1 Source: (Top left) FactSet, J.P. Morgan Asset Management. (Bottom left) FactSet, MSCI, J.P. Morgan Asset Management. (Right) Bloomberg, FactSet, MSCI, Tullett Prebon, J.P. Morgan Asset Management. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by consensus estimates for earnings in the next 1 months and is provided by FactSet Market Aggregates. Earnings yield is calculated as the inverse of the forward P/E ratio. *Represented by the German Bund yield. Guide to the Markets - UK. Data as of 31 December 15. 1

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

43 US S&P 5 at inflection points 3 S&P 5 Index,, Characteristic Mar Oct 7 Dec 15 Index level 1,57 1,55, P/E ratio (fwd) 7.x 15.x 1.1x Dividend yield US 1 year Dec 15: P/E = 1,1x, 1, 1, Mar : P/E = 7.x 1,57 9 Oct 7: P/E = 15.x 1,55 Equities 1, Total return: , -55 1, 31 Dec 199: 9 Oct : 9 Mar 9: P/E = 1.x P/E = 1.1x P/E = 1.3x '97 '9 '99 ' '1 ' '3 ' '5 ' '7 ' '9 '1 '11 '1 '13 '1 '15 '1 Source: FactSet, Standard & Poor s, Tullett Prebon, J.P. Morgan Asset Management. The P/E ratios are forward P/E ratios. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by the mean consensus estimates for earnings in the next 1 months and is provided by FactSet Market Aggregates. Return calculations shown in green are based on the total return index. Guide to the Markets - UK. Data as of 31 December 15. 3

44 US S&P 5 equity valuations Equities Earnings yield and Baa corporate bond yield 1 1 US value vs. growth performance and US Treasury yield 5 3 Baa corporate bond yield Earnings yield 31 Dec 15: (inverse of forward P/E) 5.5 '9 '9 '9 '9 '9 ' ' ' ' ' '1 '1 '1 '1 US 1-year yield Growth outperforms value Value outperforms growth Russell 1 Value/ Russell 1 Growth 31 Dec 15:. 1. '3 ' '5 ' '7 ' '9 '1 '11 '1 '13 '1 '15 ' Forward P/E ratio x 1 1 Average: 1.5x 31 Dec 1999:.x '9 '9 '9 '9 '9 ' ' ' ' ' '1 '1 '1 '1 S&P 5 Shiller cyclically adjusted P/E 31 Dec 15: 1.1x Adjusted using trailing 1-year average inflation-adjusted earnings 5 31 Dec 15: x 5.9x 3 1 Average: 1.x ' '1 ' '3 ' '5 ' '7 ' '9 ' '1 Source: (Top left) FactSet, IBES, Moody s, Standard & Poor s, J.P. Morgan Asset Management. (Bottom left) FactSet, Russell, J.P. Morgan Asset Management. (Top right) FactSet, Standard & Poor s, J.P. Morgan Asset Management. (Bottom right) Robert Shiller, FactSet, J.P. Morgan Asset Management. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by consensus estimates for earnings in the next 1 months and is provided by FactSet Market Aggregates. Guide to the Markets - UK. Data as of 31 December 15.

45 US S&P 5 earnings and profit margins 5 S&P 5 earnings and performance Index level, analyst estimates of the next 1 months of earnings 13 $ S&P 5 EPS S&P 5 index level 1, S&P 5 earnings per share growth Full year 15 with Q15 forecast, change over Equities , 1, 1, 1, 1, Total index Index ex-energy -.3 Most USD sensitivity Employee compensation and profitability Average USD sensitivity Index ex-energy Least USD sensitivity of GDP 1 Employee compensation Corporate profits ' '9 '1 '11 '1 '13 '1 '15 '1 5 '59 ' '9 '7 '79 ' '9 '9 '99 ' '9 '1 Source: (Left and top right) FactSet, Standard & Poor s, J.P. Morgan Asset Management. (Bottom right) BEA, FactSet, J.P. Morgan Asset Management. USD sensitivity is determined by calculating the proportion of each stock s historical variation in returns that is explained by variation in the US dollar. EPS is earnings per share. Guide to the Markets - UK. Data as of 31 December 15. 5

46 Bear markets S&P 5 declines from all-time highs market decline - 3 Recession Equities Characteristics of past bear and bull markets* Bear markets Macro environment Bull markets Market corrections Market Bear Duration Commodity Aggressive Extreme Bull Bull Duration peak Return (months) Recession spike Fed tightening valuations start date return (months) 1 Crash of 199 excessive leverage, irrational exuberance Sep Jul Fed Tightening premature policy tightening Mar Mar Post WWII Crash post-war demobilisation, recession fears May Apr Flash crash of 19 flash crash, Cuban Missile Crisis Dec Oct Tech crash of 197 economic overheating, civil unrest Nov Oct Stagflation OPEC oil embargo Jan May Volcker Tightening campaign against inflation Nov Mar crash Programme trading, overheating markets Aug Aug Tech bubble extreme valuations, dot com boom/bust Mar Oct Global Financial Crisis Leverage/housing, Lehman collapse Oct Oct 11 1 Current cycle Mar 9 3 Average Source: FactSet, NBER, Robert Shiller, Standard & Poor s, J.P. Morgan Asset Management. *A bear market represents a or more decline from the previous market high using a monthly frequency; a bull market represents a increase from a market trough. Periods of recession are defined using US National Bureau of Economic Research (NBER) business cycle dates. Commodity spike is defined as significant rapid upward moves in oil prices. Periods of extreme valuations are those where S&P 5 last 1 months P/E levels were approximately two standard deviations above long-run averages. Aggressive Fed tightening is defined as US Federal Reserve monetary tightening that was unexpected and significant in magnitude. Guide to the Markets - UK. Data as of 31 December 15.

