Jan G. Loeys. Global Investment Strategy. (1-212)

Global Investment Strategy Jan G. Loeys jan.loeys@jpmorgan.com (1-212) 834-5874 Jan G. Loeys is Chief Investment Strategist for J.P. Morgan. He works from New York and writes and edits J.P. Morgan s Global Asset Allocation, The J.P. Morgan View, and Investment Strategies. Mr. Loeys joined J.P. Morgan in New York in 1986 where he worked in International Economics and in Markets Research. Between 1992 and 2010, he worked from London as Chief Bond Strategist and then as Head of Markets Research. Prior to his arrival at J.P. Morgan, Mr. Loeys was Senior Economist at the Federal Reserve Bank of Philadelphia. He has taught finance and economics at UCLA, the Wharton School, NYU, and Fordham University. Mr. Loeys received a Lic. in Economics and Bac. in Philosophy from the Katholieke Universiteit te Leuven (Belgium) in 1975 and a Ph.D. in Economics from UCLA in 1982. See the end pages of this presentation for important disclosures J A N U A R Y 2017 1

Trump Trade joins the Growth Trade Asset allocation Allocation Direction Country Sector OW EQ, CR, CO; UW Bonds, US vs. EM Banks, Energy Cash Equities 15% Long and OW US, JA vs. EM Bonds - 17% UW. Flat duration Credit +5% Small OW vs Bonds NZ, SP vs FR USD FX Long USD Short EM, EUR Small caps, Energy, Banks, Cyclicals TIPs, Steepeners HY, Loans, Financials, UW EM Comd s +2% OW OW Energy, Gold Cash -5% UW Source: J.P. Morgan, GAA, Jan 4, 2017 Investment Themes The Growth Strategy is still growing Recent activity data and corporate confidence are signaling upside risk even as forecasters await facts before upgrading. OW Equities, Cyclicals, Financials, Credit, Energy, Commodities, and Linkers vs Gov't Bonds and Cash. Corporate America joins the cabinet The entry of corporate America into the Trump Cabinet suggests deregulation and tax reform that should boost the value of shares and bonds issued by US companies, even as the impact on economic growth is harder to forecast. Favor US risk assets over rest of world. Near-term risks require hedging Near-term risks come from the puzzling Q1 weak US GDP growth of the last 6 years, negative feedback from the dollar, bonds, and oil, and a new US Administration starting Day 1 with growth negative measures. We partially hedge these by adding to our EM short, focused on FX vs USD, going flat bond duration, long Gold, and reducing tactical risk to average. Into later months, risk comes more from Euro elections: Be short EUR. Value Challenges Credit spreads are nearing their cycle lows. We reduce our OWs to small. Global Asset Allocation We are 15% OW Equities, +5% Credit, 2% CO versus UW -17% Gov t Bonds and -5% Cash. 2

Growth Trade Trump Trade Long Equities vs cash, Bonds Cyclicals, Banks OW Credit vs Bonds Financials America First OW US in Equities, Credit, USD UW multinationals and EM. OW small caps. Country selection becomes more important. OW Commodities Industrial, Ag, Oil OW/short precious Short Bonds, Duration OW Inflation linked Bond equity correlation turns negative Source: J.P. Morgan Company CEOs move to Washington: Buy US Companies Tax cuts benefit after-tax earnings before economy: Long US Equities Repatriation of foreign profits reduces net HG issuance by ¼. Fiscal easing: Short duration. UW Bonds. OW Banks. 3

The Risks The hedges Day 1 Trump focus on Trade, Immigration and Obamacare Growth boosting measures come much later Puzzling bad seasonal for US Q1 GDP Euro populism, starting in Netherlands and France Valuations overextended Short/UW EM assets. Long USD. Foremost in FX But also equity, credit Flat bond duration. Long Gold Short Euro, OATs. Reduced credit spread tightening positions to small, Flat bond duration Source: J.P. Morgan 4

