MARKET INSIGHTS. Guide to the Markets. Europe 1Q 2017 As of 31 December 2016

Transcription

1 MARKET INSIGHTS Guide to the Markets Europe 1Q 217 As of 31 December 216

2 Global Market Insights Strategy Team Americas Europe Asia Dr. David P. Kelly, CFA New York Anastasia V. Amoroso, CFA Houston Julio C. Callegari São Paulo Samantha M. Azzarello New York David M. Lebovitz New York Gabriela D. Santos New York Abigail B. Dwyer, CFA New York John C. Manley New York Ainsley E. Woolridge, CFA New York Hannah J. Anderson 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, CFA 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 2 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 216 or most recently available.

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

4 Europe: GDP and inflation GTM Europe 4 Europe economy Real GDP EU28, % change quarter on quarter Average since Q16 Real GDP,3%,4% Average Inflation EU28, % change year on year 5 4 Average since 1999 Nov 216 Headline CPI* 1,9%,6% Core CPI 1,6%,8% ' '2 '4 '6 '8 '1 '12 '14 '16 Source: (Both charts) Eurostat, FactSet, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding energy and unprocessed food. Guide to the Markets - Europe. Data as of 31 December

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) Retail sales (RHS) 85 '97 '99 '1 '3 '5 '7 '9 '11 '13 ' ' '2 '4 '6 '8 '1 '12 '14 ' Economic sentiment and GDP Index level (LHS); % change year on year (RHS) Economic sentiment GDP '97 '99 '1 '3 '5 '7 '9 '11 '13 ' Source: (All charts) Eurostat, Thomson Reuters Datastream, J.P. Morgan Asset Management. Light grey columns in all charts indicate recession. Guide to the Markets - Europe. Data as of 31 December

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 and bottom left) Eurostat, FactSet, J.P. Morgan Asset Management. (Right) ECB, FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December

7 Eurozone recovery monitor 7 Europe economy Contribution to eurozone GDP growth % change year on year Change in inventories Exports Investment Consumption Imports GDP Eurozone government expenditure % change year on year '99 '1 '3 '5 '7 '9 '11 '13 '15 1 Gross fixed capital formation % of GDP, non-residential 17 US Eurozone '12 '13 '14 '15 '16 14 '99 '1 '3 '5 '7 '9 '11 '13 '15 Source: (Left) Eurostat, Haver Analytics, J.P. Morgan Asset Management. (Top right) OECD, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) BEA, Eurostat, Haver Analytics, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December

8 Eurozone credit conditions 8 Europe economy Credit demand and eurozone GDP growth Net % of banks reporting positive loan demand (LHS); % GDP growth (RHS) 15 1 Stronger loan demand 6 4 Bank loans to households and non-financial corporations EUR billions, net lending flow, three-month moving average Corporate lending rates to smaller companies % interest, non-financial corporations* Consumer credit (LHS) Housing loans (LHS) Weaker loan demand Overall corporate (LHS) Eurozone GDP growth y/y (RHS) '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 Source: (Left) ECB, Eurostat, FactSet, J.P. Morgan Asset Management. (Top right 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 31 December Italy Germany Spain France 8

9 European Central Bank (ECB) policies 9 Europe economy ECB balance sheet: Assets* EUR trillions 5, 4,5 4, ECB Dec 216 forecasts CPI inflation** 1,3 1,5 1,9 Cumulative ECB sovereign bond purchases by country EUR billions ,5 3, 2,5 2, Jan 25 Jul 212: 249% Aug 212 Sep 214: -35% Trade-weighted euro and EUR/USD Index level (LHS); price of euro in dollars (RHS) ,5 15 EUR/USD , 1 1.3,5, '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 ' Trade-weighted euro 9 1. '11 '12 '13 '14 '15 '16 '17 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 8bn per month expansion between now and March 217 and EUR 6bn per month expansion between April 217 and December 217. **Inflation is Q4 to Q4 for each year. (Top right) ECB, J.P. Morgan Asset Management. Purchases up to December 23 rd (Bottom right) FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December

10 European monetary policy and relative bond supplies GTM Europe 1 Europe economy Available universe of corporate bonds for CSPP* EUR billions Size of bond markets EUR billions Euro IG Exfinancials Exsubordinated debt Ex-noneligible corps 7% ISIN limit Euro govt. Euro IG ex-financials 2 BB B CCC CoCos Source: (Left) Barclays POINT, BofA/ML, ECB, J.P. Morgan Asset Management. *CSPP is the corporate sector purchase programme. (Right) Bloomberg, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December

11 European politics 11 Europe economy Europe 217 political timeline January France Socialist presidential primaries 31 March UK Deadline for formal activation of Article 5 7 May France Second round of the presidential election September Spain Possible Catalonia independence referendum Jan Feb Mar Apr May Jun Jul Aug Sep Oct 24 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 October Germany Latest date for election Support for populist parties % Alternative für Deutschland (Germany) Syriza (Greece) Podemos (Spain) Movimento 5 Stelle (Italy) Front National (France) Survey results: Do you support the euro? % answering yes as of November 216 Source: (Top) J.P. Morgan Asset Management. (Bottom left) National surveys, J.P. Morgan Asset Management. (Bottom right) European Commission, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December Italy France Spain Belgium N lands Germany 11