47 Interest rates and equities 7 Correlations between weekly equity returns and interest rate movements Rolling two-year correlation of weekly returns of the S&P 5, MSCI Europe Index and the -year Treasury yield, Positive relationship between yield movements and equity returns S&P 5 MSCI Europe Market reaction when the US Fed raised rates '-'9 '9-'95 '99-' '-' Change in Fed funds Change in 1-yr yields Initial market reaction Subsequent market reaction 7 1 Equities Correlation.. Total reaction Negative relationship between yield movements and equity returns year Treasury yield Source: FactSet, MSCI, Standard & Poor s, US Treasury, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. Data for each of the rate hikes: '-'9 is March 19 to June 199, '9-'95 is February 199 to February '99-' is June 1999 to May, '-' is June to June. Guide to the Markets - UK. Data as of 31 December 15. 7

48 Japanese equities TOPIX earnings and performance Index level, analyst estimates of the next 1 months of earnings of market capitalisation, average between and 1 1 1, 5 TOPIX TOPIX price level 11 EPS 1 1, , 9 Listed companies cash and cash equivalents holdings* 1 15 Equities 7 5 1, 1, Japan Germany Italy France UK US Canada Listed companies dividend pay-out and share buybacks JPY trillions 1 Share buybacks** 1 Dividends 3 ' '9 '1 '11 '1 '13 '1 '15 '1 Source: (Left) FactSet, TOPIX, J.P. Morgan Asset Management. (Top right) IMF, J.P. Morgan Asset Management. (Bottom right) Nomura, J.P. Morgan Asset Management. *Cash and cash equivalent holdings derived from Unstash the Cash! Corporate Governance Reform in Japan, Chie Aoyagi and Giovanni Ganelli, IMF, August 1. **Share buyback data are for repurchases of common stock, excluding repurchases from Resolution and Collection Corp. and repurchases of preferred stock collected by Nomura. Guide to the Markets - UK. Data as of 31 December 15. '9 '95 ' '5 '1 '15

49 Chinese equities 9 Stock market performance and margin debt Index level, of GDP, 5,.5. Chinese household financial asset allocation Other 11 Mutual funds Equities 7 Insurance & pensions 7 Cash 7 Equities, 3, Onshore equity index (CSI 3) Price to earnings ratio 5 x 3 Shenzhen Composite Shanghai Composite Hang Seng, Margin debt of GDP.5 1 1,. Dec '13 Apr '1 Aug '1 Dec '1 Apr '15 Aug '15 Dec '15 ' ' '1 '1 '1 Source: (Left) CEIC, FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management. (Top right) Central Bank of the Republic of China, J.P. Morgan Asset Management. (Bottom right) Bloomberg, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 31 December 15. 9

50 Emerging markets: Valuations and returns 5 MSCI Emerging Markets Index: Price to book ratio 3. x std. dev..5.5 MSCI Emerging Markets Index: Price to book and returns Price to book ratio and next 1 months price return* Current level Equities Average: 1.79x Dec 15: 1.x std. dev '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 ' x 3.5 Source: (All charts) FactSet, MSCI, J.P. Morgan Asset Management. *Dots represent monthly data points between December 1995 and December 15. Guide to the Markets - UK. Data as of 31 December 15. 5

51 Emerging market equities 51 EM vs. DM growth and equity performance Monthly, consensus expectations for GDP growth in 1 months 5 EM minus DM GDP growth EM growth & equity outperformance 1 1 EM earnings expectations by region Consensus EPS for next 1-month, local currency, rebased to 1 in 5 EM Europe EM Asia EM Latin America Equities 1 EM growth & equity underperformance 1 5 ' '7 ' '9 '1 '11 '1 '13 '1 '15 '1 Number of companies yielding greater than by region Constituents of the MSCI All Country World Index MSCI EM relative to MSCI DM -1 '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 Source: (Left) Consensus Economics, J.P. Morgan Asset Management. (Top and bottom right) FactSet, MSCI, J.P. Morgan Asset Management. EM DM GDP Growth is consensus estimates for EM growth in the next 1 months minus consensus estimates for DM growth in the next 1 months, provided by Consensus Economics. Guide to the Markets - UK. Data as of 31 December 15. Emerging markets Europe US Japan 51

52 Emerging market equity valuations by country 5 Emerging markets + Std dev How to interpret this chart Std dev from global average + Std dev + Std dev Average - Std dev - Std dev Expensive relative to own history Cheap relative to own history Expensive relative to world Current Average Cheap relative to world Equities - Std dev Russia Brazil Taiwan EM Index China S. Korea ACWI S. Africa Mexico India Current composite index Current 1-year average Forward P/E P/B P/CF Dividend yield Forward P/E P/B P/CF Dividend yield Russia x.5x.x 5. 7.x.7x 5.9x.7 Brazil Taiwan EM Index China S. Korea ACWI S. Africa Mexico India Source: FactSet, MSCI, J.P. Morgan Asset Management. Each valuation index shows an equally weighted composite of four metrics: price to forward earnings (forward P/E), price to (P/B), price to last 1 months cash flow (P/CF) and price to last 1 months dividends. Results are then normalised using means and average variability over the last 1 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). Guide to the Markets - UK. Data as of 31 December 15. 5

53 Equity income 53 S&P 5 total return index: Dividends and capital appreciation Average annualised returns Capital appreciation Dividends Equities s 19s 195s 19s 197s 19s 199s s FTSE indices: Price vs. total return* Rebased to 1 at December High dividend yield total return Total return Price return ' ' ' ' ' '1 '1 '1 '1 Sources of income Yield Average UK inflation:.1 (1 months to Nov 15).5... Cash Gilts Converts EM equity UK corp FTSE All- Share Source: (Top) Ibbotson, Standard & Poor s, J.P. Morgan Asset Management. (Bottom left) FactSet, FTSE, J.P. Morgan Asset Management. (Bottom right) Barclays, BofA/Merrill Lynch, FactSet, FTSE, Tullett Prebon, J.P. Morgan Asset Management. UK corporate: BofA/Merrill Lynch Sterling Corporate Index; EM debt: J.P. Morgan EMBI Global; High yield: BofA/Merrill Lynch Developed Markets High Yield Constrained; Global REITs: FTSE NAREIT Index; Converts: Barclays Global Convertibles; EM equity; MSCI EM. Yields for the bond indices are yield to worst and dividend yields for the equity indices. *Returns are in local currency. Guide to the Markets - UK. Data as of 31 December Global REITs.7 EM debt 7.9 High yield

54 Annual returns and intra-year declines 5 Equities FTSE All-Share Index intra-year declines vs. calendar-year returns Despite average intra-year drops of 15. (median 1.), annual returns are positive in 1 of 3 years Calendar-year return Intra-year decline ' ' '9 '9 '9 '9 '9 ' ' ' ' ' '1 '1 '1-3 Source: FactSet, FTSE, J.P Morgan Asset Management. Returns are based on local price only and do not include dividends. Intra-year decline refers to the largest market fall from peak to trough within a short time period during the calendar year. Returns shown are calendar years from 19 to 15. Guide to the Markets - UK. Data as of 31 December 15. 5

