Download Guide to the Markets - JP Morgan Asset Management

MARKET INSIGHTS
Guide to the Markets
Australia | 2Q 2017 | 31 March 2017
Global Market Insights Strategy Team
Americas
Europe
Asia
Dr. David P. Kelly, CFA
New York
Stephanie H. Flanders
London
Tai Hui
Hong Kong
Julio C. Callegari
São Paulo
Manuel Arroyo Ozores, CFA
Madrid
Kerry Craig, CFA
Melbourne
Samantha M. Azzarello
New York
Tilmann Galler, CFA
Frankfurt
Yoshinori Shigemi
Tokyo
David M. Lebovitz
New York
Lucia Gutierrez-Mellado
Madrid
Marcella Chow
Hong Kong
Gabriela D. Santos
New York
Vincent Juvyns
Luxembourg
Akira Kunikyo
Tokyo
Abigail B. Dwyer, CFA
New York
Dr. David Stubbs
London
Ben Luk
Hong Kong
John C. Manley
New York
Maria Paola Toschi
Milan
Dr. Jasslyn Yeo, CFA
Singapore
Ainsley E. Woolridge, CFA
New York
Michael J. Bell, CFA
London
Ian Hui
Hong Kong
Alexander W. Dryden, CFA
London
Hannah J. Anderson
Hong Kong
Nandini Ramakrishnan
London
Page reference
 Australian economy
4.
5.
6.
7.
8.
9.
10.
11.
Economic growth and the composition of GDP
Growth indicators
Inflation
Labour market
Consumer finances
Residential real estate
Trade
Government finances
 Global economy
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
Global growth
Global Purchasing Managers’ Index (PMI) for manufacturing
Global inflation dynamics
Fiscal policy and government debt
Globalisation and trade
U.S.: GDP and inflation
U.S.: Growth indicators
U.S.: Labour market
U.S.: Fiscal policies
U.S.: Long-run economic growth
Eurozone economy
Eurozone credit conditions
European politics
Japan: GDP and inflation
Japan: Growth indicators
Japan: Policies, currencies and dividends
China: GDP and inflation
China: Growth indicators
China financial dynamics
 Equities
31.
32.
33.
34.
35.
36.
37.
38.
39.
3
World equity market returns
Global equity earnings and valuations
Australia ASX 200 at inflection points
Australia ASX 200 valuation measures
Australia ASX 200 earnings
Australia sector returns
Market volatility
Correlation and dispersion
Global style performance
GTM – Australia
40.
41.
42.
43.
44.
45.
46.
47.
48.
Global investing
U.S. S&P 500 at inflection points
U.S. S&P 500 earnings and valuations
Bear markets and subsequent bull runs
Interest rates and equities
Europe: Market performance and valuation
Emerging markets valuations and returns
Emerging markets equities: Relative performance
Emerging markets: Flows, earnings and income
 Fixed income
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
Fixed income sector returns
Policy rates and market expectations
Central bank balance sheets and their impact
G3 bond yields
Australian interest rates and inflation
The Australian yield curve
The U.S. Federal Reserve outlook
Historical impact of U.S. Federal Reserve tightening
Fixed income interest rate risk
Global investment-grade bonds
U.S. high yield bonds
European high yield bonds
Emerging market debt
 Other asset classes
62.
63.
64.
65.
66.
Oil consumption and production
Commodities
Australian dollar
Global currency trends
Correlations
 Investing principles
67.
68.
69.
70.
71.
72.
73.
Asset class returns (AUD)
Cash accounts
Annual returns and intra-year declines
The power of compounding
Life expectancy and pension shortfall
Time, diversification and the volatility of returns
Asset markets in coming decade
|3
Australian
economy
Economic growth and the composition of GDP
GTM – Australia
Real GDP
Components of GDP
Year-over-year % change
Nominal GDP, sum of last four quarters, AUD billions*
$1,800
7.7% Housing
Real GDP
Avg 1965
4Q16
3.4%
2.4%
$1,600
$1,400
$1,200
12.6% Investment ex-housing
23.4% Gov’t spending
$1,000
$800
$600
57.2% Consumption
$400
$200
$0
-0.9% Net exports
-$200
Source: Australian Bureau of Statistics, FactSet, J.P. Morgan Asset Management. *Values may not sum to 100% due to rounding.
Guide to the Markets – Australia. Data as of 31 March 2017.
4
|4
Growth indicators
GTM – Australia
Australian
economy
Retail sales growth and consumer confidence
Year-over-year % change
Retail sales growth
14%
New capital expenditures
Index
Consumer confidence
% of GDP
130
12%
Residential
Resources
Non-residential
Public engineering
120
10%
8%
110
6%
100
4%
90
2%
80
0%
'99
'01
'03
'05
'07
'09
'11
'13
'15
Business conditions
Business credit growth
Index
30
Year-over-year % change
Feb 2017:
9.3
20
Feb 2017:
3.7%
10
0
-10
-20
'99
'01
'03
'05
'07
'09
'11
'13
'15
Source: FactSet, J.P. Morgan Asset Management; (Top left and right, bottom right) Australian Bureau of Statistics; (Top left) Westpac; (Bottom left) National Australia
Bank.
Guide to the Markets – Australia. Data as of 31 March 2017.
5
|5
Inflation
GTM – Australia
|6
Australian
economy
CPI and core CPI
Year-over-year % change
12%
Average
4Q16
11%
Headline CPI*
3.8%
1.5%
10%
Core CPI
3.8%
1.5%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
'83
'85
'87
'89
'91
'93
'95
'97
'99
'01
'03
'05
'07
'09
'11
Source: Australian Bureau of Statistics, FactSet, J.P. Morgan Asset Management. *CPI is the consumer price index, core CPI is the average of the trimmed mean and
weighted median measures of inflation.
Guide to the Markets – Australia. Data as of 31 March 2017.
6
'13
'15
Australian
economy
Labour market
GTM – Australia
Unemployment rate
Employment change
Seasonally adjusted
Monthly change in trend series, thousands
40
|7
Part time
Full time
30
20
Feb 2017:
5.9%
10
0
-10
-20
Average: 5.5%
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
Wage growth
Year-over-year % change, excluding bonuses
Average: 3.3%
4Q16:
1.8%
Source: Australian Bureau of Statistics, FactSet, J.P. Morgan Asset Management.
Guide to the Markets – Australia. Data as of 31 March 2017.
7
Australian
economy
Consumer finances
GTM – Australia
Consumer balance sheet
Household debt and savings ratio
4Q16, AUD trillions of dollars outstanding, not seasonally adjusted*
$12
Total assets: $11.1tn
$11
Other
financial: 13%
$10
Percent of annualised household disposable income
|8
Household debt
$9
Pension funds: 20%
$8
$7
$6
Savings rate
Deposits: 9%
Other tangible: 3%
Household debt service ratio
Interest payments to household disposable income, seasonally adjusted
$5
$4
$3
Homes: 55%
Securities other
than shares: 1%
Other accounts payable: 10%
Total liabilities: $2.3tn
$2
Loans: 90%
$1
$0
Assets
Liabilities
Source: Australian Bureau of Statistics, FactSet, RBA, J.P. Morgan Asset Management. *Values may not sum to 100% due to rounding.
Guide to the Markets – Australia. Data as of 31 March 2017.
8
3Q08:
13.1%
4Q16:
8.5%
Residential real estate
Capital cities house prices
Australian
economy
|9
GTM – Australia
Year-over-year % change, 3-month moving average
25%
20%
Sydney
Melbourne
Canberra
Adelaide
Brisbane
Perth
House prices and loan approvals
Year-over-year % change
Dwelling prices*
60%
Loan approvals ex-refi
adv. 5 months
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
45%
30%
15%
0%
15%
-15%
-30%
'97
10%
'99
'01
'03
'05
'07
'09
'11
'13
'15
'17
Building supply
5%
Number of dwellings under construction, 000s
160
0%
120
Multi-storey
Houses
80
-5%
40
0
-10%
'07
'09
'11
'13
'15
'64
'69
'74
'79
'84
'89
Source: J.P. Morgan Asset Management; (Left and top right) RPD CoreLogic; (Top and bottom right) Australian Bureau of Statistics; (Bottom right) FactSet.
*Dwelling price is the year-over-year change in the hedonic index for eight capital cities.
Guide to the Markets – Australia. Data as of 31 March 2017.
9
'94
'99
'04
'09
'14
Trade
GTM – Australia
Australian
economy
Terms of trade and commodity prices
Export / import prices
Terms of trade
Current account
RBA commodity price index
Commodity prices
| 10
Trade
% of nominal GDP
2%
Income
0%
-2%
-4%
-6%
-8%
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
Exports by destination
% of total exports, 12-month rolling sum
China
Japan
EU
U.S.
Source: Australian Bureau of Statistics, FactSet, J.P. Morgan Asset Management; (Left) RBA.
Guide to the Markets – Australia. Data as of 31 March 2017.
10
Australian
economy
Government finances
GTM – Australia
2016 Commonwealth budget
Commonwealth budget surplus/deficit
Budget, AUD billions
$500
% of GDP, 2016 MYEFO*, end of fiscal year
3%
$450
Total spending: $451bn
Borrowing: $34bn (7%)
$400
Defence: $27bn (6%)
Other: $44bn (10%)
0%
$350
Health:
$71bn (16%)
Excise: $36bn (8%)
-1%
Non-defence:
$146bn (32%)
Corp:
$71bn (16%)
$300
$250
$200
2016-17: Forecast
-2.1%
2%
Other: $48bn (11%)
Sales:
$65bn (14%)
1%
-2%
-3%
-4%
-5%
'71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13 '16 '19
$150
$100
Income:
$201bn (45%)
Social security:
$159bn (35%)
$50
Commonwealth gross debt
$0
Government spending
Sources of revenue
Budget assumptions
2016 MYEFO*, end of fiscal year
$700
Total debt (bn)
$600
Forecast
% of GDP
35%
30%
$500
25%
$400
20%
2016-17
2017-18
2018-19
2019-20
$300
15%
Real GDP growth
2.0%
2.75%
3.0%
3.0%
$200
10%
Unemployment
5.5%
5.5%
5.25%
5.25%
$100
5%
Inflation (CPI)
1.75%
2.0%
3.25%
3.5%
$0
0%
'71
'76
'81
'86
'91
'96
'01
Source: Australian Treasury, J.P. Morgan Asset Management. *MYEFO is the Mid-Year Economic and Fiscal Outlook, which updates the Commonwealth budget
projections.
Guide to the Markets – Australia. Data as of 31 March 2017.
11
| 11
'06
'11
'16
Global growth
GTM – Australia
| 12
Real GDP growth
Year-over-year % change
10%
EM GDP growth
Forecast*
Global economy
DM GDP growth
8%
EM less DM growth
EM growth
outperforms DM
6%
4%
2%
0%
-2%
DM growth
outperforms EM
-4%
-6%
'80
'82
'84
'86
'88
'90
'92
'94
'96
'98
'00
'02
'04
Source: IMF, J.P. Morgan Asset Management. *Forecasts are from the IMF’s World Economic Outlook October 2016 edition.
Guide to the Markets – Australia. Data as of 31 March 2017.
12
'06
'08
'10
'12
'14
'16
'18
'20
Global Purchasing Managers’ Index (PMI) for manufacturing
2015
Global economy
Apr
May Jun
Jul
GTM – Australia
2016
Aug Sep Oct
Nov Dec Jan
Feb Mar Apr
May Jun
Jul
2017
Aug Sep Oct
Nov Dec Jan
Feb Mar
Global
50.8
51.1
50.9
50.8
50.5
50.4
51.0
51.0
50.7
50.9
50.0
50.7
50.2
50.1
50.4
51.0
50.7
51.0
51.9
52.0
52.7
52.7
52.9
53.0
Developed
51.9
52.1
51.7
52.1
51.9
51.7
52.6
52.3
52.0
52.1
50.8
50.9
50.5
50.3
51.2
51.4
51.2
51.5
52.6
52.9
53.7
54.2
54.1
-
Emerging
49.6
49.8
49.9
49.1
48.6
48.5
49.0
49.2
49.0
49.3
48.9
50.2
49.6
49.5
49.3
50.3
50.1
50.4
51.0
50.7
51.0
50.8
51.3
-
Australia
48.0
52.3
44.2
50.4
51.7
52.1
50.2
52.5
51.9
51.5
53.5
58.1
53.4
51.0
51.8
56.4
46.9
49.8
50.9
54.2
55.4
51.2
59.3
57.5
U.S.
