Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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