55 Fixed income sector returns 55 Local Q15.9 Euro HY 9..9 Linkers.9.5 Linkers Euro HY US Treas US IG Euro HY.1. US HY US HY EM Debt Linkers UK Gilts Euro HY UK IG Euro HY. 5. US HY Linkers US IG EM Debt 1..7 US Treas... EM Debt 1.. US IG -. 1-yr ann..5 US HY..3 EM Debt.7. UK IG. 7. US Treas EM Debt UK IG US IG Portfolio EM Debt UK IG UK Gilts US IG US Treas Euro HY.. UK Gilts. 5.1 UK Gilts Portfolio EM Debt Portfolio US Treas US HY Linkers.5 1. EM Debt. 3. Portfolio.1 1. Euro HY Portfolio. Fixed income -.7 Portfolio. -.9 US HY EM Debt EM Debt.5. Portfolio 5.1. US IG. 13. UK Gilts Linkers US HY Portfolio 17.. Linkers. 5.7 US IG Euro HY US Treas Linkers.9 1. EM Debt 9..9 US IG.1.5 UK IG.5.5 Portfolio US IG 9.. UK Gilts. -. Portfolio US IG UK Gilts Portfolio UK IG US Treas UK Gilts 1..9 US HY -..7 UK IG.7 1. UK IG Portfolio -..5 US HY -..9 US IG Linkers.7 5. US Treas US IG.3.9 US HY. -1. UK IG UK Gilts UK IG US HY.. Linkers. -. US Treas US HY.5-1. Linkers UK Gilts UK Gilts US Treas UK IG Euro HY US Treas UK Gilts Euro HY US Treas EM Debt Euro HY Euro HY Linkers UK IG.9 55 Source: Barclays, BofA/Merrill Lynch, FactSet, FTSE, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Annualised return covers period to 15. UK Gilts: J.P. Morgan UK Global Bond; US Treasuries: Barclays US Agg. Gov. Treasury; Linkers: FTSE UK Gilts Indexed Linked Gov.; US IG: Barclays US Agg. Corporate Investment Grade; UK IG: Barclays Sterling Agg. Non-Gilts Corporate; US HY: BofA/Merrill Lynch US High Yield Constrained; Euro HY: BofA/Merrill Lynch Euro Non-Financial High Yield Constrained; EM Debt: J.P. Morgan EMBI+. Hypothetical portfolio (for illustrative purposes only and should not be taken as a recommendation): UK Gilts; 15 US Treasuries; 1 Linkers; 15 US IG; 1 UK IG; 1 US HY; 5 Euro HY; 15 EM Debt. Returns are unhedged in sterling and local currencies. Guide to the Markets - UK. Data as of 31 December 15.

56 Fixed income interest rate risk 5 Fixed income Current and historical yields for selected indices Last 1 years* Illustration of the impact a 1 rise in local interest rates may have on selected indices Assumes a parallel shift in the yield curve and spreads are maintained UK Gilts 1-3 years 5-7 years 1+ years Floating Investmentrate grade credit UK Gilts 1-3 years 5-7 years 1+ years Floating rate High yield Investment- grad e credit EMD USD sovereign High yield EMD USD corporate EMD USD sovereign EMD LC sovereign How to interpret this chart Max Average Current Min Price return Total return EMD USD corporate EMD LC sovereign Source: (Both charts) Barclays, FactSet, J.P. Morgan Asset Management. *Historical spread analysis is based on the last 1 years of data, with the exception of 1+ years UK Treasuries and local currency emerging markets debt, which are based on nine years and six years of data, respectively, due to data availability. Fixed income sectors shown are provided by Barclays and are represented by: Treasury UK: Barclays Sterling Aggregate Gilts; Floating rate: Barclays US Floating Rate Notes (BBB); IG credit: Barclays Global Aggregate Corporates; High yield: Barclays Global High Yield; EMD sovereign USD: Barclays Emerging Markets Sovereigns; EMD corporate ($): Barclays Emerging Markets Corporates; EMD sovereign (LC): Barclays Emerging Market Local Currency Government. For illustrative purposes only. Change in bond price is calculated using both duration and convexity. Guide to the Markets - UK. Data as of 31 December 15. 5

57 Liquidity risks 57 US corporate debt outstanding and dealer inventories $ billions $ Dealer inventories US corporate debt outstanding 1, $ US investment-grade corporate bond trades Average size of trades greater than $1,, number of trades 3.5 $ 3. Average daily number Average trade size (millions) (hundreds) 5 5 1, , '5 ' '7 ' '9 '1 '11 '1 '13 '1 '15 5 Fixed income 3 1,,, Factors affecting bond liquidity during Taper Tantrum* Relative liquidity performance '1 ' '3 ' '5 ' '7 ' '9 '1 '11 '1 '13 '1 '15 Number of dealers Depth of market** Size of issue Investmentgrade rating Time to maturity 57 Source: (Left) Federal Reserve Bank of New York, SIFMA, J.P. Morgan Asset Management. (Top right) TRACE, J.P. Morgan Asset Management. (Bottom right) Markit, IMF, J.P. Morgan Asset Management. *US corporate debt outstanding is the Barclays US Corporate Investment Grade. *The chart shows the contribution of each factor to a non-financial corporate bond s liquidity performance during the taper tantrum episode. Liquidity is measured using Markit s liquidity score, which is a composite index of market liquidity. The effects are normalised by the average change in liquidity (as per liquidity score) in the period. **Depth of market is the ability for the market on a security to absorb larger buy and sell orders before a single order moves the price on the security. Guide to the Markets - UK. Data as of 31 December 15.