12 UK economic indicators 12 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 Wage growth % of GDP Investment income % change year on year 4 Trade balance 6 2 Current account balance 3 Nominal wage growth* Headline CPI Real wage growth '5 '7 '9 '11 '13 ' '2 '4 '6 '8 '1 '12 '14 '16 Source: (Top left) OECD, J.P. Morgan Asset Management. (Bottom left) ONS, Thompson 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 31 December

13 Brexit: The UK and the EU GTM Europe 13 Europe economy Trade with the UK % of GDP, UK exports to the EU EU countries exports to the UK Regions exports to the UK Tradeoffs for the UK post EU exit MARKET ACCESS TO THE EU Participation in EU legislation process Full market access Norway EU Market access by negotiation Switzerland UK trade balance with the EU GBP billions Goods Services FDI* in the UK ( bn) From EU 431 From US 252 Rest of world 267 '99 '1 '3 '5 '7 '9 '11 '13 '15 Goods market access but not services WTO ACCESS Canada Turkey No financial contribution Source: (Top left) ONS, Eurostat, J.P. Morgan Asset Management. (Bottom left) Haver Analytics, J.P. Morgan Asset Management. *FDI is foreign direct investment and as measured in 215. (Right) J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December 216. Free movement of labour Some financial contribution EU member SHARING OF SOVEREIGNTY 13

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 ,5 1,6,3,7 -,75 3,3 United States ,2 2,3 2,3 2,4,5 4,6 Sweden ,2 2,2 1,6 1,9 -,5 6,2 Netherlands ,6 1,6 1, 1,3 -,4 7,2 Finland , 1, 1,1 1,3 -,4 8,1 Germany ,4 1,5 1,6 1,7 -,4 6, Japan ,,9,6 1,,1 3,1 United Kingdom ,2 1,3 2,4 2,5,25 4,8 France ,2 1,3 1,2 1,4 -,4 9,7 Eurozone ,4 1,5 1,3 1,5 -,4 9,8 Italy ,8 1,,9 1,2 -,4 11,6 Spain ,4 2,1 1,2 1,3 -,4 18,9 Greece ,3 2,,7 1, -,4 22,6 Russia ,1 1,5 5, 4,4 1, 5,2 Brazil ,8 2,2 5,1 4,7 13,75 8,2 China ,5 6,1 2,2 2,2 4,35 4, India ,9 7,5 4,8 5, 6,25 7,1 Source: Bloomberg, FactSet, various national statistical agencies, J.P. Morgan Asset Management. Table ordered by GDP per capita. Nominal GDP figure is latest quarter annualised. *Forecasts are Bloomberg consensus estimates. Guide to the Markets - Europe. Data as of 31 December

15 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 51,6 51,8 51,5 5,8 51,1 5,9 5,8 5,4 5,4 51,1 51, 5,7 5,9 5, 5,6 5,2 5,1 5,4 51, 5,8 51, 52, 52,1 52,7 Global economy Eurozone Developed Emerging Eurozone France Germany Italy Spain 52,3 52,6 52,9 52,1 52,4 52,2 52,5 52,3 52,1 52,9 52,6 52, 52,3 51, 51,1 5,7 5,5 51,3 51,6 51,3 51,8 53, 53,2 54, 5,8 51,1 5,1 49,5 49,6 49,5 48,8 48,4 48,3 49, 49,2 49,2 49,3 48,9 5,1 49,6 49,6 49,4 5,4 5,1 5,1 5,9 5,7 51,2 51, 51, 52,2 52, 52,2 52,5 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 49,2 47,6 48,8 48, 49,4 5,7 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 5,9 51,1 52,8 52,1 51,1 51,9 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 49,9 51,9 53,3 53,8 54,8 54,1 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 54,7 54,2 54,3 54,2 55,8 54,5 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 Developed Switzerland UK US Japan 49, 48, 48,1 48,8 47,3 5,2 49,5 5,3 47, 49,4 49,6 5,4 5, 51,6 53,2 54,7 55,8 51,6 5,1 51, 53,2 54,7 56,6 56, 52,6 54, 53,7 52,3 52,1 51,5 52,2 51,7 51,5 54,8 52,6 51,4 52,7 5,7 51, 49,7 5,5 52,4 48,2 53,4 55,5 54,6 53,6 56,1 53,9 55,1 55,7 54,1 54, 53,6 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 54,2 52,2 51,6 5,3 49,9 5,9 5,1 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 51,9 Brazil 5,7 49,6 46,2 46, 45,9 46,5 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 Emerging Russia India China Korea 47,6 49,7 48,1 48,9 47,6 48,7 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 52,9 51,2 52,1 51,3 52,6 51,3 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 49,7 5,7 49,6 48,9 49,2 49,4 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 51,1 51,1 49,2 48,8 47,8 46,1 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 Taiwan 51,7 52,1 51, 49,2 49,3 46,3 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 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. Guide to the Markets - Europe. Data as of 31 December 216.

