Guide to the Markets...Shogo Maekawa Vice President Global Market Strategist Chaoping Zhu, CFA Vice President Global Market Strategist Hannah J. Anderson Associate Global Market Strategist

Guide to the Markets

MARKET INSIGHTS

Asia | 2Q 2019 | As of March 31, 2019

Quarterly Perspectives Asia | 2Q 2019

The opinions and views expressed here are those held by the author at the date of publication which are subject to change and are not to be taken as or construed as investment advice.

STRATEGISTS

Tai HuiManaging DirectorChief Market Strategist Asia Pacific

Kerry Craig, CFAExecutive DirectorGlobal Market Strategist

Yoshinori ShigemiExecutive DirectorGlobal Market Strategist

Dr. Jasslyn Yeo, CFAExecutive DirectorGlobal Market Strategist

Marcella ChowVice President Global Market Strategist

Ian HuiVice PresidentGlobal Market Strategist

Agnes LinVice PresidentGlobal Market Strategist

Shogo MaekawaVice PresidentGlobal Market Strategist

Chaoping Zhu, CFAVice PresidentGlobal Market Strategist

Hannah J. AndersonAssociate Global Market Strategist

J.P. Morgan Asset Management is pleased to present the latest edition of Quarterly Perspectives. This piece explores key themes from our Guide to the Markets, providing timely economic and investment insights.

THIS QUARTER’S THEMES

Keep the global economy gliding

China: Go with the flow, but with caution

Fixed income investing amid Fed’s late-cycle pause

Asian equities: Not a temporary bounce

1

2

3

4

|GTM – Asia 15

15

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Source: Australian Industry Group, J.P. Morgan Economic Research, Markit, J.P. Morgan Asset Management.PMIs are relative to 50, which indicates contraction (below 50) or expansion (above 50) of the sector. *Developed market includes Australia, Canada, Denmark, Euro area, Japan, New Zealand, Norway, Sweden, Switzerland, UK and U.S. Emerging market includes Brazil, Chile, China, Colombia, Croatia, Czech Republic, Hong Kong SAR, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Philippines, Poland, Romania, Russia, Saudi Arabia, Singapore, South Africa, Taiwan, Thailand, Turkey and Vietnam. **% of countries available with a manufacturing PMI above 50.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

Developed and emerging market manufacturing PMI* Global manufacturing activity% of markets in expansionary territory**

DM PMI

EM PMI

Global Purchasing Managers’ Index (PMI): Manufacturing

30

35

40

45

50

55

60

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '190%

20%

40%

60%

80%

100%

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

|GTM – Asia 9

9

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y 2018 and 2019 Chinese policy measures

Source: Various news sources, J.P. Morgan Asset Management.*CPC is the Communist Party of China and the 6 aspects are employment, financial markets, trade, foreign investment, domestic investment and expectations. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

China: Policy stimulus timeline

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Cuts in tax, fee and social security payments

Central Economic Work Conference agreed to even stronger stimulus policies

Individual income tax cut

100bps reserve requirement ratio (RRR) cut

Special deductible items introduced in individual income tax

50bps targeted RRR cut

100bps RRR cut

100bps RRR cut

RMB 1.35 trillion local government special bond issuance push

1% point cut to value-added tax (VAT) rate

Politburo of the CPC Central Committee: stability in 6 aspects needed*

2019

Fiscal policyMonetary policy Announcements of policy intention

2018

RMB 1.39 trillion local government bond issuance push

|GTM – Asia 12

12

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and

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y

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

-1,000

0

1,000

2,000

3,000

4,000

5,000

'15 '16 '17 '18 '19

0.0x0.5x1.0x1.5x2.0x2.5x3.0x3.5x4.0x4.5x

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Total social financingRMB billions Year-over-year change, 3MMA

Debt level by sector% of GDP

Credit growth to GDP growthBroad credit measure*, ratio, year-over-year change, 3-month moving average

Source: J.P. Morgan Asset Management; (Top) CEIC, China Central Depository & Clearing Co., People’s Bank of China, Shanghai Clearing House; (Bottom right) BIS; (Bottom left) CEIC, People’s Bank of China. Credit growth to GDP growth ratio utilizes rolling 12-month nominal GDP and broad credit. CPI stands for consumer price index and PPI stands for producer price index. *The broad credit measure consists of all reported bank claims on the domestic economy, plus bankers’ acceptances, entrusted loans, trust loans, new net corporate bond and non-financial equity financing, issuance of asset-backed securities and interbank loans. **Wenzhou SME crisis refers to the wave of bankruptcies and funding problems faced by a large number of SMEs in Wenzhou in 2011. ***LGFV refers to local government financing vehicle. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

Rapid rebound in CPI & PPI

'08 '10 '12 '14 '16 '1870%

90%

110%

130%

150%

170%

190%

0%

10%

20%

30%

40%

50%

60% Government

Non-financial corporations

Households

Total social financing

Global Financial Crisis

Loosening: 216bps rate cuts, 4tn stimulus

Tightening: 125bps rate hikes, BASEL III adoption

Wenzhou small and medium enterprise (SME) crisis**

Interbank liquidity crunchLoosening: 56bps

rate cuts, trust boom

Tightening: shadow banking tightening

Loosening: 165bps rate cuts, LGFV debt swap***

A-share market crash

Tightening

Rate cut

Bank loans + direct financingOff-balance sheet financing

China: Credit and leverage

Loosening: 350bps RRR cuts

|GTM – Asia 10

10

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and

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y

0.0%

1.5%

3.0%

4.5%

6.0%

7.5%

'15 '16 '17 '18 '19-300

-200

-100

0

100

200

300

400

500

600

-1,200

-800

-400

0

400

800

1,200

1,600

2,000

2,400

'14 '15 '16 '17 '18 '19

Source: CEIC, People’s Bank of China, J.P. Morgan Asset Management; (Bottom right) National Interbank Funding Center.*Open market operation includes reverse repo, repo and central bank bill issuance by the People’s Bank of China. **Monetary policy tools include short-term liquidity operations (SLO), standing liquidity facility (SLF), medium-term liquidity facility (MLF) and pledged supplementary lending (PSL).Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

China: Monetary policy

Interbank repo (7-day)

Standing lending facility (7-day)

Lending rate (1-year)

Deposit rate (1-year)Total, 6-month moving average

Monetary policy tools**Open market operation*

Liquidity injection by the PBoCRMB billions, net injection RMB billions, net injection

Reserve requirement ratio

Key policy ratesPer annum

10%

12%

14%

16%

18%

20%

22%

'09 '11 '13 '15 '17 '19

Small- and medium-sized banks

Large banks

|GTM – Asia 29

29

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0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '200.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Federal Reserve liabilitiesUSD trillions

Source: FactSet, Federal Reserve, J.P. Morgan Economics Research, J.P. Morgan Asset Management. *Other assets include federal agency debt securities, central bank liquidity swaps, repurchase agreements, foreign currency denominated assets, gold, special drawing rights and net portfolio holdings of Maiden Lane LLC. **Other liabilities include capital, treasury general account, deposits from foreign banks, reverse repurchase agreements. ***U.S. Federal Reserve (Fed) balance sheet assets are projected to decrease until the end of September 2019, in line with the Fed’s announced plans. After this point, total assets are projected to remain constant, while holdings of mortgage-backed securities continue to be reduced, and Treasury holdings increased in order to maintain the size of total assets. MBS pay down projections are J.P. Morgan Economic Research forecasts. Other assets and other liabilities are held constant over the forecast period. Liabilities are assumed to increase in proportion and inverse to the reduction in balance sheet assets.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

