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

Transcription

1 MARKET INSIGHTS Guide to the Markets UK Q 17 As of 3 September 17

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

3 3 Page reference UK economy. UK: GDP and inflation 5. UK labour market and consumer dynamics 6. UK growth monitor 7. Brexit: UK Trade 8. Brexit: Current account and financial services Global economy 9. Global Purchasing Managers Index (PMI) for manufacturing 1. Global growth 11. Global inflation dynamics 1. Global monetary and fiscal policy 13. Global currency trends 1. Central bank policies 15. Eurozone debt 16. Eurozone: GDP and inflation 17. Eurozone growth monitor 18. European politics 19. Eurozone credit conditions. US: GDP and inflation 1. US growth monitor. US labour market 3. US inflation and wages. US wages and interest rates 5. US Federal Reserve outlook 6. Long-term drivers of US economic growth 7. US consumer and business environment 8. Japan economic indicators 9. China economic indicators 3. China financial dynamics 31. China monetary conditions and housing 3. Emerging market adjustments 33. Globalisation and trade Equities 3. World stock market returns 35. European sector returns and valuations 36. Relative equity valuations 37. European equities 38. MSCI Europe ex-uk performance and drivers 39. MSCI Europe ex-uk equity valuations. UK FTSE All-Share at inflection points 1. UK equities. UK equities performance and drivers 3. UK equity valuations. US S&P 5 at inflection points 5. US equities 6. US S&P 5 equity indicators 7. US equity earnings and performance 8. US corporate fundamentals and activity 9. US bear markets 5. Interest rates and equities 51. Japanese equities performance and drivers 5. Japanese equities: Corporate governance 53. Developed market equity valuations by country 5. Emerging market equity valuations by country 55. Emerging markets: Valuations and returns 56. Emerging markets: Investment drivers 57. Emerging markets: Flows, earnings and income 58. Equity income 59. Correlation and volatility Fixed income 6. Global fixed income: Yields and returns 61. Fixed income interest rate risk 6. Inflation implications for fixed income 63. Historical impact of Fed tightening 6. Historical yields of government bonds 65. Government bonds 66. Global investment-grade bonds 67. Global investment-grade bond market 68. US high yield bonds 69. European high yield bonds 7. Emerging market debt Other assets 71. Commodities 7. Oil market drivers 73. Gold market dynamics 7. Risk-adjusted returns and downside protection 75. Alternative strategies 76. Correlation of returns (GBP) 77. Asset markets in coming years Investing principles 78. Life expectancy 79. Cash investments 8. The power of compounding 81. Annual returns and intra-year declines 8. Impact of being out of the market 83. US asset returns by holding period 8. Asset class returns (GBP)

4 UK: GDP and inflation UK economy Real GDP Inflation Average % change quarter on quarter since Q17 % change year on year. Real GDP.%.3% Average Average since August 17 Headline CPI*.%.9% Core CPI 1.6%.7% UK consensus forecast May 16.1%.% Latest 1.5% 1.3% % change -.6% -.9% 3 1 Official inflation target -.5 ' '3 '6 '9 '1 '15-1 ' ' '8 '1 '16 Source: (Left) ONS, Thomson Reuters Datastream, J.P. Morgan Asset Management. Consensus forecasts are the Bloomberg contributor composite. (Right) ONS, Thomson Reuters Datastream, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - UK. Data as of 3 September 17.

5 UK labour market and consumer dynamics 5 UK economy Real wage growth % change year on year 8 6 Nominal wage growth* Headline CPI Real wage growth UK unemployment % '71 '76 '81 '86 '91 '96 '1 '6 '11 '16 UK savings rate % of household disposable income ' ' '6 '8 '1 '1 '1 '16 '7 '77 '8 '87 '9 '97 ' '7 '1 '17 Source: (Left) Bloomberg, ONS, J.P. Morgan Asset Management. *Nominal wages include bonuses. (Top right) ONS, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) ONS, Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 September 17. 5

6 UK growth monitor 6 UK economy Retail sales vs. consumer confidence % change year on year (LHS); Index level (RHS) Retail sales Consumer confidence 1 8 Recession 1 Manufacturing and services investment intentions Index level '86 '91 '96 '1 '6 '11 ' Services Manufacturing - '1 '3 '5 '7 '9 '11 '13 '15 '17 RICS house price survey and house prices Index level (LHS); % change year on year (RHS) Source: (Left) GFK, ONS, Thomson Reuters Datastream, J.P. Morgan Asset Management. Retail sales data is a three-month moving average. (Top right) Bank of England, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) Royal Institute of Chartered Surveyors, Nationwide Building Society, Thomson Reuters Datastream, J.P. Morgan Asset Management. Light grey columns in all charts indicate recession. Guide to the Markets - UK. Data as of 3 September House prices RICS Housing survey -1 '9 '96 ' ' '8 '1 '

7 Brexit: UK trade 7 UK economy UK exports and imports of goods and services GBP billions EU7 US Switzerland Exports: Services Goods China Imports: Services Goods Japan Australia Singapore Hong Kong Canada India UK export share EU7 % US % Asia 13% Middle East 5% Saudi Arabia Source: UK ONS Pink Book, JP. Morgan Asset Management. Data is latest available, measured at end of 15. Middle East includes Israel, Saudi Arabia, residual Gulf Arabian countries and other near and middle eastern countries. Asia includes China, Hong Kong, India, Indonesia, Iran, Japan, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand. Guide to the Markets - UK. Data as of 3 September 17. 7