16 Global inflation dynamics GTM Europe 16 Global economy Developed economy inflation Headline inflation and forecasts % change year on year % change year on year 5 4 US UK Eurozone 4 Japan 3 Forecasts* Average Jan 1993 to Dec 28: 2,% 3 Policy target Average Jan 29 to Nov 216: 1,2% -2 '93 '95 '97 '99 '1 '3 '5 '7 '9 '11 '13 '15-1 '13 '14 '15 '16 '17 '18 Source: (Left) Haver Analytics, J.P. Morgan Asset Management. (Right) 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 J.P. Morgan Economic Research Guide to the Markets - Europe. Data as of 31 December

17 Nominal GDP and inflation outlook GTM Europe 17 Nominal GDP growth Rebased to 1 at 1Q Core inflation % change year on year 4 Forecast* Global economy US UK Eurozone UK US Eurozone 1 Japan Japan '8 '9 '1 '11 '12 '13 '14 '15 '16 '17-2 '11 '12 '13 '14 '15 '16 '17 Source: (Left) FactSet, National Statistics Agencies, J.P. Morgan Asset Management. (Right) National Statistics Agencies, J.P. Morgan Asset Management. *Forecasts from J.P. Morgan Economic Research. Core inflation is CPI ex food and energy. Guide to the Markets - Europe. Data as of 31 December

18 Global central bank policy GTM Europe 18 Global economy Market expectations for policy rate Percent of government bond market held by central banks % % 2,5 5 Projection* Japan 2, UK UK US 4 US Japan Eurozone 1,5 Eurozone 3 1,,5 2, 1 -,5-1, Dec '17 Dec '19 Dec 21 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 Source: (Left) Bloomberg, J.P. Morgan Asset Management. (Right) Bank of England, Bank of Japan, ECB, 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 31 December

19 Fed funds long-run expectations 19 Market expectations of Fed funds rate % 7 Mar 21 Global economy Mar 26 Mar 28 Mar Dec Sep '1 '3 '5 '7 '9 '11 '13 '15 '17 '19 '21 '23 '25 Source: Bloomberg, J.P. Morgan Asset Management. The lines show the market expectation for the path of interest rates at the stated date. Values shown are from the last day of the month. Guide to the Markets - Europe. Data as of 31 December

20 Global supply dynamics 2 Labour productivity % change year on year 6 Medium-term GDP growth projections % annual GDP growth for the next five years Global economy 4 2 DM post-crisis average:,2% World Developed markets Emerging markets -2 DM pre-crisis average: 1,4% -4 Developed markets -6 Emerging markets* -8 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 Global population and old age share % change year on year (LHS); % of population (RHS) 2, 1,5 1,,5 Population growth Age 65+ Forecast** '6 '65 '7 '75 '8 '85 '9 '95 ' '5 '1 '15 ' Source: (Left) J.P. Morgan Economic Research, J.P. Morgan Asset Management.*Emerging markets productivity data excludes China and India due to data availability. (Top right) IMF, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Economic Research, United Nations, J.P. Morgan Asset Management. **Forecasts from UN. Guide to the Markets - Europe. Data as of 31 December

21 Developed market fiscal policy GTM Europe 21 Global economy Change in deficit excluding debt interest % of potential GDP % of GDP 1,5 Forecast* 12 Tighter 1, policy,5, Developed economy government debt and interest expense 11 1 Gross debt Forecast** Interest expense 2,2 2, 1,8 -,5 9 1,6-1, -1,5-2, -2,5 Looser policy Euro area Japan US Rest of OECD OECD '6 '8 '1 '12 '14 '16 ' to 216 Change in gross debt (% of GDP) Change in interest costs (% of GDP) US 44,2 -,12 Eurozone 26,8 -,58 UK 46,8,5 Japan 67,3,8 6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 '18 1,4 1,2 1, Source: (Left) OECD, J.P. Morgan Asset Management. Figures correspond to the estimated change in the structural, or cyclically adjusted, budget balance excluding net interest payments as a share of GDP. *Forecasts from the OECD. (Right) IMF Fiscal Monitor October 216, 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 31 December

22 Global currency trends 22 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 : 8-7,1% 7 '73 '77 '81 '85 '89 '93 '97 '1 '5 '9 '13 Nov 216 US dollar index 95,7 11, : -28,9% : +26,2% Trends in key currencies Real effective exchange rate, rebased to 1 as of Jan EUR USD RMB JPY GBP 8 Jan '16 Mar '16 May '16 Jul '16 Sep '16 Nov '16 US dollar vs. market rate expectations in the next 12 months Index (LHS); basis points (RHS) Trade-weighted dollar US rate hikes priced over 12 months Source: (Top) US Federal Reserve, J.P. Morgan Asset Management. (Bottom left) FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. (Bottom right) Bloomberg, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December '13 '14 '15 '