Federal Reserve assetsUSD trillions

United States: Federal Reserve balance sheet

Other*Mortgage-backed securitiesTreasuries

Other**Excess reservesRequired reservesCurrency in circulation

Forecast*** Forecast***

|GTM – Asia 11

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y Infrastructure investment (ex-electricity sector)Year-to-date, year-over-year change

Local government bond issuance**RMB billions

Fiscal revenue and expenditure*Year-over-year change, 3-month moving average

Source: CEIC, J.P. Morgan Asset Management; (Top left) Ministry of Finance of China; (Bottom left) China Central Depository & Clearing Co., Ltd; (Right) National Bureau of Statistics of China.*Fiscal revenue includes taxes, government funds, which are mostly derived from local government land sales, and other government revenues. Fiscal expenditure includes government spending of funds raised from taxes, government funds and general bond issuance.**A general local government bond is issued to raise funds and offset fiscal deficit so as to maintain the ordinary operation of local government. It is backed by the future fiscal revenue of the local government. A special local government bond is issued to support the investment in a specific infrastructure or public project. It is backed by the future revenue from the project. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

China: Fiscal policy

0

200

400

600

800

1,000

Jan '18 Apr '18 Jul '18 Oct '18 Jan '19

Special bonds

General bonds

-15%

-5%

5%

15%

25%

'14 '15 '16 '17 '18

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

'04 '06 '08 '10 '12 '14 '16 '18

Fiscal expenditure

Fiscal revenue

|GTM – Asia 21

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Developed markets political timeline

Emerging markets political timeline


Source: Bloomberg Finance L.P., J.P. Morgan Asset Management.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

17 April IndonesiaGeneral election

Apr-May IndiaGeneral election

13 May PhilippinesHouse of Representatives elections


21 October CanadaFederal election

Political calendar

22 June ASEANLeaders summit

28 June G-20G-20 Summit

16 November GlobalAPEC Summit

December ChinaCentral Economic Work Conference

January TaiwanGeneral election

March ChinaNational People’s Congress

May AustraliaFederal election

23-26 May EuropeEU Parliament election

United Kingdom8 April: Deadline to inform EU of proposed deal / extension request10 April: EU leaders to convene in Brussels to discuss UK’s proposal12 April: Current default Brexit date

2020

2020

|GTM – Asia 40

40

Equi

ties

-30

0

30

60

90

-30

0

30

60

90

'14 '15 '16 '17 '18

43.7% 42.6%30.2% 28.6% 25.8%

0.7% 3.3%14.7%

0%

20%

40%

60%

80%

100%

Share of EMGDP*

Share of EMmarket cap**

5% A-shareinclusion(Current)

20% A-shareinclusion (Nov

2019)

100% A-shareinclusion

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

'13 '14 '15 '16 '17 '18

Source: J.P. Morgan Asset Management; (Top and bottom left) FactSet, MSCI; (Bottom left) Bloomberg Finance L.P.; (Top right) Bloomberg, MSCI, World Bank (Bottom right) CEIC, Hong Kong Exchanges and Clearing Limited. The CSI 300 represents onshore Chinese A-share large cap equities. MSCI China represents primarily offshore listed Chinese equities and the onshore equities included in MSCI benchmarks.*Share of EM GDP is for 2017 and is calculated as Chinese nominal GDP in USD as a percentage of all emerging markets within the MSCI EM index.**Share of EM market cap is for 2017 and is calculated as China’s market capitalization of listed domestic companies as a percentage of all emerging markets’ capitalization of listed domestic companies within the MSCI EM index. ***Currently, an index inclusion factor (IIF) of 5% is applied to China A Large Cap securities. By November 2019, the inclusion factor will be 20% for China A large Cap, ChiNext Large Cap and China A Mid Cap (including eligible ChiNext shares). 100% A share inclusion is shown for illustrative purposes only. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

MSCI A-share inclusion China’s % share in selected emerging market indicators

Corporate earningsNext 12-month consensus earnings per share, USD, Jan. 2013 = 100

Foreign investors’ holdings of onshore Chinese equitiesRMB trillions

Stock Connect monthly net flowsHKD billions RMB billions

'13 '14 '15 '16 '17 '18 '1970

80

90

100

110

120

130

140

CSI 300

MSCI China

Foreign investor holdingsTotal as a % of domestic market cap Northbound

(Hong Kong to China)Southbound (China to Hong Kong)

China: Equities snapshot

A-shareOffshore China

Share of MSCI EM Index***

2 | QUARTERLY PERSPECTIVES | 2Q 2019


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Keep the global economy glidingGLOBAL PURCHASING MANAGERS’ INDEX (PMI): MANUFACTURING - page 4

UNITED STATES: FEDERAL RESERVE BALANCE SHEET - page 4

CHINA: CREDIT AND LEVERAGE - page 5

POLITICAL CALENDAR - page 5

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China: Go with the flow, but with cautionCHINA: POLICY STIMULUS TIMELINE - page 6

CHINA: FISCAL POLICY - page 6

CHINA: MONETARY POLICY - page 7

CHINA: EQUITIES SNAPSHOT - page 7

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• After the sharp correction in equities and corporate credit in 4Q 2018, compelling valuations and a more pro-growth stance from central banks facilitated a robust rebound in 1Q 2019.

• To sustain this rally, global economic momentum will need to improve and translate into more earnings upgrades. We are cautiously optimistic, as more governments are adjusting their policies to keep this economic hang glider in the air for as long as possible. U.S and Asian equities, corporate high yield debt and emerging market fixed income should remain in sweet spots.

• Eventually a slowdown will occur. Investors should adopt a more defensive allocation—one that is more dependent on income-generating assets, such as U.S. government bonds and high-dividend, defensive equities.

• The record flight distance for a hang glider is 764 kilometers, achieved with a combination of good weather, favorable geography and skillful piloting. Central banks face a similar challenge keeping the global economy aloft.

• Monetary authorities, especially in the U.S. and China, have adopted more accommodative stances in response to the loss of some growth momentum entering 2019. The moves should help the global economy regain some altitude and support investor confidence in the short term.

• Nonetheless, investors should be prepared for a downturn in the longer term. Being prepared is like packing an emergency parachute: You may not need it now, but it is good to have a backup plan.

• In order to stabilize the economy, China entered a new cycle of policy easing in mid-2018.

• As the People’s Bank of China adopts a more accommodative stance and local governments spend more on infrastructure projects, gross domestic product growth will likely bottom out by the middle of 2019.

• Besides the conventional stimulus measures, a reduction in personal income tax and value-added tax may further support growth and corporate earnings. These stimulus policies, together with a potential U.S.–China trade truce, would likely lead to stronger risk appetite and a momentum rally in A-shares.

• We think there is still potential upside in the current rally but the market may become more volatile. Investors need to be more selective and enhance risk controls.

• We believe there is still potential upside to China’s stock market rally, as monetary conditions remain accommodative and the government will likely be spending more to stimulate the economy.

• However, we continue to stress the importance of active investing in the Chinese equity markets and remind investors to focus on both corporate and economic fundamentals.