54.1
54.0
53.6
53.8
53.0
53.1
54.1
52.8
51.2
52.4
51.3
51.5
50.8
50.7
51.3
52.9
52.0
51.5
53.4
54.1
54.3
55.0
54.2
53.3
UK
52.3
52.2
51.5
52.3
51.8
51.3
54.9
52.5
51.3
52.3
50.9
51.2
49.7
50.7
52.5
48.2
53.5
55.2
54.6
53.5
56.0
55.4
54.5
54.2
Japan
Eurozone
49.9
50.9
50.1
51.2
51.7
51.0
52.4
52.6
52.6
52.3
50.1
49.1
48.2
47.7
48.1
49.3
49.5
50.4
51.4
51.3
52.4
52.7
53.3
52.4
52.0
52.2
52.5
52.4
52.3
52.0
52.3
52.8
53.2
52.3
51.2
51.6
51.7
51.5
52.8
52.0
51.7
52.6
53.5
53.7
54.9
55.2
55.4
56.2
Germany
52.1
51.1
51.9
51.8
53.3
52.3
52.1
52.9
53.2
52.3
50.5
50.7
51.8
52.1
54.5
53.8
53.6
54.3
55.0
54.3
55.6
56.4
56.8
58.3
France
48.0
49.4
50.7
49.6
48.3
50.6
50.6
50.6
51.4
50.0
50.2
49.6
48.0
48.4
48.3
48.6
48.3
49.7
51.8
51.7
53.5
53.6
52.2
53.4
Italy
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
51.0
50.9
52.2
53.2
53.0
55.0
55.7
Spain
Ireland
54.2
55.8
54.5
53.6
53.2
51.7
51.3
53.1
53.0
55.4
54.1
53.4
53.5
51.8
52.2
51.0
51.0
52.3
53.3
54.5
55.3
55.6
54.8
53.9
55.8
57.1
54.6
56.7
53.6
53.8
53.6
53.3
54.2
54.3
52.9
54.9
52.6
51.5
53.0
50.2
51.7
51.3
52.1
53.7
55.7
55.5
53.8
53.6
China
48.9
49.2
49.4
47.8
47.3
47.2
48.3
48.6
48.2
48.4
48.0
49.7
49.4
49.2
48.6
50.6
50.0
50.1
51.2
50.9
51.9
51.0
51.7
51.2
Indonesia
46.7
47.1
47.8
47.3
48.4
47.4
47.8
46.9
47.8
48.9
48.7
50.6
50.9
50.6
51.9
48.4
50.4
50.9
48.7
49.7
49.0
50.4
49.3
50.5
Korea
48.8
47.8
46.1
47.6
47.9
49.2
49.1
49.1
50.7
49.5
48.7
49.5
50.0
50.1
50.5
50.1
48.6
47.6
48.0
48.0
49.4
49.0
49.2
48.4
Taiwan
49.2
49.3
46.3
47.1
46.1
46.9
47.8
49.5
51.7
50.6
49.4
51.1
49.7
48.5
50.5
51.0
51.8
52.2
52.7
54.7
56.2
55.6
54.5
-
India
51.3
52.6
51.3
52.7
52.3
51.2
50.7
50.3
49.1
51.1
51.1
52.4
50.5
50.7
51.7
51.8
52.6
52.1
54.4
52.3
49.6
50.4
50.7
52.5
Brazil
46.0
45.9
46.5
47.2
45.8
47.0
44.1
43.8
45.6
47.4
44.5
46.0
42.6
41.6
43.2
46.0
45.7
46.0
46.3
46.2
45.2
44.0
46.9
49.6
Mexico
Russia
53.8
53.3
52.0
52.9
52.4
52.1
53.0
53.0
52.4
52.2
53.1
53.2
52.4
53.6
51.1
50.6
50.9
51.9
51.8
51.1
50.2
50.8
50.6
51.5
48.9
47.6
48.7
48.3
47.9
49.1
50.2
50.1
48.7
49.8
49.3
48.3
48.0
49.6
51.5
49.5
50.8
51.1
52.4
53.6
53.7
54.7
52.5
52.4
Source: AIG, Markit, FactSet, 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. Global PMI is a GDP-weighted calculation. Heatmap colours are based on PMI relative to 50 and across all
countries shown.
Guide to the Markets – Australia. Data as of 31 March 2017.
13
| 13
Global inflation dynamics
GTM – Australia
Inflation and inflation forecasts
Producer price index
Global economy
Year-over-year % change
Projection*
Year-over-year % change
4.0%
China
China
3.5%
U.S.
Australia
Eurozone
U.S.
Australia
Eurozone
3.0%
Japan
Japan
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
'14
'15
'16
'17
'18
Source: ABS, BEA, Bureau of Statistics China, Eurostat, FactSet, J.P. Morgan Economic Research, Ministry of Internal Affairs and Communication,
J.P. Morgan Asset Management. *Inflation projections are J.P. Morgan Economic Research forecasts.
Guide to the Markets – Australia. Data as of 31 March 2017.
14
| 14
Fiscal policy and government debt
Primary fiscal balance changes
Gross government debt
As a % of potential GDP
Forecast
Global economy
1.5ppt
Tighter
policy
1.0ppt
Public debt as % of GDP*
Forecast
140%
120%
0.5ppt
100%
0.0ppt
Developed markets
80%
-0.5ppt
Euro area
60%
Japan
-1.0ppt
U.S.
Rest of OECD
-1.5ppt
40%
OECD
Looser
policy
-2.5ppt
'06
'08
Emerging markets
20%
-2.0ppt
'10
'12
'14
'16
'18
0%
1900
1920
1940
1960
1980
Source: J.P. Morgan Asset Management; (Left) OECD; (Right) IMF. *Due to data availability, central government debt is used prior to 1980, otherwise gross general
government debt is used. Figures are purchasing power parity GDP-weighted averages. Forecasts are from the IMF’s World Economic Outlook October 2016 edition.
Guide to the Markets – Australia. Data as of 31 March 2017.
15
| 15
GTM – Australia
2000
2020
Globalisation and trade
Exports as a % of GDP
Global trade
Goods exported, 2015
Year-over-year % change, 3MMA
20%
U.S.
Brazil
Eurozone
China
India
EM ex-China
China
Other
Russia
Index
60
10%
55
0%
50
-10%
45
Mexico
-20%
S. Korea
-30%
'02
'04
40
Global PMI
(adv. 3 months)
Trade growth
'00
'06
'08
'10
'12
'14
35
'16
Discriminatory trade measures
U.S.
Number of implemented measures worldwide
800
Japan
Australia
700
UK
600
500
Eurozone
400
Canada
300
Germany
200
0%
5%
10%
15%
20%
25%
30%
35%
40%
2009
2010
2011
2012
2013
Source: J.P. Morgan Asset Management; (Left and top right) FactSet; (Left) IMF Direction of Trade Statistics; (Top right) J.P. Morgan Securities, Netherlands Bureau
for Economic Policy Analysis World Trade Monitor; (Bottom right) Centre for Economic Policy Research, Global Trade Alert. Discriminatory trade measures are
measures taken by governments worldwide that harmed foreign traders, investors, workers or owners of intellectual property.
Guide to the Markets – Australia. Data as of 31 March 2017.
16
| 16
GTM – Australia
2014
2015
U.S.: GDP and inflation
GTM – Australia
Real GDP
Inflation
Quarter-over-quarter % change, SAAR
Year-over-year % change
Global economy
Real GDP
Components of GDP
Avg
1999
4Q16
1.9%
2.1%
Avg
1964
Avg
1999
Feb
2017
Headline CPI*
4.0%
2.2%
2.8%
Core CPI
4.0%
2.0%
2.2%
PCE
3.5%
1.8%
2.1%
Core PCE
3.5%
1.7%
1.8%
4Q16
Consumption
68.9%
Government spending
17.5%
Investment ex-housing
12.6%
Housing
3.8%
Net exports
-2.9%
Source: FactSet, J.P. Morgan Asset Management; (Left) BEA; (Right) BLS. Components of GDP percentages may not sum to 100% due to rounding. *CPI is the
consumer price index. Core CPI is CPI excluding food and energy. PCE is the Personal Consumption Expenditure deflator and employs an evolving chain-weighted
basket of consumer expenditures instead of the fixed-weight basket used in CPI calculations. SAAR is the seasonally adjusted annualised rate.
Guide to the Markets – Australia. Data as of 31 March 2017.
17
| 17
U.S.: Growth indicators
GTM – Australia
Light vehicle sales
Manufacturing and trade inventories
Millions, seasonally-adjusted annualised rate
Days of sales, seasonally adjusted
| 18
Global economy
Feb 2017:
17.5
Average: 15.6
Jan 2017:
41.1
Housing starts
Real capital goods orders*
Thousands, seasonally-adjusted annualised rate
Non-defence capital goods orders ex-aircraft, USD billions, SA
$80
$75
Feb 2017:
1,288
Average: 1,314
$70
Average: $62.6
$65
$60
$55
Feb 2017:
$59.6
$50
$45
'96
'98
'00
'02
'04
'06
'08
Source: FactSet, J.P. Morgan Asset Management; (Top left) BEA; (Top and bottom right and bottom left) U.S. Census Bureau. *Capital goods orders deflated using
the producer price index with a base year of 2009. November non-defence capital goods orders ex-aircraft is an advance estimate.
Guide to the Markets – Australia. Data as of 31 March 2017.
18
'10
'12
'14
'16
U.S.: Labour market
GTM – Australia
Unemployment rate and wage growth
Labour force participation rate decline since 2007 peak*
Wages of production and non-supervisory workers, SA
12%
Population employed or looking for work as a % of total, ages 16+
67%
Global economy
Unemployment rate
Oct 2009:
10.0%
10%
66%
Labour force
participation rate
63%
8%
Aging
Cycle
65%
64%
Other
62%
'06
Average: 6.1%
6%
'07
'08
'09
'10
'11
'12
'13
'14
'15
Total private job openings and quits
Thousands, seasonally adjusted
Job openings
4%
Average: 4.2%
Feb 2017:
4.7%
2%
0%
Wage growth
Feb 2017:
2.5%
'70
'80
'90
'00
'10
Source: BLS, FactSet, J.P. Morgan Asset Management. *Aging effect on the labour force participation rate is the estimated number of people who are no longer
employed or looking for work because they are retired. Cyclical effect is the estimated numbers of people who lose their jobs and stop looking for work or do not look
for work because of the economic conditions. Other represents the drop in the labour force participation from the prior expansion peak that cannot be explained by age
or cyclical effects. Estimates for the reason of decline in labour force participation rate are made by J.P. Morgan Asset Management.
Guide to the Markets – Australia. Data as of 31 March 2017.
19
| 19
Quits
'16
'17
U.S.: Fiscal policies
GTM – Australia
Federal budget surplus/deficit
OECD corporate income tax rate by country
% of GDP, 1990 – 2026, 2016 CBO Baseline
4%
Global economy
| 20
Forecast
2016
30%
2017:
-2.9%
2%
2006
40%
20%
35%
0%
10%
-2%
30%
23%
23%
20%
16%
15%
13%
0%
Average
-4%
U.S.
Australia Japan
UK
Germany Canada
Ireland
U.S. federal net debt (accumulated deficits)
% of GDP, 1940 – 2027, 2017 CBO Baseline, end of fiscal year
120%
-6%
Forecast
2017:
88.9%
100%
-8%
2017: 77.5%
80%
60%
-10%
40%
20%
-12%
'90
'95
'00
'05
'10
'15
'20
'25
'40
'48
'56
'64
'72
'80
'88
Source: J.P. Morgan Asset Management; (Left and bottom right) BEA, FactSet, Treasury Department; (Top right) OECD. 2017 Federal Budget is based on the
Congressional Budget Office (CBO) January 2017 Baseline Budget Forecast. Years shown are fiscal years (Oct.1 through Sep. 30).
Guide to the Markets – Australia. Data as of 31 March 2017.
20
'96
'04
'12
'20
U.S.: Long-run economic growth
GTM – Australia
Drivers of U.S. GDP growth
Average year-on-year % change
4.5%
4.2%
Global economy
4.0%
3.5%
Length of economic expansions and recessions
Growth in workers
+ Growth in real output per worker
Growth in real GDP
3.3%
3.1%
3.0%
3.0%
125
Average length (months):
Expansions: 47 months
Recessions: 15 months
93
months*
100
1.4%
3.2%
75
1.3%
2.5%
2.1%
2.0%
1.5%
1.5%
2.0%
50
1.3%
2.8%
0.4%
1.0%
1.6%
0.5%
1.0%
1.9%
1.2%
25
0.9%
0.0%
0
'57-'66
'67-'76
'77-'86
'87-'96
'97-'06
'07-'16
1900
1912
1921
1933
1949
1961
Source: BEA, J.P. Morgan Asset Management; (Left) BLS; (Right) NBER. *Current expansion began in July 2009 and continued through March 2017. Data for length
of recovery and recessions obtained from the National Bureau of Economic Research (NBER). GDP drivers are calculated as the average annualised growth between
4Q of the first and last year.
Guide to the Markets – Australia. Data as of 31 March 2017.
21
| 21
1980
2001
Eurozone economy
GTM – Australia
Retail sales and consumer confidence
Eurozone unemployment rates
Year-over-year % change, 6MMA
Level
Harmonised rates, seasonally adjusted
Spain
Global economy
Eurozone
Germany
Consumer confidence
Retail sales
Eurozone CPI inflation
Contribution to headline inflation, year-over-year % change
3.0%
Food, alcohol & tobacco
Core inflation
Energy
1.5%
Headline inflation
0.0%
-1.5%
'12
'13
'14
'15
'16
Source: European Commission, Eurostat, FactSet, J.P. Morgan Asset Management.
Guide to the Markets – Australia. Data as of 31 March 2017.
22
'17
| 22
Eurozone credit conditions
GTM – Australia
Credit demand
Non-financial corporations, new business lending, 1-5 years, <EUR 1 million
Net % of banks reporting positive loan demand
100
Consumer credit
Stronger loan
Housing loans
75
demand
Overall corporate
50
Global economy
Corporate lending rates to smaller companies
Germany
Spain
Italy
France
| 23
25
0
-25
Credit impulse and real GDP
-50
Loans to non-financial corporations and change in real GDP
4%
Credit impulse*
Real GDP
3%
6%
-75
4%
2%
1%
2%
-100
0%
0%
-125
-1%
-2%
-2%
-4%
-3%
-4%
-6%
'04
'06
'08
'10
'12
'14
'16
Weaker loan
demand
-150
-175
'05
'06
'07
'08
'09
'10
'11
'12
Source: ECB, Eurostat, FactSet, J.P. Morgan Asset Management. *Credit impulse is defined as the one-year difference in the quarterly growth rate of lending in the
economy.
Guide to the Markets – Australia. Data as of 31 March 2017.
