GLOBAL ECONOMICS Nikolaj Schmidt, Chief International Economist 2 February 2017 Amsterdam For investment professionals only. Not for further distribution. Past performance is not a reliable indicator of future performance.
Global GDP accelerates. PMI peaks. As at 31 December 2016 Source: Bloomberg Finance, L.P. 2
Global PMIs: Improvement across services and manufacturing. Driven by DM. As at 30 November 2016 Source: Markit 3
Global Manufacturing PMI vs 10y UST As at 19 January 2017 Source: Bloomberg Finance L.P. Used with permission of Bloomberg Finance L.P. Source: Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan s prior written approval. Copyright 2017, J.P. Morgan Chase & Co. All rights reserved. Source: MARKIT PMI: Copyright 2017, Markit Economics Limited. All rights reserved and all intellectual property rights retained by Markit Economics Limited. 4
Lead Indicators As at January 2017 Source: T. Rowe Price calculations 5
End of EM Leverage Boom As at 31 October 2016 Source: International Monetary Fund 6
Credit growth in the US As at 30 September 2016 As of 30 Sep 2016 Source: Federal Reserve Flow of Funds 7
Jan_50 Apr_55 Jul_60 Okt_65 Jan_71 Apr_76 Jul_81 Okt_86 Jan_92 Apr_97 Jul_02 Okt_07 Jan_13 US Investment Boom Unlikely As at 19 January 2017 INVESTMENT VS PROFITS 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% 50% 30% 10% -10% -30% -50% US CAPACITY UTILIZATION Real Private Nonresidential Fixed Investment (SAAR, Bil.$) Corporate Profits (NIPA Accounts) 4Q Lag; RHS Source: Bureau of Economic Analysis, Federal Reserve 8
Percent of Potential GDP Global Fiscal Tightening: First in 3 Years As at 30 September 2016 STRUCTURAL BUDGET BALANCE 2,0 1,0 0,0-1,0-2,0-3,0-4,0-5,0-6,0-7,0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Advanced Emerging Source: International Monetary Fund s projections in their WEO. 9
Trump: More Regressive Tax System Source: Tax Policy Center as at 18 October 2016. The publication is called: AN ANALYSIS OF DONALD TRUMP S REVISED TAX PLAN Jim Nunns, Len Burman, Ben Page, Jeff Rohaly, and Joe Rosenberg 10
Global Inflation. As at 19 January 2017 Source: T. Rowe Price Calculations 11
Unemployment: US, Eurozone, Germany and Japan As at 31 December 2016 Source: Bloomberg Finance L.P. Used with permission of Bloomberg Finance L.P. 12
Phillips Curves As at 31 October 2016. Source: Haver, National Statistics Bureaus, T. Rowe Price 13
Global Equities VOLATILITY, UNCERTAINTY AND THE AGING BULL Laurence Taylor Global Equity Portfolio Specialist 2 February 2017 For investment professionals only. Not for further distribution.