23 US: GDP and inflation GTM Europe 23 Global economy Real GDP Inflation Average % change quarter on quarter, SAAR 3Q16 since 1999 % change year on year Real GDP 1,8% 3,5% Average 4 2 Average since 1999 Nov 216 Headline CPI* 2,2% 1,7% Core CPI 2,% 2,1% Components of nominal GDP 3Q16 Consumption 68,7% Government 17,6% Investment ex-housing 12,4% Housing 3,7% Net exports -2,4% ' '3 '6 '9 '12 ' ' '3 '6 '9 '12 '15 Source: (Left) BEA, FactSet, J.P. Morgan Asset Management. (Right) BLS, FactSet, J.P. Morgan Asset Management. SAAR is seasonally adjusted annual rate. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - Europe. Data as of 31 December

24 US Federal Reserve outlook 24 Global economy Federal funds rate expectations % Fed funds rate, FOMC and market expectations Federal funds rate US Fed FOMC forecasts median US Fed FOMC forecasts range Market expectations on 31 Dec 216 FOMC long-run projection FOMC December 216 forecasts* Long run Change in real GDP, 4Q to 4Q 2,1 2, 1,9 1,8 Unemployment rate, 4Q 4,6 4,5 4,5 4,8 PCE inflation, 4Q to 4Q 1,9 2, 2, 2, 3 3,% 2 1 '99 '3 '7 '11 '15 '19 Source: Bloomberg, Federal Reserve Bank of New York, US Federal Reserve, J.P. Morgan Asset Management. *Forecasts of 17 Federal Open Market Committee (FOMC) participants, midpoints of central tendency except for Federal funds rate, which is a median estimate. Guide to the Markets - Europe. Data as of 31 December

25 US labour market 25 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: 6,1% Wage growth Nov 216: 4,6% Nov 216: 2,4% Productivity and wage growth % change year on year Wage growth Productivity -1 '98 ' '2 '4 '6 '8 '1 '12 '14 '16 Employee compensation and profitability % of GDP Employee compensation Corporate profits Source: (Top) BEA, FactSet, J.P. Morgan Asset Management. (Bottom left) BLS, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) BEA, FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December

26 US growth monitor 26 Global economy Corporate profits, business investment and employment growth % change year on year Profits Recession Business investment -4 Employment '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) Jobless claims Consumer confidence 2 '84 '94 '4 ' Housing starts and Conference Board Leading Economic Index Index level (LHS); thousands (RHS) Leading indicator Housing starts '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 31 December

27 US consumer finances GTM Europe 27 Household net worth USD billions, SAAR 2Q7: $ Q16*: $92.96 Consumer balance sheet USD trillions outstanding, not seasonally adjusted, 3Q16 1 Total assets: $15,1tn 3Q7 peak: $81,9tn 1Q9 low: $68,7tn Global economy Homes: 25% Other tangible: 6% Deposits: 1% % of total US mortgages that are fixed rate** 71% Household debt service ratio and savings rate % of disposable personal income, seasonally adjusted Debt service ratio Savings rate 9 '8 '85 '9 '95 ' '5 '1 '15 Source: (Top left and right) FactSet, US Federal Reserve, J.P. Morgan Asset Management. (Bottom left) US Federal Reserve, Thomson Reuters Datastream, J.P. Morgan Asset Management. *Latest numbers for US household net worth and debt service ratio are J.P. Morgan Asset Management forecasts. **Taken from the Monthly Interest Rate Survey for 15-year and 3-year fixed mortgages. ***Revolving includes credit cards. Guide to the Markets - Europe. Data as of 31 December Pension funds: 21% Other financial assets: 39% Other non-revolving: 2% Revolving***: 7% Auto loans: 7% Other liabilities: 11% Student debt: 9% Total liabilities: $14,9tn Mortgages: 64% 27

28 Long-term drivers of US economic growth GTM Europe 28 Global economy Growth in US working age population % increase in civilian non-institutional population ages , 1,9% Forecast* 1,5% 1,5 1,3% 1,2% 1,% 1,,7%,5,4%, '55-'64 '65-'74 '75-'84 '85-94 '95-'4 '5-'14 '15-'24 Growth in investment in structures and equipment Non-residential fixed assets, year on year % change 6 Drivers of US GDP growth Average year on year % change 4,5 4, 3,5 3, 2,5 2, 4,% 1,3% 3,% 3,4% Growth in workers + Growth in real output per worker Growth in real GDP 2,9% 3,4% 1,3% : 2,% 1,5 1, 1,9% 2,2% 1,5% 1,4%,5% 2 1 '55 '6 '65 '7 '75 '8 '85 '9 '95 ' '5 '1 '15,5, 2,7% 1,1% 1,2% 1,4% 2,1%,9% '56-'65 '66-'75 '76-'85 '86-'95 '96-'5 '6-'15 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 31 December