8 Brexit: Current account and financial services 8 UK economy Current account balance UK financial services industry revenues % of GDP GBP billion 8 Services balance 6 Financial services balance 18 EU related international business Net current account Goods balance '9 '95 ' '5 '1 ' Non-EU international business Domestic business with UK clients Source: (Left) ONS, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Right) Oliver Wyman, J.P. Morgan Asset Management. International business revenues include wholesale revenues. Guide to the Markets - UK. Data as of 3 September 17. 8

9 Global Purchasing Managers Index (PMI) for manufacturing Global economy Eurozone Developed Emerging Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Global Developed Emerging Eurozone France Germany Italy Spain Greece Ireland Sweden Switzerland UK US Australia Japan China Indonesia Korea Taiwan India Brazil Mexico Russia Lowest relative to 5 PMI 5 Highest relative to 5 PMI Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 9 Source: FactSet, Markit, J.P. Morgan Asset Management. The Global Purchasing Managers Index (PMI) assesses the economic health of the manufacturing sector by surveying output and employment intentions. The results are rebased such that a score of 5 means that economic conditions are neither accelerating nor deteriorating. Guide to the Markets - UK. Data as of 3 September 17.

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

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

12 Global monetary and fiscal policy 1 Global economy Market expectations for policy rate %. 1.6 US UK Japan. -. Eurozone Dec '17 Dec '18 Dec '19 Change in deficit excluding debt interest, % of potential GDP Tighter policy G central bank asset purchases USD billions, rolling 1-month flows, Forecast* -.5 1,5 1, 5-5 '9 '1 '11 '1 '13 '1 '15 '16 '17 '18 '19 ' Looser policy 1 Source: (Top left) Bloomberg, J.P. Morgan Asset Management. Expectations calculated using OIS forwards. (Bottom left) Bank of England (BoE), Bank of Japan (BoJ), European Central Bank (ECB), US Federal Reserve (Fed), Bloomberg, J.P. Morgan Asset Management. *Balance sheet forecast assumptions: BoE to have zero net purchases until the end of 19; BoJ to have an ann. pace of 6tn yen until the end of 17, then a reduction in the ann. monthly purchase rate by 1tn yen each quarter until Oct 18, when purchases continue at an ann. monthly pace of tn yen; ECB to keep purchases at EUR 6bn per month from Oct 17 to Dec 17 and then reduce monthly purchases to EUR bn in Jan 18, then to EUR bn in Jul 18 and to zero asset purchases at the end of 18; Fed forecast is based on a monthly reduction of USD 1bn, starting in Oct 17 and then stepping up the monthly reduction by a further USD 1bn in each subsequent quarter until reaching a maximum of USD 5bn reduction per month, depending on the monthly maturity schedule of the balance sheet. (Right) OECD, J.P. Morgan Asset Management. Figures correspond to the estimated change in the primary balance or structural deficit excluding net interest payments as a share of GDP. Guide to the Markets - UK. Data as of 3 September 17.

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

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

15 Eurozone debt 15 Global economy Eurozone debt and ECB PSPP* purchases Euro area net bond supply in 17** EUR billions EUR billions, 1,8 1,6 1, 1, 1, 8 6 Total outstanding debt Cumulative ECB PSPP purchases 33% limit Gross bond issuance Gross bond issuance minus redemptions PSPP purchases in 17 Net bond supply Source: (Left) ECB, Eurostat, J.P. Morgan Asset Management. (Right) ECB, J.P. Morgan Securities Research, J.P. Morgan Asset Management. *PSPP is Public Sector Purchase Programme. 33% is the ECB purchase limit. **Gross issuance and gross minus redemptions and PSPP are 17 figures for YTD plus estimates for remainder of the year. Net bond supply is gross bond issuance minus redemptions minus PSPP purchases in 17. Guide to the Markets - UK. Data as of 3 September

16 Eurozone: GDP and inflation 16 Global economy Contribution to eurozone real GDP growth Contribution to eurozone CPI inflation % contribution to GDP growth, change year on year % contribution to headline inflation, change year on year 3 1 Average since Q17 1.3%.3% ECB inflation target Government Change in inventories Net exports Investment Consumption GDP '1 '11 '1 '13 '1 '15 '16 ' Food, alcohol, tobacco Core rate -1. Energy CPI* -1.5 '1 '11 '1 '13 '1 '15 '16 '17 Source: (Left) Eurostat, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Right) Eurostat, FactSet, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food, alcohol, tobacco and energy. Guide to the Markets - UK. Data as of 3 September

17 Eurozone growth monitor 17 Global economy Change in unemployment and unemployment rate Thousands of people per three months (LHS); % rate (RHS), 1,5 1, 5 Change in unemployment Recession Unemployment rate Retail sales and industrial production Index level Industrial production (LHS) 1 Retail sales (RHS) ' ' ' '6 '8 '1 '1 '1 '16 Composite PMI and GDP Index level (LHS); % change year on year (RHS) 65 PMI 6 GDP , ' ' ' '6 '8 '1 '1 '1 ' ' ' ' '6 '8 '1 '1 '1 '16-6 Source: (Left and top right) Eurostat, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) Bloomberg, Eurostat, Markit, J.P. Morgan Asset Management. Light grey columns in all charts indicate recession. Guide to the Markets - UK. Data as of 3 September