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|GTM – Asia 32

32

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Source: FactSet, MSCI, Standard & Poor’s, J.P. Morgan Asset Management.Returns are total returns based on MSCI indices, except the U.S., which is the S&P 500 and China A, which are based on the CSI 300 index in U.S. dollar terms. China return is based on the MSCI China index. 10-yr total (gross) return data is used to calculate annualized returns (Ann. Ret.) and annualized volatility (Ann. Vol.) and reflect the period 31/03/09 – 31/03/19. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

Global and Asia equity market returns

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1Q '19 Ann. Ret. Ann. Vol.

Japan India ASEAN U.S. India U.S. China A Japan Taiwan China U.S. China A U.S. China A

-29.1% 102.8% 32.4% 2.1% 26.0% 32.4% 52.1% 9.9% 19.6% 54.3% -4.4% 31.4% 15.7% 26.7%

U.S. China A Korea ASEAN China Japan India China A U.S. Korea India China Taiwan India

-37.0% 98.5% 27.2% -6.1% 23.1% 27.3% 23.9% 2.4% 12.0% 47.8% -7.3% 17.7% 11.8% 25.4%

Taiwan Taiwan Taiwan Europe ASEAN Europe U.S. U.S. Korea India Taiwan U.S. ASEAN Korea

-45.9% 80.2% 22.7% -10.5% 22.8% 26.0% 13.7% 1.4% 9.2% 38.8% -8.2% 13.6% 11.6% 21.7%

Europe ASEAN India Korea APAC ex-JP

Taiwan Taiwan Europe APAC ex-JP

APAC ex-JP

ASEAN APAC ex-JP

India China

-46.1% 75.0% 20.9% -11.8% 22.6% 9.8% 10.1% -2.3% 7.1% 37.3% -8.4% 11.5% 11.2% 21.0%

ASEAN APAC ex-JP

APAC ex-JP

Japan Korea Korea China India ASEAN China A Japan Europe APAC ex-JP

Taiwan

-47.6% 73.7% 18.4% -14.2% 21.5% 4.2% 8.3% -6.1% 6.2% 32.6% -12.6% 11.0% 10.9% 18.4%

China Korea Japan APAC ex-JP

Europe China ASEAN Korea Japan ASEAN APAC ex-JP

Taiwan Korea APAC ex-JP

-50.8% 72.1% 15.6% -15.4% 19.9% 4.0% 6.4% -6.3% 2.7% 30.1% -13.7% 9.0% 10.1% 17.8%APAC ex-JP

China U.S. China Taiwan APAC ex-JP

APAC ex-JP

China China Taiwan Europe India China Europe

-51.6% 62.6% 15.1% -18.2% 17.7% 3.7% 3.1% -7.6% 1.1% 28.5% -14.3% 7.2% 9.7% 17.4%

Korea Europe China Taiwan U.S. China A Japan APAC ex-JP

Europe Europe China Japan Europe ASEAN

-55.1% 36.8% 4.8% -20.2% 16.0% -2.6% -3.7% -9.1% 0.2% 26.2% -18.7% 6.8% 9.5% 17.0%

China A U.S. Europe China A China A India Europe Taiwan India Japan Korea ASEAN Japan Japan

-63.2% 26.5% 4.5% -20.5% 10.9% -3.8% -5.7% -11.0% -1.4% 24.4% -20.5% 5.1% 7.4% 13.5%

India Japan China A India Japan ASEAN Korea ASEAN China A U.S. China A Korea China A U.S.

-64.6% 6.4% -8.4% -37.2% 8.4% -4.5% -10.7% -18.4% -15.2% 21.8% -27.6% 5.0% 6.6% 13.4%

10-yrs ('09 - '19)

|GTM – Asia 33

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12%

24% 24%

16%

24%

8%

6% 6%

4%

7%

4%5%

0%

5%

10%

15%

20%

25%

30%

U.S. EM Asia Pacific ex-Japan

Europe'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

20

40

60

80

100

120

140

160

180

Forward earnings per shareIndex, U.S. dollar, Jan. 2008 = 100

Source: FactSet, J.P. Morgan Asset Management. (Left) MSCI, Standard & Poor’s; (Right) IBES. Asia Pacific ex-Japan, EM, Europe and U.S. equity indices used are the MSCI Asia Pacific ex-Japan, MSCI Emerging Markets, MSCI Europe and S&P 500, respectively. Consensus estimates used are calendar year estimates from IBES. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

Earnings growthEarnings per share, year-over-year change, consensus estimates

Asia Pacific ex-Japan

Europe

Japan

U.S.

EM

Global equities: Earnings expectations

2018

2017

2019

|GTM – Asia 28

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2.20%1.89% 1.86%

2.40%2.60% 2.60%

2.80%

0%

1%

2%

3%

4%

5%

6%

'05 '07 '09 '11 '13 '15 '17 '19 '21

Source: Bloomberg Finance L.P., FactSet, Federal Reserve, J.P. Morgan Asset Management.Market expectations are the federal funds rates priced into the Fed Fund futures market as of 31/03/19. Federal Reserve projections shown are median estimates of FOMC participants.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

Federal funds rate expectationsFOMC and market expectations for the fed funds rate

Longrun

Federal funds rate

FOMC long-run projection

FOMC year-end estimatesMarket expectations on 31/03/19

United States: Monetary policy

FOMC March 2019 forecastsPercent

2019 2020 2021 Longrun

Change in real GDP, 4Q to 4Q 2.1 1.9 1.8 1.9

Unemployment rate, 4Q 3.7 3.8 3.9 4.3

PCE inflation, 4Q to 4Q 1.8 2.0 2.0 2.0 |GTM – Asia 52

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0

50

100

150

200

250

300

350

'21 '22 '23 '24 '25 '26 '27 '28

Maturity profileUSD billions

Source: J.P. Morgan Asset Management; (Top and bottom left) J.P. Morgan Economic Research; (Bottom right) BofA/ML, FactSet.*Default rate is defined as the percentage of the total market trading at or below 50% of par value and includes any Chapter 11 filing, pre-packaged filing or missed interest payments. Spreads indicated are benchmark yield-to-worst less comparable maturity Treasury yields. **EBITDA is earnings before interest, tax, depreciation and amortisation. U.S. corporate high yield is represented by the J.P. Morgan Domestic High Yield Index.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

High yield leverageEBITDA** / interest expense Debt/EBITDA

High yield spread and default rate*Default rate Spread to worst (basis points)

10-yr average Latest

HY spread to worst 574bps 452bpsHY default rate 2.6% 0.9%

BB B CCC and below

Recessions

Average issuance: 2014 – 2018

Interest coverage

U.S. high yield bonds

3.5

4.0

4.5

5.0

5.5

3.0

3.5

4.0

4.5

5.0

5.5

'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

0

400

800

1,200

1,600

2,000

0%

4%

8%

12%

16%

20%

'90 '95 '00 '05 '10 '15

Leverage

|GTM – Asia 53

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-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

100 200 300 400 500 600 700 800 900

Source: Bloomberg Finance L.P., J.P. Morgan Asset Management; (Left) J.P. Morgan Economics Research.*J.P. Morgan GBI-EM Broad Diversified Index sub-component used for each country. Spread is the difference between the yield on each country’s local 3-5 year government bond and the yield on the Bloomberg Barclay’s U.S. Aggregate Government - Treasury (3-5 Year). **EM debt is represented by the J.P. Morgan Emerging Market Equal Weight Blended Index, which is an equal-weighted composite index of the J.P. GBI-EM Global Diversified, J.P. Morgan EMBI Global Diversified and J.P. Morgan CEMBI Broad Diversified indices. Spreads are the difference between the yield on EM debt securities and an equivalent maturity U.S. Treasury bond in basis points. Returns are calculated using monthly data from 31/01/03 –31/03/19.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

