78
EUROPE Guide to the Markets 1Q | 2015 As at 31 December 2014
EUROPE Guide to the Markets
1Q | 2015 As at 31 December 2014
Global Market Insights Strategy Team
Past performance is no guarantee of comparable future results. For China and Australia distribution, please note this communication is for intended recipients only and is for wholesale clients only in Australia. For details, please refer to the full disclaimer at the end. Unless otherwise stated, all data is as at 31 December 2014 or most recently available.
Americas Europe Asia
Dr. David P. Kelly, CFA New York
Stephanie H. Flanders London
Tai Hui Hong Kong
Andrew D. Goldberg New York
Maria Paola Toschi Milan
Geoff Lewis Hong Kong
Anastasia V. Amoroso, CFA Houston
Vincent Juvyns Luxembourg
Yoshinori Shigemi Tokyo
James C. Liu, CFA Chicago
Manuel Arroyo Ozores, CFA Madrid
Grace Tam, CFA Hong Kong
Julio C. Callegari So Paulo
Tilmann Galler, CFA Frankfurt
Ian Hui Hong Kong
David M. Lebovitz New York
Dr. David Stubbs London
Ben Luk Hong Kong
Gabriela D. Santos New York
Lucia Gutierrez Madrid
Ainsley E. Woolridge New York
Kerry Craig, CFA London
Hannah J. Anderson New York
Alexander W. Dryden London
Abigail B. Dwyer New York
Nandini L. Ramakrishnan London
Page Reference
3. Europe: GDP and Inflation 4. Eurozone Recovery Monitor 5. Eurozone Credit Demand and Supply 6. Eurozone Divergences 7. Europe Government Interest Rates 8. European Central Bank (ECB) 9. Europe Cash Accounts 10. Europe Corporate Finances
11. World Economic Data 12. Global Purchasing Managers Index (PMI) for Manufacturing 13. Economic Slack and the Equity Market 14. Global Disinflationary Pressures 15. Economic and Monetary Policy Divergence 16. US Dollar 17. Sovereign Debt Stresses 18. Fiscal Austerity and Debt Levels 19. Global Trade: The Importance of Exports 20. US Federal Reserve Policies 21. US Economic Growth and the Composition of GDP 22. US Employment 23. US Inflation 24. US Cyclical Indicators 25. US Consumer Finances 26. Japan: GDP and Inflation 27. Japan: Abenomics and the Economy 28. China: GDP and Inflation 29. China: Growth and Transformation 30. China Financial Dynamics 31. Emerging Markets Structural Dynamics 32. Emerging Markets Challenges 33. Emerging Markets Currencies 34. Emerging Markets Sensitivity
35. World Stock Market Returns 36. European Sector Returns 37. Bond and Equity Relative Valuations 38. MSCI Europe Index at Inflection Points 39. MSCI Europe Index Equity Valuations 40. MSCI Europe Earnings and Profit Margins 41. US S&P 500 at Inflection Points
42. US S&P 500 Equity Valuations 43. US S&P 500 Earnings and Profit Margins 44. Interest Rates and Equities 45. Developed Markets Equity Valuations by Country 46. Emerging Markets Equity Valuations by Country 47. Emerging Markets Valuations and Returns 48. Emerging Markets Equity Composition 49. Emerging Markets: Performance, Dividends and Earnings Growth 50. Equity Income 51. Equity Dividends and Valuations 52. Equity Correlations and Volatility 53. Annual Returns and Intra-year Declines
54. Fixed Income Sector Returns 55. Fixed Income Market Data 56. Policy and Real Rates 57. Fixed Income Interest Rate Risk 58. Liquidity and Duration Risks 59. Global Bond Supply and Demand 60. Government and Investment Grade Bond Yields 61. US High Yield Bonds 62. European High Yield Bonds 63. Emerging Markets Debt 64. Emerging Markets Debt Composition
65. Asset Class Returns 66. Correlation of Returns (EUR) 67. Commodity Returns 68. Commodities 69. Oil Consumption and Production 70. Life Expectancy and Pension Shortfall 71. Consumer Confidence and the Stock Market 72. Industry Fund Flows 73. US Asset Returns by Holding Period 74. Returns in Different Inflation Environments
Equities
European Economy
Fixed Income Global Economy
Other Assets and Investor Behaviour
'99 '01 '03 '05 '07 '09 '11 '13-3,0
-2,5
-2,0
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
'99 '01 '03 '05 '07 '09 '11 '130
1
2
3
4
5
3
Europe: GDP and Inflation
Source: (Both charts) Eurostat, FactSet, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding unprocessed food and energy. Guide to the Markets - Europe. Data as at 31 December 2014.
Real GDP EU28, change quarter on quarter
Inflation EU28, change year on year
% %
Avg since 1999 Nov 2014
Headline CPI* 2,4% 0,4%
Core CPI 1,9% 0,8%
Avg since 1999 3Q14
Real GDP 0,3% 0,3%
Euro
pe E
cono
my
Average
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14-6
-4
-2
0
2
4
Oct 2014: 1,4%
Manufacturing purchasing managers indices Index level
4
Eurozone Recovery Monitor
Source: (Top left) Markit, J.P. Morgan Asset Management. (Bottom left) Eurostat, J.P. Morgan Asset Management. (Top right) European Commission, FactSet, J.P. Morgan Asset Management. (Bottom right) Eurostat, FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as at 31 December 2014.
Euro
pe E
cono
my
'07 '08 '09 '10 '11 '12 '13 '14 '1570
80
90
100
110
120
Economic sentiment Index level
France
Germany Greece
Spain
Italy
France
Germany Greece
Spain
Italy
Retail sales Excluding motor vehicles, change year on year
%
'99 '01 '03 '05 '07 '09 '11 '134
6
8
10
12
14Unemployment rate
% France Germany
Eurozone
25
30
35
40
45
50
55
60
65
'07 '08 '09 '10 '11 '12 '13 '14
-6
-5
-4
-3
-2
-1
0
1
2
3
4
-150
-100
-50
0
50
100
'14 '13 '12 '11 '09 '08 '07 '06 '04 '03
5
Eurozone Credit Demand and Supply
Credit demand and eurozone GDP growth Net % of banks reporting positive loan demand, GDP growth
%
Stronger loan demand
Weaker loan demand
Eurozone bank lending Change year on year
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14-6
-3
0
3
6
9
12
15House purchases Non-financial companies
%
Source: (Left) ECB, Eurostat, FactSet, J.P. Morgan Asset Management. (Top and bottom right) ECB, FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as at 31 December 2014.
Non-periphery banks Eurozone aggregate Periphery banks
Eurozone bank loans outstanding Rebased to 100 as at December 2010, households and non-financial companies
Euro
pe E
cono
my
%
Overall corporate (lhs)
Housing loans (lhs)
Consumer credit (lhs)
Eurozone GDP growth (y/y) (rhs)
80
85
90
95
100
105
110
'10 '11 '12 '13
2,5
3,5
4,5
5,5
6,5
7,5
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14
-2
-1
0
1
2
3
4
5
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14
'07 '08 '09 '10 '11 '12 '13 '1470
80
90
100
110
120
130
140
6
Eurozone Divergences
Inflation Change year on year
Core
Periphery
%
Euro
pe E
cono
my Gross exports
Rebased to 100 at December 2007, two-quarter moving average Corporate lending rates Non-financial corporations, new business lending up to 1 million
Core
Periphery
%
Portugal Spain
Germany
Source: (Top left) ECB, Thomson Reuters Datastream, J.P. Morgan Asset Management. (Bottom left, top and bottom right) Eurostat, FactSet, J.P. Morgan Asset Management. Core includes Germany and France; periphery includes Spain, Italy, Greece, Portugal and Ireland. All aggregations are based on simple averages. Guide to the Markets - Europe. Data as at 31 December 2014.
Italy Ireland France
'99 '01 '03 '05 '07 '09 '11 '130
5
10
15
20
25
30%
Unemployment rate for selected European countries
Portugal
Spain
Italy
Greece
Ireland
'06 '07 '08 '09 '10 '11 '12 '13 '140
5
10
15
20
25
30
35
Source: Tullett Prebon, FactSet, J.P. Morgan Asset Management. The ECB announced the second round of Long-Term Refinancing Operations (LTRO) in February 2012. The Outright Monetary Transaction (OMT) programme was formally outlined in September 2012. The ECB conducted the first round of Targeted Long-Term Refinancing Operations (TLTRO) in September 2014. Guide to the Markets - Europe. Data as at 31 December 2014.
7
Europe Government Interest Rates
Europe sovereign funding costs 10-year benchmark bond yield
31 Dec 2014 yield
One-year change
Greece 9,4% +115 bps Portugal 2,7 -336 Italy 1,9 -221
UK 1,8 -127 Spain 1,6 -253 Ireland 1,2 -221 Germany 0,5 -139
%
LTRO
OMT Eur
ope
Econ
omy
TLTRO
0
1
2
3
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Q2 2014
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '140,5
1,0
1,5
2,0
2,5
3,0
3,5
8
European Central Bank (ECB)
ECB balance sheet and the euro trillions, real broad effective exchange rate (REER)
ECB balance sheet: Assets trillions
Jan 2005 Jun 2012: 248%
Jun 2012 Dec 2014: -31%
Source: (Left) ECB, FactSet, J.P. Morgan Asset Management. (Top right) ECB, European Covered Bond Council (ECBC), Security Industry and Financial Markets Association (SIFMA), J.P. Morgan Asset Management. (Bottom right) ECB, J.P. Morgan Economic Research, J.P. Morgan Asset Management. *ABS is asset-backed securities. Yearly covered bond amounts are from ECBC and 2Q14 amount is from ECB. Guide to the Markets - Europe. Data as at 31 December 2014.
'07 '08 '09 '10 '11 '12 '13 '1490
95
100
105
110
115 1,2
1,6
2,0
2,4
2,8
3,2
Euro REER (lhs)
ECB balance sheet (rhs, inverted)
Eurozone ABS* and covered bonds outstanding trillions
ABS Covered bonds
Euro
pe E
cono
my
0
1
2
3
4
5
0
1.000
2.000
3.000
4.000
5.000
'00 '02 '04 '06 '08 '10 '12 '14 0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
'06 '07 '08 '09 '10 '11 '12 '13 '14
Europe Cash Accounts
Euro area deposits trillions
Source: (Left) ECB, J.P. Morgan Asset Management. (Right) Bloomberg, Eurostat, J.P. Morgan Asset Management. Orange marker points represent year on year inflation and illustrates how the value of income would have been eroded due to inflation. Guide to the Markets - Europe. Data as at 31 December 2014.