23
'13
'14
'15
'16
European politics
GTM – Australia
| 24
European 2017 political timeline
Global economy
22-29 January France
Socialist presidential
primaries
Jan
29 March UK
Article 50 is activated,
“Brexit” is triggered
Feb
Mar
26 January Italy
Court decision on
“Italicum” political
reform
Apr
15 March
The Netherlands
General election
September Spain
Catalonia plan
independence referendum
7 May France
Second round of the
presidential election
May
23 April France
First round of the
presidential election
Jun
Jul
Aug
11-18 June France
Legislative election
Support for populist parties
Number of seats
350
292
300
40%
200
2011
Latest peak*
2017
30%
199
20%
150
10%
100
31
50
0
Socialist Republican
UDI
17
13
15
Green Social-Liberal Left
French Political Parties
8
2
N.A National Front
0%
Alternative für
Deutschland
(Germany)
Syriza
(Greece)
Podemos
(Spain)
Source: J.P. Morgan Asset Management; (Bottom left) National Assembly of France; (Bottom right) National surveys. *Peak dates: Alternative fur Deutschland:
October 2015, Syriza: September 2015; Podemos: June 2016, Movimento 5 Stelle: January 2107, Front National: September 2016.
Guide to the Markets – Australia. Data as of 31 March 2017.
24
Oct
24 September
Germany Latest
date for election
Composition of the French National Assembly
250
Sep
Movimento 5
Front National
Stelle
(France)
(Italy)
Japan: GDP and inflation
GTM – Australia
Real GDP
Inflation
Year-over-year % change
Year-over-year % change
Global economy
5%
Real GDP
Average
Avg
1999
4Q16
0.9%
1.6%
4%
Avg
1999
Feb
2017
Headline CPI*
0.0%
0.2%
Core CPI
-0.3%
-0.1%
| 25
3%
2%
1%
0%
-1%
-2%
-3%
'99
'01
'03
Source: FactSet, J.P. Morgan Asset Management; (Left) Japanese Cabinet Office; (Right) Ministry of Internal Affairs and Communication.
*CPI is the consumer price index. Core CPI excludes food and energy prices.
Guide to the Markets – Australia. Data as of 31 March 2017.
25
'05
'07
'09
'11
'13
'15
Japan: Growth indicators
GTM – Australia
| 26
Private consumption and sentiment indicator
Global economy
Diffusion index
Year-over-year % change, 3MMA
Private consumption
Household sentiment*
Unemployment and wage growth
Seasonally adjusted
Wage growth (6MMA)
Operating profits
Unemployment rate
(inverted)
Year-over-year % change
Manufacturing
Non-manufacturing
Source: FactSet, J.P. Morgan Asset Management; (Top) Japanese Cabinet Office; (Bottom left) Japanese Statistics Bureau and Statistics Centre, Ministry of Health,
Labour and Welfare; (Bottom right) Ministry of Finance. *Household sentiment is based on the Economy Watchers Survey Household index.
Guide to the Markets – Australia. Data as of 31 March 2017.
26
Japan: Policies, currencies and dividends
Real interest rate differential and Japanese yen
GTM – Australia
Japanese yen and the stock market
2-year U.S. / Japan treasury bond spread (inflation adjusted)
Global economy
Nikkei 225 Index
Real interest rate
differential
Japanese ¥ per U.S. $
Relative dividend yields
Next twelve months
Nikkei 225
S&P 500
Source: FactSet, J.P. Morgan Asset Management; (Top left) Tullett Prebon; (Bottom left and right) Nikkei; (Bottom left) Standard & Poor’s.
Guide to the Markets – Australia. Data as of 31 March 2017.
27
Japanese ¥ per U.S. $
| 27
China: GDP and inflation
Real GDP
Inflation
Year-over-year % change
21%
Year-over-year % change
18%
Global economy
GTM – Australia
GDP growth
Investment
Consumption
Net exports
| 28
PPI
Feb 2017:
7.8%
15%
12%
CPI*
9%
6%
3%
0%
-3%
Feb 2017:
0.8%
-6%
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16
Source: FactSet, NBS China, J.P. Morgan Asset Management. Latest Chinese GDP growth figure 4Q16. *CPI is the consumer price index. PPI is the producer price
index.
Guide to the Markets – Australia. Data as of 31 March 2017.
28
China: Growth indicators
GTM – Australia
Retail sales and industrial production
China home prices
Year-over-year % change, 3-month moving average
Year-over-year % change
Tier 1
Tier 2
Tier 3
Retail sales
Global economy
| 29
Dec 2016:
10.6%
Dec 2016:
6.1%
Industrial production
Central government fiscal deficit
Fixed asset investment (FAI)
% of GDP
2%
Year-over-year % change, year to date
40%
1%
4Q16: -3.3%
0%
-1%
Local government
Private
State-owned enterprises
30%
20%
-2%
-3%
10%
-4%
0%
-5%
'05
'06
'07
'08
'09
'10
'11
'12
Source: FactSet, NBS China, J.P. Morgan Asset Management.
Guide to the Markets – Australia. Data as of 31 March 2017.
29
'13
'14
'15
'16
'11
'12
'13
'14
'15
'16
'17
China financial dynamics
GTM – Australia
Foreign exchange reserves
USD trillions
| 30
Key policy rates
Feb 2017: $3.0tn
%, per annum
6%
Global economy
5%
Lending rate (1-year)
4%
MLF (6-month)
SLF (7-day)
3%
2%
1%
SHIBOR (7-day)
Deposit rate (1-year)
'15
Chinese yuan
'17
Lending alternatives
Rebased index
China REER*
'16
RMB billion
CNY per USD (inverted)
7,000
6,000
Pledged supplementary lending
Medium-term lending facility
5,000
Standard lending facility
4,000
3,000
2,000
1,000
0
'14
'15
Source: J.P. Morgan Asset Management. (Top and bottom left) FactSet; (Top left) NBS China; (Bottom left) J.P Morgan Economic Research; (Top and bottom right)
CEIC, PBoC. *REER is the real effective exchange rate.
Guide to the Markets – Australia. Data as of 31 March 2017.
30
'16
'17
World equity market returns
AUD
Equities
Local
GTM – Australia
10-years '07 - '16
Ann.
Vol.
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
1Q17
34.2%
Sm all Cap
34.2%
25.5%
EM
33.6%
-7.8%
Japan
-40.6%
57.4%
Sm all Cap
57.4%
13.1%
Sm all Cap
13.1%
2.1%
U.S.
2.1%
20.3%
Australia
20.3%
53.6%
U.S.
32.4%
24.3%
U.S.
13.7%
25.6%
Japan
12.1%
13.2%
Sm all Cap
13.2%
5.8%
EM
7.8%
7.9%
U.S.
6.9%
Sm all Cap
19.6%
25.0%
Europe
19.6%
17.1%
Sm all Cap
17.1%
-20.7%
U.S.
-37.0%
38.8%
EM
62.8%
4.6%
EM
14.4%
-10.4%
Portfolio
-9.8%
18.4%
Europe
16.4%
47.4%
Japan
54.4%
8.3%
Portfolio
6.7%
14.0%
U.S.
1.4%
12.5%
U.S.
12.0%
4.8%
Australia
4.8%
4.5%
Australia
4.5%
Japan
19.4%
24.2%
Australia
24.2%
16.1%
Australia
16.1%
-32.1%
Europe
-38.5%
37.0%
Australia
37.0%
1.7%
Japan
1.0%
-10.5%
Europe
-8.8%
17.1%
EM
17.4%
46.2%
Europe
22.3%
7.3%
EM
5.6%
10.2%
Sm all Cap
10.2%
12.1%
EM
10.1%
2.9%
Portfolio
5.0%
4.5%
Portfolio
4.4%
EM
17.4%
23.4%
EM
28.8%
8.2%
Portfolio
12.5%
-32.7%
Portfolio
-41.0%
21.3%
Portfolio
36.6%
1.6%
Portfolio
8.2%
-10.5%
Australia
-10.5%
15.6%
Portfolio
17.1%
30.4%
Portfolio
21.8%
5.7%
Japan
10.3%
9.8%
Europe
5.4%
11.8%
Australia
11.8%
2.1%
Europe
6.2%
3.0%
EM
4.7%
Portfolio
16.1%
19.0%
Portfolio
21.4%
2.7%
Europe
6.5%
-38.4%
Australia
-38.4%
6.1%
Europe
28.6%
1.6%
Australia
1.6%
-12.5%
Japan
-17.0%
14.6%
U.S.
16.0%
20.2%
Australia
20.2%
5.6%
Australia
5.6%
8.0%
Portfolio
3.3%
9.7%
Portfolio
10.0%
1.5%
Sm all Cap
1.5%
2.0%
Japan
1.0%
U.S.
15.2%
7.8%
U.S.
15.8%
-5.3%
U.S.
5.5%
-41.0%
EM
-45.7%
-2.0%
U.S.
26.5%
1.0%
U.S.
15.1%
-18.2%
EM
-12.5%
6.6%
Sm all Cap
6.6%
13.4%
EM
3.8%
3.1%
Europe
5.2%
2.6%
Australia
2.6%
4.0%
Japan
0.3%
0.7%
U.S.
6.1%
1.8%
Europe
3.5%
Europe
15.2%
-5.0%
Japan
3.0%
-14.9%
Japan
-11.1%
-53.2%
Sm all Cap
-53.2%
-18.8%
Japan
7.6%
-8.3%
Europe
7.5%
-21.4%
Sm all Cap
-21.4%
6.2%
Japan
20.9%
-0.8%
Sm all Cap
-0.8%
-3.8%
Sm all Cap
-3.8%
-3.9%
EM
-5.4%
0.7%
Europe
7.9%
-0.1%
Japan
0.6%
-0.3%
Sm all Cap
-0.3%
Australia
14.3%
Source: FactSet, MSCI, Standard & Poor’s, TOPIX, J.P. Morgan Asset Management. Annualised return (Ann.) and volatility (Vol.) covers the period 2007 to 2016.
Volatility is based on local currency returns. Small Cap: S&P ASX Small Ordinaries; EM: MSCI EM Index; Europe: MSCI Europe Index; Japan: TOPIX first section;
Australia: ASX 200 Index; U.S.: S&P 500 Index. Hypothetical portfolio (for illustrative purposes only and should not be taken as a recommendation): 20% U.S.; 30%
Australia; 15% EM; 15% Europe; 10% Japan; 10% small cap. All indices are total return.
Guide to the Markets – Australia. Data as of 31 March 2017.
31
| 31
Global equity earnings and valuations
GTM – Australia
Forward earnings per share
Global valuations
Rebased to 2009 = 100 in USD
200
Current and 20-year historical valuations*
40x
Current
180
U.S.
160
Axis
5.2x
20-year range
20-year average
35x
4.8x
4.4x
4.0x
30x
Japan
| 32
EM
120
Australia
100
25x
3.2x
2.8x
20x
17.5
16.5
15.8
2.4x
15.1
13.9
15x
2.0x
Europe
1.6x
80
10x
60
5x
1.6
1.2x
0.8x
0.4x
40
0x
'09
'10
'11
'12
'13
'14
'15
'16
'17
U.S.
World
Australia
Europe
Japan
Source: Bloomberg, FactSet, MSCI, Standard & Poor’s, J.P. Morgan Asset Management. *Valuations refer to NTMA P/E for Europe, U.S., Japan, Australia and
developed markets (world) and P/B for emerging markets. Valuation and earnings charts use MSCI indices for all regions/countries, except for the U.S. and Australia,
which are the S&P 500 and ASX 200, respectively. Valuations for Australia start in 1999.
Guide to the Markets – Australia. Data as of 31 March 2017.
32
EM
0.0x
Price-to-book
Equities
140
Price-to-earnings
3.6x
Australia ASX 200 at inflection points
GTM – Australia
01 Nov 2007:
P/E = 17.2x
6,829
ASX 200 Index
7,000
Characteristic
Index level
P/E ratio (fwd)
Dividend yield
10-year Tsy
6,500
6,000
| 33
Mar 2002
3,498
16.2x
3.0%
6.3%
Nov 2007
6,829
16.4x
3.1%
6.3%
Mar 2017
5,865
15.8x
3.8%
2.7%
31 Mar 2017:
P/E = 15.8x
5,865
5,500
Equities
-50%
+207%
5,000
4,500
Total return:
+77%
3,500
3,000
+163%
7 Mar 2002:
P/E = 17.4x
3,498
4,000
-20%
31 Dec 1996:
2,425
2,500
10 Mar 2009:
P/E = 15.7x
3,185
13 Mar 2003:
P/E = 12.6x
2,700
2,000
'96
'97
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
Source: FactSet, Standard & Poor’s, 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. Dividend yield is based on current data. Return calculations shown in green are based on the total return index.
Guide to the Markets – Australia. Data as of 31 March 2017.
33
'13
'14
'15
'16
Australia ASX 200 valuation measures
GTM – Australia
| 34
ASX 200 Index: Forward P/E ratio
18x
31 Mar 2017:
15.8x
16x
Average: 14.0x
Equities
14x
12x
10x
Valuation
measure
Description
31 Mar
2017
P/E
Forward P/E
15.8x
14.0x
Div. Yield
Dividend yield
4.4%
4.6%
P/B
Price-to-book
2.0x
2.0x
P/CF
Price-to-cash flow
11.1x
9.4x
EY Spread
EY minus corp bond yield
2.8%
1.4%
Avg*
8x
'99
34
'01
'03
'05
'07
'09
'11
'13
Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. Price to earnings is price divided by consensus analyst estimates of earnings per share for the
next 12 months. Dividend yield is calculated as the next 12-month consensus dividend divided by most recent price. Price-to-book ratio is the price divided by book
value per share. Price-to-cash flow is price divided by NTM cash flow. EY minus corporate bond yield is the forward earnings yield (consensus analyst estimates of
EPS over the next 12 months divided by price) less the yield on the AusBond Credit (5-10y) Index. *Average dates vary due to data availability, start date is 31
December 1999 except for P/B, which is January 2001, and EY spread, which is October 2003.