Outlook Summary As at 31 December 2016 Equity market sentiment has become increasingly unstable as the bull market has matured with big macro having an exaggerated influence on markets in 2016. While the global economy is wrestling with structural change, cyclical earnings trends are improving which should prolong the equity cycle. Selectivity is critical given raised expectations. Political uncertainty and popular protest have become mainstream as economic inequality has been called into question. Fiscal stimulus is one potential outcome, dis-functional politics another. Emerging market equity fundamentals are as dispersed as ever. EMlisted stocks delivering long-term growth should regain/retain a premium, especially if growth-oriented policy in DM s disappoints. Reasonable valuations, modest global profit growth and solid balance sheets should provide support to global equities. It is important to temper return expectations however. 15
Year over Year % Growth From The Ashes, A New Hope (for Growth) As at 30 November 2016 EMPLOYMENT GROWTH BY REGION RATES AND EARNINGS WHERE NEXT? 4% 3% Japan EU US 2% 1% 0% -1% -2% -3% -4% -5% 2004 2006 2008 2010 2012 2014 Most bullish Falling Rates Rising Earnings Falling Rates Falling Earnings? Higher Rates Rising Earnings Higher Rates Falling Earnings Most bearish Sources: Ministry of Health, Labour & Welfare, Statistical Office of the European Communities, Bureau of Labor Statistics, Haver Analytics, Morgan Stanley Research. 16
Economic Activity is on the Rise As at 31 December 2016 USA PMI 62 60 Services Manufacturing 58 56 54 52 50 48 46 44 2012 2013 2014 2015 2016 JAPAN PMI 62 60 Services Manufacturing 58 56 54 52 50 48 46 44 2012 2013 2014 2015 2016 EURO AREA PMI 62 60 Services Manufacturing 58 56 54 52 50 48 46 44 2012 2013 2014 2015 2016 CHINA PMI 62 60 Services Manufacturing 58 56 54 52 50 48 46 44 2012 2013 2014 2015 2016 Sources: Haver Analytics, Markit, T.Rowe Price 17
Earnings Revisions are on the Up 30 November 2016 EARNINGS REVISIONS BY REGION 60% US earnings revisions, m/m net upgrades (%) 40% 20% 0% -20% -40% 60% 40% 20% 0% -20% -40% Japan earnings revisions, m/m net upgrades (%) -60% 2013 2014 2015-60% 2013 2014 2015 2016 60% 40% Europe earnings revisions, m/m net upgrades (%) 60% 40% ACWI earnings revisions, m/m net upgrades (%) 20% 20% 0% 0% -20% -20% -40% -40% -60% 2013 2014 2015 2016-60% 2013 2014 2015 2016 Past performance is not a reliable indicator of future performance. Sources: Facset. 18
Trump Tantrum Making Value Great Again As at 31 December 2016 MSCI WORLD VALUE MSCI WORLD GROWTH TOTAL RETURN (%) 105 100 95 50% 40% 30% 20% 10% 0% -10% 31 Dec 2014-11 Feb 2016 12 Feb 2016-31 Dec 2016 90 85 Value - Growth Mean -1 St Dev +1 St Dev -20% -30% -40% -50% Past performance is not a reliable indicator of future performance. Source for MSCI data: MSCI, Total return indices used for MSCI Value and MSCI Growth. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. 19
MSCI Value/Growth (12/31/1999 = 100) 10 Year US Treasury Yield, % The Value Cycle and the Link to Growth and Inflation As at 31 December 2016 US TREASURY YIELDS VS. MSCI WORLD VALUE/GROWTH 31 December 2002 31 December 2016 140 130 Value/Growth US 10 Year Treasury Yield (RHS) 5,5 5,0 120 110 4,5 4,0 3,5 100 90 80 3,0 2,5 2,0 1,5 70 1,0 2002 2004 2006 2008 2010 2012 2014 2016 Past performance is not a reliable indicator of future performance. Source: FactSet Economics. 20