18 European politics 18 Italian election polling Survey results: Do you support the euro? % % answering yes as of May Global economy Nov 13 Nov 16 May PD M5S FI LN FdI Italy France Spain Germany Source: (Left) Termometropolitico.it, J.P. Morgan Asset Management. M5S is 5 Star Movement, PD is Democratic Party, FI is Forza Italia, LN is Lega Nord, Fdl is Brothers of Italy. (Right) Eurobarometer survey, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 September

19 Eurozone credit conditions 19 Global economy Credit demand and eurozone GDP growth Net % of banks reporting positive loan demand (LHS); % GDP growth (RHS) Stronger loan demand 6 Bank loans to households and non-financial corporations EUR billions, net lending flow, three-month moving average -5-1 Weaker loan demand Consumer credit (LHS) Overall corporate (LHS) Housing loans (LHS) Eurozone GDP growth - y/y (RHS) -8 '5 '6 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 ' Corporate lending rates to smaller companies % interest, non-financial corporations* Italy Germany Spain France Source: (Left) ECB, Eurostat, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top and bottom right) ECB, FactSet, J.P. Morgan Asset Management. *Interest on new business lending up to 1 million, on a 1-5 year maturity. Guide to the Markets - UK. Data as of 3 September

20 US: GDP and inflation Global economy Contribution to US real GDP growth Inflation % contribution to GDP growth, change year on year % change year on year Average Government since Q Change in inventories.%.% Net exports 6 3 Investment Consumption GDP 5 3 Average August since 17 Headline CPI*.% 1.9% Core CPI.% 1.7% '1 '11 '1 '13 '1 '15 '16 '17 - ' ' ' '6 '8 '1 '1 '1 '16 Source: (Left) BEA, Haver Analytics, J.P. Morgan Asset Management. (Right) BLS, Thomson Reuters Datastream, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - UK. Data as of 3 September 17.

21 US growth monitor 1 Global economy Corporate profits, business investment and employment growth % change year on year 6 Recession Profits - Business investment Employment - '8 '88 '9 '96 ' ' '8 '1 ' Initial jobless claims vs. consumer confidence Jobless claims in thousands (LHS); index level (RHS) 7 Consumer confidence Jobless claims '8 '9 ' ' Housing starts and Conference Board Leading Economic Index Index level (LHS); thousands (RHS) 15 Housing 3, starts Leading indicator 5 '8 '9 ' '1, 1, Source: (All charts) Thomson Reuters Datastream, J.P. Morgan Asset Management. Light grey columns in all charts indicate recessions determined by NBER. Guide to the Markets - UK. Data as of 3 September 17. 1

22 US labour market US unemployment rate and wage growth %, wage growth is year on year Global economy Unemployment August 17:.% Wage growth August 17:.3% Source: BEA, FactSet, J.P. Morgan Asset Management. Wage growth is average hourly earnings of total private production and non-supervisory employees. Guide to the Markets - UK. Data as of 3 September 17.

23 US inflation and wages 3 ISM Manufacturing and core inflation Index level, advanced 18 months (LHS); absolute change in year on year core CPI in % (RHS) 7 ISM Manufacturing 6 Recession Global economy 5 Core CPI 3 '89 '93 '97 '1 '5 '9 '13 ' Wage growth and companies planning to raise wages % change year on year (LHS); % of businesses (RHS) 5 NFIB companies planning to raise wages 17 Wage growth and US quit rate % change year on year (LHS); % of total employment (RHS) 5 US quit rate Wage growth 1 '1 '3 '5 '7 '9 '11 '13 '15 '17-3 Wage growth 1 '1 '3 '5 '7 '9 '11 '13 '15 ' Source: (Top) ISM, Thomson Reuters Datastream, J.P. Morgan Asset Management. Light grey columns indicate recessions determined by NBER. (Bottom left) BLS, NFIB, Thomson Reuters Datastream, J.P. Morgan Asset Management. NFIB companies planning to raise wages is a 1-month moving average. Wage growth is average hourly earnings of total private production and non-supervisory employees. (Bottom right) BLS, Thomson Reuters Datastream, J.P. Morgan Asset Management. US quit rate is a three-month moving average. Wage growth is average hourly earnings of total private production and non-supervisory employees. Guide to the Markets - UK. Data as of 3 September 17.