Guide to the Markets – Australia. Data as of 31 March 2017.
'15
Australia ASX 200 earnings
GTM – Australia
ASX 200 earnings and performance
Annual earnings estimates
Index level, analyst estimates of the next 12 months of earnings
Monthly earnings per share consensus estimate
$420
'13
'15
$400
'16
'14
ASX 200 EPS
ASX 200 index level
| 35
$380
'17
$360
$340
Equities
$320
$300
'11
'12
'13
'14
'15
Earnings revisions by sector
'16
Materials
Financials ex-REITs
Three-month earnings revisions*
40
20
0
-20
-40
-60
-80
-100
'07
'08
'09
'10
'11
'12
'13
Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. *Revisions is the difference between the number of companies seeing upward and downward
revisions to earnings estimates for the coming year.
Guide to the Markets – Australia. Data as of 31 March 2017.
35
'14
'15
'16
Health
Care
Industrials
Cons.
Discr.
Energy
Telecom
Utilities
Australia
ASX 200 weight
38.8%
15.7%
8.1%
7.2%
6.9%
6.6%
4.7%
4.1%
3.9%
2.7%
1.1%
100%
Growth
10.7%
21.0%
9.1%
13.6%
10.4%
14.0%
3.6%
3.7%
8.4%
4.4%
1.0%
100%
Value
75.2%
9.5%
7.9%
2.2%
0.3%
0.0%
1.9%
0.2%
1.3%
1.5%
0.0%
100%
1Q17
5.9
1.8
0.3
10.8
14.9
3.1
2.5
3.2
-4.6
10.7
2.7
4.8
2016
10.3
42.9
12.4
4.7
1.9
10.5
11.9
15.8
-7.1
19.4
4.5
11.8
Since Market Peak
(November 2007)
58.0
-20.4
-2.1
64.9
199.3
4.6
14.1
-24.8
89.9
118.5
110.1
31.5
Since Market Low
(March 2009)
285.8
50.3
283.9
135.6
235.4
223.3
211.8
-6.2
164.3
285.2
150.1
162.7
Forward P/E Ratio
14.3x
13.5x
15.7x
18.9x
24.8x
21.7x
18.5x
16.3x
13.7x
26.4x
20.9x
15.8x
15-yr avg.
12.4x
13.3x
12.6x
16.1x
20.2x
17.6x
14.2x
18.1x
13.3x
17.8x
17.7x
13.7x
Trailing P/E Ratio
14.8x
18.0x
16.3x
19.8x
27.1x
23.1x
19.4x
22.7x
14.7x
28.3x
22.8x
17.3x
15-yr avg.
13.3x
15.1x
14.2x
17.6x
23.4x
20.8x
15.4x
19.8x
13.7x
19.6x
21.1x
15.0x
Dividend Yield
5.0%
1.7%
4.6%
3.2%
1.8%
3.5%
3.5%
2.5%
6.4%
3.8%
2.1%
3.8%
15-yr avg.
5.3%
2.0%
6.1%
3.9%
2.1%
3.8%
3.8%
2.7%
6.5%
5.7%
2.6%
4.0%
Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. All calculations are total returns in local currency not annualised. Growth and value indices are
sub-sets of the ASX 200 Index. Since market peak represents period 1 November 2007 to the end of the last quarter. Since market low is the period 10 March 2009 to
the end of the last quarter.
Guide to the Markets – Australia. Data as of 31 March 2017.
36
Tech
Weights
Cons.
Staples
Return
Real
Estate
| 36
P/E
Equities
Financials Materials
GTM – Australia
Div
Australia sector returns
Market volatility
GTM – Australia
| 37
Market pullbacks
ASX 200 price index
13 Oct 2014:
-8.4%
6,000
5,500
25 Jun 2013:
-10.6%
5 Jul 2010:
-15.6%
5,000
26 Sep 2011: 4 Jun 2012:
-10.0%
-17.0%
4,500
12 Feb 2016:
-10.4%
24 Aug 2015:
-12.2%
Equities
4,000
3,500
'09
Volatility
ASX 200 VIX*
50
45
40
35
'10
'11
Sep ’11:
Eurozone crisis
'12
Jun ’12:
Euro double dip
Jul ’10:
BP oil spill,
eurozone crisis,
Greek default
Jun ’13:
Taper Tantrum
30
25
20
'13
VIX
'08 peak
Average
Latest
'14
'15
Level
66.7
17.2
11.2
'16
Feb ’16:
Oil, U.S.
recession
fears,
China
Aug ’15:
Global slowdown
fears, China, Fed
uncertainty
Oct ’14:
Global slowdown
fears
15
10
'09
'10
'11
'12
'13
'14
'15
Source: J.P. Morgan Asset Management; (Top) Standard & Poor’s; (Bottom) CBOE. *The VIX measures market expectations of near-term volatility conveyed by the
S&P ASX 200 index option prices.
Guide to the Markets – Australia. Data as of 31 March 2017.
37
'16
Correlation and dispersion
GTM – Australia
Dispersion of equity sector returns
Average global stock-to-stock correlation
MSCI World, standard deviation of sector returns, 12MMA
6%
Rolling six-month average pairwise correlations
0.3
| 38
0.2
5%
Equities
0.1
4%
0.0
'00
'02
'04
'06
'08
'10
'12
'14
'16
Number of +/- 1% days on the ASX 200
3%
160
140
120
YTD:
4 days
100
2%
80
Average: 56
60
40
20
0
1%
'95
'97
'99
'01
'03
'05
'07
'09
'11
'13
'15
'00
'02
'04
'06
'08
'10
Source: J.P. Morgan Asset Management; (Left and bottom right) FactSet; (Left and top right) MSCI; (Top right) Bernstein Research; (Bottom right) Standard & Poor’s.
Dispersion is a measure of relative returns of each sector in the index, weighted by the size of each sector. The higher the dispersion the greater the difference
between the performance between the sectors in the index. Correlation is a measure of how similar the price changes of each stock are relative to other stocks in the
index. The lower the correlation, the less similar returns are between stocks in the index.
Guide to the Markets – Australia. Data as of 31 March 2017.
38
'12
'14
'16
Global style performance
GTM – Australia
Value vs. growth performance and rates
Cyclicals vs. defensives relative performance and rates*
MSCI World value / growth performance, 10-year U.S. Treasury yield
MSCI World cyclical / defensive performance, 10-year U.S. Treasury yield
10-year U.S. Treasury
Cyclicals vs. defensives
10-year U.S. Treasury
Value
outperforming
Cyclicals
outperforming
Growth
outperforming
Defensives
outperforming
Equities
Value vs. growth
Source: FactSet, MSCI, J.P. Morgan Asset Management.
Guide to the Markets – Australia. Data as of 31 March 2017.
39
| 39
Global investing
GTM – Australia
Share of global GDP
Share of global equity market
Canada, 3.2%
MSCI AC World Index
Based on purchasing power parity
Japan,
4.1%
Canada, 1.4%
Other DM, 2.9%
EM,
58.1%
Japan, 7.6%
UK, 5.9%
U.S., 53.2%
U.S.,
15.6%
EU,
16.8%
Equities
| 40
EM, 12.8%
Europe
ex-UK,
14.8%
Australia, 1.0%
Australia, 2.5%
Sector exposure
% of MSCI World Index and MSCI Australia Index
50%
44%
World
40%
Australia
30%
20%
18%
10%
15%
12%
1%
0%
Financials
I.T.
12%
3%
Consumer
Disc.
7%
Health Care
15%
11%
5%
Industrials
10% 8%
Consumer
Staples
7% 5%
Energy
5%
Materials
8%
3% 3%
3% 2%
Utilities
Telecoms
Source: FactSet, J.P. Morgan Asset Management; (Top left) IMF; (Top right and bottom) MSCI. Share of global market capitalisation is based on float-adjusted MSCI
data. Share of global GDP based on purchasing power parity (PPP) estimates for 2016. Percentages may not sum to 100% due to rounding.
Guide the Markets – Australia. Data as of 31 March 2017.
40
3%
Real Estate
U.S. S&P 500 at inflection points
GTM – Australia
| 41
S&P 500 Index
2,400
Characteristic
Index level
P/E ratio (fwd)
Dividend yield
10-year Tsy
2,200
Mar 2000
1,527
24.4x
1.1%
6.2%
Oct 2007
1,565
14.8x
1.7%
4.6%
Mar 2017
2,363
17.5x
1.9%
2.4%
2,000
Equities
1,800
1,600
1,400
9 Oct 2007:
P/E = 15.8x
1,565
24 Mar 2000:
P/E = 27.3x
1,527
Total return:
+116%
31 Mar 2017:
P/E = 17.5x
2,363
+121%
-47%
+314%
1,200
-55%
1,000
800
31 Dec 1996:
P/E = 16.0x
741
600
'96
'97
'98
9 Mar 2009:
P/E = 10.3x
677
9 Oct 2002:
P/E = 14.1x
777
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
Source: Compustat, FactSet, Standard & Poor’s, J.P. Morgan Asset Management. Forward price-to-earnings ratio is a bottom-up calculation based on the most recent
S&P 500 Index price, divided by consensus estimates for earnings in the next 12 months, and is provided by FactSet Market Aggregates. Returns calculations shown
in green as based on total return index.
Guide to the Markets – Australia. Data as of 31 March 2017.
41
'14
'15
'16
U.S. S&P 500 earnings and valuations
S&P 500 earnings and performance
GTM – Australia
| 42
S&P 500 forward P/E ratio
Index level, analyst estimates of the next 12 months of earnings
S&P 500 EPS
S&P 500 index level
31 Jan 1999:
24.3x
26x
22x
31 Mar 2017:
17.5x
18x
Average:
15.7x
Equities
14x
10x
'89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15
S&P 500 Shiller cyclically adjusted P/E
Adjusted using trailing 10-year average inflation-adjusted earnings
31 Mar 2017:
29.0x
Average:
25.4x
Source: FactSet, J.P. Morgan Asset Management; (Left and top right) Standard & Poor’s; (Bottom right) Robert Shiller.
Guide to the Markets – Australia. Data as of 31 March 2017.
42
Bear markets and subsequent bull runs
GTM – Australia
| 43
S&P 500 Composite declines from all-time highs
0%
-20%
Equities
43
9
6
10
3
-80%
Recession
2
1
1931
1936
1941
1946
1951
1956
1961
Market corrections
Crash of 1929 - excessive leverage, irrational exuberance
1937 Fed tightening - premature monetary tightening
Post WWII crash - post-war demobilisation, recession fears
Flash crash of 1962 - flash crash, Cuban Missile Crisis
Tech crash of 1970 - economic overheating, civil unrest
Stagflation - OPEC oil embargo
Volcker tightening - whip inflation now
1987 crash - programme trading, overheating markets
Tech bubble - extreme valuations, dotcom boom/bust
Global financial crisis - leverage/housing, Lehman collapse
Current cycle
Averages
1966
1971
Bear markets
Characteristics of bull and bear markets
1
2
3
4
5
6
7
8
9
10
20% market
decline*
8
5
-60%
-100%
1926
7
4
-40%
1976
1981
1986
1991
1996
2001
Macro environment
Mkt. Peak
Bear
return
Duration
Commodity
Recession
(months)
spike
Sep 1929
Mar 1937
May 1946
Dec 1961
Nov 1968
Jan 1973
Nov 1980
Aug 1987
Mar 2000
Oct 2007
-86%
-60
-30
-28
-36
-48
-27
-34
-49
-57
33
63
37
7
18
21
21
3
31
17
-
-45%
25
Aggressive Extreme
Fed
valuations
2006
2011
2016
Bull markets
Bull begin
date
Bull
return
Duration
(months)
Jul 1926
Mar 1935
Apr 1942
Oct 1960
Oct 1962
May 1970
Mar 1978
Aug 1982
Oct 1990
Oct 2002
Mar 2009
-
152%
129
158
39
103
74
62
229
417
101
249
156%
38
24
50
14
74
32
33
61
115
61
98
55
Source: FactSet, NBER, Robert Shiller, Standard & Poor’s, J.P. Morgan Asset Management. *A bear market represents a 20% or more decline from the previous
market high using a monthly frequency. Periods of recession are defined using the NBER’s business cycle dates. Commodity spike is defined by a significant upward
movement in oil prices. Periods of extreme valuation are defined as periods where the forward P/E multiple on the S&P 500 were approximately two standard
deviations above the long-run average. Aggressive Fed tightening is defined as Federal Reserve monetary tightening that was unexpected and/or significant in
magnitude.
Guide to the Markets – Australia. Data as of 31 March 2017.
Interest rates and equities
| 44
GTM – Australia
Correlations between weekly equity returns and interest rate movements
Rolling two-year correlation of weekly returns on the S&P 500 and the ASX 200 and the 10-year Treasury yield, 1972-2017
0.8
S&P 500
ASX 200
0.6
0.4
Positive
relationship
between yield
movements and
equity returns
Correlation
0.2
0.0
-0.2
-0.4
Negative
relationship
between yield
movements and
equity returns
-0.6
-0.8
0%
2%
4%
6%
8%
10%
12%
10-year Treasury yield
Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends.
Guide to the Markets – Australia. Data as of 31 March 2017.
44
14%
16%
18%
Europe: Market performance and valuation
MSCI Europe earnings and performance
GTM – Australia
| 45
MSCI Europe forward P/E ratio
Index level, analyst estimates of the next 12 months’ earnings
€10.5
MSCI Europe EPS
1,600
MSCI Europe index level
€10.0
1,500
€9.5
Average: 13.7x
1,400
€9.0
Equities
31 Mar 2017:
15.1x
1,300
€8.5
1,200
€8.0
Europe price-to-book relative to U.S.