58 Government bonds 5 1-year bond yields 1 1 Black Friday 197 Britain leaves ERM 199 Asian currency crisis 1997 Dot com bubble Feb US UK 9/11 attacks 1 Germany Japan Fed QE BoE QE 9 Fed QE 1 Fed QE3 1 BoJ QE 13 ECB QE 15 Fall of Berlin Oil shock Wall ' ' ' ' ' '9 '9 '9 '9 '9 ' ' ' ' ' '1 '1 '1 '1 Fixed income Two-year bond yields 1 US UK Japan Germany Government bond yield curves At the start of respective years 5 US 11 Germany '1 '11 '1 '13 '1 '15 '1-1 3m 1y 3y 5y 1y 3y Source: (All charts) FactSet, Tullett Prebon, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 31 December 15. 5

59 US investment-grade bonds 59 US Investment-grade spreads Spread of yields over treasuries 7 bps IG energy IG Leverage measures Leverage* and interest coverage** ratio. x Leverage 1. 1 x Interest coverage 1. ' ' ' ' ' '1 '1 '1 Fixed income 3 US cumulative net investment-grade bond issuance $ billions $bn 15 issuance Range of last 5 years 1 ' ' ' ' ' '1 '1 '1 '1 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: (Left) Barclays, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top and bottom right) J.P. Morgan Securities, J.P. Morgan Asset Management. *Leverage is net debt to earnings before interest, tax, depreciation and amortisation (EBITDA). **Interest coverage ratio is EBITDA over interest expense. Guide to the Markets - UK. Data as of 31 December

60 Global investment-grade market Market value by duration 1-3 years 3-7 years 7-1 years +1 years Global investment-grade bond market $ billions, of total USD EUR GBP 1,3 1 Fixed income Cumulative number of issuers as a of total index issuers USD GBP 5 EUR 5, Number of issuers USD EUR GBP CAD Other Source: (All charts) J.P. Morgan Economic Research, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 31 December 15.

61 US high yield bonds 1 US high yield spreads and defaults 15 Asset class Average since 19 Latest HY spread bps (rhs) HY defaults (lhs).. 1 Federal funds rate (lhs) 5, bps 1,5 1, 5 ' ' '9 '9 '9 '9 '9 ' ' ' ' ' '1 '1 '1 Fixed income US high yield spreads 1, bps US high yield energy 1, US high yield ex-energy US high yield leverage measures Leverage* and interest coverage ratio** 5.5 x 5..5 Leverage Interest coverage ratio. '13 '1 '15 '1 3.5 ' '9 '1 '11 '1 '13 '1 '15 1 Source: (Top) Credit Suisse, J.P. Morgan Economic Research, US Treasury, J.P. Morgan Asset Management. Default rates are defined as the par value percentage of the total market trading at or below 5 of par value and include any Chapter 11 filing, prepackaged filing or missed interest payments. (Bottom left) ) J.P. Morgan Economic Research, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Economic Research, J.P. Morgan Asset Management. *Leverage is net debt to earnings before interest, tax, depreciation and amortisation (EBITDA). **Interest coverage ratio is EBITDA over interest expense. Guide to the Markets - UK. Data as of 31 December 15.

62 European high yield bonds European high yield: Spread to worst and default rates Default rate : 3 Asset class Average Latest HY spread - bps (rhs) 5 HY defaults (lhs) 5..7,5 bps, 1,5 1, 5 '9 '99 ' '1 ' '3 ' '5 ' '7 ' '9 '1 '11 '1 '13 '1 '15 Fixed income European high yield issuance by credit rating billions 9 Unrated CCC B BB 15: 75.9bn European high yield earnings and revenue growth Change year on year EBITDA* Revenue 3 - '3 ' '5 ' '7 ' '9 '1 '11 '1 '13 '1 '15 - ' '9 '1 '11 '1 '13 '1 '15 Source: (Top) BofA/Merrill Lynch, Credit Suisse, FactSet, J.P. Morgan Asset Management. (Bottom left) FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Economic Research, J.P. Morgan Asset Management. *EBITDA is earnings before interest, tax, depreciation and amortisation. Spread to worst is BofA/Merrill Lynch Euro Non-Financial High Yield Constrained.Guide to the Markets - UK. Data as of 31 December 15.

63 Emerging market debt 3 Emerging market debt yields 1 1 EM sovereign (local currency) EM corporate (USD) EM sovereign (USD) Real 1-year government bond yields, local currency 3-3 Developed markets Emerging markets 1 - Fixed income Emerging markets investable debt universe $ trillions. $ EM corporate (USD) 3. EM sovereign (USD) EM sovereign (local currency). 1. ' '3 ' '5 ' '7 ' '9 '1 '11 '1 '13 '1 '15 '1. '1 ' '3 ' '5 ' '7 ' '9 '1 '11 '1 '13 '1 '15 Source: (Left) FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. (Top right) FactSet, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Economic Research, J.P. Morgan Asset Management. EM sovereign (local currency) is the J.P. Morgan GBI-EM; EM sovereign (USD) is the J.P. Morgan EMBI+; EM corporate (USD) is the J.P. Morgan CEMBI. Guide to the Markets - UK. Data as of 31 December 15. 3

64 Asset class returns Q15 REITS 3. EM E 33. Govt bonds 1. EM E. REITS 7. EM D 9. REITS.1 DM Equities 9. REITS 7.1 DM Equities. REITS yr ann. HY bonds 7.3 EM E. DM Equities 1.1 Cmdty 1. Hedge Funds 1. Cash.9 IG bonds -. HY bonds 59. REITS 7. Cmdty 1. HY bonds 1. REITS 7.3 Govt bonds.3 HY bonds 19. EM D 1. Hedge Funds 9.7 Portfolio 9.1 DM Equities 1. EM D. REITS.3 EM D 1. DM Equities.3 EM D 1. REITS.9 EM D.7 Portfolio 13.9 Govt bonds 1. EM D -9.7 Portfolio.5 EM E 1. IG bonds.3 EM E 17. HY bonds 7.3 EM E 5. Cash.7 Portfolio 1.7 EM E. Other assets and investor behaviour Hedge Funds 13.9 HY bonds 13.7 EM D 1.5 IG bonds 7. Govt bonds. Cash. Cmdty.1 Portfolio.7 IG bonds.7 EM D.5 Cash.1 DM Equities 5. HY bonds 3. REITS -17. Hedge Funds Portfolio -. HY bonds -.9 Cmdty -35. REITS DM Equities -3.3 EM E -5.7 DM Equities.5 EM D 5.9 IG bonds 19. Cmdty 1.9 Hedge Funds 1. Govt bonds. Cash. EM D 11. Hedge Funds 1.9 Portfolio 1.7 DM Equities 1. Govt bonds 5.9 IG bonds 5. Cash 1. HY bonds 3.1 Cash 1. Portfolio -1. Hedge Funds -.5 DM Equities -5. EM E -1.5 Cmdty DM Equities 1. Portfolio 1. IG bonds 11. Hedge Funds 7.7 Govt bonds 1. Cash 1. Cmdty -1.1 EM E 3. REITS 3. Cash.5 IG bonds.3 Govt bonds -.3 EM D -.3 Cmdty -9.5 Portfolio 5.1 Hedge Funds.1 IG bonds 3.1 Cash. HY bonds. Govt bonds -. Cmdty -17. Hedge Funds.1 Portfolio -1.9 HY bonds -.7 Govt bonds -3.3 IG bonds -3. EM E -5. Cmdty -.7 EM E 1. Hedge Funds.7 Cash. IG bonds -. HY bonds -.9 Govt bonds -1. Cmdty -1.5 DM Equities 5.5 Portfolio 5.3 Hedge Funds 5.1 IG bonds.3 Govt bonds 3. Cash.5 Cmdty -. Source: Barclays, Bloomberg, FactSet, FTSE, MSCI, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Annualised return covers the period from to 15. Govt bonds: Barclays Global Aggregate Government Treasuries; HY bonds: Barclays Global High Yield; EMD: Barclays Emerging Markets (USD); IG bonds: Barclays Global Aggregate Corporates; Cmdty: Bloomberg UBS Commodity; REITS: FTSE NAREIT All REITS; DM Equities: MSCI World; Hedge funds: Credit Suisse/Tremont Hedge Fund; Cash: JP Morgan Cash United Kingdom (3M). Hypothetical portfolio (for illustrative purposes only and should not be taken as a recommendation): 3 DM equities; 1 EM equities; 15 IG bonds; 1.5 government bonds; 7.5 HY bonds; 5 EMD; 5 commodities; 5 cash; 5 REITS and 5 hedge funds. Returns are unhedged. Guide to the Markets - UK. Data as of 31 December 15.