Spread between local rates and U.S. Treasuries3-5 year local currency government bond index*, basis points

EM debt spreads to U.S. Treasuries and returns12-month forward total return, spread in basis points**

Emerging market debt

Current spread range: 340-350

-200 0 200 400 600 800 1000

Brazil

Russia

Mexico

S. Africa

Indonesia

India

Colombia

Malaysia

China

Thailand

Poland

5-year averageCurrent

J .P.MORGAN ASSET MANAGEMENT | 3


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Fixed income investing amid Fed’s late-cycle pauseUNITED STATES: MONETARY POLICY - page 8

U.S. HIGH YIELD BONDS - page 9

EMERGING MARKET DEBT - page 9

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Asian equities: Not a temporary bounceGLOBAL AND ASIA EQUITY MARKET RETURNS - page 10

GLOBAL EQUITIES: EARNINGS EXPECTATIONS - page 11

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• The Fed’s decision to pause its rate hiking cycle and to put an earlier end to its balance sheet run-off reduces the risk of a U.S. recession in the near term and likely will help extend the late cycle.

• We highlight that in this late-cycle environment, investors should focus within their fixed income portfolios on both (i) quality in U.S. securitized credit; in particular, consumer asset-backed securities and (ii) the yield pick-up offered by global high yield and emerging market bonds.

• The U.S. Federal Reserve’s (Fed) pause lowers the risks of a U.S. recession in the near term, and helps to extend the decade-long expansion. Within the fixed income space, investors may wish to consider opportunities in U.S. securitized credit; in particular, consumer asset-backed securities, which offer quality in the late cycle. U.S. households are in a good financial shape, given that they have de-leveraged significantly since the global financial crisis.

• Global high yield and emerging market bonds also offer an attractive yield pickups. Importantly, the headwind of significantly higher U.S. Treasury bond yields has abated with the Fed’s more dovish stance.

• After a lackluster 2018, Asian equities have outperformed for the first few months of this year. But with continued macro uncertainties, slowing global growth and fears of the approaching end of the current business cycle, the concern is whether this rebound could be but a temporary peak that will soon reverse.

• While we agree the global economy is losing momentum and a downturn is possible, Asian equities still retain their ability to generate return.

• We believe the current market recovery will persist and there is still life left in Asian equities before the next recession or downturn.

• We still view Asian equities favorably. Sentiment is positive and we do not expect a recession this year. Earnings expectations are modest, but the new Fed direction and the implied effect on the USD is a positive for Asia. There is less pressure on exchange rates and most central banks appear to have an accommodative stance. And the region still offers defense, in the form of relatively high dividend payments, should sentiment turn sour and markets pull back.

INV

ES

TM

EN

T I

MP

LIC

AT

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S

|GTM – Asia 15

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Source: Australian Industry Group, J.P. Morgan Economic Research, Markit, J.P. Morgan Asset Management.PMIs are relative to 50, which indicates contraction (below 50) or expansion (above 50) of the sector. *Developed market includes Australia, Canada, Denmark, Euro area, Japan, New Zealand, Norway, Sweden, Switzerland, UK and U.S. Emerging market includes Brazil, Chile, China, Colombia, Croatia, Czech Republic, Hong Kong SAR, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Philippines, Poland, Romania, Russia, Saudi Arabia, Singapore, South Africa, Taiwan, Thailand, Turkey and Vietnam. **% of countries available with a manufacturing PMI above 50.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

Developed and emerging market manufacturing PMI* Global manufacturing activity% of markets in expansionary territory**

DM PMI

EM PMI

Global Purchasing Managers’ Index (PMI): Manufacturing

30

35

40

45

50

55

60

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '190%

20%

40%

60%

80%

100%

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

|GTM – Asia 29

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0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '200.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Federal Reserve liabilitiesUSD trillions

Source: FactSet, Federal Reserve, J.P. Morgan Economics Research, J.P. Morgan Asset Management. *Other assets include federal agency debt securities, central bank liquidity swaps, repurchase agreements, foreign currency denominated assets, gold, special drawing rights and net portfolio holdings of Maiden Lane LLC. **Other liabilities include capital, treasury general account, deposits from foreign banks, reverse repurchase agreements. ***U.S. Federal Reserve (Fed) balance sheet assets are projected to decrease until the end of September 2019, in line with the Fed’s announced plans. After this point, total assets are projected to remain constant, while holdings of mortgage-backed securities continue to be reduced, and Treasury holdings increased in order to maintain the size of total assets. MBS pay down projections are J.P. Morgan Economic Research forecasts. Other assets and other liabilities are held constant over the forecast period. Liabilities are assumed to increase in proportion and inverse to the reduction in balance sheet assets.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

Federal Reserve assetsUSD trillions

United States: Federal Reserve balance sheet

Other*Mortgage-backed securitiesTreasuries

Other**Excess reservesRequired reservesCurrency in circulation

Forecast*** Forecast***



• Global manufacturing PMI shows softening growth momentum.

• The Fed’s balance sheet reduction to end by September.

Source: Guide to the Markets – Asia, page 29


Keep the global economy gliding

The global economy has lost some altitude

• Global growth momentum abated entering 2019. Worries over higher U.S. interest rates, trade tension between the U.S. and China and a weakening global trade cycle have dampened business and consumer sentiment. U.S. economic growth eased to 2.6% in 4Q 2018, down from 3.4% in the third quarter.

• The Global Manufacturing Purchasing Managers’ Index (PMI) for February also fell, indicating that businesses have become more cautious. In China, consumer spending during the Lunar New Year holiday expanded at a slower pace compared with previous years. China’s economic growth fell to 6.4% in 4Q 2018, below Beijing’s full-year target of 6.5%. In Europe, a drop in export momentum overshadowed stable domestic demand.

1

OVERVIEW

The record flight distance for a hang glider is 764 kilometers, achieved with a combination of good weather, favorable geography and skillful piloting. Central banks face a similar challenge keeping the global economy aloft. Monetary authorities, especially in the U.S. and China, have adopted more accommodative stances in response to the loss of some growth momentum entering 2019. The moves should help the global economy regain some altitude and support investor confidence in the short term. Nonetheless, investors should be prepared for a downturn in the longer term. Being prepared is like packing an emergency parachute: You may not need it now, but it is good to have a backup plan.

The Fed pivots to keep the economy aloft

• Given the weaker growth momentum, central banks are becoming more cautious in policy normalization. The U.S. Federal Reserve (Fed) is now forecasting no interest rate increase in 2019. This is possible because after several years of steady policy normalization, the Fed funds target rate is close to neutral. Tame inflationary pressure is also allowing the Fed more flexibility.