1,100
MSCI Europe and MSCI USA
€7.5
1,000
+1.0 Std dev
€7.0
900
€6.5
Average: 0.74
800
€6.0
€5.5
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
700
Source: FactSet, J.P. Morgan Asset Management; (Left and top right) MSCI; (Bottom right) STOXX, Tullett Prebon.
Guide to the Markets – Australia. Data as of 31 March 2017.
45
-1.0 Std dev
31 Mar 2017:
0.61
Emerging markets valuations and returns
MSCI Emerging Markets Index: Price-to-book ratio
GTM – Australia
| 46
MSCI Emerging Markets: Price to book and returns
Price-to-book ratio and next five-year annualised % total return
50%
Current level
40%
+2.0 Std dev
Equities
30%
20%
10%
0%
Average: 1.78x
31 Mar 2017: 1.59x
-10%
-2.0 Std dev
-20%
0.75x 1.00x 1.25x 1.50x 1.75x 2.00x 2.25x 2.50x 2.75x 3.00x
Source: FactSet, MSCI, J.P. Morgan Asset Management.
Guide to the Markets – Australia. Data as of 31 March 2017.
46
Emerging markets equities: Relative performance
EM vs. DM growth and equity performance
| 47
EM equity relative performance and commodity prices
Monthly, consensus expectations for GDP growth in 12 months
5%
EM less DM GDP growth
Rebased 2003 = 100
160
MSCI EM / MSCI DM
140
EM growth & equity
outperformance
4%
GTM – Australia
120
3%
Bloomberg commodity index
Equities
100
80
2%
60
1%
EM equity relative performance and the USD
Rebased to 100 in 1993
250
MSCI EM / MSCI DM
200
EM growth & equity
underperformance
40
100
150
110
0%
MSCI EM / MSCI DM
-1%
20
'97
'99
'01
'03
'05
'07
'09
'11
'13
'15
100
0
120
USD REER
(inverted)*
50
0
'95
'93
'95
Source: FactSet, MSCI, J.P. Morgan Asset Management; (Left) J.P. Morgan Economic Research; (Top right) Bloomberg.
*REER is the real effective exchange rate.
Guide to the Markets – Australia. Data as of 31 March 2017.
47
90
'97
'99
'01
'03
'05
'07
'09
'11
'13
'15
130
Emerging markets: Flows, earnings and income
GTM – Australia
| 48
Total non-resident flows into EM assets
EM earnings expectations by region
USD billion
$50
Consensus EPS for next 12 months, local currency, rebased to 100 in 2006
EM Europe
Debt
EM Asia
Equity
$40
$30
EM Latin America
Equities
$20
$10
Number of companies yielding greater than 3%
$0
Constituents of the MSCI All Country World Index
400
315
300
-$10
-$20
200
-$30
100
-$40
Aug '14
123
50
41
Australia
Japan
0
Feb '15
Aug '15
Feb '16
Aug '16
Feb '17
Source: J.P. Morgan Asset Management; (Left) IIF; (Top and bottom right) FactSet, MSCI.
Guide to the Markets – Australia. Data as of 31 March 2017.
48
203
Emerging
markets
Europe
U.S.
Fixed income sector returns
GTM – Australia
Correl to Treasuries
Yield
Duration
U.S.
Fixed income sector returns
2011
Australia
-0.25
-0.34
13.5%
US TIPS
LCL 13.6%
AUD
Global HY
EM Debt
Portfolio
Fixed income
Australia IG
Global IG
Australia Gov
U.S. Treasuries
U.S. TIPS
49
5.92% 4.5 Yrs
| 49
2012
2013
2014
2015
2016
1Q17
Ten-yr Ann
17.8%
Global HY
18.8%
25.3%
Global HY
7.1%
16.0%
EM Debt
6.2%
14.5%
EM Debt
1.8%
15.3%
Global HY
15.9%
1.7%
Aus IG
1.7%
7.1%
Global HY
7.3%
5.82
7.4
0.26
0.03
13.4%
Aus Gov
13.4%
16.6%
EM Debt
18.0%
16.4%
Global IG
0.3%
14.8%
US Treas.
5.1%
13.4%
US Treas.
0.8%
10.1%
EM Debt
9.6%
1.2%
Aus Gov
1.2%
6.8%
EM Debt
6.7%
3.11
-
-
-
9.8%
US Treas.
9.8%
9.9%
Aus IG
9.9%
12.9%
US Treas.
-2.7%
13.3%
US TIPS
3.6%
10.9%
US TIPS
-1.4%
5.7%
Portfolio
5.6%
-1.3%
Portfolio
1.7%
6.5%
Aus IG
6.5%
3.07
3.4
0.37
0.68
9.3%
Portfolio
9.4%
9.8%
Global IG
11.2%
9.3%
Portfolio
-0.3%
12.8%
Global IG
3.1%
8.5%
Global IG
-3.6%
5.2%
US TIPS
4.7%
-1.5%
EM Debt
3.8%
5.9%
Portfolio
6.0%
2.67
6.6
0.25
-0.06
9.2%
EM Debt
9.2%
8.8%
Portfolio
9.6%
6.4%
EM Debt
-8.3%
11.6%
Portfolio
6.2%
7.8%
Global HY
-2.1%
4.8%
Global IG
4.3%
-2.2%
Global HY
2.8%
5.9%
Aus Gov
5.9%
2.33
5.8
0.73
0.99
9.1%
Aus IG
9.1%
5.6%
US TIPS
7.0%
6.1%
US TIPS
-8.6%
10.3%
Aus Gov
10.3%
7.6%
Portfolio
0.5%
3.8%
Aus IG
3.8%
-3.6%
Global IG
1.6%
4.4%
Global IG
4.3%
1.91
6.1
0.99
0.73
4.3%
Global IG
4.3%
5.5%
Aus Gov
5.5%
4.3%
Aus IG
4.3%
9.2%
Global HY
2.5%
3.0%
Aus IG
3.0%
2.5%
Aus Gov
2.5%
-3.9%
US TIPS
1.3%
4.2%
US Treas.
4.2%
0.43
5.7
0.57
0.29
2.6%
Global HY
3.1%
0.7%
US Treas.
2.0%
0.3%
Aus Gov
0.3%
8.1%
Aus IG
8.1%
2.3%
Aus Gov
2.3%
1.5%
US Treas.
1.0%
-4.4%
US Treas.
0.7%
4.0%
US TIPS
3.9%
Source: Barclays, Bloomberg, BoA/ML, FactSet, J.P. Morgan Asset Management. Aus Gov: AusBond Treasury (0+Y); U.S. Treas.: Barclays US Aggregate
Government – Treasury; Global IG: Barclays Global Aggregate – Corporate – Investment Grade; Aus IG: Blooberg AusBond Credit (0+Y); Global HY: BoA/ML Global
High Yield; EM Debt: J.P. Morgan EMBI+; U.S. TIPS: Bloomberg Barclays US Treasury Inflation Protected (TIPS). Hypothetical portfolio (for illustrative purposes only
and should not be taken as a recommendation): 25% Aus Gov, 15% Aus IG, 10% Global IG, 15% Global HY; EM Debt 10%, US Treas. 15%, US TIPS 10%.
Correlation to U.S. Treasuries and Australian Treasuries are to the Barclays US Treasury (10Y) and Bloomberg AusBond Treasury (7-10Y), respectively, for the past
10 years.
Guide to the Markets – Australia. Data as of 31 March 2017.
Policy rates and market expectations
Central bank key policy rates
Target rates
RBA
U.S. Fed
ECB
BoJ
GTM – Australia
| 50
Market expectations for target policy rate
Policy rate
Deposit rate
1.50%
1.00%
0.00%
-0.10%
1.50%
0.75%
-0.40%
-0.10%
2.0%
1.84%
1.8%
U.S.
1.6%
1.46%
1.4%
1.2%
1.0%
0.98%
0.74%
Fixed income
0.8%
0.55%
0.6%
0.37%
0.4%
0.2%
0.05%
0.05%
0.0%
-0.2%
Japan
-0.18%
0.08%
0.01%
-0.32%
-0.4%
Jun '17
Eurozone
Dec '17
Source: J.P. Morgan Asset Management; (Left) Bank of Japan, European Central Bank, FactSet, RBA, U.S. Federal Reserve; (Right) Bloomberg.
Guide to the Markets – Australia. Data as of 31 March 2017.
50
UK
Jun '18
Dec '18
Jun '19
Central bank balance sheets and their impact
Central bank balance sheets
16%
| 51
ECB’s asset purchase programme
Share of global GDP
20%
18%
GTM – Australia
European Central Bank
Percent of available bonds owned and planned purchases**
30%
6-month forecast*
6 months ago
Current
25%
Bank of Japan
20%
U.S. Fed
15%
Projections*
10%
14%
5%
0%
12%
Asset-backed
Bonds
Fixed income
10%
Bank of Japan’s asset purchases
Percent of market owned***
8%
JGBs
60%
ETF
50%
6%
40%
4%
30%
20%
2%
10%
0%
0%
'06
51
Covered Bonds Corporate Bonds Public Sector
Bonds
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
'17
'10
'11
'12
'13
'14
Source: J.P. Morgan Asset Management; (Left) FactSet, Federal Reserve System, IMF; (Left and top right) European Central Bank; (Left and bottom right) Bank of
Japan; (Bottom right) Bloomberg, Investment Trusts Association of Japan. *Balance sheet forecasts are based on central banks’ stated economic intentions, i.e.
assumptions are that the BoJ will expand its balance sheet at an annual rate of JPY 80 trillion, the ECB will expand its balance sheet at a monthly rate of EUR 80
billion until March 2017 and reduced to EUR60 billion until December 2017 and the Fed will keep its balance sheet at its current level. Nominal GDP growth forecasts
provided by IMF World Economic Outlook. **6-month projection assumes purchases continue at a pace of EUR 80 Billion through March 2017 and then at a pace of
EUR 60 billion and the outstanding supply of bonds holds constant. ***ETF and J-REITs purchase data as of 31/12/16, JGBs data as of 31/12/16 and ETF holdings
data as of 30/11/16. Guide to the Markets – Australia. Data as of 31 March 2017.
'15
'16
G3 bond yields
GTM – Australia
| 52
10-year bond yields
Fall of Berlin
Wall 1989
UK
U.S.
Black Friday
1987
Eurozone
Britain leaves ERM
1992
Fixed income
Asian currency crisis
1997
Dot com bubble
Feb 2000
Oil shock
1981
Source: FactSet, Tullett Prebon, J.P. Morgan Asset Management.
Guide to the Markets – Australia. Data as of 31 March 2017.
52
Fed QE3
2012
9/11 attacks
2001
U.S.
election
2016
Fed QE2
2010
Fed QE
2008
ECB QE
2015
Australian interest rates and inflation
GTM – Australia
| 53
Nominal and real 10-year Treasury yields
20%
30 Jun 1982:
16.40%
Nominal 10-year
Treasury yield
15%
Avg. 19702016
31 Mar
2017
Nominal yield
8.30%
2.69%
Real yield*
2.83%
1.19%
10%
31 Mar 2017:
2.69%
Fixed income
5%
Real 10-year
Treasury yield
0%
31 Mar 2017:
1.19%
-5%
-10%
'70
'75
'80
'85
'90
'95
'00
'05
Source: Australian Bureau of Statistics, FactSet, Tullett Prebon, J.P. Morgan Asset Management. *December real yield calculated using 4Q16 inflation.
Guide to the Markets – Australia. Data as of 31 March 2017.
53
'10
'15
The Australian yield curve
GTM – Australia
| 54
Yield curve
4.0%
3.6%
2.7%
2.8%
2.4%
2.0%
1.6%
Fixed income
1.2%
3.9%
31 Mar 2017
3.2%
2.3%
2.0%
2.2%
3m 1y
1.7%
1.9%
2y 3y
31 Mar 2016
2.5%
1.9% 1.9%
1.6%
1.8%
3.0%
2.5%
2.3%
2.1%
5y
7y
10y
30y
Yield curve steepness
Correlation of government bonds*
10-year minus 2-year Australian Treasuries, basis points
Correlation between U.S. and Australian Treasury yields
0.8
10-year bonds
0.7
31 Mar 2017:
94bps
Average: 49bps
0.6
0.5
0.4
0.3
2-year bonds
0.2
0.1
'11
'12
Source: FactSet, Tullett Prebon, J.P. Morgan Asset Management. *52-week rolling correlations of the weekly change in bond yields.
Guide to the Markets – Australia. Data as of 31 March 2017.
54
'13
'14
'15
'16
'17
The U.S. Federal Reserve outlook
GTM – Australia
Federal funds rate expectations
Maturity profile of securities held outright
FOMC and market expectations for the fed funds rate
Value of assets by maturity schedule, USD billions
$500
7%
Federal funds rate
FOMC year-end estimates
Market expectations on 31 March 2017
6%
Agency Debt
$400
MBS
$300
FOMC long-run projection
| 55
Treasuries
$200
5%
$100
$0
'17
4%
Fixed income
3.00%
3%
3.00%
2.10%
2%
1.97%
1.40%
1%
0%
'01
'03
'05
'07
'09
'11
'13
'15
'17
'32
'37
'42
Federal Reserve holdings
Billions USD
Mortgagebacked
securities,
$1,775
U.S.
Treasuries,
$2,434
Long
'19 run
Source: Federal Reserve, J.P. Morgan Asset Management; (Left) Bloomberg, FactSet.
Guide to the Markets – Australia. Data as of 31 March 2017.