Income generated by 100.000 investment in a one-year bank deposit
Dec 2014: 365
2007: 4.580
%
Inflation (y/y) Income
Euro
pe E
cono
my
Aug 2012: 3,3tn
Nov 2014: 1,5tn
9
10
Europe Corporate Finances
Source: (Top left) MSCI, Thomson Reuters Datastream, Worldscope, J.P. Morgan Asset Management. (Right and bottom left) MSCI, FactSet, J.P. Morgan Asset Management. *RoW denotes revenues coming from the world excluding Europe, Asia and the Americas. Guide to the Markets - Europe. Data as at 31 December 2014.
MSCI Europe Index: Geographical source of revenues
Interest coverage ratio (EBIT / net interest) MSCI Europe, quarterly
Total leverage MSCI Europe, ratio of total debt to total equity, quarterly
Euro
pe E
cono
my
'97 '99 '01 '03 '05 '07 '09 '11 '132
3
4
5
6
7
'97 '99 '01 '03 '05 '07 '09 '11 '13180
200
220
240
260
280
300
320
340
4Q14: 4,6x
x
4Q14: 186%
%
Average: 4,1x
Average: 261%
RoW* 11%
Americas 25%
Asia 10%
Europe 54%
11
World Economic Data
Source: Bloomberg, FactSet, various national statistical agencies, J.P. Morgan Asset Management. Table ordered by GDP per capita. Nominal GDP figure is latest quarter annualised. *Forecasts are Bloomberg consensus estimates. Guide to the Markets - Europe. Data as at 31 December 2014.
Selected countries
Glo
bal E
cono
my
Gross domestic product (GDP)
Real GDP %
Inflation %
Policy rate %
Unemployment %
per capita billions 2014* 2015* 2014* 2015*
Switzerland 62.449 499 1,8 1,8 0,0 0,1 -0,25 3,2 Sweden 44.677 431 1,9 2,4 -0,2 0,7 0,00 7,4 United States 44.028 13.932 2,3 3,0 1,7 1,5 0,25 5,8 Netherlands 41.076 690 0,7 1,4 0,4 0,7 0,05 8,0 United Kingdom 37.588 2.383 3,0 2,6 1,5 1,4 0,50 6,0 Germany 37.114 3.049 1,5 1,2 0,9 1,1 0,05 6,6 Finland 36.685 193 -0,2 0,7 1,2 1,0 0,05 8,2 France 35.611 2.248 0,4 0,8 0,6 0,6 0,05 9,9 Japan 28.969 3.687 0,3 1,0 2,8 1,5 0,10 3,5 Eurozone 28.885 11.188 0,8 1,1 0,5 0,6 0,05 11,5 Italy 27.516 1.692 -0,4 0,4 0,2 0,3 0,05 12,8 Spain 23.471 1.112 1,3 1,8 -0,1 0,3 0,05 23,7 Greece 18.700 201 0,3 1,7 -1,2 -0,1 0,05 25,5 Russia 11.366 1.631 0,5 -1,2 7,6 8,2 8,25 4,9 Brazil 8.919 1.793 0,2 0,9 6,3 6,4 11,75 4,8 China 5.742 7.749 7,4 7,0 2,1 2,0 5,60 4,1 India 1.253 1.530 5,4 5,5 7,2 6,7 8,00 8,8
Global Purchasing Managers Index (PMI) for Manufacturing
Lowest relative to 50 PMI Highest relative to 50 PMI
Glo
bal E
cono
my
50
Korea
Japan
Ireland
Eurozone
France Germany
Italy
Spain
UK
US
Brazil
Russia
India
China
Taiwan
Global
Euro
pe
Dev
elop
ed
Emer
ging
12
Source: Markit, J.P. Morgan Economic Research, J.P. Morgan Asset Management. The Purchasing Managers Index (PMI) assesses the economic health of the manufacturing sector by surveying output and employment intentions. Heatmap colours are based on PMI relative to 50, which indicates expansion or contraction of the sector for the time period shown. Guide to the Markets - Europe. Data as at 31 December 2014.
2014 2012
Dec
Jan
Feb
Mar
Apr
May
Jun
2013
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
50,1 51,4 50,8 51,0 50,1 50,4 50,4 50,6 51,5 51,7 51,9 52,9 52,9 53,0 53,2 52,4 51,9 52,2 52,6 52,4 52,6 52,2 52,2 51,8 51,6
46,1 47,9 47,9 46,8 46,7 48,3 48,8 50,3 51,4 51,1 51,3 51,6 52,7 54,0 53,2 53,0 53,4 52,2 51,8 51,8 50,7 50,3 50,6 50,1 50,6
44,6 42,9 43,9 44,0 44,4 46,4 48,4 49,7 49,7 49,8 49,1 48,4 47,0 49,3 49,7 52,1 51,2 49,6 48,2 47,8 46,9 48,8 48,5 48,4 47,5
46,0 49,8 50,3 49,0 48,1 49,4 48,6 50,7 51,8 51,1 51,7 52,7 54,3 56,5 54,8 53,7 54,1 52,3 52,0 52,4 51,4 49,9 51,4 49,5 51,2
46,7 47,8 45,8 44,5 45,5 47,3 49,1 50,4 51,3 50,8 50,7 51,4 53,3 53,1 52,3 52,4 54,0 53,2 52,6 51,9 49,8 50,7 49,0 49,0 48,4
44,6 46,1 46,8 44,2 44,7 48,1 50,0 49,8 51,1 50,7 50,9 48,6 50,8 52,2 52,5 52,8 52,7 52,9 54,6 53,9 52,8 52,6 52,6 54,7 53,8
51,4 50,3 51,5 48,6 48,0 49,7 50,3 51,0 52,0 52,7 54,9 52,4 53,5 52,8 52,9 55,5 56,1 55,0 55,3 55,4 57,3 55,7 56,6 56,2 56,9
50,6 51,0 48,1 50,1 50,4 52,0 52,5 54,5 58,4 56,8 56,3 57,7 57,0 56,6 56,4 55,5 57,0 56,6 56,7 54,9 52,9 51,4 53,3 53,3 52,5
54,0 55,8 54,3 54,6 52,1 52,3 51,9 53,7 53,1 52,8 51,8 54,7 55,0 53,7 57,1 55,5 55,4 56,4 57,3 55,8 57,9 57,5 55,9 54,8 53,9
45,0 47,7 48,5 50,4 51,1 51,5 52,3 50,7 52,2 52,5 54,2 55,1 55,2 56,6 55,5 53,9 49,4 49,9 51,5 50,5 52,2 51,7 52,4 52,0 52,1
51,1 53,2 52,5 51,8 50,8 50,4 50,4 48,5 49,4 49,9 50,2 49,7 50,5 50,8 50,4 50,6 49,3 48,8 48,7 49,1 50,2 49,3 49,1 48,7 50,2
50,0 52,0 52,0 50,8 50,6 50,4 51,7 49,2 49,4 49,4 51,8 49,4 48,8 48,0 48,5 48,3 48,5 48,9 49,1 51,0 51,0 50,4 50,3 51,7 48,9
54,7 53,2 54,2 52,0 51,0 50,1 50,3 50,1 48,5 49,6 49,6 51,3 50,7 51,4 52,5 51,3 51,3 51,4 51,5 53,0 52,4 51,0 51,6 53,3 54,5
51,5 52,3 50,4 51,6 50,4 49,2 48,2 47,7 50,1 50,2 50,9 50,8 50,5 49,5 48,5 48,0 48,1 49,4 50,7 51,7 50,2 50,2 50,4 50,0 49,6
50,1 49,9 50,9 52,0 52,6 51,1 49,4 47,2 47,5 49,7 50,2 50,4 50,8 50,9 49,8 50,4 50,2 49,5 48,4 49,3 50,3 48,8 48,7 49,0 49,9
50,6 51,5 50,2 51,2 50,7 47,1 49,5 48,6 50,0 52,0 53,0 53,4 55,2 55,5 54,7 52,7 52,3 52,4 54,0 55,8 56,1 53,3 52,0 51,4 50,0
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13100
200
300
400
500
600
700
800900
1.000
-6
-5
-4
-3
-2
-1
0
1
2
13
Economic Slack and the Equity Market
DM output gap DM stock market (log scale)
Developed markets (DM) output gap* and equity market Index level, output gap shown as % of potential GDP
Glo
bal E
cono
my
% Narrow output gap
Wide output gap
Developed markets real GDP Index 2010 = 100
Source: (Left) J.P. Morgan Economic Research, J.P. Morgan Asset Management. (Right) MSCI, IMF World Economic Outlook October 2014, J.P. Morgan Asset Management. *The output gap is the difference between actual output and the output that could be achieved if the economy were running at full capacity (also referred to as potential GDP). DM stock market is the MSCI World Index. Guide to the Markets - Europe. Data as at 31 December 2014.
90
95
100
105
110
115
120
'04 '06 '08 '10 '12 '14
Actual
Potential Pre-2006 trend
1,5
1,6
1,7
1,8
1,9
2,0
2,1
2,2
2,3
2,4
2,2
2,4
2,6
2,8
3,0
3,2
3,4
3,6
3,8
4,0
0,0
0,5
1,0
1,5
2,0
2,5
-1,8
-1,5
-1,2
-0,9
-0,6
-0,3
0,0
0,3
14
Global Disinflationary Pressures
Long-term inflation expectations 5-year/5-year breakeven inflation
% %
US (lhs) UK (lhs) Eurozone (rhs)
Glo
bal E
cono
my
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14-1
0
1
2
3
4
5
-40
-35
-30
-25
-20
-15
-10
-5
0%
Consumer confidence CPI* lagged six months (y/y)
Contribution to the decline in eurozone inflation Since January 2013
Eurozone inflation and consumer confidence
Source: (Left) Bloomberg, J.P. Morgan Asset Management. (Top and bottom right) Eurostat, FactSet, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. 5-year/5-year breakeven inflation expectations is the market expectation for inflation over 5 years beginning in 5 years time, derived from the breakevens in the long term forwards market. Guide to the Markets Europe. Data as at 31 December 2014.