% GDP growth Donald Trump US Businesses Impressed, Economists Not So Much US BUSINESS SENTIMENT SPIKED POST ELECTION 110 105 100 95 NFIB Small Business Economic Trends, Optimism...BUT ECONOMISTS WERE UNMOVED (US REAL GDP GROWTH ESTIMATES) 3,0 2,8 CY '17E 2,6 2,4 2,2 2,0 1,8 90 Election 1,6 Election 85 1,4 1,2 80 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1,0 01.16 03.16 05.16 07.16 09.16 11.16 Indexed to 1986 = 100 Source: NFIB, FactSet. As of 30 December 2016. 21
India Philippines China Indonesia Peru Turkey South Korea Mexico South Africa Russia Brazil Australia United States United Kingdom France Japan 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Real GDP Growth YoY % Amid the Hope, A Scarcity of Growth Remains As at 30 September 2016 REAL GDP GROWTH YOY (%) 8 7,1 7,0 6,7 As at 31 December 2016 REGIONAL PROFITS (EPS IN USD) In USD Since Last Cycle Peak (October 2007) 140 6 5,1 120 100 4 2 3,1 3,0 2,5 2,0 0,6 2,6 1,5 1,5 1,1 0,4 80 60 40? 0 20-2 -4-1,2-2,4 0-20 -40 Emerging Markets Japan United States Europe ex UK United Kingdom Source: FactSet Economics. 22
2008 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 (E) 2016 Q4 (E) 2017 Q1 (E) 2017 Q2 (E) 2017 Q3 (E) 2017 Q4 (E) Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Cumulative Growth in Operating Earnings Per Share Corporate Profits Why So Bad? As at 31 December 2016 U.S. PROFITS GROWTH BY SECTOR 2010 to 2017E 70% 60% S&P 500 Health Care and Information Technology S&P 500 Financials and Utilities S&P 500 Consumer Discretionary and Consumer Staples S&P 500 Energy, Industrials, and Materials 65% MSCI EU INDEX: PERCENT OF EARNINGS FROM ENERGY MATERIALS, AND FINANCIALS 70% 60% 57% Energy Materials Financials 50% 40% 30% 43% 42% 34% 50% 40% 30% 25% 20% 20% 10% 10% 0% 0% -10% -10% Past performance is not a reliable indicator of future performance. Chart is shown for illustrative purposes only and does not represent the performance of any specific security. Sources: FactSet, MSCI data: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. 23
Year over Year Change (%) Index Level Oil Price ($) Millions of Barrels Per Day Oil and China Structural Headwinds Persist As at 31 December 2016 CHINA INDUSTRIAL PRODUCTION VS INDUSTRIAL METALS PRICES January 2011 to December 2016 GLOBAL DEMAND MINUS SUPPLY VS. OIL PRICE (BRENT CRUDE) 16% China - Industrial Production (Left) S&P GSCI Industrial Metals Index Price (Right) 500 160 Oil Price (L) 12 Month Average of Demand Minus Supply (R) 2 14% 450 140 120 1,5 1 12% 400 100 0,5 10% 350 80 0-0,5 8% 300 60-1 6% 250 40 20-1,5-2 4% 200 0-2,5 Past performance is not a reliable indicator of future performance. Sources: Factset, Haver Analytics, China National Bureau of Statistics, Bank of Korea, T. Rowe Price 24
Unemployment Rate Cumulative Increase in Fed Target Rate US Inflation Inflection How Far, How Fast? As at 30 September 2016 US AND EUROPEAN EMPLOYMENT AND INFLATION FUNDAMENTALS 13% 12% 11% 10% 9% 2016 Q3 Eurozone US 2012 Q1 LOW AND SLOW: PRIOR FED RATE HIKING CYCLES VS. PROJECTION OF CURRENT CYCLE 6 5 4 3 Mar-83 Apr-88 Jun-99 Dec-15 Jan-87 Feb-94 Jun-04 FOMC Projection 8% 7% 2012 Q1 2 6% Fed Target X 1 5% 2016 Q3-1% 0% 1% 2% 3% 4% Inflation (Total CPI, Y/Y) -1 1 4 7 10 13 16 19 22 25 28 31 34 37 Number of Months from Beginning of Hike Source: Evercore ISI, FactSet 25
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Leverage Has Increased In Corporate America January 1995 December 2016 TOTAL DEBT AS % OF TOTAL EQUITY 110 CASH AS % OF MARKET CAPITALIZATION 20 100 S&P 500 Large Cap S&P 600 Small Cap 18 16 S&P 500 Large Cap S&P 600 Small Cap 90 14 % % 12 80 10 70 8 6 60 4 50 2 Past performance is not a reliable indicator of future performance. Chart is shown for illustrative purposes only and does not represent the performance of any specific security. Sources: FactSet, Standard & Poor s. 26