55
'27
1.68%
1.26%
'99
'22
Agency
debt, $13
'47
Historical impact of U.S. Federal Reserve tightening
GTM – Australia
| 56
Federal funds rate
Target rate*, highlighted areas denote periods of rate hikes
7 hikes
14 months
10 hikes
11 months
7 hikes
12 months
6 hikes
11 months
17 hikes
24 months
3 hikes
16 months
Fixed income
5-cycle average: 9 hikes, 14 months
56
Market reaction during previous rate hiking cycles
May 1983 –
July 1984
March 1988 –
February 1989
February 1994 –
February 1995
June 1999 –
May 2000
June 2004 –
June 2006
Average of past five
rate hiking cycles
Cycle beginning
December 2015
Federal funds rate
313
325
300
175
425
308
75
2-year Treasury
311
227
305
121
238
240
25
10-year Treasury
274
91
185
50
52
130
10
S&P 500 return
-9.6%
6.8%
-2.1%
8.5%
12.0%
3.1%
14.0%
U.S. dollar
10.4%
1.7%
-4.7%
3.4%
-5.8%
1.0%
-0.3%
Yield change (bps)
Source: FactSet, U.S. Federal Reserve, Standard & Poor’s, J.P. Morgan Asset Management.
S&P 500 returns are price returns and do not include reinvestment of dividends. Averages do not include the current cycle. *Between 1979 and 1982, the FOMC
changed its approach to monetary policy, focusing on the money supply, rather than the federal funds rate. In autumn of 1982, however, the U.S. Federal Reserve
shifted back to its approach of targeting the “price” rather the “quantity” of money. Because the federal funds rate was not the FOMC’s key policy tool, we exclude
increases in the federal funds rate between 1979 – 1982 in our analysis of rate hike cycles.
Guide to the Markets – Australia. Data as of 31 March 2017.
Fixed income interest rate risk
GTM – Australia
| 57
Current and historical yields for selected indices
Last 10 years*
How to interpret
this chart
20%
Max
15%
Average
10%
Current
5%
Min
0%
Treasury:
Australia
1-3 years
5-7 years
10+ years
Investment
grade credit
High yield
EMD USD
sovereign
EMD USD
corporate
EMD LC
sovereign
Fixed income
Illustration of the impact a 1% rise in local interest rates may have on selected indices
Assumes a parallel shift in the yield curve and spreads are maintained
3%
Price return
0%
Total return
-3%
-6%
-9%
-12%
Treasury:
Australia
57
1-3 years
5-7 years
10+ years
Investment
grade credit
High yield
EMD USD
sovereign
EMD USD
corporate
EMD LC
sovereign
Source: Barclays, FactSet, J.P. Morgan Asset Management. *Historical spread analysis is based on last 10 years of data, with the exception of EMD LC sovereign,
which is based on seven years due to data availability. Fixed income sectors shown are provided by Barclays and are represented by: Treasury Australia; Bloomberg
AusBond Treasury indices; Investment-grade credit: Barclays Global Aggregate – Corporates; High yield: Barclays Global High Yield; EMD USD sovereign: Barclays
Emerging Markets – Sovereign; EMD USD corporate: Barclays Emerging Markets – Corporate; EMD LC sovereign: Barclays Emerging Markets Local Currency
Government. For illustrative purposes only. Change in bond price is calculated using both duration and convexity.
Guide to the Markets – Australia. Data as of 31 March 2017.
Global investment-grade bonds
GTM – Australia
Global investment-grade bonds
U.S. IG leverage measures
Option-adjusted spreads, basis points
600
Leverage* and interest coverage** ratio
3.2x
Leverage
2.8x
U.S.
Australia
Europe
500
| 58
16x
Interest coverage
14x
2.4x
12x
2.0x
10x
1.6x
8x
1.2x
400
6x
0.8x
'00
Fixed income
300
'02
'04
'06
'08
'10
'12
'14
'16
U.S. IG issuance
Gross issuance, USD trillion
$1.4
Non-financials
Financials
$1.2
200
YTD:
$363bn
$1.0
$0.8
$0.6
100
$0.4
$0.2
0
'99
'01
'03
'05
'07
'09
'11
'13
'15
$0.0
'00
'02
'04
'06
'08
Source: J.P. Morgan Asset Management; (Left) Barclays, BofA Merrill Lynch, FactSet; (Top and bottom right) J.P. Morgan Securities.
*Leverage is net debt to earnings before interest, tax, depreciation and amortisation (EBITDA). **Interest coverage is EBITDA over interest expense.
Guide to the Markets – Australia. Data as of 31 March 2017.
58
'10
'12
'14
'16
U.S. high yield bonds
GTM – Australia
| 59
U.S. high yield spread and default rate
20%
Average since
1986
Asset class
15%
2000bps
Latest
HY spread (RHS)
578
456
HY default (LHS)
3.9%
1.9%
1500bps
10%
1000bps
5%
500bps
0bps
0%
Fixed income
'94
'96
'98
'00
'02
'04
'06
'08
'10
'12
U.S. high yield leverage measures
U.S. high yield leverage measures
Yield to worst
Net leverage* and interest coverage ratio**
5.0x
U.S. high yield - energy
U.S. high yield
'14
'16
Net leverage
Interest
coverage ratio
4.5x
European high yield
4.0x
3.5x
3.0x
'11
59
'12
'13
'14
Source: J.P. Morgan Asset Management; (Top and bottom right) J.P. Morgan Economic Research; (Bottom left) Barclays, FactSet. Default rates are defined as the par
value percentage of the total market trading at or below 50% of par value and include any Chapter 11 filing, prepackaged filing or missed interest payments. Spreads
indicated are benchmark yield to worst less comparable maturity Treasury yields. Yield to worst is defined as the lowest potential yield that can be received on a bond
without the issue actually defaulting and reflects the possibility of the bond being called at an unfavourable time for the holder. *Net leverage is net debt divided by
adjusted earnings before interest, tax, depreciation and amortization (EBITDA). **Interest coverage ratio is EBITDA over interest expense.
Guide to the Markets – Australia. Data as of 31 March 2017.
'15
European high yield bonds
GTM – Australia
European high yield: Spread to world and default rates*
Asset class
20%
HY spread (RHS)
627
351
HY default (LHS)
4.6%
0.6%
Default rate 2002:
34%
Average
| 60
Latest
2,500bps
2,000bps
15%
1,500bps
10%
1,000bps
5%
500bps
0bps
0%
Fixed income
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
European high yield issuance by credit rating
High yield sector weights
EUR billions
€ 90
100%
€ 60
'13
'14
'15
'17
% of index**
Unrated
CCC
B
BB
YTD:
€21.5bn
Other 21%
80%
60%
40%
€ 30
Other 12%
Energy 9%
Energy 19%
Industrial 17%
Industrial 11%
Telecom 16%
Telecom 15%
Financial 12%
Financial 7%
20%
Consumer 27%
€0
Consumer 34%
0%
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17
U.S. HY
Source: FactSet, J.P. Morgan Asset Management; (Top) BofA/Merrill Lynch, Credit Suisse; (Bottom left) J.P. Morgan Economic Research; (Bottom right) Barclays.
*Spread to worst is BofA/Merrill Lynch Euro Non-Financial High Yield Constrained. Default rated are reported by JPMAM’s Quant Team. **U.S. HY is the J.P. Morgan
Domestic HY index and Euro HY is the J.P. Morgan Euro HY index. Percentages may not sum to 100% due to rounding.
Guide to the Markets – Australia. Data as of 31 March 2017.
60
'16
Euro HY
Emerging market debt
GTM – Australia
Emerging market yields
Headline inflation
Yield to worst
Year-over-year change, LatAm and EM Asia aggregates
10%
13%
31 Mar 17 Average
Sovereign (LCL)
6.6%
6.8%
8%
Sovereign (USD)
5.5%
Corporate (USD)
4.7%
6.1%
6.1%
6%
11%
| 61
EM LatAm
EM Asia
4%
2%
0%
9%
'01
'03
'05
'07
'09
'11
'13
'15
Fixed income
Emerging market debt flows
USD million
$21,000
7%
$14,000
5%
$7,000
Sovereign (USD)
Corporate (USD)
Sovereign (LCL)
Blend
Total
$0
3%
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
-$7,000
Jan '16
Mar '16
Jun '16
Sep '16
Source: J.P. Morgan Economics Research, J.P. Morgan Asset Management; (Left) FactSet.
EM sovereign (local currency) is the J.P. Morgan GBI-EM; EM sovereign (USD) is the J.P. Morgan EMBI+; EM corporate (USD) is the J.P. Morgan CEMBI.
Guide to the Markets – Australia. Data as of 31 March 2017.
61
Dec '16
Feb '17
'17
Oil consumption and production
GTM – Australia
Change in the production and consumption of oil
| 62
Price of oil
Production, consumption and inventories, millions of barrels per day
World production
100
World consumption
Forecast
96
Brent crude, nominal prices, USD / barrel
2.5
2.0
Jul 2008:
$145.65
1.5
Jun 2014:
$115.60
1.0
92
0.5
88
0.0
84
-0.5
Implied stock change
80
'12
'13
'14
'15
'16
'17
-1.0
'18
U.S. crude oil inventories and rig count
Millions barrels
Other
asset classes
Inventories (incl. SPR)
Number of active rigs
Active rigs
Dec 2008:
$34.27
Source: J.P. Morgan Asset Management; (Top and bottom left) EIA; (Bottom left) Baker Hughes; (Right) FactSet.
U.S. crude oil inventories include the Strategic Petroleum Reserves (SPR). Active rig count includes both natural gas and oil rigs. Forecasts are the December 2016
EIA Short-Term Energy Outlook and start in 2016.
Guide to the Markets – Australia. Data as of 31 March 2017.
62
31 Mar 2017:
$53.47
Commodities
GTM – Australia
Commodity prices
Chinese iron ore port inventories
RBA commodity indices
Attributable to each country, 10,000 tonnes
14,000
Index weights
Bulk commodities
Rural commodities
Base metals
Other resources*
Index
2016
54.4%
13.4%
5.3%
26.9%
100.0%
| 63
12,000
10,000
8,000
Other
6,000
Australia
4,000
2,000
Brazil
0
'14
'15
'16
'17
China steel production growth
Change year-over-year
50%
40%
Other
asset classes
30%
20%
30 Dec 2016:
3.2%
10%
0%
-10%
-20%
'97
'99
'01
'03
Source: J.P. Morgan Asset Management; (Left) FactSet, RBA; (Top right) Bloomberg; (Bottom right) National Bureau of Statistics of China.
*Not plotted on chart.
Guide to the Markets – Australia. Data as of 31 March 2017.
63
'05
'07
'09
'11
'13
'15
Australian dollar
GTM – Australia
| 64
AUD trade-weighted index
$A REER
10-year moving average
140
130
120
110
100
90
80
70
60
50
+1.5 std dev
-1.5 std dev
'80
'84
'88
'92
Iron ore price and FX
'96
'00
'04
'08
'12
Short rates (bps) and FX
USD per tonne
Other
asset classes
USD per AUD
Iron ore price
USD per AUD
2-year U.S. / Australia
Treasury spread (bps)
Source: (All charts) FactSet, J.P. Morgan Asset Management; (Bottom left) Commodity Research Bureau; (Bottom right) Tullett Prebon.
Guide to the Markets – Australia. Data as of 31 March 2017.
64
'16
Global currency trends
GTM – Australia
Trends in key currencies
EM currencies vs. U.S. dollar
Real effective exchange rate, rebased to 100 as of Dec 2015
% from fair value*, relative to U.S. dollar
10%
UK
+1 std. dev.
0%
Japan
U.S.
Euro
China
| 65
-10%
Average
-20%
-1 std. dev.
-30%
'11
'12
'13
'14
'15
'16
U.S. dollar historical context
Broad real effective exchange rate (REER)
130
Other
asset classes
120
1985: Plaza
Accord
1978-1985:
+52.7%
110
1973-1978:
-21.8%
100
1987: Louvre
Accord
1985-1988:
-29.5%
90
Mar 2017
95.8
101.2
2002-2011:
-28.6%
1995-2002:
+34.2%
'73
'75
'77
'79
'81
'83
'85
'87
'89
'91
'93
'95
'97
'99
'01
'03
'05
'07
'09
Source: (All charts) J.P Morgan Asset Management; (Top left and bottom) FactSet; (Bottom) U.S. Federal Reserve.
*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.
Guide to the Markets – Australia. Data as of 31 March 2017.
65
2011-2017:
+26.2%
1988-1995:
-7.1%
80
70
Average
U.S. dollar index
'11
'13
'15
Correlations
GTM – Australia
| 66
Ten-year correlations
ASX 200 S&P 500
ASX 200
S&P 500
MSCI Europe
MSCI EM
Aus Govt Bonds
Global Agg
Global HY
Other
asset classes
EM debt
REITs
Hedge Funds
Cmdty
MSCI
Europe
MSCI EM
Aus Govt
Bonds
Global
Agg
Global HY EM debt
REITs
Hedge
Funds
Cmdty
1.00
0.85
0.93
0.84
-0.53
0.05
0.74
-0.02
0.69
0.82
0.47
0.64
1.00
0.91
0.80
-0.57
0.06
0.75
-0.09
0.75
0.79
0.54
0.94
0.60
1.00
0.82
-0.55
0.06
0.75
0.00
0.75
0.80
0.46
0.56
0.73
0.65
1.00
-0.62
0.23
0.87
-0.02
0.58
0.87
0.63
0.09
-0.07
-0.06
0.04
1.00
0.27
-0.57
0.55
-0.21
-0.69
-0.54
-0.27
-0.05
-0.34
0.20
0.59
1.00
0.27
0.49
0.02
0.01
0.26
0.22
0.37
0.27
0.69
0.04
0.56
1.00
-0.01
0.66
0.85
0.67
0.25
0.38
0.16
0.62
0.65
0.80
0.65
1.00
0.16
-0.31
-0.34
0.74
0.33
0.58
0.23
0.63
-0.05
-0.12
0.39
1.00
0.58
0.31
0.71
0.25
0.78
0.50
0.11
-0.36
0.10
0.03
-0.36
1.00
0.66
0.03
0.18
0.08
0.32
-0.22
0.22
0.73
0.23
-0.05
0.11
1.00
Three-year correlations
Source: Barclays, Bloomberg, Credit Suisse, FactSet, FTSE, MSCI, Standard & Poor’s, J.P. Morgan Asset Management. EMD (USD): JP Morgan GBI-EM Global
Diversified Composite; Aus Govt Bonds: Bloomberg AusBond Govt (0+Y); Global High Yield: Barclays Global High Yield; REITS: FTSE EPRA/NAREIT Developed;
Hedge funds: Credit Suisse / Tremont Hedge Fund Index Multi-Strategy - Hedge Fund Index; Commodities: Bloomberg Commodity Index. All correlation coefficients
based on quarterly total return data.