29 US fiscal policy 29 US budget surplus/deficit % of GDP 6 Recession US public investment % of GDP 7 6 Global economy : -2,5% '65 '7 '75 '8 '85 '9 '95 ' '5 '1 '15-4 US federal net debt % of GDP 12 Forecast* : 77,% 226: 85,5% '65 '7 '75 '8 '85 '9 '95 ' '5 '1 '15 2 '4 '48 '56 '64 '72 '8 '88 '96 '4 '12 '2 Source: (Left) Haver, US Congressional Budget Office, J.P. Morgan Asset Management. Light grey columns in all charts indicate recessions determined by NBER. (Top right) US BEA, J.P. Morgan Asset Management. (Bottom right) US Congressional Budget Office, J.P. Morgan Asset Management. *Forecast is from the US Congressional Budget Office. Guide to the Markets - Europe. Data as of 31 December

30 Japan: GDP and inflation GTM Europe 3 Global economy Real GDP growth Inflation Average % change quarter on quarter since Q16 % change year on year 3 Real GDP,2%,3% 5 2 Average Average since 1999 Nov 216 Headline CPI*,%,5% Core CPI -,3%,1% CPI less food & consumption tax -,1% -,4% ' '2 '4 '6 '8 '1 '12 '14-3 '8 '9 '1 '11 '12 '13 '14 '15 '16 Source: (Left) FactSet, Japan Statistics Bureau & Statistics Centre, J.P. Morgan Asset Management. (Right) Bloomberg, FactSet, Japan Ministry of Internal Affairs & Communications, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - Europe. Data as of 31 December

31 Japan: Abenomics and the economy GTM Europe 31 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) Global economy Core CPI* Nominal wage growth 8 4 Job-to-applicant ratio 1,6 1,4 1,2 1, Japanese yen effective exchange rate Index level Abe elected US election Yield curve targeting NIRP -4,8,6,4,2 Bank lending (y/y) -8 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 '16, Source: (Top left) FactSet, Japan Ministry of Internal Affairs & Communications, Japan Ministry of Health, Labour and Welfare, 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) Bloomberg, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December

32 China: GDP, inflation and policy rate 32 Real GDP growth % change year on year GDP growth Inflation % change year on year Nov 216 Headline CPI* 2,3% 18 Investment Core CPI 1,9% Consumption Headline PPI** 3,3% Net exports Global economy 12 3Q16: 6,7% 6 Policy rate and reserve ratio requirement (RRR)*** % policy rate on one-year renminbi deposits (LHS); % RRR (RHS) RRR -6 '9 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 '16 PBoC policy rate Source: (Left and top right) FactSet, National Bureau of Statistics of China, 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. (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 31 December

33 China economic indicators GTM Europe 33 China industrial production and retail sales % change year on year, three-month moving average 25 2 Fixed asset investment (FAI) % change year on year Public Private Overall Global economy Retail sales Industrial production '96 '98 ' '2 '4 '6 '8 '1 '12 '14 '16 Central government fiscal deficit % of GDP : -4,2% China home prices % change year on year Tier 1 cities -3-4 '95 ' '5 '1 '15-1 Tier 2 cities Tier 3 cities '11 '12 '13 '14 '15 '16 Source: (Top left) FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management. (Top right) FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management. (Bottom left) CEIC, 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 31 December

34 China financial dynamics 34 Global economy Public, household and non-financial corporate debt % of GDP, 2Q Public debt Non-financial corporation debt Household debt Chinese renminbi Rebased index level (LHS); price of a dollar in RMB (RHS) 13 6, 125 Trade-weighted RMB 6, , ,8 1 USD/RMB 95 7, '11 '12 '13 '14 '15 '16 '17 China foreign exchange reserves and external debt USD trillions External debt as a % of global GDP EM Asia 1998 US 28 China 214 1,7% 21,8% 1,2% 6,6 Japan Eurozone China UK US Korea Source: (Left) BIS, J.P. Morgan Asset Management. Household and NFC debt is market value. Government debt is gross and nominal value, except for Korea which is market value due to data limitations. All series adjusted for breaks by the BIS. (Top right) BIS, FactSet, J.P. Morgan Asset Management. (Bottom right) FactSet, People s Bank of China, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December

35 Emerging market adjustments 35 Global economy EM currencies vs.us dollar % from fair value, relative to US dollar Average std. dev. EM currencies expensive relative to USD Fragile Five current account balance % of GDP '96 '98 ' '2 '4 '6 '8 '1 '12 '14 EM foreign exchange reserves vs. external debt % of GDP std. dev EM reserves EM currencies cheap relative to USD -25 '12 '13 '14 '15 '16 2 External debt '9 '92 '94 '96 '98 ' '2 '4 '6 '8 '1 '12 '14 ' Source: (Left) J.P. Morgan Asset Management. Based on nominal exchange rates relative to PPP-exchange rates and adjusted for GDP per capita. EM currencies used are a weighted average of JPM GBI-EM Global Diversified Index countries. (Top right) Haver Analytics, J.P. Morgan Asset Management. Fragile Five are Brazil, India, Indonesia, South Africa and Turkey. (Bottom right) J.P. Economic Research, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December