Services (lhs) Industrial goods (lhs) Energy (lhs) Food (lhs)
CPI* (rhs)
% %
Dec 12 Jun 13 Dec 13 Jun 14 Dec 14
Apr 14 Jan 14 Oct 13 Jul 13 Apr 12 Jan 13 Jul 14 Oct 14
0,0
0,2
0,4
0,6
0,8
1,0
1,2
1,4
1,6
1,8
2,0
'15 '16 '17
15
Economic and Monetary Policy Divergence
Glo
bal E
cono
my
%
Market expectations for target policy rate Nominal GDP growth Rebased to 100 at Q1 2008
Source: (Left) Various national statistics agencies, FactSet, J.P. Morgan Asset Management. (Right) Bloomberg, J.P. Morgan Asset Management. Eurozone core is Germany and France; periphery is Spain, Italy, Greece, Portugal and Ireland. There is no active Japanese futures market and therefore we cannot derive the market expectations for Japans target policy rate. Guide to the Markets Europe. Data as at 31 December 2014.
US UK Eurozone
Dec 2015: 0,80%
Dec 2016: 1,30%
Dec 2016: 1,50%
Dec 2015: 0,60%
Dec 2015: 0,05% Dec 2016: 0,10%
'08 '09 '10 '11 '12 '13 '1485
90
95
100
105
110
115
120
Eurozone core
Eurozone periphery
UK
US
Japan
2,5
6,2
9,0
11,7 12,5 13,9 14,1
0
4
8
12
16
1,2
1,4
1,6
1,8
2,0
2,2
2,4
2,0
3,0
4,0
5,0
6,0
7,0
'99 '01 '03 '05 '07 '09 '11 '13
80
90
100
110
120
130
'73 '77 '81 '85 '89 '93 '97 '01 '05 '09 '13
16
US Dollar
US Dollar Index Real broad effective exchange rate (REER)
1978-85: +52,6%
1985-88: -30,0%
2002-11: -28,6%
1995-02: +34,2%
1973-78: -21,8%
Current account deficit % of GDP
Source: (Top) US Federal Reserve, J.P. Morgan Asset Management. (Bottom left) BEA, FactSet, J.P. Morgan Asset Management. (Bottom right) FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as at 31 December 2014.
1985: Plaza Accord
1987: Louvre Accord
2011-14: +10,5%
US dollar performance vs. selected currencies 2014
%
US current account deficit
US net oil imports % %
Avg since 1973 Nov 2014
US Dollar Index 95,7 89,0
Glo
bal E
cono
my
Chinese Renminbi
British Pound
Canadian Dollar
Mexican Peso
Swiss Franc
Euro Japanese Yen
Brazil
South Africa
Mexico US
Turkey
Korea
China
France
Germany
Greece
India
Indonesia
Italy
Japan
Malaysia
Russia
Singapore
Spain Portugal EU
Australia UK
-2
-1
0
1
2
3
4
5
6
7
8
0 20 40 60 80 100 120 140 160 180 200
GDP growth, debt-to-GDP and borrowing costs
Source: IMF World Economic Outlook October 2014, FactSet, Barclays, J.P. Morgan Asset Management. Borrowing costs based on local currency debt. EU overall borrowing cost based on Barclays Capital Euro-Aggregate 7-10 Year Treasury Index. South Africas borrowing costs are based on seven-year government bond yield due to data availability. Guide to the Markets - Europe. Data as at 31 December 2014.
Sovereign Debt Stresses
Glo
bal E
cono
my
Rea
l GD
P gr
owth
(201
3
2015
F)
Gross debt-to-GDP ratio (2014F)
Bubble size = 10-year government bond yield
240
Emerging markets
Developed markets
%
%
10%
5%
17
0
1
2
3
4
5
Fiscal Austerity and Debt Levels
Glo
bal E
cono
my %
Government fiscal tightening Decline in structural deficit* as % of GDP
2010-2013
2013-2016F
Government debt levels Gross debt as % of GDP
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '1620
40
60
80
100
120
140
Italy
Portugal
Ireland US Spain
UK
France
Germany
Forecast
%
18
Source: (Both charts) IMF World Economic Outlook October 2014, FactSet, J.P. Morgan Asset Management. *Structural deficit is the cyclically adjusted budget deficit or the deficit that would prevail if the economy were running at full capacity. **Eurozone data is change between 2013 and 2015 due to data availability. Guide to the Markets - Europe. Data as at 31 December 2014.
US UK Eurozone** Japan
2,4
1,7
1,2
1,7
1,9
2,7
0,6
4,3
1,9
1,2
14,7
9,9
9,8
7,9
1,1
1,2
10,1
3,0
2,0
1,9
3,9
1,8
1,4
1,0
2,5
3,2
1,2
2,3
1,5
1,2
2,2
16,6
11,2
8,3
9,0
14,1
7,6
7,0
13,2
16,1
10,8
5,5
0 5 10 15 20 25 30 35 40
Source: IMF, FactSet, J.P. Morgan Asset Management. Numbers represent goods exports only and would be higher if services were included. Values may not sum to total exports due to rounding. *BRIC is Brazil, Russia, India and China. Guide to the Markets - Europe. Data as at 31 December 2014.
Exports as % of GDP Goods exports only in 2013
US Eurozone BRIC* Other
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Global Trade: The Importance of Exports
%
19
Brazil
India
China
Russia
Japan
Eurozone
UK
France
Italy
Germany
10,8%
16,0%
24,9%
26,2%
9,4%
14,6%
19,6%
20,7%
24,6%
37,6%
18,5%
US
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
5,0
0
1
2
3
4
5
'08 '09 '10 '11 '12 '13 '14 '15
0
20
40
60
80
100
120
Source: (All charts) US Federal Reserve, FactSet, J.P. Morgan Asset Management. *New purchases are the stated purchases from the US Federal Reserve. Reinvested purchases are bonds purchased with the principal received from maturing bonds. Guide to the Markets - Europe. Data as at 31 December 2014.
20
US Federal Reserve Policies
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Individual FOMC member forecasts for the federal funds rate From the December 2014 meeting
2015 2016 2017 Longer run
% Mid-point of FOMC forecasts
US Treasuries
Other
Agency MBS
US Federal Reserve balance sheet: Assets $ trillions
US Federal Reserve MBS purchases $ billions
$
Forecast
$
New purchases*
Reinvested purchases*
-2
0
2
4
6
8
10
12
14
16
18
'99 '01 '03 '05 '07 '09 '11 '13-10
-8
-6
-4
-2
0
2
4
6
8
10
Avg since 1999 3Q14
Real GDP 2,0% 5,0%
US Economic Growth and the Composition of GDP
Source: (Both charts) BEA, FactSet, J.P. Morgan Asset Management. SAAR denotes seasonally adjusted annual rate. Percentages may not sum to 100% due to rounding. Guide to the Markets - Europe. Data as at 31 December 2014.
Real GDP Change quarter on quarter, SAAR
%
Components of GDP 3Q14 nominal GDP, $ trillions
$
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21
13,3% Investment ex-housing
68,2% Consumption
18,2% Government spending
3,2% Housing
-2,9% Net exports
Average
'65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '153
4
5
6
7
8
9
10
11
22
US Employment
Source: (All charts) BLS, FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as at 31 December 2014.
Unemployment rate Seasonally adjusted
%
'93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
63
64
65
66
67
68
Nov 2014: 62,8%
Labour force participation rate % of population aged 16+ working or looking for work
Nov 2014: 5,8%
Average: 6,1%
Glo
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%
'85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '131
2
3
4
5
Employment cost index: Wages and salaries Change year on year for private sector workers
%
Sep 2014: 2,2%
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
0
5
10
15
20
25
'87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
23
US Inflation
Inflation Change year on year
'64 '69 '74 '79 '84 '89 '94 '99 '04 '09 '14-3
0
3
6
9
12
15
Avg since 1964
Avg since 1999
Nov 2014
Headline CPI* 4,2% 2,4% 1,3%
Core CPI 4,1% 2,0% 1,7%
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US Federal Reserve inflation projections Average PCE** projection, December 2014
2014 2015 2017 Longer run
% %
Wages & salaries*** lagged nine months (y/y)
% of small businesses planning to raise worker pay
% %
Planned vs. actual wage rises
Source: (Left) BLS, FactSet, J.P. Morgan Asset Management. (Top right) US Federal Reserve, J.P. Morgan Asset Management. (Bottom right) National Federation of Independent Business (NFIB), BLS, FactSet, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. **Personal consumption expenditure (PCE) measures the prices paid by consumers for goods and services, excluding food and energy prices. ***Wages & salaries is the civilian employment cost index (ECI). Guide to the Markets - Europe. Data as at 31 December 2014.
2016
1,25 1,30
1,85 1,90 2,00
0,0
0,5
1,0
1,5
2,0
2,5
'93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '130
400
800
1.200
1.600
2.000
2.400
24
US Cyclical Indicators
Light vehicle sales Millions, SAAR
Housing starts Thousands, SAAR
Manufacturing and trade inventories Days of sales, seasonally adjusted
Real capital goods orders* Non-defense capital goods orders ex-aircraft, $ billions, seasonally adjusted
'93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '138
10
12
14
16
18
20
22
24
Average: 15,3
Dec 2014: 16,8
'93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '1336
38
40
42
44
46
48
Oct 2014: 39,5
Nov 2014: 1.028
Average: 1.349
'99 '01 '03 '05 '07 '09 '11 '13
45
50
55
60
65
70
75
Average: 57,4
Nov 2014: 61,0
Source: (Top left) BEA, FactSet, J.P. Morgan Asset Management. (Top and bottom right and bottom left) US Census Bureau, FactSet, J.P. Morgan Asset Management. *Capital goods orders deflated using the producer price index for capital goods. SAAR is seasonally adjusted annual rate. Guide to the Markets - Europe. Data as at 31 December 2014.