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

25 US Federal Reserve outlook 5 Federal funds rate expectations % Fed funds rate, FOMC and market expectations 7 FOMC September 17 forecasts* Change in real GDP, Q to Q Global economy 6 5 Unemployment rate, Q PCE inflation, Q to Q Federal funds rate US Fed FOMC median forecasts 3 Market expectations on 3 September 17 1 ' ' ' '6 '8 '1 '1 '1 '16 '18 ' Source: Bloomberg, Federal Reserve Bank of New York, US Federal Reserve, J.P. Morgan Asset Management. *Forecasts are median estimates of Federal Open Market Committee (FOMC) participants. Guide to the Markets - UK. Data as of 3 September 17. 5

26 Long-term drivers of US economic growth 6 Global economy Growth in US working age population % increase in civilian non-institutional population ages US born Immigrant % 1.% 1.%.6% Forecast*.3% '77-'86 '87-'96 '97-'6 '7-'16 '17-'6 Drivers of US GDP growth Average year on year % change.5.% % 3.% 3.3% Growth in workers + Growth in real output per worker Growth in real GDP 3.1% 3.% US productivity % change year on year 6 3 Recession %.1% 1.5% 1.3% 1.3%.%.5-3 '81 '86 '91 '96 '1 '6 '11 '16..8% 1.1% 1.% 1.6% 1.9%.9% '57-'66 '67-'76 '77-'86 '87-'96 '97-'6 '7-'16 6 Source: (Top left) Census Bureau, DOD, DOJ, J.P. Morgan Asset Management. *Forecast by J.P. Morgan Asset Management. (Bottom left) BLS, Thomson Reuters Datastream, J.P. Morgan Asset Management. Light grey columns indicate recessions determined by NBER. (Right) BEA, BLS, J.P. Morgan Asset Management. GDP drivers are calculated as the average annualised growth between Q 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 - UK. Data as of 3 September 17.

27 US consumer and business environment 7 Global economy Future capex intentions and business investment Index level (LHS); % change year on year (RHS) Future capex intentions Business investment -3 - '5 '7 '9 '11 '13 '15 '17 US savings rate % of disposable income 1 Recession '81 '86 '91 '96 '1 '6 '11 '16 National tax rate on corporate income %, including local government taxes Headline rate US Japan Italy Germany Canada UK 3 19 Source: (Top left) BEA, Dallas Fed, Kansas City Fed, New York Fed, Philadelphia Fed, Richmond Fed, Thomson Reuters Datastream, J.P. Morgan Asset Management. Capex intentions is an average index level of the five aforementioned Fed districts equally weighted displayed using a three-month moving average. (Bottom left) BEA, Thomson Reuters Datastream, J.P. Morgan Asset Management. Light grey columns indicate recessions determined by NBER. (Right) Germany Federal Ministry of Finance, OECD, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 September 17. 7

28 Japan economic indicators 8 Global economy Real wage growth and labour market % change year on year, six-month moving average (LHS); % (RHS) 8 1 Unemployment rate 6 (inverted) Real wages -6 '8 '85 '9 '95 ' '5 '1 ' Bank lending and job-to-applicant ratio % lending growth year on year (LHS); ratio of number of jobs to applicants (RHS) 8 Job-to-applicant ratio Tankan business conditions Index level 6 Manufacturing Non-manufacturing '8 '8 '88 '9 '96 ' ' '8 '1 '16 - Bank lending (y/y) -8 '9 '96 '98 ' ' ' '6 '8 '1 '1 '1 ' Source: (Top left) FactSet, J.P. Morgan Asset Management. (Bottom left and right) Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 September 17. 8

29 China economic indicators 9 Global economy China industrial production and retail sales % change year on year 5 15 Retail sales Industrial production Fixed asset investment (FAI) % change year on year Public Overall Private 1 5 '96 ' ' '8 '1 '16 Central government fiscal deficit % of GDP '5 '6 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 '17 Source: (Left) National Bureau of Statistics of China, Thomson Reuters Datastream, J.P. Morgan Asset Management. Industrial production is a three-month moving average and retail sales is a six-month moving average. (Top right) FactSet, National Bureau of Statistics of China, J.P. Morgan Asset Management. (Bottom right) BofA/Merrill Lynch, CEIC, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 September 17. 9

30 China financial dynamics 3 Public, household and non-financial corporate debt % of GDP, Q117 3 Chinese renminbi Rebased index level (LHS); RMB per US dollar (RHS) Trade-weighted RMB Non-financial corporation debt Global economy 5 Public debt Household debt USDRMB 15 1 China FX reserves Change in monthly FX reserves, USD billions '96 '98 ' ' ' '6 '8 '1 '1 '1 '16-13 '13 '1 '15 '16 '17 Source: (Left) BIS, J.P. Morgan Asset Management. Household and NFC debt is market value. Government debt is gross and nominal value. (Top right) BIS, FactSet, J.P. Morgan Asset Management. (Bottom right) People s Bank of China, Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 September 17. 3

31 China monetary conditions and housing 31 Global economy Chinese house prices vs. Shanghai Interbank Offered Rate %, three-month SHIBOR (LHS); % change year on year (RHS) China house price growth Chinese property inventories Months of inventory Top nd tier average Low nd tier average 1 st tier* average '1 '13 '1 '15 '16 '17 Policy rate and reserve ratio requirement (RRR)** % policy rate on one-year renminbi deposits (LHS); % RRR (RHS) RRR 3 - SHIBOR - '11 '1 '13 '1 '15 '16 '17 Source: (Left) BIS, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) CREIS, J.P. Morgan Securities Research, J.P. Morgan Asset Management. *Tier system used in China to rank cities based on GDP, politics and population. (Bottom right) FactSet, People s Bank of China (PBoC), J.P. Morgan Asset Management. **Average RRR for large and small banks. Guide to the Markets - UK. Data as of 3 September PBoC 1 year deposit rate 31