• Moreover, the Fed has signaled that it will half the pace of balance sheet reduction in May, then stop altogether in September. These changes have addressed investors’ fears that policy tightening may jeopardize the U.S. economy’s growth streak. Continued low interest rates may be needed, in particular, to prevent a cutback in corporate spending and investment, given corporations’ relatively high degree of leverage.

|GTM – Asia 12

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-40%

-20%

0%

20%

40%

60%

80%

100%

120%

-1,000

0

1,000

2,000

3,000

4,000

5,000

'15 '16 '17 '18 '19

0.0x0.5x1.0x1.5x2.0x2.5x3.0x3.5x4.0x4.5x

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Total social financingRMB billions Year-over-year change, 3MMA

Debt level by sector% of GDP

Credit growth to GDP growthBroad credit measure*, ratio, year-over-year change, 3-month moving average

Source: J.P. Morgan Asset Management; (Top) CEIC, China Central Depository & Clearing Co., People’s Bank of China, Shanghai Clearing House; (Bottom right) BIS; (Bottom left) CEIC, People’s Bank of China. Credit growth to GDP growth ratio utilizes rolling 12-month nominal GDP and broad credit. CPI stands for consumer price index and PPI stands for producer price index. *The broad credit measure consists of all reported bank claims on the domestic economy, plus bankers’ acceptances, entrusted loans, trust loans, new net corporate bond and non-financial equity financing, issuance of asset-backed securities and interbank loans. **Wenzhou SME crisis refers to the wave of bankruptcies and funding problems faced by a large number of SMEs in Wenzhou in 2011. ***LGFV refers to local government financing vehicle. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

Rapid rebound in CPI & PPI

'08 '10 '12 '14 '16 '1870%

90%

110%

130%

150%

170%

190%

0%

10%

20%

30%

40%

50%

60% Government

Non-financial corporations

Households

Total social financing

Global Financial Crisis

Loosening: 216bps rate cuts, 4tn stimulus

Tightening: 125bps rate hikes, BASEL III adoption

Wenzhou small and medium enterprise (SME) crisis**

Interbank liquidity crunchLoosening: 56bps

rate cuts, trust boom

Tightening: shadow banking tightening

Loosening: 165bps rate cuts, LGFV debt swap***

A-share market crash

Tightening

Rate cut

Bank loans + direct financingOff-balance sheet financing

China: Credit and leverage

Loosening: 350bps RRR cuts

|GTM – Asia 21

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Developed markets political timeline

Emerging markets political timeline


Source: Bloomberg Finance L.P., J.P. Morgan Asset Management.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

17 April IndonesiaGeneral election

Apr-May IndiaGeneral election

13 May PhilippinesHouse of Representatives elections


21 October CanadaFederal election

Political calendar

22 June ASEANLeaders summit

28 June G-20G-20 Summit

16 November GlobalAPEC Summit

December ChinaCentral Economic Work Conference

January TaiwanGeneral election

March ChinaNational People’s Congress

May AustraliaFederal election

23-26 May EuropeEU Parliament election

United Kingdom8 April: Deadline to inform EU of proposed deal / extension request10 April: EU leaders to convene in Brussels to discuss UK’s proposal12 April: Current default Brexit date

2020

2020



• China’s monetary policy bias swings from de-leveraging to growth.

• Political events are likely to only have a local impact.

INVESTMENT IMPLICATIONS

• After the sharp correction in equities and corporate credit in 4Q 2018, compelling valuations and a more pro-growth stance from central banks facilitated a robust rebound in 1Q 2019.

• To sustain this rally, global economic momentum will need to improve and translate into more earnings upgrades. We are cautiously optimistic, as more governments are adjusting their policies to keep this economic hang glider in the air for as long as possible. U.S and Asian equities, corporate high yield debt and emerging market (EM) fixed income should remain in sweet spots.

• Eventually a slowdown will occur. Investors should adopt a more defensive allocation—one that is more dependent on income-generating assets, such as U.S. government bonds and high-dividend, defensive equities.

Be realistic about what Beijing can achieve

• The People’s Bank of China (PBoC) needs to be balanced in injecting liquidity—providing enough to support growth while restraining speculative activity in the financial and property markets. Nonetheless, January’s surge in total social financing shows the PBoC, like its counterparts elsewhere, is shifting priorities from deleveraging to reversing the slowdown in growth.

• Expansionary fiscal policy will do more of the heavy lifting, but there are some limitations. High levels of local government debt could constrain the number of infrastructure projects that can be undertaken. Cuts in personal income tax and value-added tax will need to be combined with more upbeat sentiment to translate into more consumption and corporate spending.



Hoping for a better political climate?

• A U.S.–China trade agreement would reduce uncertainties for global businesses and Asia’s manufacturing supply chain. However, friction could still arise over long-term structural issues, such as the enforcement of a trade agreement.

• Several general elections in 2Q 2019 could impact individual markets or regions. India’s Prime Minister Narendra Modi needs to regain voters’ support after slower than expected economic reforms. Indonesian President Joko Widodo will likely be re-elected—a welcome outcome for investors who would like to see continued support for infrastructure development and a greater use of private-public partnerships. European parliamentary elections in late May will be a litmus test for the rise of populism and whether eurosceptic politicians can gain more influence, thereby undermining the European Union’s unity.

|GTM – Asia 9

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y 2018 and 2019 Chinese policy measures

Source: Various news sources, J.P. Morgan Asset Management.*CPC is the Communist Party of China and the 6 aspects are employment, financial markets, trade, foreign investment, domestic investment and expectations. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

China: Policy stimulus timeline


Cuts in tax, fee and social security payments

Central Economic Work Conference agreed to even stronger stimulus policies

Individual income tax cut

100bps reserve requirement ratio (RRR) cut

Special deductible items introduced in individual income tax

50bps targeted RRR cut

100bps RRR cut

100bps RRR cut

RMB 1.35 trillion local government special bond issuance push

1% point cut to value-added tax (VAT) rate

Politburo of the CPC Central Committee: stability in 6 aspects needed*

2019

Fiscal policyMonetary policy Announcements of policy intention

2018

RMB 1.39 trillion local government bond issuance push

|GTM – Asia 11

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y Infrastructure investment (ex-electricity sector)Year-to-date, year-over-year change

Local government bond issuance**RMB billions

Fiscal revenue and expenditure*Year-over-year change, 3-month moving average

Source: CEIC, J.P. Morgan Asset Management; (Top left) Ministry of Finance of China; (Bottom left) China Central Depository & Clearing Co., Ltd; (Right) National Bureau of Statistics of China.*Fiscal revenue includes taxes, government funds, which are mostly derived from local government land sales, and other government revenues. Fiscal expenditure includes government spending of funds raised from taxes, government funds and general bond issuance.**A general local government bond is issued to raise funds and offset fiscal deficit so as to maintain the ordinary operation of local government. It is backed by the future fiscal revenue of the local government. A special local government bond is issued to support the investment in a specific infrastructure or public project. It is backed by the future revenue from the project. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

China: Fiscal policy

0

200

400

600

800

1,000

Jan '18 Apr '18 Jul '18 Oct '18 Jan '19

Special bonds

General bonds

-15%

-5%

5%

15%

25%

'14 '15 '16 '17 '18

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

'04 '06 '08 '10 '12 '14 '16 '18

Fiscal expenditure

Fiscal revenue



• China has been escalating its stimulus policies through multiple channels.

Escalating efforts to stabilize growth

• In the face of weaker economic activity, the Chinese government has since mid-2018 implemented escalating counter-cyclical measures. At the annual session of the National People’s Congress (NPC) in March, further supportive measures were announced to stabilize the economy.