65 Correlation of returns (GBP) 5 1-year correlations FTSE 1 S&P 5 MSCI Europe ex-uk MSCI Japan MSCI Asia ex-japan MSCI EM UK Gilts EM debt FTSE 1 S&P 5 MSCI Europe ex-uk MSCI Japan MSCI Asia ex-japan MSCI EM UK Gilts EM debt High yield bonds Global bonds Cmdty Hedge funds Real estate Other assets and investor behaviour High yield bonds Global bonds Cmdty Hedge funds Real estate year correlations Source: Barclays, Bloomberg, Citigroup, FTSE, J.P. Morgan Economic Research, MSCI, NCREIF, Standard & Poor s, US Federal Reserve, J.P. Morgan Asset Management. UK Gilts: FTSE Actuaries Government Securities UK Gilts All Stocks; EM debt: JP Morgan EMBI Global; High yield bonds: JP Morgan Domestic High Yield; Global bonds: Barclays Global Aggregate; Cmdty: Bloomberg Commodity; Hedge Funds: CS/Tremont Multi-Strategy; Real estate: blended index, which includes NCREIF Property Index data and Federal Reserve estimates of changes in capital value. All indices except Real Assets are total return based on quarterly return data in GBP; real asset correlations are based on quarterly data and are as of 3 September 15. Guide to the Markets - UK. Data as of 31 December 15.

66 Asset volatility and dispersion in returns Relative price volatility of key assets Rebased to 1 at January Volatility measures (index level) Average Latest Crude oil (OVX) 3 7 US Treasuries (MOVE) 71 7 S&P 5 (VIX) '1 '13 '1 '15 Other assets and investor behaviour Sector dispersion and market volatility Standard deviation across annual S&P 5 sector returns 1 1 Dispersion 1 Dec '13 Feb '1 Apr '1 Jun '1 Aug '1 Oct '1 Dec '1 Feb '15 Apr '15 Jun '15 Aug '15 Oct '15 Dec '15 VIX Source: (Top) BofA/Merrill Lynch, CBOE, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom) CBOE, FactSet, Standard & Poor s, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 31 December 15.

67 Risk-adjusted returns and downside protection 7 Risk-adjusted returns of a 5/5 portfolio Sharpe ratio of a portfolio of 5 global equities and 5 global bonds* year Sharpe ratio Three-month stock and bond correlations Total return on US equities (S&P 5) and US Treasuries (1-yr) year Sharpe ratio ' '7 ' '9 '1 '11 '1 '13 '1 '15 '1 Other assets and investor behaviour '3 '5 '7 '9 '11 '13 Hedge fund returns in different market environments Average total return in up and down months, S&P 5 HFRI FW S&P 5 up S&P 5 down Bond up months Bond down months Source: (Left) MSCI, J.P. Morgan Asset Management. (Top right) Bloomberg, J.P. Morgan Asset Management. (Bottom right) Barclays, FactSet, Hedge Fund Research, Standard and Poor s, J.P. Morgan Asset Management. *The equity index is the MSCI World (EUR hedged) and the bond index is the JP Morgan Global Bond index (EUR hedged). Sharpe ratio is calculated as (Return - Risk free rate) / Volatility. HFRI FW is Hedge Fund Research Index Fund Weighted. US bonds is the Barclays US Aggregate Bond Index. Guide to the Markets - UK. Data as of 31 December 15. US Bonds HFRI FW 7

68 Commodities Commodity prices Rebased to 1 at December 1 13 Bloomberg Commodity Index weights Livestock 5 Industrial metals 15 Energy 3 Precious metals 17 1 Crops 33 China s consumption of commodities of world total, October Crude oil Zinc Copper Nickel Aluminium Other assets and investor behaviour '13 '1 '15 '1 Commodity prices and US inflation Change year on year Bloomberg 5 Headline CPI* Commodity Index '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 Source: (Left) Bloomberg, FactSet, J.P. Morgan Asset Management. (Top right) Bloomberg, IEA, World Bureau of Metal Statistics, J.P. Morgan Asset Management. (Bottom right) Bloomberg, FactSet, MSCI, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Guide to the Markets - UK. Data as of 31 December 15.