32 Emerging market adjustments 3 Global economy EM currencies vs. US dollar % from fair value, relative to US dollar EM currencies cheap relative to USD EM currencies expensive relative to USD Average -1 std. dev. +1 std. dev. -3 '9 '96 ' ' '8 '1 '16 Fragile Five current account balance % of GDP - - EM foreign exchange reserves vs. external debt % of GDP 35 EM reserves '96 '98 ' ' ' '6 '8 '1 '1 '1 '16 External debt 5 '9 '9 '9 '96 '98 ' ' ' '6 '8 '1 '1 '1 ' Source: (Left) J.P. Morgan Asset Management. Based on nominal exchange rates relative to PPP exchange rates and adjusted for GDP per capita. EM currencies used are a weighted average of JPM GBI-EM Global Diversified Index countries. (Top right) Haver Analytics, J.P. Morgan Asset Management. Fragile Five are Brazil, India, Indonesia, South Africa and Turkey. (Bottom right) J.P. Morgan Economic Research, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 September 17. 3

33 Globalisation and trade 33 Global economy Exports of goods Global export volumes % of GDP, 16 % change year on year, three-month moving average US US 8 China Eurozone EM ex-china 7 EM Canada Eurozone Global 6 Other DM 5 Brazil India 3 China Russia Mexico 1 Japan Korea '1 '13 '1 '15 '16 '17 Source: (Left) IMF Direction of Trade, IMF World Economic Outlook October 16, J.P. Morgan Asset Management. (Right) CPB Netherlands, Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 September

34 World stock market returns 3 Equities GBP Local YTD QTD 38.% Asia ex-jp 38.% 37.5% MSCI EM 33.6% 15.5% Euro ex-uk 6.6% 13.3% Portfolio 11.% 7.9% HDY Equity.7% 7.% FTSE 1 7.% 3.7% S&P 5 5.5% -.6% Small Cap -3.8% -6.8% TOPIX -11.1% 1.3% TOPIX -.6% -1.8% S&P 5-37.% -18.3% HDY Equity -3.% -19.1% Small Cap -.% -1.9% Portfolio -38.5% -3.9% Euro ex-uk -.7% -8.3% FTSE 1-8.3% -33.9% Asia ex-jp -7.7% -35.% MSCI EM -5.7% 59.% MSCI EM 6.8% 53.6% Asia ex-jp 67.% 8.9% Small Cap.8% 7.3% FTSE 1 7.3% 7.3% Portfolio 35.6% 3.% HDY Equity 3.% 19.3% Euro ex-uk 9.% 1.6% S&P 5 6.5% -6.7% TOPIX 7.6% 3.5% Small Cap.% 3.7% Asia ex-jp 15.6%.9% MSCI EM 1.% 19.5% TOPIX 1.% 18.7% S&P % 17.3% Portfolio 11.9% 1.6% FTSE 1 1.6% 1.1% HDY Equity 8.% 5.7% Euro ex-uk 5.1%.9% S&P 5.1%.9% HDY Equity 1.5% -.% FTSE 1 -.% -7.% Portfolio -6.5% -8.% Small Cap -8.7% -11.9% TOPIX -17.% -13.9% Euro ex-uk -1.1% -16.5% Asia ex-jp -1.6% -17.6% MSCI EM -1.5% 17.3% Asia ex-jp 19.7% 17.% Euro ex-uk.% 13.% MSCI EM 17.% 13.% Small Cap 18.% 11.6% Portfolio 16.% 1.9% S&P 5 16.% 1.3% HDY Equity 1.% 1.% FTSE 1 1.%.8% TOPIX.9% 3.5% Small Cap 35.8% 9.9% S&P 5 3.% 6.3% Euro ex-uk.%.7% TOPIX 5.% 18.7% FTSE % 17.6% Portfolio 3.1% 16.8% HDY Equity.5% 1.% Asia ex-jp 6.% -.1% MSCI EM 3.8%.8% S&P % 11.7% Asia ex-jp 7.7% 8.7% Small Cap 6.7% 8.% HDY Equity 8.7% 7.6% Portfolio 7.5%.3% MSCI EM 5.6%.7% TOPIX 1.3%.7% FTSE 1.7%.% Euro ex-uk 7.% 18.% TOPIX 1.1% 7.3% S&P 5 1.% 5.9% Small Cap.8% 5.9% Euro ex-uk 9.1%.% Portfolio 1.%.9% HDY Equity.% -1.3% FTSE 1-1.3% -3.6% Asia ex-jp -5.3% -9.7% MSCI EM -5.% 35.1% Small Cap 1.5% 33.5% S&P 5 1.% 33.1% MSCI EM 1.1% 3.% HDY Equity 13.1% 7.% Portfolio 1.8% 6.% Asia ex-jp 6.% 3.% TOPIX.3% 19.7% Euro ex-uk 3.% 19.1% FTSE %.9% Asia ex-jp 7.9% 18.% MSCI EM 3.9% 16.6% Euro ex-uk 1.5% 1.6% Portfolio 15.% 7.7% Small Cap 13.3% 7.3% TOPIX 1.5% 6.6% FTSE 1 6.6% 6.3% HDY Equity 1.9% 5.% S&P 5 1.%.6% MSCI EM 7.7% 3.6% Euro ex-uk.1% 3.% Asia ex-jp 6.7% 3.% Small Cap 5.%.% Portfolio.6% 1.8% FTSE 1 1.8% 1.% HDY Equity 3.7% 1.% TOPIX.7% 1.% S&P 5.5% 1-yr ann. 1.% S&P 5 6.9% 11.% Small Cap 6.% 8.9% Asia ex-jp 5.1% 8.6% HDY Equity 5.% 8.5% Portfolio 5.% 7.% MSCI EM.7% 6.% Euro ex-uk.8% 5.9% TOPIX 1.% 5.% FTSE 1 5.% Source: FactSet, MSCI, Standard & Poor s, TOPIX, J.P. Morgan Asset Management. Annualised return covers the period 7 to 16. HDY Equity: MSCI AC World High Dividend Yield Index; Small Cap: MSCI The World Small Cap Index. Hypothetical portfolio (for illustrative purposes only and should not be taken as a recommendation): % 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 3 September 17. 3