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$
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
20.000
30.000
40.000
50.000
60.000
70.000
80.000
'99 '01 '03 '05 '07 '09 '11 '1325
50
75
100
125
150
175
'80 '85 '90 '95 '00 '05 '10
10
11
12
13
14
25
US Consumer Finances
Source: (Top and bottom left) US Federal Reserve, FactSet, J.P. Morgan Asset Management. (Right) National Association of Realtors, US Census Bureau, FactSet, J.P. Morgan Asset Management. Price index is the mean existing home sale price. SAAR is seasonally adjusted annual rate. *4Q14 numbers for US household net worth and debt service ratio are J.P. Morgan Asset Management forecasts. Guide to the Markets - Europe. Data as at 31 December 2014.
US home sales, prices and housing starts Rebased to 100 at December 1999
US household debt service ratio Debt payments as % of disposable personal income, seasonally adjusted
%
4Q14*: 9,9%
Household net worth $ billions, SAAR
Price index
Existing home sales
Housing starts
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4Q14*: $82.907 2Q07:
$67.874
+21,2%
+42,9%
+115,0%
$
4Q07: 13,2%
'99 '01 '03 '05 '07 '09 '11 '13
-4
-3
-2
-1
0
1
2
3
'99 '01 '03 '05 '07 '09 '11 '13
-2
-1
0
1
2
3
4
5
Avg since 1999 Nov 2014
Headline CPI* -0,1% 2,4%
Core CPI -0,4% 2,1%
26
Japan: GDP and Inflation
Source: (Left) Japan Statistics Bureau & Statistics Centre, FactSet, J.P. Morgan Asset Management. (Right) Japan Ministry of Health, Labour and Welfare, FactSet, J.P. Morgan Asset Management. *CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - Europe. Data as at 31 December 2014.
Inflation Change year on year
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%
Real GDP growth Change quarter on quarter
%
Avg since 1999 3Q14
Real GDP 0,2% -0,5%
Average
0
30
60
90
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15
'97 '99 '01 '03 '05 '07 '09 '11 '13
-2
-1
0
1
2
3
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '146.000
8.000
10.000
12.000
14.000
16.000
18.000
20.000
70
80
90
100
110
120
130
27
Japan: Abenomics and the Economy
Source: (Top left) US Federal Reserve, Bank of England, Bank of Japan, ECB, J.P. Morgan Economic Research, J.P. Morgan Asset Management. (Bottom left) Japan Ministry of Health, Labour and Welfare, FactSet, J.P. Morgan Asset Management. (Right) FactSet, J.P. Morgan Asset Management. *Projections are based on central banks stated economic intentions. Guide to the Markets - Europe. Data as at 31 December 2014.
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Japanese yen and the stock market
per $ Nikkei 225 Index
Change in 2014 Yen -14,1% Nikkei 225 7,1%
Japanese wage growth Change year on year, three-month moving average
% Wage growth Core inflation
Central bank balance sheet % of nominal GDP
%
Projection*
Japan
US UK
Eurozone
0
5
10
15
20
25
30
6
7
8
9
10
11
12
13
14
15
'00 '02 '04 '06 '08 '10 '12 '14 0
5
10
15
20
25
30
35
1820 1870 1900 1930 1960 1990 2013
%
'99 '01 '03 '05 '07 '09 '11 '13
-6
0
6
12
18
24
28
China: GDP and Inflation
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Inflation Change year on year
%
Chinas share of global nominal GDP
Real GDP Growth and Li Keqiang Index* Change year on year
% Includes: Electricity production Loan growth Railway freight
Real GDP growth Li Keqiang index %
Source: (Left and top right) National Bureau of Statistics of China, FactSet, J.P. Morgan Asset Management. (Bottom right) Angus Maddison, J.P. Morgan Asset Management. *Li Keqiang index refers to an unofficial economic index used to gauge economic activity in China. Popularised by Chinese Premier Li Keqiang, such an index may include a variety of economic indicators. **CPI is the Consumer Price Index. Core CPI is defined as CPI excluding food and energy. Guide to the Markets - Europe. Data as at 31 December 2014.
Nov 2014
Food CPI 2,3%
Headline CPI** 1,4%
Core CPI 1,3%
-40
-20
0
20
40
60
80
100
-40
-20
0
20
40
60
80
100
'04 '06 '08 '10 '12 '14
15
20
25
30
35
40
45
50
'82 '86 '90 '94 '98 '02 '06 '10 '14
GDP growth Change year on year
29
China: Growth and Transformation
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External Accounts
$bn
% Investment GDP growth
Net exports Consumption
%
Investment as a share of GDP
EM Asia ex-China
China
Latin America
DM
Trade balance (rhs)
Imports (lhs)
Exports (lhs) %
Source: (Left and top right) National Bureau of Statistics of China, FactSet, J.P. Morgan Asset Management. (Bottom right) IMF World Economic Outlook October 2014, J.P. Morgan Asset Management. 2014 GDP figure is 3Q14 values. Guide to the Markets - Europe. Data as at 31 December 2014.
-6
-3
0
3
6
9
12
15
18
21
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
0
10
20
30
40
50
'96 '98 '00 '02 '04 '06 '08 '10 '12 '14
0
50
100
150
200
250
300
350
40
60
80
100
120
140
'76 '80 '84 '88 '92 '96 '00 '04 '08 '12
Foreign exchange reserves % of GDP
80
130
180
230
1 27 53 79 105 131
30
China Financial Dynamics
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2013 public, household and non-financial corporate debt % of GDP
Private non-financial debt % of GDP, quarters since the start of debt rise
Source: (Top left) BIS, CEIC, Lombard Street Research, J.P. Morgan Asset Management. (Bottom left) World Bank, J.P. Morgan Asset Management. (Top right) BIS, Lombard Street Research, IMF World Economic Outlook October 2014, J.P. Morgan Asset Management. (Bottom right) Bloomberg, Oxford Economics, FactSet, J.P. Morgan Asset Management. Foreign exchange reserves are year-end percentages for all years until 2014; 2014 data is the most recent available data. Guide to the Markets - Europe. Data as at 31 December 2014.
Japan (1965)
China (1998)
%
Credit to private sector % of GDP
Average: 93%
%
2013: 140%
%
Japan UK US Eurozone China Korea
%
Public debt
Household debt
Non-financial corporate debt
0
10.000
20.000
30.000
40.000
50.000
60.000
0 20 40 60 80 100
15
20
25
30
35
40
'90 '94 '98 '02 '06 '10
31
Emerging Markets Structural Dynamics
Urbanisation and economic growth Urbanisation ratios and real GDP per capita, 1960-2013
Share of global consumption % of global consumption
EM consumption
US consumption
2012: 27%
% 2012: 36%
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%
$ US
Japan
South Korea
China
India
Source: (Left) IMF, J.P. Morgan Asset Management. (Top right) United Nations, J.P. Morgan Asset Management. (Bottom right) IMF World Economic Outlook October 2014, J.P. Morgan Asset Management. Urbanisation ratio refers to the proportion of the total population living within an urban area defined by national statistical offices. *Forecast for 2014 from the IMF World Economic Outlook October 2014. Guide to the Markets - Europe. Data as at 31 December 2014.
Urbanisation ratio
GD
P pe
r cap
ita
Contribution to global GDP growth*
-3
0
3
6
'80 '84 '88 '92 '96 '00 '04 '08 '12
EM growth DM growth
Global economic growth
%
4,5
5,0
5,5
6,0
6,5
7,0
7,5
8,0
8,5
-2,0
-1,0
0,0
1,0
2,0
3,0
4,0
5,0
6,0
'93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '130
50
100
150
200
250 90
100
110
120
130
32
Emerging Markets Challenges
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Real policy rates: Emerging and developed markets
Source: (Left) Bloomberg, J.P. Morgan Asset Management. (Top right) J.P. Morgan Economic Research, J.P. Morgan Asset Management. (Bottom right) MSCI, FactSet, J.P. Morgan Asset Management. *REER is real effective exchange rate. Guide to the Markets - Europe. Data as at 31 December 2014.
% %
Consensus growth forecasts Estimates for next 12 months
Developed markets
Emerging markets
%
Relative EM / DM equity performance and USD REER* Rebased to 1993 = 100
USD REER (inverted)
MSCI EM / MSCI DM
Jan 13 Jul 13 Oct 13 Apr 13 Jan 14 Apr14 Oct 14 Jul 14
-3
-2
-1
0
1
2
3
4
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Indonesia (rhs) Thailand China (rhs)
Russia
Turkey
Brazil
India (rhs)
-45,2
-18,7
-17,4
-13,4
-11,2
-11,1
-9,5
-8,1
-6,3
-4,0
-2,4
-2,0
-1,7
-0,8
-0,1
-50 -40 -30 -20 -10 0 0
2
4
6
8
10
12
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
33
Emerging Markets Currencies
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Source: (Left) FactSet, J.P. Morgan Asset Management. (Top right) MSCI, FactSet, J.P. Morgan Asset Management. (Bottom right) Bloomberg, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as at 31 December 2014.
Emerging market currency volatility
Currency performance in 2014 Performance against the US dollar
Emerging markets real effective exchange rate (REER) Market cap weighted
%
% Asian crisis
Financial crisis
Taper Tantrum
Eurozone crisis
Thai Baht
Philippine Peso
Indonesian Rupiah
Indian Rupee
Chinese Renminbi
South Korean Won
Malaysian Ringgit
Turkish Lira
South African Rand
Brazilian Real
Chilean Peso
Hungarian Forint
Columbian Peso
Russian Rouble
Mexican Peso
95
105
115
125
135
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14
50
75
100
125
150
-250 -125 0 125 250
34
Emerging Markets Sensitivity
Glo
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Source: (Left) MSCI, US Federal Reserve, J.P. Morgan Asset Management. (Right) BP, various national statistics agencies, IMF, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as at 31 December 2014.
