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Market and economic discussion

September 14, 2017

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Hurricane Harvey

• Impacted area GDP and population 7x and 4x the

one impacted by Katrina

• Losses from Harvey estimated at 0.4% of US GDP,

could be 3x-4x higher

• Harvey destroyed half a million cars, 40,000 homes

and 25,000 jobs.

• History of natural disasters: most economic impacts

are transitory given rebuilding and reconstruction

0.8

0.9

1.0

1.1

1.2

1.3

1.4

-10 -8 -6 -4 -2 0 2 4 6 8 10

Year before/after disaster

Source: "Catastrophic natural disasters and economic growth", InterAmerican Development Bank, June 2010. Data = disasters above 90th percentile.

Limited economic impact from natural disastersReal GDP/capita in countries w/ nat. disasters, 1970-2008

Actual real GDP/capita

Counterfactual real GDP/capita

(no disaster)

• In the wake of the 1995 Kobe earthquake in Japan (6,400 fatalities and cost = 2.5% of Japanese GDP), media

reports suggested it could take Kobe a decade to recover

• Within 18 months, Kobe manufacturing activity was at 98% of pre-disaster trend, imports recovered,

exports back at 85% of capacity and 79% of shops reopened

• This is not uncommon. Countries with higher income, higher educational attainment, greater openness,

more complete financial systems, better developed supply chains and decentralized governments experience

fewer losses after natural disasters

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North Korea

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2003 2006 2009 2012 2015

Source: US Korea Institute at Johns Hopkins SAIS. 2016.

China-North Korea trade% of total North Korean trade

40% 50% 60% 70% 80% 90%

North Korea:China

Mongolia:China

Canada:USA

Mexico:USA

Nepal:India

Myanmar:China

Namibia:South Africa

Belarus:Russia

Honduras:USA

Kyrgyzstan:China

Source: IMF Direction of Trade Statistics, Johns Hopkins SAIS, JPMAM, 2014.

10 highest trade concentrations in the world Bilateral Country A:Country B trade as a % of total Country A trade

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Summer 2017 news headlines

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What matters most

Lead

ing

In

dic

ato

rs

CE

O C

on

fid

en

ce

Payro

ll g

row

th

GD

P g

row

th

Fo

rward

12 m

o p

rofi

ts

Sm

all

Bu

s O

pti

mis

m

ISM

man

ufa

ctu

rin

g

Fin

an

cia

l C

on

dit

ion

s

Tra

ilin

g 1

2m

pro

fits

Po

licy U

ncert

ain

ty

Geo

po

liti

cal R

isk

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%When indicator was above average

When indicator was below average

Source: JPMAM, Conference Board, BLS, BEA, NFIB, ISM, Chicago Fed, S&P, Boston College, Stanford University.

What should investors pay attention to? Jobs, confidence & profitsAverage monthly S&P 500 returns, Jan 1985 - Aug 2017

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The example of Brazil

1.5

2.0

2.5

3.0

3.5

4.0-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2013 2014 2015 2016 2017

Source: BCB, Haver. Bloomberg. June 2017.

Brazil current account deficit% of GDP

Current account deficit

USD/BRL

6%

8%

10%

12%

14%

16%

0%

2%

4%

6%

8%

10%

12%

2013 2014 2015 2016 2017

Source: OECD, Haver. July 2017.

Brazil inflation and policy rateY/Y % change Policy rate, %

Consumer price

inflation

Policy rate

50

60

70

80

90

100

110

2013 2014 2015 2016 2017

Source: Fundaçâo Getúlio Vargas, Confederaçâo Nacional da Indústria. July 2017.

Brazil: business and consumer confidence, Index, Jan. 2013 = 100

Consumer confidence

Business confidence

-3%

-2%

-1%

0%

1%

2%

2013 2014 2015 2016 2017Source: Instituto Brasileiro de Geografia e Estatística. June 2017.

Brazil: employment growthY/Y % change of 3-month moving average

60

65

70

75

80

85

90

95

100

105

2013 2014 2015 2016 2017

Source: Bloomberg. September 1, 2017.

Industrial metals pricesPrice index, Jan. 2013 = 100

30

40

50

60

70

80

90

100

110

2013 2014 2015 2016 2017

Source: Bloomberg. September 1, 2017.

Brazil equity marketsMSCI Brazil Index, 2013 = 100

Dots= major developments in "Operation Car Wash"

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Global economy improving

2.0

3.0

4.0

5.0

6.0

7.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2012 2013 2014 2015 2016 2017

Source: Goldman Sachs Global Investment Research. July 2017.

High-frequency GDP growth estimatesContemporaneous growth, m/m % change annualized

Developedworld

Emergingmarkets

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Q2: good quarter for global profits

0%

5%

10%

15%

20%

25%

US Europe Japan EM

2Q17 FY 2017

Source: IBES, Factset, JP Morgan, Morgan Stanley. August 2017. Indices used: S&P500, Stoxx600, MSCI Japan, MSCI EM.

Earnings growth estimatesExpected y/y % change

S&P 500

• earnings growth of ~11% y/y

(+3.9% earnings surprise)

• revenue growth of 5.2%

(+0.4% surprise)

• net income margin expansion

of 38bp (+27bp surprise)

• Q1/Q2 two fastest quarters

since 2011

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So far this year, global equity market rally is based on earnings rather than P/E expansion

40

50

60

70

80

90

100

110

120

'05 '07 '09 '11 '13 '15 '17

Source: MSCI, Datastream, Bloomberg. July 2017.