• A GDP growth target ranging between 6.0% and 6.5% year-over-year was set for 2019 vs. a target of around 6.5% for 2018. The wider target range offers the government more flexibility in its policy implementation. Meanwhile, a slowdown toward the lower end of the target range, that is 6.0% growth, could prompt even stronger supportive measures.

2 China: Go with the flow, but with caution

OVERVIEW

In order to stabilize the economy, China entered a new cycle of policy easing in mid-2018. As the PBoC adopts a more accommodative stance and local governments spend more on infrastructure projects, gross domestic product (GDP) growth will likely bottom out by the middle of 2019. Besides the conventional stimulus measures, a reduction in personal income tax and value-added tax (VAT) may further support growth and corporate earnings. These stimulus policies, together with a potential U.S.–China trade truce, would likely lead to stronger risk appetite and a momentum rally in A-shares. We think there is still potential upside in the current rally but the market may become more volatile. Investors need to be more selective and enhance risk controls.


• Fiscal stimulus is crucial in supporting investment growth.


Proactive fiscal policy remains the key tool

• Fiscal expenditure, supported by a higher fiscal deficit ratio of 2.8% of GDP (vs. 2.6% in 2018), and a quota of RMB 2.15trillion for special local government bonds (vs. RMB 1.35trillion in 2018), are expected to deliver direct and instant support to investment growth.

• In addition to conventional fiscal stimulus, a package including a RMB 2trillion aggregate reduction in VAT, fees and social security payments is also proposed. In addition to the cuts to personal income tax in effect since October 2018, these measures will likely provide additional support to domestic demand and corporate earnings.

|GTM – Asia 10

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0.0%

1.5%

3.0%

4.5%

6.0%

7.5%

'15 '16 '17 '18 '19-300

-200

-100

0

100

200

300

400

500

600

-1,200

-800

-400

0

400

800

1,200

1,600

2,000

2,400

'14 '15 '16 '17 '18 '19

Source: CEIC, People’s Bank of China, J.P. Morgan Asset Management; (Bottom right) National Interbank Funding Center.*Open market operation includes reverse repo, repo and central bank bill issuance by the People’s Bank of China. **Monetary policy tools include short-term liquidity operations (SLO), standing liquidity facility (SLF), medium-term liquidity facility (MLF) and pledged supplementary lending (PSL).Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

China: Monetary policy

Interbank repo (7-day)

Standing lending facility (7-day)

Lending rate (1-year)

Deposit rate (1-year)Total, 6-month moving average

Monetary policy tools**Open market operation*

Liquidity injection by the PBoCRMB billions, net injection RMB billions, net injection

Reserve requirement ratio

Key policy ratesPer annum

10%

12%

14%

16%

18%

20%

22%

'09 '11 '13 '15 '17 '19

Small- and medium-sized banks

Large banks

|GTM – Asia 40

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-30

0

30

60

90

-30

0

30

60

90

'14 '15 '16 '17 '18

43.7% 42.6%30.2% 28.6% 25.8%

0.7% 3.3%14.7%

0%

20%

40%

60%

80%

100%

Share of EMGDP*

Share of EMmarket cap**

5% A-shareinclusion(Current)

20% A-shareinclusion (Nov

2019)

100% A-shareinclusion

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

'13 '14 '15 '16 '17 '18

Source: J.P. Morgan Asset Management; (Top and bottom left) FactSet, MSCI; (Bottom left) Bloomberg Finance L.P.; (Top right) Bloomberg, MSCI, World Bank (Bottom right) CEIC, Hong Kong Exchanges and Clearing Limited. The CSI 300 represents onshore Chinese A-share large cap equities. MSCI China represents primarily offshore listed Chinese equities and the onshore equities included in MSCI benchmarks.*Share of EM GDP is for 2017 and is calculated as Chinese nominal GDP in USD as a percentage of all emerging markets within the MSCI EM index.**Share of EM market cap is for 2017 and is calculated as China’s market capitalization of listed domestic companies as a percentage of all emerging markets’ capitalization of listed domestic companies within the MSCI EM index. ***Currently, an index inclusion factor (IIF) of 5% is applied to China A Large Cap securities. By November 2019, the inclusion factor will be 20% for China A large Cap, ChiNext Large Cap and China A Mid Cap (including eligible ChiNext shares). 100% A share inclusion is shown for illustrative purposes only. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

MSCI A-share inclusion China’s % share in selected emerging market indicators

Corporate earningsNext 12-month consensus earnings per share, USD, Jan. 2013 = 100

Foreign investors’ holdings of onshore Chinese equitiesRMB trillions

Stock Connect monthly net flowsHKD billions RMB billions

'13 '14 '15 '16 '17 '18 '1970

80

90

100

110

120

130

140

CSI 300

MSCI China

Foreign investor holdingsTotal as a % of domestic market cap Northbound

(Hong Kong to China)Southbound (China to Hong Kong)

China: Equities snapshot

A-shareOffshore China

Share of MSCI EM Index***



Monetary policy will be more supportive

• “Neutrality” had been a key word with respect to Chinese monetary policy in the previous Government Work Reports to the NPC. But this year, this word was removed. Meanwhile, “deleveraging” was replaced by “stability of leverage.” The government did not set quantitative goals for M2 and total social financing growth, but proposed keeping them “in line with nominal GDP growth.” Such changes suggest that monetary policy will remain accommodative in 2019, to support government and private investment.

• After the 100 basis points (bps) cut to the required reserve ratio (RRR) in January, an additional 200 bps of cuts are likely in 2019, to bring down financing costs. However, given high debt levels, monetary stimulus will be secondary to fiscal measures this year. • Market liquidity conditions are improving.


• We believe there is still potential upside to China’s stock market rally, as monetary conditions remain accommodative and the government will likely be spending more to stimulate the economy.

• However, we continue to stress the importance of active investing in the Chinese equity markets and remind investors to focus on both corporate and economic fundamentals.


• Rising risk appetite in the stock market.


Near-term upside potential in China A-shares

• As of March 31, the MSCI China (up 17.7%) and the CSI 300 (up 31.4%) have outperformed the MSCI Asia Pacific ex-Japan (11.5%), emerging markets ex-Asia (7.1%) and developed markets (12.6%).

• The CSI 300’s 12-month forward price-to-earnings multiple increased to 12.3X, very close to its 10-year average of 13.5X. The valuation expansion was largely due to a share price rally in which five factors boosted market sentiment:

i) better prospects for an easing of U.S.–China trade tension;

ii) improving liquidity as China’s stimulus efforts slowly kick in;

iii) hopes for additional foreign inflows after the recent announcement of an increase in China A-share weightings in benchmark indices;

iv) a stronger-than-expected Chinese renminbi;

v) the Fed’s more dovish stance.

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2.20%1.89% 1.86%

2.40%2.60% 2.60%

2.80%

0%

1%

2%

3%

4%

5%

6%

'05 '07 '09 '11 '13 '15 '17 '19 '21

Source: Bloomberg Finance L.P., FactSet, Federal Reserve, J.P. Morgan Asset Management.Market expectations are the federal funds rates priced into the Fed Fund futures market as of 31/03/19. Federal Reserve projections shown are median estimates of FOMC participants.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

Federal funds rate expectationsFOMC and market expectations for the fed funds rate

Longrun

Federal funds rate

FOMC long-run projection

FOMC year-end estimatesMarket expectations on 31/03/19

United States: Monetary policy

FOMC March 2019 forecastsPercent

2019 2020 2021 Longrun

Change in real GDP, 4Q to 4Q 2.1 1.9 1.8 1.9

Unemployment rate, 4Q 3.7 3.8 3.9 4.3

PCE inflation, 4Q to 4Q 1.8 2.0 2.0 2.0



• The Fed has turned more dovish, moving closer to market expectations.