EM equity performance and US rate hikes MSCI EM Index in USD, rebased to 100 on the date of first rate hike
Number of trading days before and after the first rate hike
7,7 7,6
6,8 6,4 6,2
5,4 4,7 4,3 3,9 3,9 3,5 3,4 3,4
2,8 2,4
1,5 0,9 0,6
-2,7 -7,4
-14,2 -28,3
-33,7
-40 -30 -20 -10 0 10
Net oil consumption for selected emerging economies Oil consumption minus oil production as a % of GDP
%
Brazil
Qatar UAE
Russia Columbia Mexican
Egypt Malaysia
Peru
Indonesia Turkey
Greece Chile
South Africa
China
India Korea
Taiwan Thailand
Czech Rep. Hungary
Poland Philippines
4 Apr 1994
30 Jun 1999
30 Jun 2004
55,0% MSCI EM
35,8%
20,2% MSCI
Europe 19,6%
26,7% MSCI Asia ex-Japan
38,0%
-23,0% Japan TOPIX -40,6%
73,4% MSCI EM
62,8%
35,4% Small Caps
24,4%
5,5% US S&P 500
2,1%
20,8% MSCI Asia ex-Japan
19,7%
27,2% Small Caps
35,8%
29,5% US S&P 500
13,7%
9,5% US S&P 500
4,9%
11,0% MSCI Asia ex-Japan
10,0% 45,3% Japan TOPIX 45,2%
19,6% MSCI Asia ex-Japan
28,6%
26,1% MSCI EM
33,6%
-33,7% US S&P 500
-37,0%
67,2% MSCI Asia ex-Japan
67,2%
28,3% MSCI Asia ex-Japan
15,6%
3,5% HDY Equity
1,5%
18,1% MSCI
Europe 16,4%
26,7% US S&P 500
32,4%
19,7% MSCI Asia ex-Japan
7,7%
7,3% Small Caps
5,1%
10,1% MSCI EM
10,3%
41,9% MSCI Asia ex-Japan
24,1%
18,6% MSCI EM
28,8%
4,6% Portfolio
11,1%
-37,9% HDY Equity
-34,4%
40,2% Small Caps
40,8%
27,5% MSCI EM
14,4%
-5,7% Small Caps
-8,7%
16,8% MSCI EM
17,4%
21,5% Japan TOPIX 54,4%
16,5% Small Caps
6,7%
4,6% MSCI Asia ex-Japan
2,3%
9,3% Small Caps
8,2%
33,8% Small Caps
23,3%
16,0% HDY Equity
21,6%
3,2% MSCI
Europe 6,5%
-38,6% Small Caps
-40,4%
37,6% Portfolio
35,8%
23,9% Japan TOPIX 1,0%
-5,8% Portfolio
-7,5%
16,3% Small Caps
18,4%
20,5% MSCI
Europe 22,3%
16,2% HDY Equity
8,7%
3,1% Portfolio
2,2%
8,9% US S&P 500
7,7%
33,6% Portfolio
23,9%
12,5% Portfolio
19,4%
-1,0% HDY Equity
4,7%
-40,3% Portfolio -40,1%
34,0% HDY Equity
30,2%
23,1% US S&P 500
15,1%
-7,5% MSCI
Europe -8,8%
15,6% Portfolio
17,1%
15,3% Portfolio
23,6%
15,3% Portfolio
8,2%
2,3% HDY Equity
1,1%
8,5% Portfolio
8,0%
27,0% HDY Equity
17,7%
5,2% Small Caps
13,6%
-4,9% US S&P 500
5,5%
-43,3% MSCI
Europe -38,5%
32,5% MSCI
Europe 28,6%
20,9% Portfolio
11,1%
-9,6% Japan TOPIX -17,0%
14,2% US S&P 500
16,0%
13,9% HDY Equity
20,5%
11,8% MSCI EM
5,6%
1,5% Japan TOPIX 6,3%
8,2% HDY Equity
7,7%
26,7% MSCI
Europe 25,5%
3,6% US S&P 500
15,8%
-8,8% Small Caps
-3,8%
-49,8% MSCI Asia ex-Japan -47,7%
22,5% US S&P 500
26,5%
16,2% HDY Equity
8,0%
-14,3% MSCI Asia ex-Japan -14,6%
13,6% HDY Equity
14,0%
-1,1% MSCI Asia ex-Japan
6,2%
10,1% Japan TOPIX 10,3%
-0,1% MSCI
Europe 0,0%
6,4% MSCI
Europe 6,4%
20,9% US S&P 500
4,9%
-8,7% Japan TOPIX 3,0%
-14,5% Japan TOPIX -11,1%
-50,8% MSCI EM
-45,7%
1,5% Japan TOPIX 7,6%
11,7% MSCI
Europe 7,5%
-15,4% MSCI EM
-12,5%
5,9% Japan TOPIX 20,9%
-6,5% MSCI EM
3,8%
7,4% MSCI
Europe 5,2%
-0,2% MSCI EM
0,1%
3,5% Japan TOPIX 3,9%
35
World Stock Market Returns
Source: MSCI, TOPIX, Standard & Poors, FactSet, J.P. Morgan Asset Management. Local return is analogous to the return from a hedged position. Annualised return covers the period 2005 to 2014. HDY Equity is the MSCI AC World High Dividend Yield Index. Small Caps is the MSCI Europe Small Cap Index. Hypothetical portfolio (for illustrative purposes only and shouldnt be taken as a recommendation): 15% EM Equity, 10% Asia ex Japan, 30% Europe, 10% Japan, 10% HDY Equity, 20% S&P 500, 5% Small Cap. All indices are total return. Guide to the Markets - Europe. Data as at 31 December 2014.
Local
Equi
ties
2010 2005 2007 2006 2012 2008 2011 4Q14 Ten-yr Ann. 2009 2013 2014
European Sector Returns
MSCI Europe Index Financials Cons. staples
Health care Industrials
Cons. disc. Energy Materials
Telecom Utilities Tech Europe
Equi
ties
36
Europe weight
4Q14
2014
Since market peak*
Since market low*
Forward P/E ratio
15-year avg
Trailing P/E ratio
15-year avg
Dividend yield
15-year avg
Growth weight
Value weight
Beta to Europe
Source: FactSet, MSCI, J.P Morgan Asset Management. All calculations are total return in local currency, not annualised. *Since market peak represents period 9 October 2007 to end of latest quarter. Since market low represents period 9 March 2009 to end of latest quarter. **Beta to int. rates is the regression coefficient based on a 10-year regression of daily sector returns on the daily change in the 10-year German Bund yield. Guide to the Markets - Europe. Data as at 31 December 2014.
Beta to int. rates** i
0
500
1.000
1.500
2.000
2.500
3.000
3.500
4.000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
'89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13-4
-2
0
2
4
6
8
37
Bond and Equity Relative Valuations
Source: (All charts) Tullett Prebon, Standard & Poors, FactSet, J.P. Morgan Asset Management. *The equity risk premium is the S&P 500 forward earnings yield less the US Treasury 10-year yield. Guide to the Markets - Europe. Data as at 31 December 2014.
Equity risk premium*
Equi
ties
Equities relatively m
ore expensive Equities relatively
less expensive
Average: 1,7%
%
Histogram: S&P 500 earnings yield (inverse of P/E) Number of days: 1964 2014
31 Dec 2014: lower than 68% of days since 1964
Histogram: Nominal 10-year Treasury yield Number of days: 1964 2014
0
500
1.000
1.500
2.000
2.500
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
31 Dec 2014: lower than 96% of days since 1964
%
%
'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
800
1.000
1.200
1.400
1.600
1.800
Source: MSCI, FactSet, BofA/Merrill Lynch, 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. Euro government bond is the BofA/Merrill Lynch Euro Government (7-10Y) Index. Return calculations shown in green are based on the total return index. Guide to the Markets - Europe. Data as at 31 December 2014.
16 Jul 2007: P/E = 13,5x
1.641
12 Mar 2003: P/E = 11,9x
676
4 Sep 2000: P/E = 21,3x
1.623
9 Mar 2009: P/E = 8,3x
714
-55% +180% -54%
31 Dec 2014: P/E = 14,1x
1.379
MSCI Europe Index
+140%
Characteristic Sep 2000 Jul 2007 Dec 2014 Index level 1.623 1.641 1.379 P/E ratio (fwd) 21,3x 13,5x 14,1x Dividend yield 1,9% 2,9% 3,3% Euro gov bond yld 5,4% 4,5% 1,0%
MSCI Europe Index at Inflection Points
Total return +133%
31 Dec 1996: P/E = 16,3x
714
Equi
ties
38
'00 '02 '04 '06 '08 '10 '12 '140
2
4
6
8
10
12
14
'01 '03 '05 '07 '09 '11 '130
2
4
6
8
10
'99 '01 '03 '05 '07 '09 '11 '135
10
15
20
25
30
39
Earnings yield (inverse of forward P/E)
Source: (Top left) FactSet, J.P. Morgan Asset Management. (Bottom left) Barclays, MSCI, FactSet, J.P. Morgan Asset Management. (Right) MSCI, BofA/Merrill Lynch, FactSet, J.P. Morgan Asset Management. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by consensus estimates for earnings in the next 12 months and is provided by FactSet Market Aggregates. Earnings yield is calculated as the inverse of the forward P/E ratio. Guide to the Markets - Europe. Data as at 31 December 2014.
31 Dec 2014: 1,0%
10-year European bond yield
%
Forward P/E ratio Earnings yield and 10-year bond yield
x
31 Dec 2014: 14,1x
31 Dec 2014: 7,1%
Equi
ties
Europe dividend yield vs. European corporate bonds
Average: 13,7x
Dividend yield
European corporate bond yield
31 Dec 2014: 1,4%
31 Dec 2014: 3,3%
%
MSCI Europe Equity Index Valuations
'07 '08 '09 '10 '11 '12 '13 '145
6
7
8
9
10
11
700
800
900
1.000
1.100
1.200
1.300
1.400
1.500
1.600
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '146
7
8
9
10
11
40
MSCI Europe Earnings and Profit Margins
MSCI Europe earnings and performance Index level, analyst estimates of the next 12 months of earnings
Source: (Left) MSCI, FactSet, J.P. Morgan Asset Management. (Top right) Markit, MSCI, FactSet, J.P. Morgan Asset Management. (Bottom right) MSCI, Standard & Poors, FactSet, J.P. Morgan Asset Management. *Data is last 12 months. Guide to the Markets - Europe. Data as at 31 December 2014.