2016 returns and forecasts for 2017 2017 return forecast 2016 Return 2017 EM equities Asset Class Index Forecast Realized A Forecast US equities S&P 500 9.4% 12.0% 2.6% 8.5% Japan equities Eurozone equities MSCI EMU (Local) 12.8% 2.5% -10.3% 6.4% Japan equities Topix 10.5% 0.3% -10.2% 10.6% Global equities EM equities MSCI EM ($) 20.8% 11.2% -9.5% 18.5% US equities Global equities MSCI AC World ($) 10.3% 8.6% -1.8% 8.7% DM govie bonds GBI Global (USD-hedged) -2.4% 3.8% 6.1% -0.7% Eurozone equities GBI EM (local ccy) GBI-EM (USD-hedged) 1.8% 4.7% 2.9% 1.6% Global high grade JULI + iboxx Euro HG -0.2% 5.5% 5.7% 2.2% Global high yield Global high yield JPM US HY + iboxx Euro HY 6.2% 16.4% 10.2% 4.0% EM FX EMCI 2.7% 0.2% -2.6% 1.4% Global high grade Commodities S&P GSCI 31.5% 11.0% -20.5% 0.3% GBI EM (local ccy) *Returns are calculated based on levels as of Jan 02, 2017 EM FX 10.6% 8.7% 8.5% 6.4% 4.0% 2.2% 1.6% 1.4% 18.5% Commodities 0.3% DM govie bonds-0.7% -5% 0% 5% 10% 15% 20% Source: J.P. Morgan, as of Jan 2 5

Global long-only portfolio Allocation Major Asset Classes Long-only Active Weights Equities 15% Bonds -17% Credit 5% Commodities 2% Cash -5% Major Sectors within each Asset Class Active Weights UW OW vs. US Benchmark UW OW Equities Countries US 7.5% US Sectors Financials 2.5% Europe ex-uk 0.0% Energy 5.0% Japan 7.5% Healthcare 2.5% UK 0.0% Consumer Staples -2.5% EM -15.0% Other -7.5% Other 0.0% vs. Benchmark Bonds Countries US Nominal -3.4% Note Yield (bp) +4 US TIPs 2.0% Dur (months) -0.2 Europe Core -1.3% Inflation-linked vs Nominal 2.0% Europe Periphery 1.4% Periphery vs Core 1.4% Japan 0.0% Australia vs US 2.0% UK -1.4% France vs Germany -2.0% EM Local 0.0% UK vs US -1.4% Australia 2.0% Other 0.6% vs. Benchmark Credit HG US -1.0% Note Yield (bp) +13 Europe -1.0% Duration (months) -2.6 UK -3.0% US vs Europe 3.0% HY US 3.0% HY vs HG 6.0% Europe 2.0% US Loans 2.0% EM Sovereigns -2.0% Corporates 0.0% Commodities Energy 10% Industrial metals 0% Agriculture -5% Precious metals 5% Livestock -10% UW OW Source: J.P. Morgan, GAA, Jan 4, 2017 6

Global long-short portfolio VaR in bp, annualized VaR size OVERALL 106 FIXED INCOME 28 Long 5Y US breakevens 12 10s/30s Germany Steepener 10 5Y NZ vs. US 10 10Y USD vs. GBP swaps (cross-market rules) 10 Short 10y France vs. Germany 8 5Y Spain vs. Germany 8 10Y SEK vs. NOK swaps (cross-market rules) 5 EQUITIES 46 World Cyclicals vs. Defensives (PMI) 25 US vs. EM 15 Japan vs. EM 15 US Small Cap vs. Large Cap 10 Long US Banks vs. S&P500 10 Long US Energy vs. S&P500 10 Long US Healthcare vs. Staples 5 Japan vs. Russia (FX signal) 5 Euro area vs. Switzerland (FX signal) 5 Australia vs. India (PMI signal) 5 CREDIT 28 US HY vs. UST 10 Long Euro HY vs. Swaps 8 US HY Loan vs. Cash 6 US HG vs. UST 6 US HG Financials vs. Non-Financials 6 itraxx Senior Financials vs. itraxx Main 6 US HG vs. EMBIGD 6 HEDGES 30 Short EMCI 30 COMMODITIES 21 Long CME Feb'17 Gold 12 Long LME Mar'17 Zinc 8 Long ICE Dec'17 #2 Cotton 8 Long ICE Mar'18 Brent vs. Mar'18 WTI 6 Long ICE Jun'17 Brent vs. Dec'17 Brent 6 CROSS ASSET 40 MSCI AC World vs. GBI Global 40 FX 23 NOK vs. EUR 11 NOK vs. CAD 10 ARS vs. USD 7 CHF vs. EUR 6 CZK vs. EUR 2 Buy 6-mo NZD put/sek call, strike of 6.10 1 Source: J.P. Morgan, GAA, Jan 4, 2016 7