36 Globalisation and trade 36 Exports of goods % of GDP, 215 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 Mexico World trade growth Index level, 25 = Aug 28 trend 2 Actual 15 Japan Korea '3 '5 '7 '9 '11 '13 '15 Source: (Left) IMF World Economic Outlook October 216, IMF Direction of Trade, 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) Netherlands Bureau for Economic Policy Analysis, Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December

37 World stock market returns 37 EUR Local Q16 26,7% Asia ex-jp 38,% -23,% TOPIX -4,6% 73,4% MSCI EM 62,8% 35,4% Small Cap 24,4% 5,5% US S&P 5 2,1% 2,8% Asia ex-jp 19,7% 27,2% Small Cap 35,8% 29,5% US S&P 5 13,7% 24,4% TOPIX 12,1% 16,6% Small Cap 14,5% 1,6% US S&P 5 3,8% 1-yr ann. 9,4% US S&P 5 6,9% 26,1% MSCI EM 33,6% -33,7% US S&P 5-37,% 67,2% Asia ex-jp 67,2% 28,3% Asia ex-jp 15,6% 3,5% HDY Equity 1,5% 18,1% Europe 16,4% 26,7% US S&P 5 32,4% 19,7% Asia ex-jp 7,7% 12,9% US S&P 5 1,4% 15,3% US S&P 5 12,% 9,6% Sm all Cap 6,1% 8,4% Sm all Cap 6,4% 4,6% Portfolio 11,1% -37,9% HDY Equity -34,4% 4,2% Small Cap 4,8% 27,5% MSCI EM 14,4% -5,7% Small Cap -8,7% 16,8% MSCI EM 17,4% 21,5% TOPIX 54,4% 16,5% Small Cap 6,7% 11,5% Sm all Cap 2,8% 14,9% MSCI EM 1,1% 6,6% HDY Equity 2,7% 6,3% Asia ex-jp 5,1% Equities 3,2% Eur ope 6,5% -1,% HDY Equity 4,7% -38,6% Small Cap -4,4% -4,3% Portfolio -4,1% 37,6% Portfolio 35,8% 34,% HDY Equity 3,2% 23,9% TOPIX 1,% 23,1% US S&P 5 15,1% -5,8% Portfolio -7,5% -7,5% Europe -8,8% 16,3% Sm all Cap 18,4% 15,6% Portfolio 17,1% 2,5% Eur ope 22,3% 15,3% Portfolio 23,6% 16,2% HDY Equity 8,7% 15,3% Portfolio 8,2% 8,8% Eur ope 5,4% 8,3% Portfolio 1,9% 14,3% HDY Equity 13,1% 1,1% Portfolio 9,% 6,3% TOPIX 15,% 6,2% Europe 5,5% 6,1% HDY Equity 5,2% 6,% Portfolio 4,9% -4,9% US S&P 5 5,5% -43,3% Europe -38,5% 32,5% 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% 6,1% Portfolio 3,9% 4,5% MSCI EM 4,7% -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% 2,2% MSCI EM -1,4% 3,5% TOPIX 1,% -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% Europe 5,2% -4,9% MSCI EM -5,4% 3,2% Europe 7,9% -,1% Asia ex-jp -3,5% 3,2% Eur ope 3,5% Source: FactSet, MSCI, Standard & Poor s, TOPIX, J.P. Morgan Asset Management. Annualised return covers the period 27 to 216. HDY Equity: MSCI AC World High Dividend Yield Index; Small Cap: MSCI Europe 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 31 December

38 European sector returns and valuations 38 Equities MSCI Europe Index Europe weight Growth weight Value weight 4Q Since market peak** Since market low*** Beta to Europe Forward P/E ratio 15-year average Trailing P/E ratio 15-year average Dividend yield 15-year average Financials* Health care Cons. staples Cons. disc. Industrials Materials Energy Telecom Utilities Tech Europe 2,4% 12,8% 13,8% 1,8% 12,8% 8,2% 7,8% 4,2% 3,5% 4,2% 1% 3,8% 2,6% 27,1% 12,3% 15,5% 8,9%,9% 2,5%,6% 7,5% 1% 36,2% 5,6% 1,2% 9,5% 1,2% 7,6% 14,2% 5,8% 6,3% 1,2% 1% 18,1 -,9-5, 7,9 4,5 9,2 17,8, -3,8-1,4 5,5 5,5-6, 5,8 4,4 14,9 33,7 46,1-7,9,5 6,5 7,9-27,8 1,8 116,2 77,2 38,4 1,5 39,9 42, -6,2 18,7 27,3 27, 188,2 216,1 291,9 224,6 162,1 92, 113,4 65,2 2,1 172,8 1,35x,65x,64x,96x 1,12x 1,28x 1,x,81x,86x,98x 1,x 11,7x 15,2x 18,7x 13,1x 16,5x 15,8x 15,2x 16,x 13,8x 18,8x 14,8x 1,6x 15,2x 15,9x 13,9x 14,1x 12,8x 11,9x 15,9x 13,2x 19,5x 13,x 13,5x 16,x 2,9x 14,6x 18,x 19,4x 25,4x 17,5x 14,2x 21,8x 16,9x 12,4x 16,3x 17,1x 16,4x 16,1x 14,5x 12,1x 17,9x 13,8x 34,3x 14,4x 4,2% 3,% 2,8% 2,9% 2,7% 2,2% 5,7% 4,9% 5,1% 1,7% 3,4% 3,9% 2,8% 2,8% 2,8% 2,8% 2,8% 4,3% 4,6% 4,9% 1,8% 3,4% Source: FactSet, MSCI, J.P Morgan Asset Management. All calculations are total return in local currency, not annualised. *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 31 December 216. Div. P/E β Return Weights 38