Price to Earnings Ratio PE NTM / Implied PE Can Valuations Hold In a Goldilocks World? As at 31 December 2016 DEVELOPED VS EMERGING MARKETS 12 Months Forw ard Price to Earnings Ratio (P/E) January 1996- December 2016 29 27 25 MSCI EM MSCI World EM LT Average World LT Average EQUITY AND BOND VALUATIONS 70 U.S. Treasury 10-Year 1/Yield S&P 500 Japan TOPIX 60 MSCI Germany 23 21 19 17 15 13 11 MSCI World Long Term Av erage 16.2x 50 40 30 20 9 7 5 MSCI EM Long Term Av erage 11.8x 10 0 Past performance is not a reliable indicator of future performance. Sources: FactSet, MSCI Source f or MSCI data: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.. 27
Current 12 mos. Fwd PE Current 12 mos. Fwd PE Regional and Sector Valuations As at 31 December 2016 REGIONS AND COUNTRIES Valuations and Comparison To 2007 Peak 22 GLOBAL SECTORS Valuations and Comparison To 2007 Peak 22 20 20 Energy (62.5%) 18 USA 18 Info Tech Staples Industrials 16 14 Australia Japan Germany AC World Europe France UK 16 14 Discretionary Health Care Telecom Materials Utilities 12 Asia ex- Japan EM Italy 12 Financials 10-40% -30% -20% -10% 0% 10% 20% 30% Re-Rating Since 2007 Peak 10-40% -30% -20% -10% 0% 10% 20% 30% Re-Rating Since 2007 Peak Sources: FactSet, Wilshire Atlas, MSCI/S&P GICS Sectors. Analysis by T. Rowe Price Associates, Inc. 28
1958 1961 1967 1971 1972 1974 1975 1976 1977 1980 1981 1982 1983 1985 1986 1988 1994 1997 1999 2004 2015 % US Valuations in an Inflation and Rates Context As at 31 December 2016 S&P 500 AVERAGE P/E, 1871 TO PRESENT 21 20 19 TRAILING US FREE CASH FLOW YIELD BEFORE FIRST INCREASE IN US RATES 1954 Through November 2015 7 6 18 17 16 15 14 13 12 11 12m Forw ard P/E 16.9 5 4 3 2 1 10 0 Inflation range shown Past performance is not a reliable indicator of future performance. Source: Credit Suisse, Empirical Research Partners Analysis. 29
Europe Inflection or Relief? As at 30 September 2016 EUROPEAN-US RELATIVE P/B AS A LEAD INDICATOR 0,05 0,00-0,05-0,10-0,15-0,20-0,25-0,30-0,35-0,40 Europe vs US: Sector-adjusted P/B Average -0,45 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Past performance is not a reliable indicator of future performance. Source: FactSet 30
90 92 94 96 98 00 02 04 06 08 10 12 14 16E trn Japan A Cyclical Self-Help Story As at 31 December 2015 TOTAL SHAREHOLDER RETURNS OF ALL LISTED COMPANIES (On A Common Stock Basis 1990-2017 (Est for 2016-17)) 22 20 18 16 14 12 10 8 6 4 2 Dividends (LHS) Share buybacks (LHS) LEVERAGE TO RECOVERY AND RECESSION¹ Beta Of Corporate Earnings (Regional EPS) To Global Industrial Production 2 9 8 7 6 5 4 3 2 1 Beta of EPS to Global IP 0 FY 0 Japan Emerging Markets Continental Europe World US UK Past performance is not a reliable indicator of future performance. Source: FactSet, Thomson Reuters, Credit Suisse, Towers Watson, Goldman Sachs 1 As at 30 June 2014 2 Note: Based on companies with revenues of more thanus$10 billion. 31
Portfolio Performance Annualized Return (%) Emerging Markets Time to Buy the Doom? 1 January 2010 30 September 2016, in USD EM PAIN SINCE 2010 MORE RISK FOR LESS RETURN VERSUS DM 20 15 S&P 500 MSCI PHILIPPINES 10 MSCI WORLD 5 MSCI FM (FRONTIER MARKETS) MSCI JAPAN MSCI EM ASIA MSCI EUROPE MSCI INDONESIA 0 MSCI EM (EMERGING MARKETS) -5 MSCI EM EMEA MSCI EM LATIN AMERICA -10-15 0 5 10 15 20 25 Volatility Std Dev (%) of Returns Past performance is not a reliable indicator of future performance. Source: Zephyr Style Advisor. 32