69 Oil consumption and production 9 Global oil supply and demand Millions of barrels per day 1 mns Supply 95 Demand Forecast* Crude oil prices $ per barrel 1 $ change Brent crude -3,3 Inflation-adjusted Brent crude -3, '5 ' '7 ' '9 '1 '11 '1 '13 '1 '15 '1 '9 '9 '9 '9 '9 ' ' ' ' ' '1 '1 '1 '1 3 Other assets and investor behaviour 13 global crude breakeven cost curve Average cost of production per barrel of oil and production capacity 1 Production cost 13 (USD/barrel) 1 Other offshore Heavy oils Canadian oil sands Middle East Other conventionals Russia Production capacity (barrels/day, millions) 7 9 North Sea Deepwater US shale Arctic Source: (Top left) Bloomberg, EIA, J.P. Morgan Asset Management. (Top right) FactSet, J.P. Morgan Asset Management. (Bottom) IMF, Thomson Reuters Datastream, Deloitte MarketPoint, J.P. Morgan Asset Management. *Forecast provided by EIA. Guide to the Markets - UK. Data as of 31 December 15. 9

70 Life expectancy and pension shortfall 7 Probability of living to a specific age if you are 5 today Men Women Couple at least one lives to specified age 7 Perceived retirement shortfall by country 5 yrs Expected savings shortfall (years) Savings expected to last (years) 5 Other assets and investor behaviour 3 years 9 years 5 1 Average UK 1 US 9 France Canada Australia 9 Singapore 1 Brazil 1 1 China India 9 9 Mexico UAE Source: (Left) ONS 1-1 Life Tables, J.P. Morgan Asset Management. (Right) The Future of Retirement: A new reality study by HSBC, J.P. Morgan Asset Management. Figures represent the expected portion of retirement that will not be covered by retirement savings based on survey data. Guide to the Markets - UK. Data as of 31 December 15. 7

71 Cash investments 71 Income generated by 1, in a three-month bank deposit,, Income 7:, Inflation (y/y) Total return of 1 in real terms Log scale for total returns 1, 1 Annualised real returns Equities Bonds Cash. -.3 Equities: 3 15: Bonds: Other assets and investor behaviour, '1 ' '3 ' '5 ' '7 ' '9 '1 '11 '1 '13 '1 '15 Cash: Source: (Left) Bloomberg, ONS, J.P. Morgan Asset Management. (Right) Dimson, Marsh and Staunton ABN AMRO/LBS Global Investment Returns Yearbook, FactSet, J.P. Morgan Asset Management. J.P. Morgan estimates from. Equities: FTSE 1; Bonds: JPMorgan GBP Government Bond Index; Cash: three-month GBP Libor (prior to cash is short dated Treasury bills). Guide to the Markets - UK. Data as of 31 December

72 Industry fund flows 7 Cumulative mutual fund flows US-domiciled funds, $ billions 1, Equity funds $ Bond funds 1, $37 bn $1,175 bn Cumulative flows into US equity funds Includes both mutual funds and ETFs, $ billions $ - - Institutional +$ billion Retail -$75 billion -1, '7 ' '9 '1 '11 '1 '13 '1 '15 Other assets and investor behaviour $ bn $17 bn Monthly mutual fund flows Net new cash flow to US mutual funds, $ billions $ - - '1 '11 '1 '13 '1 Equity funds Bond funds Source: (Left) FactSet, Strategic Insight, J.P. Morgan Asset Management. (Top and bottom right) FactSet, Investment Company Institute, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 31 December 15. 7

73 US asset returns by holding period 73 Range of equity and bond total returns Annualised total returns, Large cap equity Bonds 1 5/5 portfolio Other assets and investor behaviour yr rolling 5-yr rolling 1-yr rolling -yr rolling Source: Strategas/Ibbotson, J.P. Morgan Asset Management. Returns shown are per annum and are calculated based on monthly returns from 195 to November 15 and include dividends. Guide to the Markets - UK. Data as of 31 December

74 Risk/return characteristics of alternatives 7 The effects of adding alternatives to a portfolio, Annualised return 1 9 stocks bonds alternatives 3 stocks 7 bonds stocks bonds alternatives 5 stocks 5 bonds stocks bonds alternatives 7 stocks 3 bonds 1 stocks bonds Alternatives sub-portfolio* Hedge funds Real estate Other assets and investor behaviour 7 stocks 1 bonds Private equity Annualised volatility 7 Source: Barclays, Bloomberg, Hedge Fund Research, NCREIF, Standard & Poor s, The Burgiss Group, Towers Watson, J.P. Morgan Asset Management. Data period from January 199 to December 1, utilising annual rebalancing. Stocks represents the S&P 5 Index, and Bonds represents the Barclays U.S. Aggregate Bond Index. * Alternatives represents a hypothetical sub-portfolio chosen to replicate investors preferred exposure from Global Alternatives Survey 15 by Towers Watson. All portfolios and indices are for illustrative purposes only and should not be taken as a recommendation. Past performance may not be indicative of future results. Guide to the Markets - UK. Data as of 31 December 15.

75 Alternative strategies 75 Manager dispersion: Public and private markets* Annual returns 5 75 th percentile Median 5 th percentile Public vs. private equity returns MSCI AC World total return vs. Global Buyout & Growth Equity Index** MSCI ACWI Global Buyout & Growth Equity yrs 1 yrs 15 yrs yrs Other assets and investor behaviour -5-1 Public Private Infrastructure returns OECD allowed RoE for electric and natural gas investments over cost of debt 1 1 Recession Utility bond 1-yr US Treasury '7 ' '9 ' '1 Electric Natural gas Source: (Left) Lipper, Cambridge Associates. (Top right) National Venture Capital Association, MSCI, Cambridge Associates, Deutsche Bank, FactSet, J.P. Morgan Asset Management. (Bottom right) Bloomberg, Regulatory Research Associates, J.P. Morgan Asset Management. *Manager dispersion is based on the time period from 31 December 9 through 31 December 1, except for private equity, which is based on the 5-year period ending 31 March 1 due to returns being reported with a lag. **Data as of Q15. Guide to the Markets - UK. Data as of 31 December