39 MSCI Europe performance and drivers 39 MSCI Europe earnings and performance Index level, next 12 months earnings estimates (LHS); index level (RHS) MSCI Europe 12-month EPS growth and EU real GDP growth % change year on year MSCI Europe EPS MSCI Europe index level EPS growth Real GDP growth Equities MSCI Europe banks relative performance vs. German 1-year yields Rebased to 1 in 29 (LHS); % (RHS) German 1-yr yields MSCI Europe banks relative to index Source: (Left and bottom right) FactSet, MSCI, J.P. Morgan Asset Management. EPS is earnings per share. (Top right) FactSet, Eurostat, MSCI, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December

40 MSCI Europe equity valuations GTM Europe 4 MSCI Europe forward P/E ratio x, multiple 24 Dividend yield and 1-year bond yield % yield 2 16 Average: 14,x 31 Dec 216: 14,8x Dividend yield Equities 12 8 '2 '4 '6 '8 '1 '12 '14 '16 MSCI Europe cyclically adjusted P/E ratio x, adjusted using trailing 1-year average inflation-adjusted earnings 31 Dec 216: 3,4% Average: 17,8x 31 Dec 216: 16,x 1-year German Bund yield 1 '8 '84 '88 '92 '96 ' '4 '8 '12 '16 Source: (Top left) 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 12 months and is provided by FactSet Market Aggregates. (Bottom left) FactSet, MSCI, J.P. Morgan Asset Management. (Right) FactSet, MSCI, Tullett Prebon, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December Dec 216:,2% 4

41 MSCI Europe Index at inflection points 41 MSCI Europe Index Sep 2: P/E = 21,8x Characteristic Sep 2 Jul 27 Dec 216 Index level P/E ratio (fwd) 21,8x 13,x 14,8x Dividend yield 1,8% 2,8% 3,4% German 1-year 5,3% 4,6%,2% 16 Jul 27: P/E = 13,x Dec 216: P/E = 14,8x Total return: +133% Equities -55% +18% -54% +173% Dec 1996: 12 Mar 23: 9 Mar 29: P/E = 16,3x P/E = 11,9x P/E = 8,3x '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 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 31 December

42 European small capitalisation equities 42 Small cap relative performance and economic performance %, relative performance indexed to Nov 212 (LHS); change in PMI (RHS) 5 4 MSCI small cap minus large cap performance 2 15 Risk-adjusted returns by company size and holding period Sharpe ratio level* 1,5 1, Small caps Mid caps Large caps 3 1,5 Equities 2 1 5, 1-year 5-year 1-year European small cap: Price-to-book ratio x, multiple Average: 1,8x 31 Dec 216: 1,8x month net change in eurozone composite PMI -4 '5 '7 '9 '11 '13 ' Source: (Left) FactSet, 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 31 December

43 UK equities 43 FTSE All-Share earnings and performance Index level, next 12 months earnings estimates (LHS); index level (RHS) FTSE All-Share EPS FTSE All-Share index level Source of UK company revenues % of revenues International UK Equities Dividend yield and ex-energy dividend yield % yield UK Eurozone 21 MSCI EM 2. MSCI World 19 Dividend yield Japan Dividend yield US ex-energy '7 '8 '9 '1 '11 '12 '13 '14 '15 ' Source: (Left) Thomson Reuters Datastream, FTSE, J.P. Morgan Asset Management. EPS is earnings per share. (Top right) Citi, MSCI, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Economic Research, J.P. Morgan Asset Management. Japan is Topix, eurozone is Euro Stoxx 5, US is S&P 5. Guide to the Markets - Europe. Data as of 31 December

44 US S&P 5 at inflection points 44 S&P 5 Index Characteristic Mar 2 Oct 27 Dec 216 Index level P/E ratio (fwd) 27,3x 15,8x 16,9x Dividend yield 1,1% 1,7% 2,1% US 1-year 6,2% 4,6% 2,4% 31 Dec 216: P/E = 16,9x Mar 2: P/E = 27,3x Oct 27: P/E = 15,8x Equities 1.4 Total return: +116% -47% +121% +291% % Dec 1996: 9 Oct 22: 9 Mar 29: P/E = 16,x P/E = 14,1x P/E = 1,3x '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 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 31 December