35 European sector returns and valuations 35 MSCI Europe Index Europe weight Growth weight Value weight Financials* Health care Cons. staples Cons. disc. Industrials Materials Energy Telecom Utilities Tech Europe 1.% 1.8% 13.7% 1.5% 13.1% 7.9% 6.9% 3.8% 3.7%.8% 1% 5.% 15.%.9% 1.8% 18.7% 9.6%.% 1.7%.6% 8.3% 1% 36.9% 1.%.8% 6.5% 7.7% 6.3% 13.% 6.% 6.7% 1.% 1% Weights Q Equities YTD Since market peak** Since market low*** Return Beta to Europe 1.36x.65x.6x.96x 1.1x 1.8x 1.x.81x.86x.98x 1.x β Forward P/E ratio 11.7x 16.1x 19.7x 1.6x 16.9x 15.5x 15.x 15.x 1.5x 19.8x 1.9x 15-year average Trailing P/E ratio 1.x 1.9x 16.x 13.x 1.x 1.6x 11.3x 7.x 1.7x 18.1x 13.5x 13.x 16.9x.5x 13.7x 18.6x 16.7x 19.5x 17.1x 1.x.x 16.3x P/E 15-year average 1.x 15.8x 16.7x 15.1x 15.x 1.5x 1.x 1.7x 1.8x 1.1x 13.9x Dividend yield 15-year average 3.9%.8%.8%.7%.%.7% 5.7%.8%.7% 1.% 3.%.%.8%.8%.8%.8%.8%.%.7% 5.% 1.8% 3.% Div Source: FactSet, MSCI, Thomson Reuters Datastream, J.P Morgan Asset Management. All calculations are total return in local currency, not annualised. Technology and Telecomms have 1-year rather than 15-year numbers on forward and trailing P/E due to data availability. *Financials no longer includes real estate, which is now a separate section making up.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 7 to end of latest quarter. *** Since market low represents period 9 March 9 to end of latest quarter. Guide to the Markets - UK. Data as of 3 September

36 Relative equity valuations 36 Global earnings EPS, US dollar, rebased to 1 in January 9 Global valuations Current and 5-year historical valuations 75x x Axis 5.x Equities US Japan UK EM Price-to-earnings 35x 3x 5x x 15x Current 5-year range 5-year average.8x.x.x 3.6x 3.x.8x.x.x 1.6x Price-to-book 8 6 Europe ex-uk 1x 5x 1.x.8x.x '9 '1 '11 '1 '13 '1 '15 '16 '17 Source: (Left) FTSE, IBES, MSCI, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Right) FactSet, MSCI, Standard & Poor s, J.P. Morgan Asset Management. Valuations refer to NTMA P/E for Europe ex-uk, US, Japan, UK and P/B for emerging markets. Valuation and earnings charts use MSCI indices for all regions/countries, except for the US, which is the S&P 5. Guide to the Markets - UK. Data as of 3 September 17. x US Europe ex-uk UK Japan EM.x 36

37 European equities 37 Equities European earnings vs. the euro Last 1 months earnings per share, euros (LHS); US dollars per euro (RHS) MSCI Europe ex-uk EPS Europe vs. US operating profits margins %, earnings per share / sales per share '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 '17 European equities flows EUR billions, cumulative S&P 5 MSCI Europe ex-uk EURUSD '98 ' ' ' '6 '8 '1 '1 '1 ' Jan '16 Apr '16 Jul '16 Oct '16 Jan '17 Apr '17 Jul '17 Source: (Left) MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) MSCI, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) GFICC Quantitative Research Group, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 September

38 MSCI Europe ex-uk performance and drivers 38 MSCI Europe ex-uk earnings and performance Index level, next 1 months earnings estimates (LHS); index level (RHS) 1 13 MSCI Europe ex-uk EPS MSCI Europe ex-uk index level 1, 1,3 1, Eurozone yearly earnings trend EPS, rebased to 1 in January Equities ,1 1, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec European Q earnings by sector EPS, % change year on year '8 '9 '1 '11 '1 '13 '1 '15 '16 '17 5 Source: (Left) IBES, MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) IBES, MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Securities Research, J.P. Morgan Asset Management. EPS is earnings per share. Earnings are Q EPS growth figures. Guide to the Markets - UK. Data as of 3 September