3.6 3.4 3.2 3.0 2.8 2.6 2016 GDP expectations GDP estimates of JP Morgan and consensus with current JP Morgan estimates of potential growth. Consensus Economics forecasts for global growth are done using the same 5-year rolling USD GDP country/region weights that we use for our own global growth forecast. JPM Potential Global US Euro area 2.4 Jan-15 Jul-15 Jan-16 Jul-16 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 JPM Potential Japan Consensus Consensus 0.0 Jan-15 Jul-15 Jan-16 Jul-16 3.2 2.9 2.6 2.3 2.0 1.7 1.4 JPM Potential 1.1 Jan-15 Jul-15 Jan-16 Jul-16 5.4 5.2 5.0 4.8 4.6 4.4 4.2 EM Consensus Potential JPM 4.0 Consensus 3.8 Jan-15 Jul-15 Jan-16 Jul-16 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 Consensus Potential JPM 0.8 Jan-15 Jul-15 Jan-16 Jul-16 2.6 2.4 2.2 2.0 1.8 1.6 1.4 Potential JPM DM Consensus 1.2 Jan-15 Jul-15 Jan-16 Jul-16 Source: J.P. Morgan, Consensus Economics, Blue Chip. Last observation as of Dec 30. 8

3.3 3.1 2.9 2.7 2017 GDP expectations GDP estimates of JP Morgan and consensus with current JP Morgan estimates of potential growth. Consensus Economics forecasts for global growth are done using the same 5-year rolling USD GDP country/region weights that we use for our own global growth forecast. Consensus Potential Global US Euro area 2.5 Jan-16 Apr-16 Jul-16 Oct-16 1.6 1.4 1.2 1.0 0.8 0.6 0.4 Potential Japan JPM JPM Consensus 0.2 Jan-16 Apr-16 Jul-16 Oct-16 2.7 2.4 2.1 1.8 1.5 JPM Consensus Potential 1.2 Jan-16 Apr-16 Jul-16 Oct-16 4.9 4.8 4.7 4.6 4.5 Potential Consensus EM JPM 4.4 Jan-16 Apr-16 Jul-16 Oct-16 2.2 2.0 1.8 1.6 1.4 1.2 1.0 JPM Consensus Potential 0.8 Jan-16 Apr-16 Jul-16 Oct-16 DM 2.2 2.1 2.0 Consensus 1.9 1.8 JPM 1.7 1.6 1.5 1.4 Potential 1.3 1.2 Jan-16 Apr-16 Jul-16 Oct-16 Source: J.P. Morgan, Consensus Economics, Blue Chip. Last observation as of Dec 30. 9

Forecast revision indices since 2013 The FRI is cumulative weekly changes in GDP forecasts for the current Quarter (Q), Q-1, Q+1 and Q+2 made by J.P. Morgan economists. The beginning of every series is normalized to begin at zero. 0.5 Global 0.0-0.5-1.0-1.5-2.0-2.5-3.0-3.5 Jan-13 Jan-14 Jan-15 Jan-16 3.0 Japan 2.0 1.0 0.0-1.0-2.0-3.0 Jan-13 Jan-14 Jan-15 Jan-16 0.8 US 0.4 0.0-0.4-0.8-1.2-1.6-2.0-2.4 Jan-13 Jan-14 Jan-15 Jan-16 1.0 EM 0.0-1.0-2.0-3.0-4.0-5.0 Jan-13 Jan-14 Jan-15 Jan-16 0.0-0.4 Euro area -0.8-1.2-1.6-2.0-2.4-2.8-3.2 Jan-13 Jan-14 Jan-15 Jan-16 0.4 DM 0.0-0.4-0.8-1.2-1.6-2.0-2.4 Jan-13 Jan-14 Jan-15 Jan-16 Source: J.P. Morgan. As of Dec 30. 10

Modal forecast and mean asset prices Probability Low growth Most of 2016, downside risk (UW Equities), if not low growth (Income) Recession Mean = Price Mode = Forecast Growth 11

Modal forecast and mean asset prices Probability Low growth Upside risk from policy and self fulfilling confidence? Recession risk down Wider up- and downside tail Mode = Forecast Mean = Price Growth 12