Guide to the Markets – Australia. Data as of 31 March 2017.
66
Investing
principles
Asset class returns (AUD)
67
GTM – Australia
| 67
15-years '02 - '16
Ann.
Vol.
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
1Q17
Aus. FI
8.8%
EM
equity
16.8%
REITS
34.4%
EM
equity
43.8%
REITS
33.2%
EM
equity
25.5%
Global
FI
32.0%
EM
equity
38.8%
Aus. FI
6.0%
Aus. FI
11.4%
REITS
32.2%
DM
equity
47.8%
REITS
27.3%
REITS
14.0%
REITS
13.9%
EM
equity
5.8%
Aus.
Equity
8.0%
REITS
16.1%
Global
FI
5.9%
Aus.
Equity
14.6%
Aus.
Equity
28.0%
Aus.
Equity
22.8%
Aus.
Equity
24.2%
Aus.
Equity
16.1%
Aus. FI
14.9%
Aus.
Equity
37.0%
Cash
4.7%
Global
FI
5.6%
Aus.
Equity
20.3%
Aus.
Equity
20.2%
DM
equity
15.3%
DM
equity
12.1%
EM
equity
12.1%
Aus.
Equity
4.8%
EM
equity
7.3%
EM
equity
14.6%
Cash
4.8%
REITS
8.8%
EM
equity
21.1%
DM
equity
17.6%
EM
equity
23.4%
Cash
6.8%
Cash
7.6%
Port.
12.6%
EM
equity
4.6%
Cash
5.0%
EM
equity
17.1%
Port.
16.2%
Port.
10.8%
Global
FI
8.9%
Aus.
Equity
11.8%
Port.
1.9%
Port.
6.7%
Aus.
Equity
12.9%
REITS
3.8%
Port.
5.6%
Port.
16.7%
Port.
16.2%
Port.
14.6%
Port.
6.6%
Port.
-15.6%
Cash
3.5%
Port.
1.7%
Port.
-1.8%
DM
equity
15.1%
EM
equity
13.4%
Global
FI
10.0%
Port.
5.1%
DM
equity
8.7%
Aus. FI
1.2%
Aus. FI
6.0%
DM
equity
12.0%
Port.
-4.3%
Cash
4.9%
DM
equity
10.8%
REITS
15.5%
DM
equity
12.3%
Aus. FI
3.5%
DM
equity
-24.9%
REITS
3.3%
Aus.
Equity
1.6%
REITS
-2.0%
Port.
14.7%
Global
FI
13.0%
Aus. FI
9.8%
Aus. FI
2.6%
Port.
7.9%
DM
equity
1.1%
REITS
5.7%
Port.
9.4%
Aus.
Equity
-8.8%
Aus. FI
3.0%
Aus. FI
7.0%
Aus. FI
5.8%
Cash
6.0%
DM
equity
-1.6%
Aus.
Equity
-38.4%
Aus. FI
1.7%
REITS
0.4%
DM
equity
-5.0%
Aus. FI
7.7%
REITS
6.6%
EM
equity
7.3%
Aus.
Equity
2.6%
Aus. FI
2.9%
Cash
0.4%
Cash
4.6%
Global
FI
5.7%
EM
equity
-14.5%
DM
equity
-0.0%
Cash
5.6%
Cash
5.7%
Aus. FI
3.1%
Global
FI
-1.7%
EM
equity
-41.0%
DM
equity
1.4%
DM
equity
-1.4%
Aus.
Equity
-10.5%
Cash
4.0%
Cash
2.9%
Aus.
Equity
5.6%
Cash
2.3%
Global
FI
2.6%
REITS
-0.5%
DM
equity
4.0%
Aus. FI
2.8%
DM
equity
-26.9%
Global
FI
-15.9%
Global
FI
5.0%
Global
FI
2.1%
Global
FI
-0.8%
REITS
-7.7%
REITS
-55.2%
Global
FI
-17.1%
Global
FI
-7.4%
EM
equity
-18.2%
Global
FI
3.0%
Aus. FI
2.0%
Cash
2.7%
EM
equity
-3.9%
Cash
2.1%
Global
FI
-3.4%
Global
FI
2.4%
Cash
0.5%
Source: Bloomberg, FactSet, FTSE, J.P. Morgan, MSCI, Standard & Poor's, J.P. Morgan Asset Management. Annualised return (Ann.) and volatility (Vol.) covers the
period 2002 to 2016. EME: MSCI Emerging Markets; Australian FI: Bloomberg AusBond Composite (0+Y); Global FI: Barclays Global Aggregate; DM Equities: MSCI
World; Australian equities: ASX 200 Index; REITs: FTSE EPRA/NAREIT Australia; Cash: Bloomberg AusBond Bank Bill Index. Port. is hypothetical portfolio (for
illustration purposes only and should not be taken as a recommendation): 15% DM equities; 10% EM equities; 25% Australian equities; 25% Australian FI; 10% Global
FI; 5% Cash and 10% REITs. Returns are unhedged, total return, in Australian dollars.
Guide to the Markets – Australia. Data as of 31 March 2017.
Cash accounts
GTM – Australia
Term deposit and policy rate
| 68
Annual income generated by AUD100,000 investment in a
one-year term deposit
3-year term deposit*
Term deposit
Cash rate
28 Feb 2017:
2.95%
$14,000
$12,000
$10,000
31 Mar 2017:
1.50%
$8,000
2008: $6,442
Term deposit held with banks
AUD billions
$700
Feb 2017:
$602bn
$6,000
$600
Feb 2017:
$2,300
$4,000
$500
$400
Investing
principles
$300
$2,000
$200
$100
$0
$0
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16
Source: (All charts) FactSet, RBA, J.P. Morgan Asset Management. *Annual term deposit rate is average rate for a $10,000 term deposit at a retail bank.
Guide to the Markets – Australia. Data as of 31 March 2017.
68
Annual returns and intra-year declines
GTM – Australia
| 69
ASX 200 index intra-year declines vs. calendar year returns
Despite average intra-year drops of 14.3% (median 11.7%), annual returns are positive in 17 out of 23 years*
40%
Calendar year return
Intra-year decline
31%
30%
23%
20%
16%
10%
10%
18%
15%
8%
19%
15%
12%
10%
15%
YTD
7%
6%
7%
3%
0%
-12%
-10%
-20%
-11%
-17%
-7%
-10%
-16%
-12%
-16%
-2%
-3%
-3%
-5%
-10%
-10%
-10%
-12%
-17%
-17%
-16%
-21%
-15%
-11%
-9%
-3%
-10%
-18%
-22%
-30%
-40%
Investing
principles
-41%
-50%
-47%
-60%
'94
'96
'98
'00
'02
'04
'06
'08
'10
'12
Source: FactSet, MSCI, J.P. Morgan Asset Management. Returns are based on price only and exclude dividends. Intra-year decline refers to the largest market fall
from peak to trough in a short period of time during the calendar year. *Returns are shown for calendar years from 1994 to 2016.
Guide to the Markets – Australia. Data as of 31 March 2017.
69
4%
1%
-12%
'14
'16
The power of compounding
GTM – Australia
| 70
$5,000 invested annually with 5% growth per year
One-off $5,000 investment with/without income reinvested
AUD
AUD, MSCI Australia returns
$700,000
$116,343
Starting at age 25
$639,199
Without dividends reinvested
Starting at age 35
$600,000
With dividends reinvested
$500,000
$400,000
$353,804
$300,000
$200,000
$32,123
Investing
principles
$100,000
$0
25
30
35
40
45
Age
50
55
Source: (All charts) J.P. Morgan Asset Management; (Right) FactSet, MSCI.
Guide to the Markets – Australia. Data as of 31 March 2017.
70
60
65
Life expectancy and pension shortfall
Probability of reaching ages 80 and 90
Perceived retirement shortfall by country
Persons aged 65, by gender, and combined by couple
Years
25
100%
93%
Expected savings shortfall
Savings expected to last
Men
11
Women
Couple – at least one
lives to specified age
78%
80%
| 71
GTM – Australia
20
7
8
66%
12
10
10
10
8
8
8
15
5
60%
6
50%
22%
9
7
11
11
12
9
10
10
9
9
UAE
10
Mexico
5
Australia
14
India
35%
Canada
40%
China
10
90 years
Source: (All charts) ABS Life Tables, “The Future of Retirement: Life after work” study by HSBC. J.P. Morgan Asset Management. Figures represent the expected
portion of retirement that will not be covered by retirement savings based on survey data.
Guide to the Markets – Australia. Data as of 31 March 2017.
71
Brazil
U.S.
Singapore
80 years
France
0%
UK
0
Average
Investing
principles
20%
Time, diversification and the volatility of returns
GTM – Australia
Range of equity, bond and blended total returns
Annual total returns, 1950-2016
60%
Large cap equity
50%
40%
Bonds
50/50 portfolio
47%
43%
30%
33%
28%
20%
23%
21%
19%
10%
16%
16%
17%
12%
1%
0%
-3%
-8%
-10%
-2%
7%
-1%
1%
2%
14%
5%
1%
-15%
-20%
-30%
Investing
principles
-39%
-40%
-50%
1-yr rolling
5-yr rolling
10-yr rolling
Source: Barclays, FactSet, U.S. Federal Reserve, Robert Shiller, Strategas/Ibbotson, J.P. Morgan Asset Management. Returns shown are based on calendar year
returns from 1950 to 2016. Large cap equity represents the S&P 500 Shiller Composite and bonds represents the Strategas/Ibbotson for periods from 1950 to 1980
and the Barclays Aggregate after index inception in 1980.
Guide to the Markets – Australia. Data as of 31 March 2017.
72
20-yr rolling
| 72
Asset markets in coming decade
GTM – Australia
| 73
Past and expected returns
% per year, AUD hedged returns
10%
Expected return in next decade
Return over past decade
8%
6%
4%
2%
0%
-2%
-4%
Investing
principles
-6%
Source: 2017 Long-term capital market assumptions, J.P. Morgan Multi-Asset Solutions, J.P. Morgan Asset Management, October 2016. Returns are hedged to AUD.
Guide to the Markets – Australia. Data as of 31 March 2017.
73
J.P. Morgan Asset Management – Index Definitions
All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees
or expenses.
The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index
includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P
500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an
ideal proxy for the total market. An investor cannot invest directly in an index.
The S&P 400 Mid Cap Index is representative of 400 stocks in the mid-range sector of the domestic stock market,
representing all major industries.
The Russell 3000 Index® measures the performance of the 3,000 largest U.S. companies based on total market
capitalization.
The Russell 1000 Index ® measures the performance of the 1,000 largest companies in the Russell 3000.
The Russell 1000 Growth Index ® measures the performance of those Russell 1000 companies with higher price-to-book
ratios and higher forecasted growth values.
The Russell 1000 Value Index ® measures the performance of those Russell 1000 companies with lower price-to-book
ratios and lower forecasted growth values.
The Russell Midcap Index ® measures the performance of the 800 smallest companies in the Russell 1000 Index.
The Russell Midcap Growth Index ® measures the performance of those Russell Midcap companies with higher price-tobook ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth index.
The Russell Midcap Value Index ® measures the performance of those Russell Midcap companies with lower price-tobook ratios and lower forecasted growth values. The stocks are also members of the Russell 1000 Value index.
The Russell 2000 Index ® measures the performance of the 2,000 smallest companies in the Russell 3000 Index.
The Russell 2000 Growth Index ® measures the performance of those Russell 2000 companies with higher price-to-book
ratios and higher forecasted growth values.
The Russell 2000 Value Index ® measures the performance of those Russell 2000 companies with lower price-to-book
ratios and lower forecasted growth values.
The Russell Top 200 Index ® measures the performance of the largest cap segment of the U.S. equity universe. It includes
approximately 200 of the largest securities based on a combination of their market cap and current index membership and
represents approximately 68% of the U.S. market.
The MSCI® EAFE (Europe, Australia, Far East) Net Index is recognized as the pre-eminent benchmark in the United States
to measure international equity performance. It comprises 21 MSCI country indexes, representing the developed markets
outside of North America.
The MSCI Emerging Markets IndexSM is a free float-adjusted market capitalization index that is designed to measure equity
market performance in the global emerging markets. As of June 2007, the MSCI Emerging Markets Index consisted of the
following 25 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary,
India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South
Africa, Taiwan, Thailand, and Turkey.
The MSCI ACWI (All Country World Index) Index is a free float-adjusted market capitalization weighted index that is
designed to measure the equity market performance of developed and emerging markets. As of June 2009 the MSCI ACWI
consisted of 45 country indices comprising 23 developed and 22 emerging market country indices.
The MSCI Small Cap IndicesSM target 40% of the eligible Small Cap universe within each industry group, within each
country. MSCI defines the Small Cap universe as all listed securities that have a market capitalization in the range of
USD200-1,500 million.
The MSCI Value and Growth IndicesSM cover the full range of developed, emerging and All Country MSCI Equity indexes.