45 US equities 45 S&P 5 earnings and performance Index level, next 12 months earnings estimates (LHS); index level (RHS) S&P 5 EPS S&P 5 index level 2,2 Initial jobless claims vs. S&P 5 performance Thousands, four-week moving average (LHS); index level (RHS) Initial jobless claims S&P 5 index level , 1,8 Equities '8 '9 '1 '11 '12 '13 '14 '15 '16 '17 1,6 1,4 1,2 1, 8 6 Earnings per share (EPS) growth % change year on year 2 Index ex-energy Total index '13 '14 '15 '16 Source: (Left) FactSet, Standard & Poor s, J.P. Morgan Asset Management. (Top right) BLS, FactSet, Standard & Poor s, J.P. Morgan Asset Management. (Bottom right) MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. Index is MSCI USA. Guide to the Markets - Europe. Data as of 31 December

46 US S&P 5 equity valuations 46 Dividend yield and 1-year Treasury yield % yield Forward P/E ratio x, multiple 31 Dec 1999: 27,x 31 Dec 216: 16,9x 1-year Treasury Average: 16,5x Equities 31 Dec 216: 2,4% S&P 5 Shiller cyclically adjusted P/E x, adjusted using trailing 1-year average inflation-adjusted earnings 5 31 Dec 216: 28,3x 4 Dividend yield 31 Dec 216: 2,1% Average: 16,7x ' '1 '2 '3 '4 '5 '6 '7 '8 '9 ' '1 Source: (Left) FactSet, IBES, Moody s, Standard & Poor s, J.P. Morgan Asset Management. (Top right) FactSet, Standard & Poor s, 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 right) FactSet, Robert Shiller, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as of 31 December

47 Equity markets and reflation 47 S&P 5 average P/E ratio in various inflation environments US bond yield vs. value/growth performance* Relative index level (LHS); % (RHS) US 1-year yield Equities S&P 5 trailing P/E Value/growth US bond yield vs. banks/staples performance** Relative index level (LHS); % (RHS) Banks/staples US 1-year yield 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) Period 2 yrs 1 yrs Correl.,87,36 Source: (Left) Robert Shiller, J.P. Morgan Asset Management. (Top right) FactSet, Russell, Tullett Prebon, J.P. Morgan Asset Management. (Bottom right) FactSet, MSCI, 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 31 December

48 US bear markets GTM Europe 48 Equities 48 S&P 5 declines from all-time highs, % 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 1929 excessive leverage, irrational exuberance Sep % 33 Jul % Fed tightening premature policy tightening Mar Mar Post WWII crash post-war demobilisation, recession fears May Apr Flash crash of 1962 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 Current cycle Mar Average - 45% % 54 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. Commodity spike is defined as significant rapid upward moves in oil prices. Periods of extreme valuations are those where S&P 5 last 12 months P/E levels were approximately two standard deviations above long-run averages. Aggressive Fed tightening is defined as US Federal Reserve monetary tightening that was unexpected and significant in magnitude. Guide to the Markets - Europe. Data as of 31 December % market decline Recession 1 9

49 Interest rates and equities 49 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 2-year Treasury yield, ,8 Positive relationship between yield S&P 5 movements and equity returns MSCI Europe,6 Market reaction when the US Fed raised rates '88-'89 '94-'95 '99-' '4-'6 '15-'16 Change in Fed funds 3,13% 3,% 1,75% 4,25%,5% Change in 1-yr yields,85% 1,89%,49%,51%,17%,4 Initial market reaction -7% -1% -7% -8% -8% Subsequent market reaction 24% 7% 18% 2% 19% Equities Correlation,2, Total reaction 17% -2% 1% 11% 1% -,2 -,4 Negative relationship between yield movements and equity returns -, year Treasury yield Source: MSCI, Standard & Poor s, Thomson Reuters Datastream, US Treasury, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. Data for each of the rate hikes: '88-'89 is March 1988 to June 1989, '94-'95 is February 1994 to February 1995, '99-' is June 1999 to May 2, '4-'6 is June 24 to June 26, '15-'16 is December 215 to December 216. Guide to the Markets - Europe. Data as of 31 December

50 Japanese equities performance and drivers 5 TOPIX earnings and performance Index level, next 12 months earnings estimates (LHS); index level (RHS) TOPIX EPS TOPIX price level TOPIX vs. JPY/USD Index level (LHS); price of US dollar in yen (RHS) TOPIX Equities JPY/USD 6 7 '7 '8 '9 '1 '11 '12 '13 '14 '15 '16 Listed companies dividend pay-out and share buybacks Yen trillions Share buybacks* Dividends 8 4 '9 '95 ' '5 '1 '15 Source: (Left) FactSet, TOPIX, J.P. Morgan Asset Management. EPS is earnings per share. (Top right) FactSet, TOPIX, J.P. Morgan Asset Management. (Bottom right) Nomura, J.P. Morgan Asset Management. *Share buyback data is for repurchases of common stock, excluding repurchases from Resolution and Collection Corp. and repurchases of preferred stock collected by Nomura. Guide to the Markets - Europe. Data as of 31 December