Twin recession risks: tight labor markets and falling profits ECI growth, %oya 4.5 4.0 3.5 3.0 2.5 3.25% = 2% inflation Most recent observations MSCI AC World 12-month trailing EPS USD 28 26 24 22 20 18 2.0 16 1.5 14 NAIRU 1.0 3 4 5 6 7 8 9 10 Unemployment rate at beginning of year Source: BLS, J.P. Morgan 12 10 8 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: J.P. Morgan, MSCI, as of Dec 30. 13

S&P earnings (operating after 1991) Cycle average and current cycle Measures change in S&P500 12m trailing EPS throughout the cycle with the beginning of expansions normalized to zero. We assume current cycle lasts 9 years. Quarterly data since 1954. 150% 130% S&P500 EPS during expansions and recessions Measures change in S&P500 12m trailing EPS throughout the cycle with the beginning of expansions normalized to zero. We assume current cycle lasts 9 years. Quarterly data since 1954. 180% 1954 1958 1961 1970 1975 1982 1991 2001 2009 110% 90% Current Cycle (9 years) 140% 100% 09 91 70% 50% Average 60% 61 71 83 75 30% 10% Expansions Recessions 20% 01 54 58-10% 0% 20% 40% 60% 80% 100% -20% 0% 20% 40% 60% 80% 100% Source: J.P. Morgan, Bloomberg, Thomson Financial and S&P, Last observation is 4Q 16. 14

Near-term recession risk has fallen from 36% to 21% Probabilities of US recession within 12 months from near-term indicators Indicator Probability Current level Level at 50% probability Historical average unconditional probability 17% Consumer sentiment 12% 66.9 59.3 Nonmanufacturing sentiment 15% 60.4 50.7 Manufacturing sentiment 7% 60.8 43.5 Residential building permits 17% 1247 1028 Auto sales 29% 17.7 15.3 Payrolls 30% 176 17 Unemployment rate 19% 4.6 5.2 Initial claims 25% 263 288 Senior loan officer opinion survey 19% 7.4 16.0 Composite probability from near-term indicators 14% Background risk from medium-term indicators 38% Probability including background risk 21% US domestic corporate profit margin % of corporate value added 18 16 14 12 10 8 70 75 80 85 90 95 00 05 10 15 Source: BEA, FRB Probability of recession within 12 months 100% 80% 60% 40% 20% Composite of near-term With background risk indicators Indicator 1 year 2 years 3 years 4 years 0% 55 60 65 70 75 80 85 90 95 00 05 10 15 Source: J.P. Morgan Probabilities of US recession from medium-term indicators Historical average unconditional probability 17% 34% 48% 59% Unemployment rate 37% 60% 77% 86% Unemployment gap 30% 50% 68% 82% Compensation growth 29% 50% 65% 76% Prime-age male labor force participation 40% 62% 77% 86% Margin difference from cycle peak 51% 70% 83% 91% Durables and structures share of GDP 22% 36% 49% 62% Composite probability from medium-term indicators 38% 61% 77% 87% Composite from near and medium-term indicators 21% 49% 66% 81% 15

High frequency global indicators are encouraging Global ex China capex spending %q/q, saar 16 8 0-8 %3m/3m, saar JPM capex 16 proxy -16-16 01 03 05 07 09 11 13 15 17 Source: J.P. Morgan Real capex (ex China) 8 0-8 US business sentiment indicators Standard deviation from 2000-06 average 1 Capex plans - Fed svys 0-1 -2-3 NAHB NFIB -4 2012 2013 2014 2015 2016 2017 Source: J.P. Morgan Global profits and capex %3m/12m 16 8 0-8 -16 %q/q, saar 20-10 -24-20 01 03 05 07 09 11 13 15 17 Source: J.P. Morgan Capex (ex China) Corporate profits 10 0 Global consumer confidence Standard deviation from historical average 4 EMU 2 US 0-2 EM -4 2012 2013 2014 2015 2016 2017 Source: J.P. Morgan 16

Inflation rise to lift profits, then business spending 6 Global real GDP %ch at annual rate over 1 quarter Global nominal GDP and corporate profits %oya; both scales 9 60 5 8 7 Nominal GDP 40 4 Trend-line since 2013 6 20 3 5 0 2 4 3 Profits -20 1 10 11 12 13 14 15 16 17 Source: J.P. Morgan 2 98 01 04 07 10 13 16 Source: J.P. Morgan; MSCI earnings -40 17