The Fed on pause

• U.S. Federal Reserve Chairman Jerome Powell surprised markets in January with a pivot on monetary policy. The Fed would be patient in making its next policy move, given softer inflation, tighter financial conditions and slower foreign growth, particularly in Europe and China.

• Notably, the Fed stated that it would be comfortable with core personal consumption expenditures1 inflation temporarily overshooting its 2% target, which sets the bar high for another rate hike. Consequently, we are not expecting additional Fed rate hikes this year, barring any significant improvements in the U.S. economic outlook.

• The Fed also indicated that it will halve the pace of its balance sheet run-off by May, and end altogether by September, which is much earlier than anticipated.

3 Fixed income investing amid Fed’s late-cycle pause

OVERVIEW

The U.S. Federal Reserve’s pause lowers the risks of a U.S. recession in the near term, and helps to extend the decade-long expansion. Within the fixed income space, investors may wish to consider opportunities in U.S. securitized credit; in particular, consumer asset-backed securities (ABS), which offer quality in the late cycle. U.S. households are in a good financial shape, given that they have de-leveraged significantly since the global financial crisis.

Global high yield and EM bonds also offer an attractive yield pickups. Importantly, the headwind of significantly higher U.S. Treasury bond yields has abated with the Fed’s more dovish stance.


A patient Fed may keep the U.S. expansion going

• It is often the case that when the Fed over tightens, it throws the U.S. economy into recession. Indeed, investor concerns about an impending recession have risen over the past few months amid slowing global growth, weakening trade and a flattening yield curve.

• We argue the Fed’s pre-emptive move to hold rates and its ending of quantitative tightening this year, significantly reduce the risks of a U.S. recession in the near term. This therefore will likely extend the U.S. expansion. In this late-cycle environment, investors may wish to consider opportunities in U.S. securitized credit as well as global high yield and EM bonds.

1 The change in the Core Personal Consumption Expenditures price index, issued by the Bureau of Economic Analysis and based on a dynamic consumption basket, is the Fed’s preferred measure of core inflation.

|GTM – Asia 52

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0

50

100

150

200

250

300

350

'21 '22 '23 '24 '25 '26 '27 '28

Maturity profileUSD billions

Source: J.P. Morgan Asset Management; (Top and bottom left) J.P. Morgan Economic Research; (Bottom right) BofA/ML, FactSet.*Default rate is defined as the percentage of the total market trading at or below 50% of par value and includes any Chapter 11 filing, pre-packaged filing or missed interest payments. Spreads indicated are benchmark yield-to-worst less comparable maturity Treasury yields. **EBITDA is earnings before interest, tax, depreciation and amortisation. U.S. corporate high yield is represented by the J.P. Morgan Domestic High Yield Index.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

High yield leverageEBITDA** / interest expense Debt/EBITDA

High yield spread and default rate*Default rate Spread to worst (basis points)

10-yr average Latest

HY spread to worst 574bps 452bpsHY default rate 2.6% 0.9%

BB B CCC and below

Recessions

Average issuance: 2014 – 2018

Interest coverage

U.S. high yield bonds

3.5

4.0

4.5

5.0

5.5

3.0

3.5

4.0

4.5

5.0

5.5

'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

0

400

800

1,200

1,600

2,000

0%

4%

8%

12%

16%

20%

'90 '95 '00 '05 '10 '15

Leverage

|GTM – Asia 53

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-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

100 200 300 400 500 600 700 800 900

Source: Bloomberg Finance L.P., J.P. Morgan Asset Management; (Left) J.P. Morgan Economics Research.*J.P. Morgan GBI-EM Broad Diversified Index sub-component used for each country. Spread is the difference between the yield on each country’s local 3-5 year government bond and the yield on the Bloomberg Barclay’s U.S. Aggregate Government - Treasury (3-5 Year). **EM debt is represented by the J.P. Morgan Emerging Market Equal Weight Blended Index, which is an equal-weighted composite index of the J.P. GBI-EM Global Diversified, J.P. Morgan EMBI Global Diversified and J.P. Morgan CEMBI Broad Diversified indices. Spreads are the difference between the yield on EM debt securities and an equivalent maturity U.S. Treasury bond in basis points. Returns are calculated using monthly data from 31/01/03 –31/03/19.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

Spread between local rates and U.S. Treasuries3-5 year local currency government bond index*, basis points

EM debt spreads to U.S. Treasuries and returns12-month forward total return, spread in basis points**

Emerging market debt

Current spread range: 340-350

-200 0 200 400 600 800 1000

Brazil

Russia

Mexico

S. Africa

Indonesia

India

Colombia

Malaysia

China

Thailand

Poland

5-year averageCurrent



U.S. securitized credit offers quality in late cycle

• Despite the U.S. economy being in the late cycle, American households are in relatively good shape in fundamental terms. They have deleveraged significantly post the global financial crisis. The household debt service ratio remains low and household net worth has increased substantially in recent years. Consumer sentiment remains at relatively high levels and wage growth is rising. Together, these conditions support the investment case for consumer ABS. Valuation-wise, many consumer ABS spreads are also trading at relatively attractive levels compared with their historical ranges.

• U.S. high yield bonds still display strong fundamentals.


• The Fed’s decision to pause its rate hiking cycle and to put an earlier end to its balance sheet run-off reduces the risk of a U.S. recession in the near term and likely will help extend the late cycle.

• We highlight that in this late-cycle environment, investors should focus within their fixed income portfolios on both (i) quality in U.S. securitized credit; in particular, consumer asset-backed securities and (ii) the yield pick-up offered by global high yield and emerging market bonds.


• EM debt spreads suggest positive returns in the next 12 months.


High yield and EM bonds offer a yield pick-up

• The benefits for global high yield with the Fed on pause are two-fold. First, it is more difficult for Treasury bond yields to rise significantly, unless inflation surges. Second, there is a lower threat of rising defaults, given a lower probability of a near-term U.S. recession.

• U.S. high yield bonds offer an attractive 452 bps spread over Treasuries and their fundamentals remain resilient. Issuance also remains low, providing technical support.

• EM bonds are seeing some reprieve from the Fed pause and lower Treasury yields. Investor sentiment has improved with a U.S.–China trade deal in the works. There is likely more upside, given current spread range of 320-330 bps. Historically, EM bonds have seen positive 12-month returns after spreads have widened to these levels.

|GTM – Asia 32

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Equi

ties

Source: FactSet, MSCI, Standard & Poor’s, J.P. Morgan Asset Management.Returns are total returns based on MSCI indices, except the U.S., which is the S&P 500 and China A, which are based on the CSI 300 index in U.S. dollar terms. China return is based on the MSCI China index. 10-yr total (gross) return data is used to calculate annualized returns (Ann. Ret.) and annualized volatility (Ann. Vol.) and reflect the period 31/03/09 – 31/03/19. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

Global and Asia equity market returns

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1Q '19 Ann. Ret. Ann. Vol.