76 J.P. Morgan Asset Management: Index definitions All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. The S&P 5 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 5 leading companies in leading industries of the U.S. economy. Although the S&P 5 Index focuses on the large-cap segment of the market, with approximately 75 coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index. The S&P Mid Cap Index is representative of stocks in the mid-range sector of the domestic stock market, representing all major industries. The Russell 3 Index measures the performance of the 3, largest U.S. companies based on total market capitalization. The Russell 1 Index measures the performance of the 1, largest companies in the Russell 3. The Russell 1 Growth Index measures the performance of those Russell 1 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1 Value Index measures the performance of those Russell 1 companies with lower price-to-book ratios and lower forecasted growth values. The Russell Midcap Index measures the performance of the smallest companies in the Russell 1 Index. The Russell Midcap Growth Index measures the performance of those Russell Midcap companies with higher price-tobook ratios and higher forecasted growth values. The stocks are also members of the Russell 1 Growth index. The Russell Midcap Value Index measures the performance of those Russell Midcap companies with lower price-tobook ratios and lower forecasted growth values. The stocks are also members of the Russell 1 Value index. The Russell Index measures the performance of the, smallest companies in the Russell 3 Index. The Russell Growth Index measures the performance of those Russell companies with higher price-to-book ratios and higher forecasted growth values. The Russell Value Index measures the performance of those Russell companies with lower price-to-book ratios and lower forecasted growth values. The Russell Top Index measures the performance of the largest cap segment of the U.S. equity universe. It includes approximately of the largest securities based on a combination of their market cap and current index membership and represents approximately of the U.S. market. The MSCI EAFE (Europe, Australia, Far East) Net Index is recognized as the pre-eminent benchmark in the United States to measure international equity performance. It comprises 1 MSCI country indexes, representing the developed markets outside of North America. The MSCI Emerging Markets Index SM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of June 7, the MSCI Emerging Markets Index consisted of the following 5 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. The MSCI ACWI (All Country World Index) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 9 the MSCI ACWI consisted of 5 country indices comprising 3 developed and emerging market country indices. The MSCI Small Cap Indices SM target of the eligible Small Cap universe within each industry group, within each country. MSCI defines the Small Cap universe as all listed securities that have a market capitalization in the range of USD-1,5 million. The MSCI All Country Asia Pacific ex-japan Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed and emerging markets in the Pacific region. The MSCI All Country Asia Pacific ex-japan Index consists of the following 11 developed and emerging market countries: Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, Taiwan, and Thailand. The MSCI China Index is an unmanaged index considered representative of stocks of China. The MSCI KOKUSAI Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets excluding Japan. The MSCI KOKUSAI Index consists of the following 3 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States*. The Nikkei 5 Index is a price-weighted average of the 5 top-rated Japanese companies listed in the first section of the Tokyo Stock Exchange. The Tokyo Price Index (TOPIX) is a capitalization-weighted index lists all firms that are considered to be under the 'first section' on the TSE, which groups all of the large firms on the exchange into one pool. The second section groups all of the remaining smaller firms. The FTSE 1 Index is an index of the 1 largest companies (by market capitalization) in the United Kingdom. The FTSE All Share Index is an index of the 3 largest companies (by market capitalization) in the United Kingdom. The MSCI Value and Growth Indices SM cover the full range of developed, emerging and All Country MSCI Equity indexes. As of the close of May 3, 3, MSCI implemented an enhanced methodology for the MSCI Global Value and Growth Indices, adopting a two dimensional framework for style segmentation in which value and growth securities are categorized using different attributes - three for value and five for growth including forward-looking variables. The objective of the index design is to divide constituents of an underlying MSCI Standard Country Index into a value index and a growth index, each targeting 5 of the free float adjusted market capitalization of the underlying country index. Country Value/Growth indices are then aggregated into regional Value/Growth indices. Prior to May 3, 3, the indices used Price/Book Value (P/BV) ratios to divide the standard MSCI country indices into value and growth indices. All securities were classified as either "value" securities (low P/BV securities) or "growth" securities (high P/BV securities), relative to each MSCI country index. The following MSCI Total Return Indices SM are calculated with gross dividends: This series approximates the maximum possible dividend reinvestment. The amount reinvested is the dividend distributed to individuals resident in the country of the company, but does not include tax credits. The MSCI Europe Index SM is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. As of June 7, the MSCI Europe Index consisted of the following 1 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The MSCI Pacific Index SM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Pacific region. As of June 7, the MSCI Pacific Index consisted of the following 5 Developed Market countries: Australia, Hong Kong, Japan, New Zealand, and Singapore. Credit Suisse/Tremont Hedge Fund Index is compiled by Credit Suisse Tremont Index, LLC. It is an asset-weighted hedge fund index and includes only funds, as opposed to separate accounts. The Index uses the Credit Suisse/Tremont database, which tracks over 5 funds, and consists only of funds with a minimum of US$5 million under management, a 1-month track record, and audited financial statements. It is calculated and rebalanced on a monthly basis, and shown net of all performance fees and expenses. It is the exclusive property of Credit Suisse Tremont Index, LLC. The NCREIF Property Index is a quarterly time series composite total rate of return measure of investment performance of a very large pool of individual commercial real estate properties acquired in the private market for investment purposes only. All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors - the great majority being pension funds. As such, all properties are held in a fiduciary environment. The NAREIT EQUITY REIT Index is designed to provide the most comprehensive assessment of overall industry performance, and includes all tax-qualified real estate investment trusts (REITs) that are listed on the NYSE, the American Stock Exchange or the NASDAQ National Market List.