US productivity and regulations 18

US equities peak 0-13 months before recession starts Cycle average and current cycle Y-axis is cumulative return throughout the cycle. The current cycle is assumed to last 9 years. We use monthly data since 1954. 160% 140% 120% Current Cycle (9 years) S&P500 in expansions and recessions Y-axis is cumulative return throughout the cycle. The current cycle is assumed to last 9 years. We use monthly data since 1954. 400% 350% 300% 1954 1958 1961 1970 1975 1980 1982 1991 2001 2009 100% 250% 91 200% 80% 150% 09 82 60% 40% 20% 0% Average Expansions Recessions 0% 50% 100% 100% 50% 0% -50% 0% 20% 40% 60% 80% 100% % of expansion or recession completed % of expansion or recession completed 54 6175 58 80 70 01 Source: J.P. Morgan, Bloomberg, Federal Reserve. Last observation is Dec 16. 19

Risk premium momentum: US risk premia vs cash are cyclical Risk-return tradeoff line %. Monthly data since 1954. HG is US long maturity BBBs. USTs are the 10YR UST. 12 IRR % Slope of the risk-return trade-off line Monthly data since 1954. Red dots mark the start of each recession. 0.7 10 Mar 09 Jun-09 0.6 0.5 8 6 S&P500 Jun-11 Dec-16 0.4 0.3 4 HG 0.2 2 USTs Cash 0 0.00 5.00 10.00 15.00 Historic vol % Last observation is Dec 2016. 0.1 0.0-0.1 53 59 65 71 77 83 89 95 01 07 13 Source: J.P. Morgan. IRRs are calculated as current yield, minus expected default or downgrade losses in the case of credit. The IRR for equities is earnings yield, based on trend earnings for operating earnings, plus the expected long-term rate of inflation. The x-axis is historical vol. The slope is calculated by applying a linear regression of the IRR of various assets against their historical vol that intersects through the cash yield. Last observation is Dec 16. 20

US risk premia in expansions and recessions Cycle average and current cycle Measures change in term premium throughout the cycle with the beginning of expansions normalized to zero. For example, by the end of the average expansion, term premium will compress by about 30 basis points. We assume current cycle lasts 9 years. Monthly data since 1954. 0.05 0.00 US risk premia during expansions and recessions Measures change in term premium throughout the cycle with the beginning of expansions normalized to zero. We assume current cycle lasts 9 years. Monthly data since 1954. 0.40 0.30 1954 1958 1961 1970 1975 1980 1982 1991 2001 2009 01-0.05 0.20 70-0.10-0.15-0.20-0.25 Current Cycle (9 years) Average 0.10 0.00-0.10-0.20-0.30 09 61 91 80 58 754 82-0.30 Expansions Recessions -0.40-0.35-0.50-0.40 0% 50% 100% -0.60 0% 20% 40% 60% 80% 100% % of expansion or recession completed Source: J.P. Morgan, Bloomberg, Federal Reserve. Last observation is Dec 16. 21

Stronger US nominal growth supports profits US Nominal GDP and Earnings Growth %oya 15% 12% 9% 6% 3% Nominal GDP Operating EPS 0% 53 58 63 68 73 78 83 88 93 98 03 08 13 60% 60% 40% 20% 0% -20% US Inflation vs Earnings Growth and Multiples %oya, dots indicate average for inflation buckets of -2%-0%, 0%-2%,,14%-16% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% EPS growth P/E Multiple Average Operating EPS %oya Average Operating P/E -2% -2-40% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 30 Inflation Bucket %oya 18 16 14 12 10 8 6 4 2 0 Operaring EPS Growth %oya 40% 20% 0% -20% y = 2.8005x - 1.4043 R² = 0.2533 Operaring P/E 24 18 12 y = -86.809x + 18.843 R² = 0.3069-40% -5% 0% 5% US Real GDP Growth %oya 10% Source: J.P. Morgan 6-2% 0% 2% 4% 6% 8% 10% 12% 14% 16% US Inflation %oya 22

Will higher bond yields drag equities down? Bond-equity return correlation DM bonds, local for MSCI World, FX hedged for GBI, 3-month rolling of daily returns Global bond and equity fund flows $bn per year of Net Sales net new sales + reinvested dividends for mutual funds and ETFs 90% 70% 50% 30% 10% -10% -30% -50% -70% -90% 93 95 97 99 01 03 05 07 09 11 13 15 900 600 300 0-300 849 673 588 580 503 512 452 478 468 402 119 100-172 -210 282 219 225 295 196 82 18 1 Equity funds Bond funds YTD 06 07 08 09 10 11 12 13 14 15 16 Source: J.P. Morgan, MSCI, as of Jan 2 Source: Bloomberg, ICI, EFAMA, J.P. Morgan, as of Dec 16 23