Rebased performance The Nearly Year For EM Investors As of December 31, 2016 114 112 110 MSCI Emerging Markets vs MSCI World MSCI World Value vs MSCI World Growth 108 106 104 102 100 98 96 94 Past performance is not a reliable indicator of future performance. Source: Factset, MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or fi nancial products. This report is not approved, reviewed, or produced by MSCI. 33
(%) Change Fragile Five (Plus Russia) Then and Now Change from 30 June 2013-31 December 2015 THE FRAGILE FIVE 8 IMPROVEMENT 6 4 2 0-2 -4-6 -8-10 DETERIORATION Current Account % of GDP Real GDP % CPI % (Inverted) Budget Surplus/Deficit % of GDP Turkey India Indonesia South Africa Brazil Russia Sources: FactSet Budget surplus or deficit change shows a comparison between CY 2013 and CY 2015 34
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Earnings Per Share Growth Earnings Per Share Growth The EM Profit Growth Reality October 2007 December 2016 TRAILING EARNINGS PER SHARE (EPS) GROWTH 250 200 MSCI Emerging Markets MSCI Latin America MSCI Emerging Asia MSCI Emerging Europe & Middle East MSCI EM SECTOR EARNINGS PER SHARE (EPS) GROWTH 250 200 Discretionary Technology Financial Industrials Materials Energy 150 150 100 100 50 50 0 0 Past performance is not a reliable indicator of future performance. Chart is shown for illustrative purposes only and does not represent the performance of any specific security. Sources: Factset, MSCI. Source for MSCI data: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. 35
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Standard Deviations Emerging Markets: Uncertainty and Opportunity EMERGING MARKETS VALUATION SPREADS The Top Quintile Compared To The Market Average¹ January 1992 Through December 2016 3,0 2,5 2,0 1,5 1,0 0,5 0,0-0,5-1,0-1,5 One Standard Deviation Valuation Spread 1 Standard Deviation -1 Standard Deviation Average Wide Disparities Narrow Disparities VALUATIONS REFLECT CHANGE AND UNCERTAINTY 12 Month Forw ard P/E as of December 31, 2016 USA Mexico India The World Index Philippines Malaysia Indonesia Chile Europe Japan Thailand Czech Republic Greece South Africa Taiwan Egypt Qatar Brazil Peru Poland Colombia United Arab Emirates Hungary China South Korea Turkey Russia 0 5 10 15 20 Past performance is not a reliable indicator of future performance. Source: FactSet, Empirical Research Partners Analysis. 1 Top-quintile compared to sector average. 36
The Equity Cycle and the Fork in the Road As of 31 December 2016 Market participants are being increasingly drawn into two very different outlook camps and markets are reacting to this backdrop of elevated uncertainty and complexity. We would agree that we at a crucial juncture for equity markets. Corporate profits have been weak and a continuation of this trend is a potential cycleending risk. We believe the U.S. economy remains fundamentally sound while we still see an uneven, but stable developed market economic backdrop elsewhere. As monetary policy reaches its limit of influence, easier fiscal conditions are being considered in Japan, the U.K. and the U.S. This may boost near term growth if debt is allowed to rise, but structural issues remain a headwind. Our central scenario for the global economy should ultimately show itself in rising demand, production and corporate profits growth, if afforded room to mature. Set against a backdrop of reasonable valuations, this should create a foundation for modest upside for global equities. 37
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