MSCI All-country worldIndex, 12/31/2016 = 100

Price

Earnings

9

11

13

15

17

'05 '07 '09 '11 '13 '15 '17

Source: MSCI, Datastream. July 2017.

MSCI All-country worldPrice-to-12 month forward earnings

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Looking forward: more capex in the US and perhaps in Europe as well

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Banking system risks?

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Commercial real estate risks?

CRE borrowing/GDP

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16

Source: Federal Reserve Board, BEA. Q1 2017.

Commercial real estate borrowing well below prior peaks% of GDP

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Leveraged loans and High yield risks?

Guidance regarding deals

with more than 6x

debt/EBITDA

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: Bridgewater Associates. August 2017.

Fed/OCC/FDIC guidelines resulted in slower leveraged loan and high yield issuance, net issuance % of GDP

Guidance release date

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Asset pricing

0

20

40

60

80

100

120

140

160

180

200

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

BELOW equivalent-maturityUS Treasury

ABOVE equivalent-maturityUS Treasury

Source: Bank of America Merril Lynch. August 10, 2017.

Growing amount of Italian BB's yielding less than US Treasuries, Face value, EUR billions

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Next area of market concern, and more valid one: what do the central banks do with their balance sheets?

-$0.8

-$0.4

$0.0

$0.4

$0.8

$1.2

$1.6

$2.0

$2.4

$2.8

2008 2010 2012 2014 2016 2018

Bank of EnglandEuropean Central BankBank of JapanFederal Reserve

Source: National central banks, J.P. Morgan. July 2017.

G-4 central bank assets US$ trillions, 12 month change

Projections

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What the Fed is thinking

0%

1%

2%

3%

4%

5%

6%

2005 2007 2009 2011 2013 2015 2017 2019

Source: Bloomberg, Federal Reserve, JPMAM. July 31, 2017.

Market currently expecting a slower rate hike cycle than the median FOMC member, Fed funds target rate

Market

Median FOMC member

High FOMC forecast

Low FOMC forecast

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Wage inflation picking up, but nothing alarming yet

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

1997 2000 2003 2006 2009 2012 2015

Source: BLS, BEA, JPMAM. Note: prior to 2010, average hourly earnings are only for production and nonsupervisory workers. June 2017.

Measures of US inflationY/Y % change, 3-month average

Average hourly earnings

Employment cost index

Core PCE

-20%

-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

'63 '67 '71 '75 '79 '83 '87 '91 '95 '99 '03 '07 '11Source: LSR, Byrne and Corrado, "ICT Prices and ICT Services: What do they tell us about Productivity and Technology?". 2017.

ICT price mismeasurement may be larger than previously thought, Y/Y % change in price

Official statistics

Byrne-Corrado estimates (2017)

U.K.

Germany

U.S.

CanadaEuro Area

Italy

France

Japan-0.4%

0.0%

0.4%

0.8%

1.2%

1.6%

2.0%

2.4%

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Source: J.P. Morgan, National statistics agencies. July 2017.

Developed world core inflationY/Y % change

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Bottom line: this super-long cycle probably has more to run, although the pace of equity market gains in the developed world is likely to slow

17.2%15.6%

13.0%

5.7%

20.6%

13.9% 13.3%

22.6%

26.7%

19.1%

28.4%

44.2%

20.4%

12.5%11.1%

2.6%

6.8%

10.5% 11.3% 13.0%

21.3%

35.7%

13.2%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

AllCountryWorld

World exEM

USLarge Cap

USSmall Cap

Nasdaq Canada &Australia

Japan Europe Eurozone EMcommodityexporters

EM ex-Chinamanuf.

Chinaoffshore

Chinaonshore

USD returns

Local currency returns

Source: Bloomberg. September 12, 2017.

YTD total returns on major equity markets/regionsPercent

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Revisionist history: another look at US wealth and income inequality

15%

20%

25%

30%

35%

40%

45%

1960 1970 1980 1990 2000 2010

Source: "What do we know about evolution of top wealth shares in the United States?", Kopczuk (Columbia, AEA) 2015.

Top 1% wealth share in the US% share of total wealth

Capitalization method (Saez)

7%

10%

13%

16%

19%

22%

'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10

Source: "Using Tax Data to Measure Long-Term Trends in U.S. Income Inequality", Auten and Splinter (Treasury, JCT) 2016.

Top 1% income shares in the US% of total income

Saez/Piketty method

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Revisionist history: another look at US wealth and income inequality

15%

20%

25%

30%

35%

40%

45%

1960 1970 1980 1990 2000 2010

Source: "What do we know about evolution of top wealth shares in the United States?", Kopczuk (Columbia, AEA) 2015.

Top 1% wealth share in the US% share of total wealth

Estate tax multiplier method

Capitalization method (Saez)

Survey of Consumer Finances method

7%

10%

13%

16%

19%

22%

'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10Source: "Using Tax Data to Measure Long-Term Trends in U.S. Income Inequality", Auten and Splinter (Treasury, JCT) 2016.

Top 1% income shares in the US% of total income

Treasury/JCTmethod

Saez/Piketty method

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The ARC and the Covenants 3.0