Rising yields depress multiples only >9% or if +150bp q/q Operating P/E 16% 14% 12% 10% Multiples and Bond Yield 0% 53 58 63 68 73 78 83 88 93 98 03 08 13 30 24 18 12 8% 6% 4% 2% 10Y UST Yield Source: J.P. Morgan P/E Multiple y = -64.807x + 19.628 R² = 0.169 6 0% 2% 4% 6% 8% 10% 12% 14% 16% Bond Yield 35 30 25 20 15 10 5 0 d(operating P/E) Multiples changes and how fast bond yield rises Dots indicate average for quarterly change in bond yield buckets in increments of 50bp 5 4 3 2 1 0-1 -2-3 -4-5 -6-7 2 1 0-1 -2 Change in P/E Mutiple Average Change in Operating P/E -3% -2% -1% 0% 1% 2% 3% Change in Bond Yield Bucket y = -17.339x + 0.0343 R² = 0.0053-3% -2% -1% 0% 1% 2% 3% d(bond Yield) 24

Bond yields and equity multiples rose with fading US recession risk US real 10-year yields and 1-year out recession risks % on right axis 10% 2.6 Overall duration signal Weighted signal; positive numbers signal long duration, negative numbers short duration, and near zero signals neutral exposure 0% 18 15% Recession Probability 2.4 5% Recession Probability 20% 2.2 10% 15% 17 25% 2 20% 30% 1.8 25% 16 35% Nominal 10yr UST Yield 1.6 30% 35% 40% Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 1.4 MSCI AC World 40% Trailing P/E Jan-15 Jul-15 Jan-16 Jul-16 15 Source: J.P. Morgan, Bloomberg, as of Dec 30 Source: J.P. Morgan, as of Dec 30 25

Systematic duration and cross-country signals Source: J.P. Morgan, GAA, Dec 31, 2016. 26

Equity Bond - Cash of Global Investor, ex banks 60% 50% 40% 30% 20% 10% Bonds Cash Equity 99 01 03 05 07 09 11 13 15 Cash, equity and bond allocation of global non-bank investors Global equities as % total holdings of equities/bonds/m2 by non-bank investors. Global M2 as % total holdings of equities/bonds/m2 by nonbank investors. Global bonds held by non-bank investors as % total holdings of equities/bonds/m2 by non-bank investors. Box: Cash, equity and bond allocation for non-bank investors. Cash: Global M2 reflects the cash balance of nonbank investors, such as households, corporations, pension funds, insurance companies and SWFs. Bonds: Bond universe for non-bank investors is the sum of the market value of global bond indices, adjusted by excluding the bonds held by central banks, FX reserve managers and commercial banks. Equities: Equity is market value of DataStream world equity index, which is mostly held by non-bank investors. Details in Flows & Liquidity dated Nov 14, 2016. Source: J.P. Morgan. 27

European and Japanese investors have a lot to catch up with US investors on equities Equity allocations of US households %, sum of equities held directly or via mutual fund shares or via Defined Contribution plans divided by total financial assets. Last obs. is Q3 16 45% Equity allocation of households %of financial assets. Excludes equities held via defined benefit pension plans. Latest obs. is Q3 16 for US for Japan and Q2 16 for Euroarea. 45% 40% 35% 30% 40% 35% 30% 25% US 25% 20% Euro area 20% 15% 10% Japan 15% 5% 10% 52 62 72 82 92 02 12 0% 97 99 01 03 05 07 09 11 13 15 Source: Fed, J.P. Morgan Source: Fed, ECB, BoJ, J.P. Morgan 28