Equi
ties
Economic growth and revenue growth estimates 12-month revenue growth & PMI for manufacturing (advanced 12 months)
US and European operating profit margins Earnings per share/sales per share for MSCI Europe and S&P 500*
US
Europe
%
%
Manufacturing PMI Revenue growth
MSCI Europe index level
MSCI Europe profits
30
40
50
60
70
-15
-10
-5
0
5
10
15
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
800
1.000
1.200
1.400
1.600
1.800
2.000
2.200
Source: Standard & Poors, FactSet, J.P. Morgan Asset Management. The 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. Return calculations shown in green are based on the total return index. Guide to the Markets - Europe. Data as at 31 December 2014.
S&P 500 Index
41
US S&P 500 at Inflection Points
24 Mar 2000: P/E = 25,6x
1.527
9 Oct 2002: P/E = 14,1x
777
9 Oct 2007: P/E = 15,2x
1.565
+244%
9 Mar 2009: P/E = 10,3x
677
-47% -55%
31 Dec 2014: P/E = 16,2x
2.059
+121%
Characteristic Mar 2000 Oct 2007 Dec 2014 Index level 1.527 1.565 2.059 P/E ratio (fwd) 25,6x 15,2x 16,2x Dividend yield 1,1% 1,8% 2,1% 10-year Treasury 6,2% 4,7% 2,2%
31 Dec 1996: P/E = 16,0x
741
Total return +116%
Equi
ties
'89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '133
4
5
6
7
8
9
10
11
'89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
12
16
20
24
28
'00 '10 '20 '30 '40 '50 '60 '70 '80 '90 '00 '100
10
20
30
40
50
42
US S&P 500 Equity Valuations
Earnings yield and Baa corporate bond yield
30 Nov 2014: 4,7%
%
31 Dec 2014: 6,2% Baa corporate
bond yield
Earnings yield (inverse of forward P/E)
Forward P/E ratio 31 Dec 1999:
25,4x
x
Source: (Left) Standard & Poors, Moodys, IBES, FactSet, J.P. Morgan Asset Management. (Top right) Standard & Poors, FactSet, J.P. Morgan Asset Management. Forward P/E ratio is a bottom-up calculation based on the most recent price data divided by consensus estimates for earnings in the next 12 months and is provided by FactSet Market Aggregates. (Bottom right) Robert Shiller, FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as at 31 December 2014.
S&P 500 Shiller cyclically adjusted P/E Adjusted using trailing 10-year average inflation-adjusted earnings
Equi
ties
31 Dec 2014: 27,3x
Average: 16,5x
x
Average: 16,2x
31 Dec 2014: 16,2x
43
US S&P 500 Earnings and Profit Margins
'07 '08 '09 '10 '11 '12 '13 '1460
70
80
90
100
110
120
130
600
800
1.000
1.200
1.400
1.600
1.800
2.000
S&P 500 earnings and performance Index level, analyst estimates of the next 12 months of earnings
S&P 500 index level S&P 500 profits
Equi
ties
$
Employee compensation and profitability % of GDP
'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '1550
52
54
56
58
60
2
4
6
8
10
12% %
Corporate profits Employee compensation
%
US operating profit margins Earnings per share / sales per share for S&P 500*
Source: (Left and top right) Standard & Poors, FactSet, J.P. Morgan Asset Management. (Bottom right) BEA, FactSet, J.P. Morgan Asset Management. *Data is last 12 months. **3Q14 profit margins are based on an estimate from Standard & Poors. Guide to the Markets - Europe. Data as at 31 December 2014.
0
2
4
6
8
10
12
'93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
3Q14**: 10,1%
-0,8
-0,6
-0,4
-0,2
0,0
0,2
0,4
0,6
0,8
0 2 4 6 8 10 12 14 16
44
Interest Rates and Equities
Correlations between weekly equity returns and interest rate movements Rolling two-year correlation of weekly returns of the S&P 500, MSCI Europe Index and the 10-year Treasury yield, 1980 - 2014
Positive relationship between yield movements and equity returns
Negative relationship between yield movements and equity returns
S&P 500
MSCI Europe
Cor
rela
tion
10-year Treasury yield
Equi
ties
Source: Standard & Poors, US Treasury, MSCI, FactSet, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. The initial reaction represents the period during which, in our judgment, markets began pricing the first rate hike through the date of the second rate hike. The subsequent market reaction is the period from the second rate hike to a point determined to be the end of the rate hiking cycle. The total reaction is the market movement across the full rate hiking cycle. Guide to the Markets - Europe. Data as at 31 December 2014.
Market reaction when the US Fed raised rates
S&P 500 price return 87 87-89 94-95 99-00 04-06
Initial reaction -5% -8% -10% -7% -8%
Subsequent market reaction
32% 27% 7% 18% 20%
Total reaction 26% 17% -2% 10% 11%
%
45
Developed Markets Equity Valuations by Country
Developed markets
Source: MSCI, FactSet, J.P. Morgan Asset Management. Each valuation index shows an equally weighted composite of four metrics: price to forward earnings (forward P/E), price to current book (P/B), price to last 12 months cash flow (P/CF) and price to last 12 months dividends. Results are then normalised using means and average variability over the last 10 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). Guide to the Markets - Europe. Data as at 31 December 2014.
Std
dev
from
glo
bal a
vera
ge
Expensive relative to
own history
Expensive relative to
world
Cheap relative to own history Cheap
relative to world
How to interpret this chart
Average
Current
Current composite index
Current 10-year average
Forward P/E P/B P/CF Dividend yield Forward P/E P/B P/CF Dividend yield
Italy -2,27 12,5x 0,9x 3,7x 3,5% 11,4x 1,0x 3,8x 4,4% Spain -1,94 14,0 1,3 4,8 5,4 11,1 1,4 4,5 6,1 UK -0,76 13,8 1,8 7,3 3,9 11,7 1,8 7,1 3,8 France -0,68 13,8 1,4 7,7 3,3 11,6 1,3 6,0 3,9 Germany -0,58 12,9 1,6 7,5 2,9 11,6 1,5 5,3 3,5 Japan 0,63 14,3 1,4 8,1 1,8 16,5 1,2 6,2 2,1 ACWI 0,65 14,8 2,1 8,7 2,5 13,3 2,0 7,3 2,6 DM Index 1,00 15,4 2,2 9,3 2,4 13,6 1,9 7,5 2,7 Switzerland 1,32 15,7 2,5 11,3 3,2 13,9 2,3 10,2 3,1 US 2,55 16,4 2,8 11,0 1,9 14,2 2,3 8,7 2,1
Equi
ties
+3 Std Dev
+2 Std Dev
+1 Std Dev
Average
-1 Std Dev
-2 Std Dev
-3 Std Dev
+5 Std Dev
+4 Std Dev
-4 Std Dev
+6 Std Dev
-5 Std Dev Italy Spain UK France Germany Japan ACWI US Switzerland DM Index
46
Emerging Markets Equity Valuations by Country
Emerging markets
Source: MSCI, FactSet, J.P. Morgan Asset Management. Each valuation index shows an equally weighted composite of four metrics: price to forward earnings (forward P/E), price to current book (P/B), price to last 12 months cash flow (P/CF) and price to last 12 months dividends. Results are then normalised using means and average variability over the last 10 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). Guide to the Markets - Europe. Data as at 31 December 2014.
Expensive relative to
own history
Expensive relative to
world
Cheap relative to
own history Cheap relative to
world
Average
Current
Std
dev
from
glo
bal a
vera
ge
How to interpret this chart
Current composite index
Current 10-year average Forward P/E P/B P/CF Dividend yield Forward P/E P/B P/CF Dividend yield
Russia -5,32 3,8x 0,4x 1,8x 6,6% 7,1x 1,1x 3,8x 2,7% Brazil -2,50 10,2 1,2 5,2 4,5 10,0 1,9 5,7 3,3 China -2,31 9,4 1,4 4,0 3,2 11,8 2,1 4,5 2,8 EM Index -1,48 11,0 1,4 5,4 2,8 11,1 1,9 6,0 2,7 Taiwan -0,56 13,2 1,9 6,9 3,0 14,5 1,9 6,3 3,7 S. Korea 0,02 9,6 1,0 5,8 1,3 9,6 1,4 5,4 1,7 ACWI 0,65 14,8 2,1 8,7 2,5 13,3 2,0 7,3 2,6 S. Africa 1,36 15,7 2,6 11,0 3,0 12,0 2,5 8,8 3,2 Mexico 2,91 18,3 2,6 7,1 1,4 15,0 2,9 6,7 1,9 India 3,71 16,7 3,0 12,2 1,5 15,8 3,2 12,5 1,4
Equi
ties
Russia Brazil China EM Index Taiwan S. Korea ACWI S. Africa India Mexico
+3 Std Dev
+2 Std Dev
+1 Std Dev
Average
-1 Std Dev
-2 Std Dev
-3 Std Dev
+5 Std Dev
+4 Std Dev
-4 Std Dev
+6 Std Dev
-5 Std Dev -6 Std Dev
+7 Std Dev
-80
-60
-40
-20
0
20
40
60
80
100
0,75 1,00 1,25 1,50 1,75 2,00 2,25 2,50 2,75 3,00 3,25
Current level
47
Source: (Both charts) MSCI, FactSet, J.P. Morgan Asset Management. Linear regression of price-to-book ratios on next 12 months price return from September 1995 through December 2014 results in a R-squared of 0,17%. Guide to the Markets - Europe. Data as at 31 December 2014.
Equi
ties
MSCI Emerging Markets Index: Price to book and returns Price-to-book ratio and next 12 months price return
%
Emerging Markets Valuations and Returns
'95 '97 '99 '01 '03 '05 '07 '09 '11 '130,75
1,00
1,25
1,50
1,75
2,00
2,25
2,50
2,75
3,00MSCI Emerging Markets Index: Price to book
Average: 1,81x
Dec 2014: 1,52x
-2,0 Std dev
+2,0 Std dev
x
48
Emerging Markets Equity Composition
MSCI Emerging Markets Index by region
MSCI Emerging Markets Index by sector
MSCI Emerging Markets indices: Country index by sector
Source: (All charts) MSCI, FactSet, J.P. Morgan Asset Management. Defensive is comprised of health care, telecommunication services and utility sectors. Ind. & mat. is industrials and materials sectors. Percentages may not sum to 100% due to rounding. Guide to the Markets - Europe. Data as at 31 December 2014.
EMEA
Asia
Latin America
Equi
ties
Defensive
Ind. & mat.
Financials
Tech
Consumer
Energy
%
Defensive
Ind. & mat.