As of the close of May 30, 2003, MSCI implemented an enhanced methodology for the MSCI Global Value and Growth
Indices, adopting a two dimensional framework for style segmentation in which value and growth securities are categorized
using different attributes - three for value and five for growth including forward-looking variables. The objective of the index
design is to divide constituents of an underlying MSCI Standard Country Index into a value index and a growth index, each
targeting 50% of the free-float adjusted market capitalization of the underlying country index. Country Value/Growth indices
are then aggregated into regional Value/Growth indices. Prior to May 30, 2003, the indices used Price/Book Value (P/BV)
ratios to divide the standard MSCI country indices into value and growth indices. All securities were classified as either
"value" securities (low P/BV securities) or "growth" securities (high P/BV securities), relative to each MSCI country index.
The following MSCI Total Return IndicesSM are calculated with gross dividends:
This series approximates the maximum possible dividend reinvestment. The amount reinvested is the dividend distributed to
individuals resident in the country of the company, but does not include tax credits.
The MSCI Europe IndexSM is a free float-adjusted market capitalization index that is designed to measure developed
market equity performance in Europe. As of June 2007, the MSCI Europe Index consisted of the following 16 developed
market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands,
Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
The MSCI Pacific IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market
performance in the Pacific region. As of June 2007, the MSCI Pacific Index consisted of the following 5 Developed Market
countries: Australia, Hong Kong, Japan, New Zealand, and Singapore.
Credit Suisse/Tremont Hedge Fund Index is compiled by Credit Suisse Tremont Index, LLC. It is an asset-weighted
hedge fund index and includes only funds, as opposed to separate accounts. The Index uses the Credit Suisse/Tremont
database, which tracks over 4500 funds, and consists only of funds with a minimum of US$50 million under management, a
12-month track record, and audited financial statements. It is calculated and rebalanced on a monthly basis, and shown net
of all performance fees and expenses. It is the exclusive property of Credit Suisse Tremont Index, LLC.
The NFI-ODCE, short for NCREIF Fund Index - Open End Diversified Core Equity, is an index of investment returns
reporting on both a historical and current basis the results of 33 open-end commingled funds pursuing a core investment
strategy, some of which have performance histories dating back to the 1970s. The NFI-ODCE Index is capitalizationweighted and is reported gross of fees. Measurement is time-weighted.
The NAREIT EQUITY REIT Index is designed to provide the most comprehensive assessment of overall industry
performance, and includes all tax-qualified real estate investment trusts (REITs) that are listed on the NYSE, the American
Stock Exchange or the NASDAQ National Market List.
The Dow Jones Industrial Average measures the stock performance of 30 leading blue-chip U.S. companies.
The Bloomberg Commodity Index is composed of futures contracts on physical commodities and represents twenty two
separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc
J.P. Morgan Asset Management – Index Definitions
All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees
or expenses.
The S&P GSCI Index is a composite index of commodity sector returns representing an unleveraged, long-only investment
in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully
collateralized basis with full reinvestment. Individual components qualify for inclusion in the index on the basis of liquidity and
are weighted by their respective world production quantities.
The Barclays Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar
denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government
and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are
subdivided into more specific indexes that are calculated and reported on a regular basis.
This U.S. Treasury Index is a component of the U.S. Government index.
West Texas Intermediate (WTI) is the underlying commodity for the New York Mercantile Exchange's oil futures contracts.
The Barclays Capital High Yield Index covers the universe of fixed rate, non-investment grade debt. Pay-in-kind (PIK)
bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.)
are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue
zeroes, step-up coupon structures, and 144-As are also included.
The Barclays Capital 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that
have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million
or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and
non convertible.
The Barclays Capital General Obligation Bond Index is a component of the Barclays Capital Municipal Bond Index.
To be included in the index, bonds must be general obligation bonds rated investment-grade (Baa3/BBB- or higher) by at
least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower
rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investmentgrade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75
million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives, are excluded from the
benchmark.
The Barclays Capital Revenue Bond Index is a component of the Barclays Capital Municipal Bond Index. To be
included in the index, bonds must be revenue bonds rated investment-grade (Baa3/BBB- or higher) by at least two of the
following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to
determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade. They must
have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds
must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date.
Remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives, are excluded from the benchmark.
The Barclays High Yield Municipal Index includes bonds rated Ba1 or lower or non-rated bonds using the middle rating of
Moody’s, S&P and Fitch.
The Barclays Capital Taxable Municipal Bond Index is a rules-based, market-value weighted index engineered for the
long-term taxable bond market. To be included in the index, bonds must be rated investment-grade (Baa3/BBB- or higher)
by at least two of the following ratings agencies if all three rate the bond: Moody's, S&P, Fitch. If only two of the three
agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a
security, the rating must be investment-grade. They must have an outstanding par value of at least $7 million and be issued
as part of a transaction of at least $75 million. The bonds must be fixed rate and must be at least one year from their
maturity date. Remarketed issues (unless converted to fixed rate), bonds with floating rates, and derivatives, are excluded
from the benchmark.
Municipal Bond Index: To be included in the index, bonds must be rated investment-grade (Baa3/BBB- or higher) by at
least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower
rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investmentgrade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75
million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their
maturity date. Remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives are excluded from the
benchmark.
The Barclays Capital Emerging Markets Index includes USD-denominated debt from emerging markets in the following
regions: Americas, Europe, Middle East, Africa, and Asia. As with other fixed income benchmarks provided by Barclays
Capital, the index is rules-based, which allows for an unbiased view of the marketplace and easy replicability.
The Barclays Capital MBS Index covers the mortgage-backed pass-through securities of Ginnie Mae, Fannie Mae, and
Freddie Mac. Aggregate components must have a weighted average maturity of at least one year, must have $250 million
par amount outstanding, and must be fixed rate mortgages.
The Barclays Capital Corporate Bond Index is the Corporate component of the U.S. Credit index.
The Barclays Capital TIPS Index consists of Inflation-Protection securities issued by the U.S. Treasury.
The J.P. Morgan EMBI Global Index includes U.S. dollar denominated Brady bonds, Eurobonds, traded loans and local
market debt instruments issued by sovereign and quasi-sovereign entities.
The J.P. Morgan Domestic High Yield Index is designed to mirror the investable universe of the U.S. dollar domestic high
yield corporate debt market.
The CS/Tremont Equity Market Neutral Index takes both long and short positions in stocks with the aim of minimizing
exposure to the systematic risk of the market (i.e., a beta of zero).
The CS/Tremont Multi-Strategy Index consists of funds that allocate capital based on perceived opportunities among
several hedge fund strategies. Strategies adopted in a multi-strategy fund may include, but are not limited to, convertible
bond arbitrage, equity long/short, statistical arbitrage and merger arbitrage.
The Barclays U.S. Dollar Floating Rate Note (FRN) Index provides a measure of the U.S. dollar denominated floating rate
note market.
*Market Neutral returns for November 2008 are estimates by J.P. Morgan Funds Market Strategy, and are based on a
December 8, 2008 published estimate for November returns by CS/Tremont in which the Market Neutral returns were
estimated to be +0.85% (with 69% of all CS/Tremont constituents having reported return data). Presumed to be excluded
from the November return are three funds, which were later marked to $0 by CS/Tremont in connection with the Bernard
Madoff scandal. J.P. Morgan Funds believes this distortion is not an accurate representation of returns in the category.
CS/Tremont later published a finalized November return of -40.56% for the month, reflecting this mark-down. CS/Tremont
assumes no responsibility for these estimates.
J.P. Morgan Asset Management – Definitions, risks & disclosures
Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise.
The price of equity securities may rise, or fall because of changes in the broad market or changes in a company’s financial
condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting individual
companies, sectors or industries, or the securities market as a whole, such as changes in economic or political conditions.
Equity securities are subject to “stock market risk” meaning that stock prices in general may decline over short or extended
periods of time.
Small-capitalization investing typically carries more risk than investing in well-established "blue-chip" companies since
smaller companies generally have a higher risk of failure. Historically, smaller companies' stock has experienced a greater
degree of market volatility than the average stock.
Mid-capitalization investing typically carries more risk than investing in well-established "blue-chip" companies. Historically,
mid-cap companies' stock has experienced a greater degree of market volatility than the average stock.
Real estate investments may be subject to a higher degree of market risk because of concentration in a specific industry,
sector or geographical sector. Real estate investments may be subject to risks including, but not limited to, declines in the
value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned
by the trust and defaults by borrower.
International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and
differences in accounting and taxation policies outside the U.S. can raise or lower returns. Also, some overseas markets may
not be as politically and economically stable as the United States and other nations.
Investments in emerging markets can be more volatile. As mentioned above, the normal risks of investing in foreign
countries are heightened when investing in emerging markets. In addition, the small size of securities markets and the low
trading volume may lead to a lack of liquidity, which leads to increased volatility. Also, emerging markets may not provide
adequate legal protection for private or foreign investment or private property.
Investments in commodities may have greater volatility than investments in traditional securities, particularly if the
instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall
market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or
commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and
regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at
the same time, creates the possibility for greater loss.
Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated
investors. Alternative investments involve greater risks than traditional investments and should not be deemed a complete
investment program. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing.
Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in
speculative investment techniques, which can magnify the potential for investment loss or gain. The value of the investment
may fall as well as rise and investors may get back less than they invested.
Derivatives may be riskier than other types of investments because they may be more sensitive to changes in economic or
market conditions than other types of investments and could result in losses that significantly exceed the original investment.
The use of derivatives may not be successful, resulting in investment losses, and the cost of such strategies may reduce
investment returns.
Price to forward earnings is a measure of the price-to-earnings ratio (P/E) using forecasted earnings. Price to book value
compares a stock's market value to its book value. Price to cash flow is a measure of the market's expectations of a firm's
future financial health. Price to dividends is the ratio of the price of a share on a stock exchange to the dividends per share
paid in the previous year, used as a measure of a company's potential as an investment.
There is no guarantee that the use of long and short positions will succeed in limiting an investor's exposure to domestic
stock market movements, capitalization, sector swings or other risk factors. Using long and short selling strategies may have
higher portfolio turnover rates. Short selling involves certain risks, including additional costs associated with covering short
positions and a possibility of unlimited loss on certain short sale positions.
The HFRI Monthly Indices (HFRI) are equally weighted performance indexes, utilized by numerous hedge fund managers
as a benchmark for their own hedge funds. The HFRI are broken down into 4 main strategies, each with multiple
substrategies. All single-manager HFRI Index constituents are included in the HFRI Fund Weighted Composite, which
accounts for over 2200 funds listed on the internal HFR Database.
Equity Market Neutral Strategies employ sophisticated quantitative techniques of analyzing price data to ascertain
information about future price movement and relationships between securities, select securities for purchase and sale.
Equity Market Neutral Strategies typically maintain characteristic net equity market exposure no greater than 10% long or
short.
Distressed Restructuring Strategies employ an investment process focused on corporate fixed income instruments,
primarily on corporate credit instruments of companies trading at significant discounts to their value at issuance or obliged
(par value) at maturity as a result of either formal bankruptcy proceeding or financial market perception of near term
proceedings.
Merger Arbitrage Strategies which employ an investment process primarily focused on opportunities in equity and equity
related instruments of companies which are currently engaged in a corporate transaction.
Global Macro Strategies trade a broad range of strategies in which the investment process is predicated on movements in
underlying economic variables and the impact these have on equity, fixed income, hard currency and commodity markets.
Relative Value Strategies maintain positions in which the investment thesis is predicated on realization of a valuation
discrepancy in the relationship between multiple securities.
The Cambridge Associates LLC U.S. Private Equity Index® is an end-to-end calculation based on data compiled from
1,052 U.S. private equity funds (buyout, growth equity, private equity energy and mezzanine funds), including fully liquidated
partnerships, formed between 1986 and 2013.
The Alerian MLP Index is a composite of the 50 most prominent energy Master Limited Partnerships (MLPs) that provides
investors with an unbiased, comprehensive benchmark for the asset class.
J.P. Morgan Asset Management – Risks & disclosures
The Market Insights program provides comprehensive data and commentary on global markets without reference to products. Designed as a tool to help clients understand the markets and
support investment decision-making, the program explores the implications of current economic data and changing market conditions.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be as advice or a recommendation for any specific investment
product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions
mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not
be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting
implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain
all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain
assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of
accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in
accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields is not a reliable indicator of current and future
results.
J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United
Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other EEA jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.;
in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited; in Singapore by JPMorgan Asset Management (Singapore)
Limited (Co. Reg. No. 197601586K), or JPMorgan Asset Management Real Assets (Singapore) Pte Ltd (Co. Reg. No. 201120355E); in Taiwan by JPMorgan Asset Management (Taiwan) Limited; in Japan by
JPMorgan Asset Management (Japan) Limited which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association
and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Korea by
JPMorgan Asset Management (Korea) Company Limited; in Australia to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Cth) by JPMorgan Asset Management
(Australia) Limited (ABN 55143832080) (AFSL 376919); in Brazil by Banco J.P. Morgan S.A.; in Canada for institutional clients’ use only by JPMorgan Asset Management (Canada) Inc., and in the United
States by JPMorgan Distribution Services Inc. and J.P. Morgan Institutional Investments, Inc., both members of FINRA/SIPC.; and J.P. Morgan Investment Management Inc.
In APAC, distribution is for Hong Kong, Taiwan, Japan and Singapore. For all other countries in APAC, to intended recipients only.
Copyright 2017 JPMorgan Chase & Co. All rights reserved.
Prepared by: Kerry Craig, Tai Hui, Ben Luk , Jasslyn Yeo, Ian Hui, and Hannah Anderson.
Unless otherwise stated, all data are as of 31 March 2017 or most recently available.
Material ID: 0903c02a81d1a2c9