EM-DM equity returns in line with growth up/downgrades EM-DM FRI and MSCI EM/World since 2002 The FRI is Cumulative weekly changes in GDP forecasts for the current Quarter (Q), Q-1, Q+1 and Q+2 made by J.P. Morgan economists. EM-DM FRI and MSCI EM/World since 2011 The FRI is Cumulative weekly changes in GDP forecasts for the current Quarter (Q), Q-1, Q+1 and Q+2 made by J.P. Morgan economists. 7.0 2.8 1.5 1.1 6.0 2.6 1.0 5.0 2.4 0.5 1.0 4.0 EM FRI - DM FRI 2.2 0.0 0.9 2.0 3.0-0.5 1.8 EM FRI - DM FRI 0.8 2.0 1.0 MSCI EM/World 1.6 1.4-1.0-1.5 MSCI EM/World 0.7 0.0 1.2-2.0 0.6-1.0 1.0-2.5-2.0 Feb-02 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12 Feb-14 Feb-16 0.8-3.0 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 0.5 Source: J.P. Morgan. Last obs. is Dec 16. 29

EM EPS impetus peaking 12m forward EPS growth (% yoy in local terms, EM is in $) 12 month forward PE multiple trend 30% 20 US Euro 20% Japan EM 10% 15 0% -10% 10-20% US Euro Japan EM -30% Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 5 06 08 10 12 14 16 Source: Datastream, J.P. Morgan. Last obs. Dec 16 30

US credit spreads US High Grade Credit US High Yield Credit and default rates (rhs) 300 250 bp Last observation: 4-Jan-17 Peak at 550bp 2000 1800 bp Last observation: 4-Jan-17 Peak at 1800bp 18% 16% 1600 14% 200 1400 12% 1200 10% 150 1000 8% 100 800 6% 600 4% 50 400 2% 0 73 77 81 85 89 93 97 01 05 09 13 200 87 90 93 96 99 02 05 08 11 14 0% Source: J.P. Morgan, Barclays. 31

US credit spreads in expansions and recessions Cycle average and current cycle Percent. Monthly data since 1954. Moody s BAA corporate bond index. Spread to US 20YR yield. 100 50 0 Current Cycle (9 years) Average US BBB spread to USTs expansions and recessions Percent. Monthly data since 1954. Moody s BAA corporate bond index. Spread to US 20YR yield. 300 200 100 1954 1958 1961 1970 1975 1980 1982 1991 2001 2009 09 01 61 54 91 0 75-50 -100 58 80 82 70-100 Expansions Recessions -200-150 0% 50% 100% % of expansion or recession completed -300 0% 20% 40% 60% 80% 100% % of expansion or recession completed Source: J.P. Morgan, Federal Reserve, Moody s. Last observation is Dec 16. 32

Worsening leverage and interest coverage 2.4 2.2 Net Leverage Net Leverage ex Energy, M/M 15 14 Interest Coverage Interest Coverage ex Energy, M/M 13 2.0 12 1.8 11 1.6 10 9 1.4 8 1.2 1Q001Q021Q041Q061Q081Q101Q121Q141Q16 7 1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16 Source: Capital IQ and J.P. Morgan, as of 3Q16. Data based on the Non-Financial companies in JPMorgan s HG bond index. 33

High income yields Yields across high income assets % 7 6.57 6.54 6 5 5.18 4.87 4 3 3.90 3.20 3.09 2.45 2 1 1.20 1.21 0.35 0 Source: J.P. Morgan, Bloomberg, as of Jan 3 3.53 3.02 5.77 5.15 6.51 Yield-to-vol ratios Vol is measured by 1yr daily volatility. 2.0 1.79 1.8 1.6 1.06 0.65 1.27 1.4 1.2 1.05 0.98 1.0 0.81 0.54 0.51 0.8 0.6 0.59 0.4 0.2 0.0 0.27 0.24 0.27 0.14 0.11 0.02 34 US High Div Europe High Div Japan High Div EM High Div US Duration Europe Duration Japan Duration EM Duration US HG US HY Euro HG Euro HY GBP HG EMBIGD CEMBI EMFX EM Duration US HG US HY Euro HG Euro HY GBP HG EMBIGD CEMBI EMFX US High Div Europe High Div Japan High Div EM High Div US Duration Europe Duration Japan Duration