Financials
Tech
Consumer
Energy
Brazil Russia India China Mexico S. Korea Turkey Indonesia
13%
14%
8%
29%
18%
17% 16%
68%
17%
25% 10%
20% 9%
36% 22% 19%
32%
4% 23%
12%
41% 35%
15%
18%
42% 17%
14%
49% 40%
10%
58%
11% 11%
2% 4% 3%
17% 11%
13% 9%
26%
18% 18% 11%
9% 7% 15% 17% 20% 4% 10% 15%
0
20
40
60
80
100
29,3
27,2
26,4
23,9
19,1
16,8
8,3
5,7
5,5
-1,8
-9,2
-10,7
-10,7
-12,2
-13,6
-13,7
-19,8
-27,4
-45,9
-50 -40 -30 -20 -10 0 10 20 30 40 50
49
Emerging Markets: Performance, Dividends and Earnings Growth
Equi
ties
Source: (Left) MSCI, FactSet, J.P. Morgan Asset Management. (Right) MSCI, IBES, FactSet, J.P. Morgan Asset Management. Regular dividends only in local currency. Guide to the Markets - Europe. Data as at 31 December 2014.
MSCI EM Index: Long-term growth in dividends per share (DPS) and earnings per share (EPS) Rebased to 100 at December 1995
EM EPS (fwd)
DM EPS (fwd)
DM DPS
EM DPS
MSCI country performance 2014, total return in USD
Russia
Hungary Colombia
Brazil
Poland
Chile
S. Korea Malaysia
Mexico
DM Index
S. Africa
China
Thailand Turkey
India
Indonesia
Egypt
Philippines
MSCI EM
% '95 '97 '99 '01 '03 '05 '07 '09 '11 '130
50
100
150
200
250
300
350
400
450
500
4,7% 5,4% 6,0% 5,1% 3,3% 4,2% 4,4% 2,5% 1,8%
2,7% 4,0%
13,9%
-5,3%
3,0% 13,6%
4,4% 1,6%
12,6% 15,3%
-2,7%
16,6% 5,9%
-10
-5
0
5
10
15
20
25
1926-1929 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010-2014 1926-2014
0,1 0,5
1,0
2,9 3,2 3,3
3,8
6,2 6,6
0
1
2
3
4
5
6
7
'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
50
100
150
200
Source: (Top) Standard & Poors, Ibbotson, J.P. Morgan Asset Management. (Bottom left) MSCI, FactSet, J.P. Morgan Asset Management. (Bottom right) Eurostat, Tullett Prebon, Barclays, J.P. Morgan Economic Research, MSCI, BofA/Merrill Lynch, FactSet, J.P. Morgan Asset Management. Total return index is the S&P 500. European corporate: BarCap European Aggregate Credit Corporate Index; Emerging markets debt: JP Morgan EMBI+; High yield: BofA/Merrill Lynch High Yield Master II; EME: MSCI Emerging Markets Index, Converts is the Barclays Global Convertibles. Global REITs: FTSE NAREIT Index. Yields for the bond indices are yield-to-worst and dividend yields for the equity indices. *Returns in local currency. Guide to the Markets - Europe. Data as at 31 December 2014.
Equity Income
MSCI Europe indices: Price vs. total return* Rebased to 100 at December 1999
Sources of income
S&P 500 total return: Dividends and capital appreciation Average annualised returns Capital appreciation
Dividends
Eurozone average CPI inflation (12 months to Nov 2014)
Cash Bunds Converts Euro corp
EM Debt
Global REITs
Equi
ties
%
50
EM equity
High dividend yield total return Total return Price return
+115%
+47%
-9%
High Yield
MSCI Europe
%
51
Equity Dividends and Valuations
Relative valuation of high dividend yielding equities Valuation vs. long-term average, three-month moving average
Europe
US
Emerging markets
Source: (Left) IBES, Compustat, FactSet, J.P. Morgan Asset Management. (Top and bottom right) MSCI, FactSet, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as at 31 December 2014.
Equi
ties
Defensives vs. cyclicals PE ratio MSCI All Country World Index Defensive
sectors more expensive
Cyclical sectors more
expensive
Number of companies yielding greater than 2% by region Constituents of the MSCI All Country World Index
80
85
90
95
100
105
110
115
120
125
'00 '02 '04 '06 '08 '10 '12 '14
504
303 232
83
0
100
200
300
400
500
600
Emerging Markets
Europe US Japan
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '140,4
0,5
0,6
0,7
0,8
0,9
Average: 0,73
0
10
20
30
40
50
60
70
'26 '32 '38 '44 '50 '56 '62 '68 '74 '80 '86 '92 '98 '04 '10
52
Equity Correlations and Volatility
Stock market volatility
Global large cap stocks Correlations among stocks
'30 '35 '40 '45 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '150,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
0
15
30
45
60
75
90
DJIA volatility shown in three-month
moving average
Source: (Top) Empirical Research Partners LLC, Standard & Poors, J.P. Morgan Asset Management. (Bottom) CBOE, Deutsche Boerse, Dow Jones, FactSet, J.P. Morgan Asset Management. Capitalisation-weighted correlation of top 750 stocks by market capitalisation, daily returns, 1926 2014. DJIA volatility is represented as three-month moving average of the daily absolute percentage change in the Dow Jones Industrial Average. Guide to the Markets - Europe. Data as at 31 December 2014.
%
Volatility measures 2008 peak Average Latest DJIA (left) 3,30% 0,71% 0,56% VIX (right) 80,9 20,0 19,2 VDAX 74,0 22,2 19,5
Sovereign Debt Crisis
Lehman Bankruptcy
Tech Bust & 9/11
1987 Crash Great Depression
OPEC Oil Crisis
Cuban Missile Crisis
Dec 2014: 37,4%
Equi
ties
%
Average: 27,0%
53
Annual Returns and Intra-year Declines
MSCI Europe Index intra-year declines vs. calendar year returns Despite average intra-year drops of 15,6% (median 11,9%), annual returns are positive in 27 of 35 years
Source: MSCI, FactSet, J.P. Morgan Asset Management. Returns are based on price only and do not include dividends. Intra-year decline refers to the largest market fall from peak to trough within a short time period during the calendar year. Returns shown are calendar years from 1980 to 2014. Guide to the Markets - Europe. Data as at 31 December 2014.
Intra-year decline Calendar year return
%
Equi
ties
13
2
15
34
16
39
21
-18
22
28
-19
13
6
34
-8
12
20
35
20
28
-4
-18
-31
17
9
22
16
3
-41
23
4
-12
12
18
2
-11
-15
-7 -4
-11
-3
-10
-35
-6
-11
-24
-11
-18
-4
-16
-6 -5
-12
-31
-9 -12
-35 -37
-22
-8 -6
-12 -12
-48
-26
-15
-25
-15 -12 -12
-50
-40
-30
-20
-10
0
10
20
30
40
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
28,9% EM Sov (USD) 11,9%
9,8% Global HY
12,2%
7,5% US Treas.
9,0%
14,2% US Treas.
13,7%
58,2% Global HY
57,7%
23,7% EM Sov
(LC) 11,1%
12,9% EM Sov (USD) 9,2%
18,6% Global HY
19,2%
6,2% Global HY
6,5%
20,9% EM Sov (USD) 6,2%
3,4% EM Sov (USD) -0,9%
9,0% EM Sov (USD) 7,7%
22,5% EM Sov
(LC) 10,7%
3,1% EM Sov
(LC) 8,6%
6,5% EM Sov
(LC) 6,4%
8,8% Govt.
(ex-US) 8,1%
22,0% EM Sov (USD) 25,9%
19,6% EM Sov (USD) 11,8%
10,6% US Treas.
9,8%
16,2% EM Sov (USD) 18,0%
0,9% Govt.
(ex-US) 1,1%
9,2% Govt.
(ex-US) 9,2%
2,9% Govt.
(ex-US) 2,9%
8,0% EM Sov
(LC) 8,9%
6,4% Portfolio
5,4%
2,2% Portfolio
5,2%
3,4% Govt.
(ex-US) 4,9%
0,1% Portfolio
1,0%
18,2% EM Sov
(LC) 8,6%
15,2% Global HY
15,1%
5,8% Portfolio
6,0%
15,0% EM Sov
(LC) 14,4%
-0,1% Global IG
0,1%
8,5% EM Sov
(LC) 9,0%
1,9% US Treas.
1,9%
7,3% Global HY
8,3%
4,4% Global HY
5,6%
1,4% Global IG
3,6%
3,2% Portfolio
4,9%
-0,3% EM Sov
(LC) 10,9%
16,6% Global IG
16,6%
8,8% Portfolio
7,1%
5,2% Global IG
4,8%
10,7% Global IG
10,9%
-1,5% Portfolio
0,2%
7,9% Portfolio
7,3%
1,7% Global IG
1,8%
5,5% Portfolio
5,9%
4,4% Govt.
(ex-US) 5,5%
1,2% Govt.
(ex-US) 3,4%
1,8% Global IG
3,2%
-5,0% EM Sov (USD) -9,7%
13,9% Portfolio
13,1%
7,2% Global IG
7,2%
4,9% Govt.
(ex-US) 4,2%
9,2% Portfolio
9,5%
-2,9% US Treas.
-2,7%
7,5% Global IG
7,6%
1,5% Portfolio
1,7%
4,6% Global IG
5,1%
2,3% Global IG
3,5%
0,9% US Treas.
3,1%
0,6% Global HY
2,0%
-5,3% Global IG
-5,1%
2,4% Govt.
(ex-US) 2,3%
6,1% US Treas.
5,9%
3,5% Global HY
3,6%
5,2% Govt.
(ex-US) 5,4%
-12,3% EM Sov (USD) -8,3%
5,0% US Treas.
5,1%
-1,5% EM Sov
(LC) 2,3%
4,3% Govt.
(ex-US) 4,7%
1,6% US Treas.
2,8%
-1,2% EM Sov (USD) 10,5%
-4,0% EM Sov (USD) 6,5%
-27,9% Global HY
-25,2%
-3,8% US Treas.
-3,6%
3,0% Govt.
(ex-US) 2,9%
1,5% EM Sov
(LC) 9,7%
1,9% US Treas.