77 J.P. Morgan Asset Management: Index definitions The Dow Jones Industrial Average measures the stock performance of 3 leading blue-chip U.S. companies The Dow Jones-UBS Commodity Index is composed of futures contracts on physical commodities and represents twenty two separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc. West Texas Intermediate (WTI) is underlying commodity in the New York Mercantile Exchange's oil futures contracts. The S&P GSCI Index is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. The Barclays U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. This U.S. Treasury Index is a component of the U.S. Government index. The Barclays High Yield Index covers the universe of fixed rate, non-investment grade debt. Pay-in-kind (PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-emg countries are included. The Barclays 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $5 million or more of outstanding face value. The Barclays Euro-Aggregate Index consists of bond issued in the euro or the legacy currencies of the sovereign countries participating the European Monetary Union (EMU). The Global Bond Index Emerging Market Broad Diversified Index (GBI-EM) is a comprehensive global local emerging markets index, and consists of liquid, fixed-rate, domestic currency government bonds. The Barclays Global Aggregate Corporate Index consists of corporate issues in Europe, the US and Asia-pacific regions. The Barclays Global High Yield Index is an unmanaged index considered representative of fixed rate, noninvestmentgrade debt of companies in the U.S., developed markets and emerging markets. The Barclays Emerging Markets Index includes USD-denominated debt from emerging markets in the following regions: Americas, Europe, Middle East, Africa, and Asia. As with other fixed income benchmarks provided by Barclays Capital, the index is rules-based, which allows for an unbiased view of the marketplace and easy replicability. The Barclays MBS Index covers the mortgage-backed pass-through securities of Ginnie Mae, Fannie Mae, and Freddie Mac. Aggregate components must have a weighted average maturity of at least one year, must have $5 million par amount outstanding, and must be fixed rate mortgages. The Barclays Corporate Bond Index is the Corporate component of the U.S. Credit index. The Barclays TIPS Index consists of Inflation-Protection securities issued by the U.S. Treasury. The J.P. Morgan EMBI Global Index includes U.S. dollar denominated Brady bonds, Eurobonds, traded loans and local market debt instruments issued by sovereign and quasi-sovereign entities. The Li Keqiang Index is a composite measure composed of China s electricity production, financial institution loans and railway freight. The Euro Stoxx Index represents large, mid and small capitalisation companies across 1 European countries. The JPMorgan GBI-EM Global Diversified consists of regularly traded, liquid fixed-rate, domestic currency government bonds to which international investors can gain exposure. The weightings among the countries are more evenly distributed within this index. The JPMorgan Corporate Emerging Markets Bond Index (CEMBI): The CEMBI tracks total returns of US dollardenominated debt instruments issued by corporate entities in Emerging Markets countries, and consists of an investable universe of corporate bonds. Both indices are also available in Diversified version. The JPMorgan CEMBI Index is a USD denominated external debt index tracking bond issued by sovereigns and quasisovereigns in the developing nations. The J.P. Morgan Domestic High Yield Index is designed to mirror the investable universe of the U.S. dollar domestic high yield corporate debt market. The CS/Tremont Equity Market Neutral Index takes both long and short positions in stocks with the aim of minimizing exposure to the systematic risk of the market (i.e. a beta of zero).* The CS/Tremont Multi-Strategy Index consists of funds that allocate capital based on perceived opportunities among several hedge fund strategies. Strategies adopted in a multi-strategy fund may include, but are not limited to, convertible bond arbitrage, equity long/short, statistical arbitrage and merger arbitrage. The Barclays U.S. Dollar Floating Rate Note (FRN) Index provides a measure of the U.S. dollar denominated floating rate note market. *Market Neutral returns for November are estimates by J.P. Morgan Funds Market Strategy, and are based on a December, published estimate for November returns by CS/Tremont in which the Market Neutral returns were estimated to be +.5 (with 9 of all CS/Tremont constituents having reported return data). Presumed to be excluded from the November return are three funds, which were later marked to $ by CS/Tremont in connection with the Bernard Madoff scandal. J.P. Morgan Funds believes this distortion is not an accurate representation of returns in the category. CS/Tremont later published a finalized November return of -.5 for the month, reflecting this mark-down. CS/Tremont assumes no responsibility for these estimates. The Office of National Statistics (ONS) Index is a mix-adjusted average housing price index. The index is calculated monthly using mortgage financed transactions from the Regulated Mortgage Survey by the Council of Mortgage Lenders. The Nationwide House Price Index is a mix adjusted index constructed from Nationwide lending data across the UK. The Halifax House Price Index is constructed from mortgage data derived from Halifax lending data across the UK. The MSCI AC World High Dividend Yield Index is composed of those securities that have higher-than-average dividend yield within its parent index, a track record of consistent dividend payments and the capacity to sustain future dividend payments.

78 J.P. Morgan Asset Management: Risks and disclosures The Market Insights programme provides comprehensive data and commentary on global markets without reference to products. Designed as a tool to help clients understand the markets and support investment decisionmaking, the programme explores the implications of current economic data and changing market conditions. The views contained herein are not to be taken as an advice or recommendation to buy or sell any investment in any jurisdiction, nor is it commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, the Investor should make an independent assessment of the legal, regulatory, tax, credit, and accounting and determine, together with their own professional advisers if any of the investments mentioned herein are suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance. Exchange rate variations may cause the value of investments to increase or decrease. Investments in smaller companies may involve a higher degree of risk as they are usually more sensitive to market movements. Investments in emerging markets may be more volatile and therefore the risk to your capital could be greater. Further, the economic and political situations in emerging markets may be more volatile than in established economies and these may adversely influence the value of investments made. It shall be the recipient s sole responsibility to verify his / her eligibility and to comply with all requirements under applicable legal and regulatory regimes in receiving this communication and in making any investment. All case studies shown are for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. Results shown are not meant to be representative of actual investment results. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in Brazil by Banco J.P. Morgan S.A. (Brazil) which is regulated by The Brazilian Securities and Exchange Commission (CVM) and Brazilian Central Bank (Bacen ); in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority (FCA); in other EU jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.; in Switzerland by J.P. Morgan (Suisse) SA, which is regulated by the Swiss Financial Market Supervisory Authority FINMA; in Hong Kong by JF Asset Management Limited, JPMorgan Funds (Asia) Limited or JPMorgan Asset Management Real Assets (Asia) Limited, all of which are regulated by the Securities and Futures Commission; in India by JPMorgan Asset Management India Private Limited which is regulated by the Securities & Exchange Board of India; in Singapore by JPMorgan Asset Management (Singapore) Limited or JPMorgan Asset Management Real Assets (Singapore) Pte. Ltd., both are regulated by the Monetary Authority of Singapore; in Taiwan by JPMorgan Asset Management (Taiwan) Limited which is regulated by the Financial Supervisory Commission; in Japan by JPMorgan Asset Management (Japan) Limited which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association and the Japan Securities Dealers Association, and is regulated by the Financial Services Agency (registration number Kanto Local Finance Bureau (Financial Instruments Firm) No. 33 ); in Korea by JPMorgan Asset Management (Korea) Company Limited which is regulated by the Financial Services Commission (without insurance by Korea Deposit Insurance Corporation) and in Australia to wholesale clients only as defined in section 71A and 71G of the Corporations Act 1 (Cth) by JPMorgan Asset Management (Australia) Limited (ABN 55133) (AFSL 37919) which is regulated by the Australian Securities and Investments Commission; in Canada by JPMorgan Asset Management (Canada) Inc.; and in the United States by J.P. Morgan Investment Management Inc., or J.P. Morgan Distribution Services, Inc., member FINRA SIPC. EMEA Recipients: You should note that if you contact J.P. Morgan Asset Management by telephone those lines may be recorded and monitored for legal, security and training purposes. You should also take note that information and data from communications with you will be collected, stored and processed by J.P. Morgan Asset Management in accordance with the EMEA Privacy Policy which can be accessed through the following website Past performance is no guarantee of comparable future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss 93cafbad Brazilian recipients: Prepared by: Stephanie Flanders, Vincent Juvyns, Dr. David Stubbs, Maria Paola Toschi, Michael Bell, Alexander Dryden, Nandini Ramakrishnan. Unless otherwise stated, all data as of 31 December 15 or most recently available. Guide to the Markets - UK JP-LITTLEBOOK