S&P P/E multiple (operating after 1991) Cycle average and current cycle Measures change in S&P500 trailing P/E ratio adjusted by using latest earnings known (e.g. Dec P/E uses Sep EPS, Jan-Mar P/E uses Dec EPS) throughout the cycle with the beginning of expansions normalized to zero. We assume current cycle lasts 9 years. Monthly data since 1954. 6 S&P500 P/E during expansions and recessions Measures change in S&P500 trailing P/E ratio adjusted by using latest earnings known (e.g. Dec P/E uses Sep EPS, Jan-Mar P/E uses Dec EPS) throughout the cycle with the beginning of expansions normalized to zero. We assume current cycle lasts 9 years. Monthly data since 1954. 16 1954 1958 1961 1970 1975 1980 1982 1991 2001 2009 4 Current Cycle (9 years) 12 8 91 82 2 4 58 54 0 Average 0 80-4 09 61-2 -8 75 70 Expansions Recessions 01-4 0% 50% 100% -12 0% 20% 40% 60% 80% 100% Source: J.P. Morgan, Bloomberg, Thomson Financial and S&P. Last observation is Dec 16. 35

JPMorgan Forecast & Strategy Interest rates Current Mar-17 Jun-17 Sep-17 Dec-17 United States Fed funds rate 0.41 0.75 1.00 1.00 1.25 10-year yields 2.48 2.45 2.60 2.70 2.85 Euro area Refi rate 0.00 0.00 0.00 0.00 0.00 10-year yields 0.27 0.45 0.60 0.75 0.90 United Kingdom Repo rate 0.25 0.25 0.25 0.25 0.25 10-year yields 1.34 1.55 1.65 1.70 1.70 Japan Overnight call rate -0.10-0.10-0.10-0.10-0.10 10-year yields 0.04-0.05-0.05 0.00 0.05 Emerging markets GBI-EM - Yield 6.79 6.85 Credit Markets Current Dec-17 US high grade (bp over UST) 145 140 Euro high grade (asset swap sprd) 83 75 USD high yield (bp vs. UST) 476 475 Euro high yield (bp over Bunds) 396 400 EMBIG Div (bp vs. UST) 341 425 EM Corporates (bp vs. UST)* 300 400 Foreign Exchange Current Mar-17 Jun-17 Sep-17 Dec-17 EUR/USD 1.04 1.04 1.06 1.08 1.15 USD/JPY 118 108 105 102 99 GBP/USD 1.24 1.21 1.19 1.20 1.26 USD/CNY 6.96 7.05 7.20 7.15 7.10 JPM USD Index 125.8 127.4 127.8 127.1 125.1 DXY 103.1 102.9 101.6 99.8 94.7 EMCI 65.6 64.1 63.8 64.1 64.7 Quarterly Averages Commodities Current 17Q1 17Q2 17Q3 17Q4 Brent ($/bbl) 58 57 59 62 55 Gold ($/oz) 1154 1244 1244 1230 1180 Equity Markets Current Mar-17 Jun-17 Sep-17 Dec-17 S&P 500 2256 2400 Stoxx Europe 600 366 370 FTSE 100 7191 7150 Topix 1519 1650 MSCI EM ($) 862 1000 *Current Levels as of Jan 02, 2017 36

World financial markets GDP Assets Equities Fixed income Govt. bonds Credit Other EM, $3 (3%) CEEMEA, $5 (7%) Latam, $5 (7%) EM Asia, $16 (22%) Other DM, $6 (8%) Japan, $5 (6%) Commodi ties, $0.4 Infrastructure, (0.2%) $8 (4%) Cash, $71 (37%) Private Equity, $3 (1%) Real Estate, $6 (3%) CEEMEA, $1 (2%) EM Asia, $5 (9%) Other DM, $8 (14%) Japan, $5 (9%) Europe, $10 (19%) Latam, $1 (3%) JPY, $5 11% GBP, $2 5% EUR, $10 23% EM Local, $2, 4% Other DM, $1 2% Securitized, $6 (15%) Credit, $11 (25%) EM, $2 (6%) JA, $5 (18%) EU, $9 (35%) Other USD EM HY, $0.2 (3%) GBP HG, $0 (4%) EUR HG, $2 (17%) USD EM HG, $0 (5%) USD HY, $1 (8%) Other USD DM HG, $1.3 (6%) USD EU HG, $1 (6%) EUR HY, $0.3 (3%) USD EU HY, $0.1 (1%) Equities, $52 (27%) Europe, $17 (22%) Govt, $26 (60%) USD HG, $4 (35%) US, $19 (25%) Fixed income, $51 (27%) US, $23 (44%) USD, $24 55% US, $10 (38%) US Munis, $1 (13%) $75tr $192tr $53tr $43tr $26tr $11tr Source: J.P. Morgan, Barclays, MSCI 37

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