2,0%
-12,9% EM Sov
(LC) -0,2%
2,3% Global HY
2,6%
-1,7% Global HY
-1,6%
4,0% US Treas.
4,4%
54
Fixed Income Sector Returns
Source: Barclays Capital, FactSet, J.P. Morgan Asset Management. Annualised return covers the period from 2005 to 2014. Global HY: Barclays Global High Yield; US Treasury: Barclays US Aggregate Government Treasury; Govt. (ex-US): Barclays Global Treasury ex-US; EM Sov Debt (USD): JP Morgan EMBI+; Global Corp (IG): Barclays Global Aggregate Corporates; EM Sov Debt (LC): JPMorgan GBI-EM Global. Hypothetical portfolio (for illustrative purposes only and shouldnt be taken as a recommendation): 15% US Treasury; 30% Treasury (ex-US); 5% EM Debt (USD); 10% Global HY; 10% EM Sov Debt (LC); 30% Global Corp (IG). Multi-currency indices are hedged. Guide to the Markets - Europe. Data as at 31 December 2014.
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2010 2005 2007 2006 2012 2011 4Q14 Ten-yr Ann. 2009 2013 2014 2008
Yield Return* 10-year correlation
Europe Treasuries # of issues Mkt. value ($ billions) Avg. maturity 31/12/2014 30/09/2014 4Q14 2014 10-year Bund
10-year Treasury
Europe bonds
1-3 years 106 1.754 1,9 years 0,31% 0,36% 0,12% 1,55% 0,44 0,17
5-7 years 59 1.251 6,0 0,76 1,03 1,72 9,99 0,83 0,58
10+ years 122 2.937 21,3 1,94 2,43 7,95 26,97 0,85 0,66
US Treasuries 1-3 years 95 2.528 2,0 years 0,68% 0,60% 0,19% 0,63% 0,46 0,65
5-7 years 39 986 6,1 1,85 2,04 1,83 4,84 0,74 0,95
10-20 years 14 128 13,4 2,31 2,71 4,83 14,53 0,79 1,00
Sector
MBS 410 5.070 6,5 years 2,60% 2,88% 1,79% 6,08% 0,63 0,80
IG credit 8.914 7.583 8,8 2,57 2,61 0,06 3,15 0,08 0,25
High yield 3.366 2.128 6,3 6,68 6,04 -2,51 0,01 -0,29 -0,20
Floating rate 492 343 2,1 0,71 0,54 -0,16 0,65 -0,26 -0,21
Convertibles 821 358 0,0 3,34 3,12 1,09 6,02 -0,45 -0,41
EMD USD sovereign 328 516 12,3 5,66 5,32 -0,61 7,15 0,06 0,22
EMD USD corporate 553 412 6,7 5,78 4,99 -2,08 3,91 -0,04 0,11
EMD LC sovereign 431 1.750 7,3 5,41 5,44 -4,19 -1,91 -0,19 -0,09
55
Fixed Income Market Data
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Source: Barclays Capital, FactSet, J.P. Morgan Asset Management. Fixed income sectors shown are represented by the following indices: Europe Treasuries Barclays Pan-Euro Aggregate Government-Treasury indices, US Treasuries Barclays US Treasury indices, MBS Barclays US Aggregate Securitized-MBS, IG Credit Barclays Global Aggregate-Corporates, High yield Barclays Global High Yield, Floating rate Barclays US Floating Rate Notes, Convertibles Barclays Global Convertibles Composite, EMD USD sovereign Barclays Emerging Markets USD Aggregate Sovereign, EMD USD corporate Barclays Emerging Markets USD Aggregate Corporate, EMD LC sovereign Barclays Emerging Market Local Currency Government. *Return is in local currency of the index and unhedged. Guide to the Markets - Europe. Data as at 31 December 2014.
56
Policy and Real Rates
'99 '01 '03 '05 '07 '09 '11 '13
-2
0
2
4
6
8
'99 '01 '03 '05 '07 '09 '11 '13
-2
0
2
4
6
US Federal Reserve
Real interest rate Nov 2014: -1,46%
Fed funds 31 Dec 2014:
0,25%
%
Source: (Top left) Bank of England, ONS, FactSet, J.P. Morgan Asset Management. (Top right) US Federal Reserve, BLS, FactSet, J.P. Morgan Asset Management. (Bottom left) ECB, Eurostat, FactSet, J.P. Morgan Asset Management. (Bottom right) Bank of Japan, Japanese Statistics Bureau & Statistics Centre, FactSet, J.P. Morgan Asset Management. Real interest rate is policy rate less core CPI inflation. Guide to the Markets - Europe. Data as at 31 December 2014.
Bank of England
Real interest rate Nov 2014: -0,67%
Base rate 31 Dec 2014:
0,50%
%
'99 '01 '03 '05 '07 '09 '11 '13
0
2
4
European Central Bank
Real interest rate Nov 2014: -0,62%
Repo rate 31 Dec 2014:
0,05%
%
Bank of Japan
'99 '01 '03 '05 '07 '09 '11 '13-2,5
-2,0
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
Real interest rate Nov 2014: -2,06%
Call rate 31 Dec 2014:
0,10%
%
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Current and historical yields for selected indices Last 10 years*
Fixed Income Interest Rate Risk
Source: (Both charts) Barclays, FactSet, J.P. Morgan Asset Management. *Historical spread analysis is based on the last 10 years of data, with the exception of 10+ yrs UK Treasuries and local currency emerging markets debt, which are based on nine years and six years of data, respectively, due to data availability. Fixed income sectors shown are provided by Barclays Capital and are represented by Treasury Europe: Barclays Pan-Euro Aggregate Government - Treasury Index; Floating Rate Barclays US Floating Rate Notes (BBB); IG credit: Barclays Global Aggregate Corporates Index; High yield: Barclays Global High Yield Index; EMD sovereign ($): Barclays Emerging Markets Sovereigns index; EMD corporate ($): Barclays Emerging Markets Corporates Index; EMD sovereign (LC): Barclays Emerging Market Local Currency Government Index. For illustrative purposes only. Change in bond price is calculated using both duration and convexity. Guide to the Markets - Europe. Data as at 31 December 2014.
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Treasury: Europe 1-3 years 5-7 years 10+ years
Investment- grade credit High yield
EMD USD sovereign
EMD USD corporate
EMD LC sovereign
Floating Rate
%
Price return Total return
Average
Current
Max
Min
How to interpret this chart
Treasury: Europe
1-3 years 5-7 years 10+ years Investment- grade credit
High yield EMD USD sovereign
EMD USD corporate
EMD LC sovereign
Floating rate
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
0
5
10
15
20
25
-15
-10
-5
0
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Liquidity and Duration Risks
US corporate debt market liquidity $ billions
Mark to market: Interest rate risks Estimated amount of yield increase to wipe out next years income
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Dealer inventories (lhs)
IG corporate debt outstanding (rhs)
Current yield $ $
159
93 102
56 43
27
22 12
0
100
200
300
400
500
600
700
800
900 bps
A 102 bps increase in yield wipes out
income earned through the end of
2015
0
500
1.000
1.500
2.000
2.500
3.000
3.500
4.000
0
100
200
300
400
500
600
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 EMD USD
EMD Sovereign
Global IG
US IG Global HY
US Treasuries
UK Gilts Euro Aggregate
Govt Source: (Left) Federal Reserve Bank of New York, Barclays, J.P. Morgan Asset Management. (Right) Barclays, FactSet, J.P. Morgan Asset Management. Interest rate risks chart assumes that all investments are issued at par and are made on 31 December 2014, with no re-investment of income and with no consideration to convexity characteristics. Fixed income sectors shown are provided by Barclays Capital and are represented by Barclays Global High Yield, Barclays Emerging Market Local Currency Government, Barclays Emerging Markets USD Aggregate, Barclays Global Credit Corporate, Barclays US Aggregate Credit - Corporate - Investment Grade, Barclays US Aggregate Government - Treasury (7-10 Y), Barclays UK Gilt (7-10 Y), Barclays Euro Aggregate Government - Treasury (7-10 Y). Guide to the Markets Europe. Data as at 31 December 2014.
-500
0
500
1.000
1.500
2.000
2.500
3.000
3.500
4.000
4.500
'07 '08 '09 '10 '11 '12 '13 '14 '15
59
Global Bond Supply and Demand
Estimated global bond demand $ billions per annum
Estimated global bond supply $ billions per annum
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Source: (Both charts) Central bank sources, ICI, Bloomberg, IMF, J.P. Morgan Securities, J.P. Morgan Asset Management. Guide to the Markets - Europe. Data as at 31 December 2014.
-500
0
500
1.000
1.500
2.000
2.500
3.000
3.500
4.000
4.500
'07 '08 '09 '10 '11 '12 '13 '14 '15
Banks, pension funds, insurance companies Retail funds
Foreign official
G4 central banks
Other bonds
Government bonds $ $
Estimated $2.600 bn
Estimated $2.000 bn
'10 '11 '12 '13 '140,5
1,0
1,5
2,0
2,5
3,0
'06 '07 '08 '09 '10 '11 '12 '13 '140
2
4
6
8
10
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Government and Investment Grade Bond Yields
'06 '07 '08 '09 '10 '11 '12 '13 '140,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
5,0
5,5Ten-year bond yields
%
US
Germany UK
Yield curve steepness Ten-year government bond yield less two-year government bond yield
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Source: (Left and bottom right) Tullett Prebon, FactSet, J.P. Morgan Asset Management. (Top right) Barclays, FactSet, J.P. Morgan Asset Management. Investment grade bond yields shown are provided by Barclays Capital and are represented by US: Barclays US Aggregate Corporate Investment Grade, UK: Barclays Sterling Aggregate Non-Gilts Corporate, Eurozone: Barclays Euro-Aggregate Corporate. Guide to the Markets - Europe. Data as at 31 December 2014.
US
Germany UK
%
Investment grade bond yields
%
US
Eurozone UK
0
500
1.000
1.500
2.000
0
5
10
15
20
'86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
0
10
20
30
40
50
60
70
'82 '85 '88 '91 '94 '97 '00 '03 '06 '09 '12 0
100
200
300
400
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14
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US High Yield Bonds
US historical high yield recovery rates High yield bonds, cents on the dollar
US high yield spreads and defaults
%
Average: 41,8 cents
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