39 MSCI Europe ex-uk equity valuations 39 MSCI Europe ex-uk forward P/E ratio x, multiple Dividend yield and 1-year bond yield % yield Average: 13.x 3 September 17: 15.x 6 5 Dividend yield 1 8 Equities '1 '3 '5 '7 '9 '11 '13 '15 '17 MSCI Europe ex-uk cyclically adjusted P/E ratio x, adjusted using trailing 1-year average inflation-adjusted earnings September 17: 3.% Average: 19.3x 3 September 17: 18.8x 1 1-year German Bund yield 15 5 '8 '8 '88 '9 '96 ' ' '8 '1 '16 3 September 17: -1.5% '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 Source: (Top left) IBES, MSCI, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom left) FactSet, MSCI, J.P. Morgan Asset Management. (Right) MSCI, Thomson Reuters Datastream, Tullett Prebon, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 September

40 UK FTSE All-Share at inflection points FTSE All-Share index, Characteristic Sep Jun 7 Sep 17 Index level 3,66 3,79,5 P/E ratio (fwd) 19.5x 13.x 1.x Dividend yield.%.7% 3.7% UK 1-year 5.% 5.5% 1.% 3 September 17: P/E = 1.x,5 3,5 Total return: +79% Sep : P/E = 19.5x 3,66 15 Jun 7: P/E = 13.x 3,79 Equities 3,,5-8% +151% -5% +7%, 31 Dec 1996: P/E = 1.5x 9 Mar 9: 1 Mar 3:,1 P/E = 8.3x P/E = 16.x 1,79 1,593 1,5 '97 '98 '99 ' '1 ' '3 ' '5 '6 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 '17 Source: FTSE, Thomson Reuters Datastream, Tullett Prebon, J.P. Morgan Asset Management. Local currency returns. P/E ratios are forward P/E ratios. Return calculations shown in green are based on the total return index. Guide to the Markets - UK. Data as of 3 September 17.

41 UK equities 1 FTSE All-Share earnings and performance Index level, next 1 months earnings estimates (LHS); index level (RHS) Commodities weights % of index 3 FTSE All-Share EPS FTSE All-Share index level,5 3, 15 1 Equities 8 6 3,5 3, 5 FTSE All-Share MSCI Europe ex-uk S&P 5 Dividend yield and ex-energy dividend yield % yield MSCI Japan 18 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 '17 Source: (Left) FTSE, IBES, Thomson Reuters Datastream, J.P. Morgan Asset Management. EPS is earnings per share. (Top right) FactSet, FTSE, MSCI, Standard & Poor s, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Economic Research, J.P. Morgan Asset Management. UK is MSCI UK, Japan is Topix, eurozone is Euro Stoxx 5, US is S&P 5. Guide to the Markets - UK. Data as of 3 September 17.,5, 1,5 UK Eurozone MSCI EM MSCI World Japan US Dividend yield Dividend yield ex-energy

42 UK equities performance and drivers Trade-weighted GBP and FTSE 5 / FTSE 1 Index level, rebased to 1 in Jan 16 FTSE 1 vs. FTSE 5 Index level, rebased to 1 in Jan FTSE 5 / FTSE , 1, FTSE % of revenues from overseas FTSE % FTSE 5 3.9% FTSE 1 Equities 95 9 '87 '9 '97 ' '7 '1 '17 UK small & mid cap exposure* % th -75 th percentile range Average fund manager exposure* 85 '16 '17 GBP trade weighted 75 1 Weight of small & mid cap in FTSE All-Share '13 '1 '15 '16 '17 Source: (Left) FactSet, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) FTSE, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) J.P. Morgan Asset Management. *Exposure to small & mid cap companies is the exposure of all UK funds excluding small & mid cap only funds. Guide to the Markets - UK. Data as of 3 September 17.

43 UK equity valuations 3 Equities FTSE All-Share forward P/E ratio x, multiple ' ' ' '6 '8 '1 '1 '1 '16 FTSE 1 Shiller CAPE x, adjusted using trailing 1-year average inflation-adjusted earnings September 17: 1.8x 5 Average: 16.9x 3 September 17: 1.x Average: 1.1x '83 '87 '91 '95 '99 '3 '7 '11 '15 FTSE All-Share dividend yield and 1-year Gilt yield % yield Dividend yield 1-year Gilt yield '98 ' ' ' '6 '8 '1 '1 '1 '16 Source: (Top left) FTSE, IBES, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom left) FTSE, Goldman Sachs, J.P. Morgan Asset Management. Index is FTSE 1 due to availability of P/E data. (Right) FTSE,Thomson Reuters Datastream, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 September September 17: 3.7% 3 September 17: 1.% 3

44 US S&P 5 at inflection points S&P 5 Index,6,, Characteristic Mar Oct 7 Sep 17 Index level 1,57 1,565,519 P/E ratio (fwd).6x 1.8x 17.9x Dividend yield 1.1% 1.7% 1.9% US 1-year 6.%.6%.3% 3 September 17: P/E = 17.9x,519, Equities 1,8 1,6 1, Total return: +116% Mar : P/E =.6x 1,57-7% +11% 9 Oct 7: P/E = 1.8x 1, % 1, -55% 1, 9 Oct : 8 31 Dec 1996: 9 Mar 9: P/E = 15.x P/E = 15.7x P/E = 1.8x '97 '98 '99 ' '1 ' '3 ' '5 '6 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 '17 Source: FactSet, Standard & Poor s, Tullett Prebon, J.P. Morgan Asset Management. The P/E ratios are forward P/E ratios. Return calculations shown in green are based on the total return index. Guide to the Markets - UK. Data as of 3 September 17.