Japan India ASEAN U.S. India U.S. China A Japan Taiwan China U.S. China A U.S. China A

-29.1% 102.8% 32.4% 2.1% 26.0% 32.4% 52.1% 9.9% 19.6% 54.3% -4.4% 31.4% 15.7% 26.7%

U.S. China A Korea ASEAN China Japan India China A U.S. Korea India China Taiwan India

-37.0% 98.5% 27.2% -6.1% 23.1% 27.3% 23.9% 2.4% 12.0% 47.8% -7.3% 17.7% 11.8% 25.4%

Taiwan Taiwan Taiwan Europe ASEAN Europe U.S. U.S. Korea India Taiwan U.S. ASEAN Korea

-45.9% 80.2% 22.7% -10.5% 22.8% 26.0% 13.7% 1.4% 9.2% 38.8% -8.2% 13.6% 11.6% 21.7%

Europe ASEAN India Korea APAC ex-JP

Taiwan Taiwan Europe APAC ex-JP

APAC ex-JP

ASEAN APAC ex-JP

India China

-46.1% 75.0% 20.9% -11.8% 22.6% 9.8% 10.1% -2.3% 7.1% 37.3% -8.4% 11.5% 11.2% 21.0%

ASEAN APAC ex-JP

APAC ex-JP

Japan Korea Korea China India ASEAN China A Japan Europe APAC ex-JP

Taiwan

-47.6% 73.7% 18.4% -14.2% 21.5% 4.2% 8.3% -6.1% 6.2% 32.6% -12.6% 11.0% 10.9% 18.4%

China Korea Japan APAC ex-JP

Europe China ASEAN Korea Japan ASEAN APAC ex-JP

Taiwan Korea APAC ex-JP

-50.8% 72.1% 15.6% -15.4% 19.9% 4.0% 6.4% -6.3% 2.7% 30.1% -13.7% 9.0% 10.1% 17.8%APAC ex-JP

China U.S. China Taiwan APAC ex-JP

APAC ex-JP

China China Taiwan Europe India China Europe

-51.6% 62.6% 15.1% -18.2% 17.7% 3.7% 3.1% -7.6% 1.1% 28.5% -14.3% 7.2% 9.7% 17.4%

Korea Europe China Taiwan U.S. China A Japan APAC ex-JP

Europe Europe China Japan Europe ASEAN

-55.1% 36.8% 4.8% -20.2% 16.0% -2.6% -3.7% -9.1% 0.2% 26.2% -18.7% 6.8% 9.5% 17.0%

China A U.S. Europe China A China A India Europe Taiwan India Japan Korea ASEAN Japan Japan

-63.2% 26.5% 4.5% -20.5% 10.9% -3.8% -5.7% -11.0% -1.4% 24.4% -20.5% 5.1% 7.4% 13.5%

India Japan China A India Japan ASEAN Korea ASEAN China A U.S. China A Korea China A U.S.

-64.6% 6.4% -8.4% -37.2% 8.4% -4.5% -10.7% -18.4% -15.2% 21.8% -27.6% 5.0% 6.6% 13.4%

10-yrs ('09 - '19)



4

Market volatility driven by sentiment

• After a volatile 4Q 2018 characterized by a combination of slowing growth and tightening conditions from a hawkish Fed, sentiment on Asian equities has rebounded. The MSCI Asia Pacific ex-Japan Index returned 11.5% during 1Q 2019, compared with an 8.8% fall in 4Q 2018. The equity rebound has been supported by positive developments, such as a shift toward a more dovish stance by the Fed and other major central banks, a potential peak of the U.S. dollar, improving U.S.–China trade discussions and the impact of China’s stimulus measures.

• But sentiment can still ebb and flow as trends, even those previously seen as positive, evolve. Many of these supportive factors could take a turn for the worse. Sentiment can fluctuate. Trade tensions can still flare up, not just with China and the U.S., but also between the U.S. and other countries. Negotiations may collapse, leading to more, instead of fewer, tariffs. The Chinese economy may not be able to stabilize, even with government support. Global economic activity numbers are still soft and growth is slowing.

• Despite these risks, our base-case scenario sees no U.S. or global recession this year. There is still upside potential for Asian equities, even as we remain cautious.

Asian equities: Not a temporary bounce

OVERVIEW

After a lackluster 2018, Asian equities have outperformed for the first few months of this year. But with continued macro uncertainties, slowing global growth and fears of the approaching end of the current business cycle, the concern is whether this rebound could be but a temporary peak that will soon reverse. While we agree the global economy is losing momentum and a downturn is possible, Asian equities still retain their ability to generate return.


• Asia outperformed, but this should not be merely temporary.

|GTM – Asia 33

33

Equi

ties

12%

24% 24%

16%

24%

8%

6% 6%

4%

7%

4%5%

0%

5%

10%

15%

20%

25%

30%

U.S. EM Asia Pacific ex-Japan

Europe'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

20

40

60

80

100

120

140

160

180

Forward earnings per shareIndex, U.S. dollar, Jan. 2008 = 100

Source: FactSet, J.P. Morgan Asset Management. (Left) MSCI, Standard & Poor’s; (Right) IBES. Asia Pacific ex-Japan, EM, Europe and U.S. equity indices used are the MSCI Asia Pacific ex-Japan, MSCI Emerging Markets, MSCI Europe and S&P 500, respectively. Consensus estimates used are calendar year estimates from IBES. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/19.

Earnings growthEarnings per share, year-over-year change, consensus estimates

Asia Pacific ex-Japan

Europe

Japan

U.S.

EM

Global equities: Earnings expectations

2018

2017

2019




• We believe the current market recovery will persist and there is still life left in Asian equities before the next recession or downturn.

• We still view Asian equities favorably. Sentiment is positive and we do not expect a recession this year. Earnings expectations are modest, but the new Fed direction and the implied effect on the USD is a positive for Asia. There is less pressure on exchange rates and most central banks appear to have an accommodative stance. And the region still offers defense, in the form of relatively high dividend payments, should sentiment turn sour and markets pull back.


Monitor what we do know

• Sentiment may be a strong driver of volatility, but it should not be the main determinant of long-term investment decisions. While it’s true that uncertainties over political negotiations can have far-reaching effects, even if temporary, we should monitor the drivers of equity returns that we know are more meaningful in the longer run.

• EM and Asian equities have historically had an inverse relationship to the USD. This suggests the Fed shifting to a more dovish position should lead to a weaker USD, and could create a tailwind for Asia. Our medium- to long-term view on the USD has not changed. We still expect it to weaken based on current valuation levels and expected increases in the U.S. current account and fiscal deficits. The pause by the Fed further supports our view. Asian currencies, which have been under pressure and are undervalued, should see some relief and stabilize. Countries such as Indonesia and the Philippines, which were forced to raise rates to defend their currencies against what was a hawkish Fed, can now shift to a more supportive stance. The direction of the USD is an important factor that now appears to be in Asia’s favor.

• The valuations and earnings data suggest a bit more caution. Valuations are now slightly closer to fully valued after the rally, with P/B ratios for the MSCI Asia Pacific ex-Japan Index now at 1.6X, still below the 15-year average, but less than one standard deviation away and not outright cheap. The earnings outlook is a bit more worrisome, with overall earnings growth expectations for Asia merely modest at 4%. Momentum has been poor with more analysts downgrading their earnings forecasts.

• Asian earnings expectations look merely modest.

Quarterly Perspectives Asia | 2Q 2019


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