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

46 US S&P 5 equity indicators 6 Equities Leading economic indicator vs. S&P 5 performance Index level Leading economic indicator S&P 5,6, 1,8 1, Forward P/E ratio x, multiple Jul 1999:.5x Average: 15.8x 3 September 17: 17.9x '9 '9 '9 '96 '98 ' ' ' '6 '8 '1 '1 '1 '16 S&P 5 Shiller cyclically adjusted P/E x, adjusted using trailing 1-year average inflation-adjusted earnings 5 3 September 17: 3.7x , 3 1 Average: 16.8x 85 '97 '99 '1 '3 '5 '7 '9 '11 '13 '15 '17 6 ' '1 ' '3 ' '5 '6 '7 '8 '9 ' '1 Source: (Left) Conference Board, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) IBES, Standard & Poor s, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom right) Robert Shiller, J.P. Morgan Asset Management. Guide to the Markets - UK. Data as of 3 September 17. 6

47 US equity earnings and performance 7 US earnings forward estimates USD, S&P 5 end-of-year earnings per share estimates (EPS) e EPS US bond yield vs. value/growth performance* Relative index level (LHS); % (RHS) 13 1 US 1-year yield Value/growth 3 Equities Oct '16 Jan '17 Apr '17 Jul '17 18e EPS Next 1 month EPS 17e EPS 6 ' '5 '6 '7 '8 '9 '1 '11 '1 '13 '1 '15 '16 '17 US bond yield vs. banks/staples performance** Relative index level (LHS); % (RHS) 13 Banks/staples US 1-year yield '15 '16 ' Source: (Left) IBES, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Top right) Russell, Thomson Reuters Datastream, Tullett Prebon, J.P. Morgan Asset Management. (Bottom right), MSCI, Thomson Reuters Datastream, Tullett Prebon, J.P. Morgan Asset Management. *Value index is the Russell 1 value index. The growth index is the Russell 1 growth index. **MSCI USA index used for both banks and consumer staples indices. Guide to the Markets - UK. Data as of 3 September 17. 7

48 US corporate fundamentals and activity 8 Equities S&P 5 corporate cash % of total assets Non-financial corporate debt % of GDP 6 38 Q17: 5.3% 36 ' ' ' '6 '8 '1 '1 '1 '16 Cash returned to S&P 5 shareholders USD (LHS); USD billions, four-quarter moving average (RHS) 5 Dividends per share Share buybacks 15 '1 '3 '5 '7 '9 '11 '13 '15 '17 Capital expenditure and M&A activity USD trillions.5 Capital expenditures Global M&A activity ' ' ' '6 '8 '1 '1 '1 '16 Source: (Top left) FactSet, J.P. Morgan Asset Management. (Top right) Bloomberg, J.P. Morgan Asset Management. (Bottom left) BEA, J.P. Morgan Asset Management. (Bottom right) Bloomberg, Thomson Reuters Datastream, J.P. Morgan Asset Management. M&A activity is the quarterly value of officially announced transactions, and capital expenditures are private non-residential fixed domestic investment. Guide to the Markets UK. Data as of 3 September

49 US bear markets 9 S&P 5 declines from all-time highs, % % market decline -6 3 Recession Equities 1-1 '8 '33 '38 '3 '8 '53 '58 '63 '68 '73 '78 '83 '88 '93 '98 '3 '8 '13 Characteristics of past bear and bull markets* Macro Bear markets Bull markets Return before peak environment Market corrections Market Bear Duration Bull Bull Duration 1 months months peak return (months) Recession start date return (months) % % 1 Crash of 199 excessive leverage, irrational exuberance Sep % Fed Tightening premature policy tightening Mar Jun 193 3% 58 7% 119% 3 Post WWII crash post-war demobilisation, recession fears May Apr Flash crash of 196 flash crash, Cuban Missile Crisis Dec Jun Tech crash of 197 economic overheating, civil unrest Nov Jun Stagflation OPEC oil embargo Jan May Volcker Tightening campaign against inflation Nov Oct crash programme trading, overheating markets Aug Aug Tech bubble extreme valuations, dot com boom/bust Mar Dec Global Financial Crisis leverage/housing, Lehman collapse Oct Oct Current cycle Mar MEDIAN - % 1 158% 68 7% 39% 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. Guide to the Markets - UK. Data as of 3 September 17. 9

50 Interest rates and equities 5 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. Equities Correlation Negative relationship between yield movements and equity returns year Treasury yield Source: MSCI, Standard & Poor s, Thomson Reuters Datastream, Tullett Prebon, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. Guide to the Markets - UK. Data as of 3 September 17. 5